January 2008

Putting Leadership Back into Strategy

Reprint: R0801C

In recent decades an infusion of economics has lent the study of strategy much needed theory and empirical evidence. Strategy consultants, armed with frameworks and techniques, have stepped forward to help managers analyze their industries and position their companies for strategic advantage. Strategy has come to be seen as an analytical problem to be solved.

But, says Montgomery, the Timken Professor of Business Administration at Harvard Business School, the benefits of this rigorous approach have attendant costs: Strategy has become a competitive game plan, separate from the company’s larger sense of purpose. The CEO’s unique role as arbiter and steward of strategy has been eclipsed. And an overemphasis on sustainable competitive advantage has obscured the importance of making strategy a dynamic tool for guiding the company’s development over time.

For any company, intelligent guidance requires a clear sense of purpose, of what makes the organization truly distinctive. Purpose, Montgomery says, serves as both a constraint on activity and a guide to behavior. Creativity and insight are key to forging a compelling organizational purpose; analysis alone will never suffice.

As the CEO—properly a company’s chief strategist—translates purpose into practice, he or she must remain open to the possibility that the purpose itself may need to change. Lou Gerstner did this in the 1990s, when he decided that IBM would evolve to focus on applying technology rather than on inventing it. So did Steve Jobs, when he rescued Apple from a poorly performing strategy and expanded the company into attractive new businesses.

Watching over strategy day in and day out is the CEO’s greatest opportunity to shape the firm as well as outwit the competition.

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Mastering the Management System

Reprint: R0801D

Companies have always found it hard to balance pressing operational concerns with long-term strategic priorities. The tension is critical: World-class processes won’t lead to success without the right strategic direction, and the best strategy in the world will get nowhere without strong operations to execute it. In this article, Kaplan, of Harvard Business School, and Norton, founder and director of the Palladium Group, explain how to effectively manage both strategy and operations by linking them tightly in a closed-loop management system.

The system comprises five stages, beginning with strategy development, which springs from a company’s mission, vision, and value statements, and from an analysis of its strengths, weaknesses, and competitive environment. In the next stage, managers translate the strategy into objectives and initiatives with strategy maps, which organize objectives by themes, and balanced scorecards, which link objectives to performance metrics. Stage three involves creating an operational plan to accomplish the objectives and initiatives; it includes targeting process improvements and preparing sales, resource, and capacity plans and dynamic budgets. Managers then put plans into action, monitoring their effectiveness in stage four. They review operational, environmental, and competitive data; assess progress; and identify barriers to execution. In the final stage, they test the strategy, analyzing cost, profitability, and correlations between strategy and performance. If their underlying assumptions appear faulty, they update the strategy, beginning another loop.

The authors present not only a comprehensive blueprint for successful strategy execution but also a managerial tool kit, illustrated with examples from HSBC Rail, Cigna Property and Casualty, and Store 24. The kit incorporates leading management experts’ frameworks, outlining where they fit into the management cycle.

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The Five Competitive Forces That Shape Strategy

Reprint: R0801E

In 1979, a young associate professor at Harvard Business School published his first article for HBR, “How Competitive Forces Shape Strategy.” In the years that followed, Michael Porter’s explication of the five forces that determine the long-run profitability of any industry has shaped a generation of academic research and business practice. In this article, Porter undertakes a thorough reaffirmation and extension of his classic work of strategy formulation, which includes substantial new sections showing how to put the five forces analysis into practice.

The five forces govern the profit structure of an industry by determining how the economic value it creates is apportioned. That value may be drained away through the rivalry among existing competitors, of course, but it can also be bargained away through the power of suppliers or the power of customers or be constrained by the threat of new entrants or the threat of substitutes. Strategy can be viewed as building defenses against the competitive forces or as finding a position in an industry where the forces are weaker. Changes in the strength of the forces signal changes in the competitive landscape critical to ongoing strategy formulation.

In exploring the implications of the five forces framework, Porter explains why a fast-growing industry is not always a profitable one, how eliminating today’s competitors through mergers and acquisitions can reduce an industry’s profit potential, how government policies play a role by changing the relative strength of the forces, and how to use the forces to understand complements. He then shows how a company can influence the key forces in its industry to create a more favorable structure for itself or to expand the pie altogether. The five forces reveal why industry profitability is what it is. Only by understanding them can a company incorporate industry conditions into strategy.

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Innovation Killers: How Financial Tools Destroy Your Capacity to Do New Things

Reprint: R0801F

Most companies aren’t half as innovative as their senior executives want them to be (or as their marketing claims suggest they are). What’s stifling innovation? There are plenty of usual suspects, but the authors finger three financial tools as key accomplices.

Discounted cash flow and net present value, as commonly used, underestimate the real returns and benefits of proceeding with an investment. Most executives compare the cash flows from innovation against the default scenario of doing nothing, assuming—incorrectly—that the present health of the company will persist indefinitely if the investment is not made. In most situations, however, competitors’ sustaining and disruptive investments over time result in deterioration of financial performance.

Fixed- and sunk-cost conventional wisdom confers an unfair advantage on challengers and shackles incumbent firms that attempt to respond to an attack. Executives in established companies, bemoaning the expense of building new brands and developing new sales and distribution channels, seek instead to leverage their existing brands and structures. Entrants, in contrast, simply create new ones. The problem for the incumbent isn’t that the challenger can spend more; it’s that the challenger is spared the dilemma of having to choose between full-cost and marginal-cost options.

The emphasis on short-term earnings per share as the primary driver of share price, and hence shareholder value creation, acts to restrict investments in innovative long-term growth opportunities.

These are not bad tools and concepts in and of themselves, but the way they are used to evaluate investments creates a systematic bias against successful innovation. The authors recommend alternative methods that can help managers innovate with a much more astute eye for future value.

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Giving Great Advice

Reprint: R0801G

Interview by Thomas A. Stewart and Gardiner Morse

Few deal makers have been at it as long, and at such a high level, as Bruce Wasserstein, the chairman and CEO of the financial advisory and asset-management firm Lazard. In this edited interview, two HBR editors explore how he creates value as a manager, as a deal maker, and as a counselor to CEOs. Wasserstein, who has been a major figure in mergers and acquisitions for more than 30 years, talks about attracting and managing talent, building and sustaining a knowledge business, sizing up industries and companies, and crafting advice to help CEOs unlock value. At the heart of his approach is a singular ability to dissect a strategy’s underlying premises in order to figure out whether a plan or deal “makes sense.” Part of that determination involves understanding the broader context: Where is the industry going? What external factors will affect it?

Such sensemaking informs every move Wasserstein makes, and it has paid off handsomely. In his career, he has helped broker more than a thousand deals, worth hundreds of billions of dollars. His intellect, creativity, and doggedness are what allow him to pick apart the most complex problems and devise novel solutions. In an age of specialization, he recognizes the importance of connecting the dots; he draws on the knowledge and skills of creative generalists as well as industry and regional specialists when setting up and executing deals.

Wasserstein studied at Harvard University’s business and law schools and at Cambridge University, helped lead First Boston’s M&A practice, cofounded the investment-banking firm Wasserstein Perella Group, and then joined Lazard, which he famously took public in 2005 after disassembling a century and a half of family ownership. He is the 2007 recipient of Harvard Law School’s Great Negotiator Award.

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Why Mentoring Matters in a Hypercompetitive World

Reprint: R0801H

Professional service firms (PSFs), like so many other companies, are juggling the modern challenges of global competition, increased regulation, and rapid employee turnover. In a people-oriented industry, attrition has special import. DeLong and Gabarro, of Harvard Business School, along with former Morgan Stanley and Ernst & Young executive Lees, argue that a PSF can gain a much-needed competitive edge by renewing its focus on mentoring. The authors’ in-depth interviews with professionals from more than 30 PSFs have yielded four principles for firms to heed as they rediscover this lost art.

First, mentoring is personal. Rather than relying on standardized programs, mentors must frequently—and fairly—provide authentic advice and nurturing. Partners at PSFs know how to use their ample people skills effectively with clients; the benefits of using them with junior colleagues are even greater.

Second, not everyone is an A player. A small dose of attention given to a B player goes at least as far as a large one offered to an A player. Since B players constitute about 70% of PSF staff, that’s time well spent.

Third, choice assignments are in short supply, which limits the number of learning opportunities available for associates. Good alternatives include shadowing senior professionals on assignments and taking on research or other projects that are not client-related but that nonetheless build expertise.

Finally, mentoring is a two-way street. Protégés should not only learn from their senior counterparts, but also be taught to attract mentors—and to co-mentor one another.

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Where Will We Find Tomorrow’s Leaders?

Reprint: R0801J

Unless we challenge long-held assumptions about how business leaders are supposed to act and where they’re sup-posed to come from, many people who could become effective global leaders will remain invisible, warns Harvard Business School professor Hill. Instead of assuming that leaders must exhibit take-charge behavior, broaden the definition of leadership to include creating a context in which other people are willing and able to guide the organization. And instead of looking for the next generation of global leaders in huge Western corporations and elite business schools, expand the search to developing countries.

In this conversation with HBR senior editor Paul Hemp, Hill describes the changing nature of leadership and what we can learn from parts of the world where people have not, until recently, had opportunities to become globally savvy executives. In South Africa, for instance, the African National Congress has provided rigorous leadership preparation for many black executives. Hill has also observed two approaches—in developed and developing economies alike—that she believes will be necessary in an increasingly complex business environment. The first, leading from behind, involves letting people hand off the reins to one another, depending on their strengths, as situations change. The second, leadership as collective genius, calls for both unleashing and harnessing individuals’ collective talents, particularly to spur innovation.

Through her descriptions of these approaches in such companies as Sekunjalo Investments, HCL Technologies, and IBM, Hill highlights the challenges of finding and preparing people who can lead by stepping back and letting others come forward to make their own judgments and take risks.

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Love and Fear and the Modern Boss

Reprint: F0801A

Should a leader be loved or feared? That age-old question still has no simple answer. It depends on who the leader is and whom she’s leading. Successful executives adapt their styles when they need to; they also know their limits.

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Beware of Old Technologies’ Last Gasps

Reprint: F0801B

When a new technology appears, the old one experiences a sudden leap in performance. Whether you are an old- or a new-technology company, understanding how that phenomenon works can help you win during this critical transition period.

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High Margins and the Quest for Aesthetic Coherence

Reprint: F0801C

The key to selling well-designed, well-crafted products at high margins is the aesthetic coherence of the company and its goods. Embodying that ideal isn’t easy, but it’s possible if you avoid three temptations.

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Do Well by Doing Good? Don’t Count on It

Reprint: F0801D

Research over 35 years shows only a weak link between socially responsible corporate behavior and good financial performance. However, there’s no evidence of risk in doing good, only in being exposed for misdeeds.

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The Value of a Broader Product Portfolio

Reprint: F0801E

The mantra “Every product must stand on its own bottom line” may no longer be the one to chant. Nowadays, broadening your portfolio can increase both your chances of a big win and the benefit your other products can get from a hit’s popularity.

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Harvard Business School’s Sandra J. Sucher on the value of a book club for executives

Reprint: F0801F

When executives meet together to grapple with moral and ethical questions in literature, they end up applying their insights in practice. This Harvard Business School professor endorses book clubs as part of leadership development.

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Seek Strategy the Right Way at the Right Time

Reprint: F0801G

Deliberate, emergent, and analogical approaches to finding the best strategy all have their advantages, depending on where an industry is in its life cycle. Be open to the best option at each juncture and wise enough to make the right call.

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When (Not) to Listen to Activist Investors

Reprint: F0801H

Poorly performing managers shouldn’t necessarily heed the demands of hedge funds that call for change in a company’s strategic direction. Giving in does not, on average, yield stock gains that outperform the market—that is, unless the firm gets acquired.

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Learning the Fine Art of Global Collaboration

Reprint: F0801J

Companies that excel in managing partnerships for innovation put a great deal of effort into improving their ability to collaborate. Their plans address four critical areas.

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How to Talk to Investors—Through the Press

Reprint: F0801K

If you’re seeking attention from investors and analysts, the press can be a convenient megaphone. Cultivating relationships with the media takes patience, but the payoffs in both good times and bad are priceless.

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How to Change the World

Reprint: R0801A

Alan Wilson has a decision to make. The CEO of his company, Grepter, wants him to relocate to Zurich, where he can gain valuable experience for a rise to the top. Karl, his best friend, hopes to lure him to a hedge fund that promises big money fast. Shiori, an enticing former girlfriend, wants him to join her in delivering medical care to patients in developing countries. Alan knows for sure only that he wants to make an impact. Four experts comment on this fictional case study.

Laura Scher, the CEO of Credo Mobile, advises Alan to consider what each option will deliver in terms of money, power, quality of life, and—most important—personal values. As long as he brings his values into the workplace, any of the three could be the right choice.

Daniel Vasella, the CEO of Novartis, cautions Alan to examine what truly drives him, personally and professionally. All things considered—not least the potential hazards of working with a friend—his future looks most promising at Grepter.

Barbara H. Franklin, the CEO of an international trade consulting and investment firm, thinks Alan would do well to join Shiori’s enterprise. The experience with social policy might draw him to public service, where his impact on society could be significant.

Christina C. Jones, the CEO of Extend Fertility, has also faced a variety of choices combined with an urge to do meaningful work. She believes that Alan should cultivate his skills at Grepter while developing a firmer notion of what he wants to be and do.

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Transforming Giants

Reprint: R0801B

Large corporations have long been seen as lumbering, inflexible, bureaucratic—and clueless about global developments. But recently some multinationals seem to be transforming themselves: They’re engaging employees, moving quickly, and introducing innovations that show true connection with the world.

Harvard Business School’s Kanter ventured with a research team inside a dozen global giants—including IBM, Procter & Gamble, Omron, CEMEX, Cisco, and Banco Real—to discover what has been driving the change. After conducting more than 350 interviews on five continents, she and her colleagues came away with a strong sense that we are witnessing the dawn of a new model of corporate power: The coordination of actions and decisions on the front lines now appears to stem from widely shared values and a sturdy platform of common processes and technology, not from top-down decrees. In particular, the values that engage the passions of far-flung workforces stress openness, inclusion, and making the world a better place. Through this shift in what might be called their guidance systems, the companies have become as creative and nimble as much smaller ones, even while taking on social and environmental challenges of a scale that only large enterprises could attempt.

IBM, for instance, has created a nonprofit partnership, World Community Grid, through which any organization or individual can donate unused computing power to research projects and see what is being done with the donation in real time. IBM has gained an inspiring showcase for its new technology, helped business partners connect with the company in a positive way, and offered individuals all over the globe the chance to contribute to something big.

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