Articles

Adapting to rapid structural change requires exploration, not contraction.

The image of the CEO as Alexander the Great has faded; comparisons today are more likely to be made with Charles Ponzi. It may seem like odd timing, then, for an important thinker on corporate leadership and public policy to be issuing a call for CEOs to undertake a serious, committed engagement with a whole range of social, economic and environmental issues & #8212; topics that for years have been at the bottom of most top-executive agendas. But that is precisely what Jeffrey Garten, dean of the Yale School of Management, envisions in his latest book. Garten seeks a new kind of leadership from chief executives, yet one that hearkens back to a period in our history that also required people from all walks of life to come together in the pursuit of common goals.In this interview with SMR senior editor David A. Light, Garten speaks of the need to balance regulation and free markets, the historical precedents for business leadership on public-policy questions, and the urgent need for institutions that can manage the progress of globalization. He also discusses the important first step that CEOs must take before they can exert leadership on a bigger stage: restoring their reputations.

As multinationals unrelentingly seek new growth to satisfy shareholders, they increasingly hear concerns from many quarters about environmental degradation, labor exploitation, cultural hegemony and local autonomy. What is to be done? Must corporations’ thirst for growth and profits serve only to exacerbate the antiglobalization movement? On the contrary, the authors say, a solution to this dilemma does exist. Companies can generate growth and satisfy social and environmental stakeholders through a “great leap” to the base of the economic pyramid, where 4 billion people aspire to join the market economy for the first time. This is not a question simply of doing the right thing in order to lift people out of poverty & #8212; although that will surely be a result of the leap the authors have in mind. From a senior executive’s point of view, it’s a matter of finding the most exciting growth markets of the future. It is also where the technologies that are needed to address the social and environmental challenges associated with economic growth can best be developed. The authors illustrate their point with examples of companies that are already profitably disrupting such industries as telecommunications, consumer electronics and energy production.

As far back as 1959, Peter Drucker insisted on the need to pay more attention to knowledge work and the people doing such work. More than 40 years later, the subject still lacks its Frederick Taylor or Henry Ford; at best, it has been explored by approximations of William Morris and the Italian Futurists & #8212; artists who expressed an understanding of industrial developments in the late 19th and early 20th centuries. In the spirit of the artists concerned with industrialism a century ago, but with an eye toward more scientific advances, the authors spent more than a year investigating the mysteries of knowledge-worker performance. In the process, they realized that organizations can’t begin to increase their understanding of what makes knowledge workers effective until they recognize the importance of such workers as a whole and how to differentiate among them as individuals. In this article, the authors explore five key issues that companies are struggling with and then develop a framework to help organizations think more clearly about how to improve the performance of their knowledge workers.

How some companies are responding to recent corporate scandals.

Why do your customers choose to buy from you rather than from your competition? For the past three years, marketing professors Mark Vandenbosch and Niraj Dawar have posed that question to more than 1,500 senior executives in interviews and group discussions. And despite the vast range of industries represented by the executives they probed, the responses they got were remarkably similar. The executives agreed almost universally that offering great products, technologies or services is merely the entry stake into the competitive arena. Most spoke of the need to maintain an edge in the way their companies interact with customers; that is, they recognized that customers often value how they interact with their suppliers as much or more than what they actually buy. As the main drivers of customer choice, the executives cited cost-oriented factors such as convenience, ease of doing business, product support and risk-oriented factors such as trust, confidence and the strength of relationships. Strategies built around reducing customers’ interaction costs and risk are strategies that offer a systematic way to tap into new sources of customer value while avoiding the often futile attempt to compete on product innovation. The authors illustrate five different strategies that some companies are using to build a sustainable advantage through their approach to customers. These strategies are not easy to devise or implement; they require creativity, imagination, hard work and a willingness to take risks. But as the examples in this article demonstrate, the rewards are more than worth the effort.

The product-development process is often seen as an undependable black box” that rarely produces results that exceed business expectations. Traditional financial models have limited success exposing the numerous product-development risks that underlie the assumptions in a typical business case. Applying the same rules to development as they do to research, managers often accept unpredictable performance as normal. Most companies’ evaluation and approval processes are driven by accounting-based metrics such as discounted cash flow or net present value (NPV) that make understanding the underlying risks of development difficult for decision makers. When risk is discussed in the business case, technology uncertainty is often confused with product-development risk, and the narrative discussion of risk is designed more to persuade than inform. In this environment, decision makers are often hard-pressed to evaluate the potential commercial success of the new-product-development investment. With an approach called “net present value, risk-adjusted” (NPVR), author Craig R. Davis, CFO of product-development consulting firm Product Genesis, offers an operational framework that gives decision makers quantitative tools to evaluate relative project risks. He shows how these tools can be integrated into existing stage-gate methodologies to create a risk-adjusted NPV that considers the impacts of product portfolio, user needs, and technical and marketing risks. The framework also provides insights into the value of additional research in advance of full commitment to development. The framework provides a vocabulary appropriate for complex technology products in medical, commercial and industrial products but is easily adapted to the unique terms, methods and measures for each risk-assessment area.

Hiring CEOs from outside the industry is a higher-risk, higher-reward proposition.

Some business builders in the Internet era have blindly focused on “getting big fast” in the mistaken belief that Metcalfe’s Law applies ad infinitum. The value of a network, in fact, does not increase forever, but there are ways to counteract the forces that put the brakes on network effects.” Around 1980 Robert Metcalfe, the inventor of the Ethernet standard and founder of 3Com, observed that the value of a network increases in proportion to the square of the number of people using it. This observation came to be known as Metcalfe’s Law. It was similar to an idea developed by economists about network effects” & #8212; meaning that some resources become more valuable to a person using them according to the number of other people also using them. At the dawn of the Internet era, network effects became the Holy Grail for many business builders, who wanted to “get big fast” in order to exploit them before the competition did. But Metcalfe’s Law doesn’t always hold, say Harvard Business School professor Andrew McAfee and consultant Fran ois-Xavier Oliveau. As networks become very large, they can fall prey to saturation, cacophony, contamination, clustering and high search costs. Those phenomena mean that larger networks can, in some cases, have less value than smaller ones. The authors have identified several strategies that network builders can employ to maintain network effects or limit their decline. When followed properly, these strategies are more effective than a blind, bigger-is-better approach in which network builders rush to sign up as many users as quickly as possible.