Executive Summaries. Harvard Business Review, Mar 2009, Vol. 87, Issue 3

MARCH 2009

|MARKETING|

COVER STORY

48 | In a Downturn, Provoke Your Customers

Philip Lay, Todd Hewlin, and Geoffrey Moore

Even as discretionary budgets are drying up, some B2B vendors have found a way to reach their customers' resource owners and motivate them to buy. They do this by identifying a thorny issue in the customer's company or industry and developing an original, compelling point of view about it. They pitch this point of view to a carefully chosen line executive in one crucial meeting and then prove its worth with a short diagnostic study. This is the essence of what the authors, all managing directors at TCG Advisors, call provocation-based selling.

Sybase, a data management and mobility company, was successful with this approach in the summer of 2008, as it tried to pry business out of financial services clients that were severely cutting their operating costs. Instead of probing for what those clients thought they might need, Sybase salespeople pointed out what they should be worried about: an industrywide failure to manage risk comprehensively. By revealing the scale of the threat and the opportunity, Sybase was able to sell its Risk Analytics Platform, a new tool for integrating risk management.

Provocation-based selling doesn't align with the customer's outlook; it provides a new angle on the situation. It doesn't identify and respond to the customer's "pain points"; it outlines a problem the customer hasn't yet put a name to. Framing a provocation creates a readiness to listen, and a diagnostic study converts the dialogue into a contract. The provocation-based sales cycle is resource intensive but appreciably shorter than that for solution-based selling -- and it leads to significant business opportunities.

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|IDEAS & TRENDS|

FORETHOUGHT

22 | When Economic Incentives Backfire

Samuel Bowles

Economic incentives become counterproductive when they undermine what Adam Smith called "the moral sentiments," such as the desire to be esteemed by others and to be viewed as ethical and dignified. Organizational and social policy makers, take note. Reprint F0903A

Another Challenge to China's Growth

Antonio Fatás and Ilian Mihov

Below $10,000 per capita, a country's income can grow even in the absence of good institutions. But at higher income levels, as China will soon discover, institutional quality starts to matter quite a lot. Reprint F0903B

Ethnographic Research: A Key to Strategy

Ken Anderson

Unlike traditional market researchers, who use highly targeted questions to extract information from customers, corporate ethnographers observe and listen in a nondirected way. Their method may appear inefficient, but it can yield rich data about product use. Reprint F0903C

Learning from Heroes

Jack Covert and Todd Sattersten

The best business books from the past 30 years offer simple yet profound advice for overcoming five recurring challenges. The lessons are strikingly similar to those learned by the heroes of mythology and popular culture. Reprint F0903D

Firms Still Willing to Pay Dearly for Talent

John T. Landry

Past economic crises curbed executive compensation -- but only temporarily. Companies continue to shell out hefty sums, even when performance is poor. Reprint F0903E

Performance Incentives for Tough Times

Timothy R. Hinkin and Chester A. Schriesheim

When there's limited cash for financial rewards, praise becomes an acutely valuable management tool. Through careful positive feedback, you can induce employees to chain several good efforts together into a pattern of excellence. Reprint F0903F

The Truths About IT Costs

Susan Cramm

Executives need to face seven truths about the waste in their IT budgets. Here they are, along with some strategies for managing each one. Reprint F0903G

Innovation Lessons from Genes

Todd Golub

If your innovation efforts need a shot in the arm, try emulating the medical researchers who seek cures for diseases by examining cells for unexpected commonalities. You might find answers to some of your most confounding business problems by looking for relationships among wildly different products or solutions. Reprint F0903H

A Conversation with Julia A. Stewart

The chairman and CEO of DineEquity, the restaurant company that owns the Applebee's and IHOP brands, says the key to managing for performance across more than 3,300 sites is to turn the workplace into a classroom. "When employees feel like they're learning," she says, "they become more enthusiastic about their work, and that shows through to the customer in a hundred different ways." Reprint F0903J

Reviews

Featuring Choose and Focus: Japanese Business Strategies for the 21st Century, by Ulrike Schaede
|HUMAN RESOURCES|

HBR CASE STUDY

33 | The Layoff

Bronwyn Fryer

Astrigo is in trouble. The home improvement chain has missed its earnings forecast badly and sales are falling. A 10% reduction in staff looks like the only choice. Layoffs, however, would undermine the retailer's longtime commitment to employees and the ability to provide its famed customer service. But tapping cash reserved for strategic acquisitions goes against the firm's values, too. What should the CEO do?

Board advisers Laurence J. Stybel and Maryanne Peabody, of Stybel Peabody Lincolnshire, suggest that the company borrow a page from McDonald's and declare Astrigo's intention to focus on the interests of long-term shareholders. This move would establish a framework that would help management make tactical decisions with more clarity and flexibility. The company could then use its cash to buy a little time to study the options. If Astrigo can't avoid layoffs, a last-in, first-out approach would be the least costly.

Former CEO Jürgen Dormann understands the challenge Astrigo faces. When he took over ABB, the company was in deep distress. After shaking up his executive committee, Dormann personally reached out to all 180,000 employees to enlist their help. They came back with ideas that saved $1.6 billion -- and rescued the company.

Management professor Robert I. Sutton thinks too many executives assume that layoffs are the best way to reduce costs. They don't factor in how long it takes to realize the savings from job cuts, the costs to hire and train people once business picks up, or the damage to morale and productivity. Astrigo's executives should consider alternatives such as pay cuts, reduced benefits, unpaid time off, and incentives for departure. If layoffs are inevitable, Astrigo should do them quickly, and firing the bottom 10% of employees would be the worst approach.

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|LEADERSHIP|

FIRST PERSON

43 | The Greening of Petrobras

José Sergio Gabrielli de Azevedo

Over the past eight years Brazilian energy giant Petrobras has transformed itself from a notorious environmental offender into a global leader in sustainability. In this article the CEO, a onetime leftist activist who believes business should drive social improvement, describes how the company turned itself around.

When Gabrielli took the reins, Petrobras was coming out of a tumultuous period. The state-owned monopoly had become a publicly traded corporation competing in an open market, and its operations were expanding rapidly. During this time a series of disastrous oil spills and accidents took place. In response, Philippe Reichstul, one of Gabrielli's predecessors, launched a $4 billion program for environmental and operational safety, comprising more than 4,000 projects.

Under Gabrielli's stewardship, the company approached environmental performance issues in three ways: improving its own culture and operations, influencing its suppliers, and championing renewable-energy development. At the center of its strategy is a program built on a set of requirements for performance in 15 areas. Among them is the stipulation that Petrobras's managers lead by example. Environmental policy is a boardroom consideration, and the company's top managers visibly demonstrate their commitment by joining the teams that go out into the field to audit health, environmental, and safety compliance.

Promoting environmentally sound behavior outside the company is another key requirement. To this end, Petrobras is pitting the firm's thousands of Brazilian suppliers against one another in a battle to see who's greenest. The company has devised a system to measure and monitor their environmental performance -- and awards contracts to the high scorers. It has also set its sights on becoming a world leader in biofuel, building a huge R&D network that stretches across Brazil and around the globe.

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|OPERATIONS|

58 | When Should a Process Be Art, Not Science?

Joseph M. Hall and M. Eric Johnson

Managers have gone overboard with process standardization. Many processes -- such as leadership training or auditing -- are more art than science. Imposing rigid rules on them squashes innovation, reduces accountability, and harms performance. Tuck professors Hall and Johnson advise companies to rescue artistic processes from the tide of standardization with a three-step approach.

1. Identify what should and shouldn't be art. Companies need art in variable environments (if, say, raw materials aren't uniform) and when customers value distinctive output. If those two conditions aren't present, mass processes (which eliminate variation) or mass customization (which controls it) will be required. Steinway & Sons, for instance, uses artistic processes to make concert pianos. Not only does the wood used in soundboards differ, but professional musicians appreciate the instruments' unique "personalities." Ritz-Carlton adopted an artistic approach to service after discovering that tightly defined procedures weren't meeting the needs of its diverse customer base. Once employees were allowed to improvise, customer satisfaction improved.
2. Develop an infrastructure to support art. Artists require proper training and metrics that help them maximize value for customers (such as continual customer feedback). Scientific processes can provide a stable platform for artists to work upon, but art and science should never be intertwined. Firms also must institute ways to mitigate failures, which are inevitable with variation.
3. Periodically reevaluate the division between art and science. Managers must ask: What new technologies can make a science of art? Do my customers value variation? How do the costs and opportunities of art and science stack up?

Art and science both have important roles to play in business processes. They need not be at odds but must be carefully harmonized.

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|STRATEGY & COMPETITION|

66 | Value-for-Money Strategies for Recessionary Times

Peter J. Williamson and Ming Zeng

In tough economic times, some companies have outmaneuvered rivals to become market leaders through value-for-money strategies. That is, they have enabled recession-hit consumers to economize (do less and spend less), become more efficient (do the same for less), or become more effective (do more but spend no more).

To implement such a strategy, argue this British professor and Chinese academic, companies must go beyond refining cost-cutting capabilities to develop expertise in cost innovation. That may not be good news for many U.S., European, and Japanese corporations, because multinationals from emerging markets, which have long experience with value-conscious customers, have already built cost-innovation capabilities that are unlocking mass markets in both developing -- and developed -- countries.

Some, like battery maker BYD, have learned to sell high-tech products profitably at mass-market prices through a combination of lower labor costs and manufacturing innovations. Others, like drinks purveyor United Spirits, have dominated industries by blanketing sizable niches in their home markets with a full range of products or customized options. And still others, like appliance manufacturer Haier, have used low-price offerings to turn small, unguarded niches into mass markets in developed countries.

In response, the authors argue, Western companies should turn to developing countries for vital lessons in lowering the cost of building brands and developing and manufacturing products. They should enter into alliances with emerging giants to gain cost-innovation capabilities. And they should use their superior financial strength to beat emerging giants at their own game of growing mass markets in developing countries.

Multinationals that fail to learn from emerging rivals are unlikely to weather the recession well -- or stay competitive for very long.

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|HUMAN RESOURCES|

76 | Making Mobility Matter

Haig R. Nalbantian and Richard A. Guzzo

Rotate up-and-comers through various functions, business units, and locations, conventional wisdom suggests, and you'll give them a chance to round out their skills and prepare for general management. However, mobility as a leadership development strategy can go wrong in many ways. It can disrupt operations and undermine accountability, demoralize managers who don't get to change roles, and cost a lot to implement. Perhaps worst of all, it can become an end in itself, causing other strategic and operational aims to get lost in the shuffle.

Mobility can be an excellent development tool when companies use it wisely -- as Marriott International, Corning, and United Health Group have done. The authors cite these successes and several failures, and offer a framework for solving the mobility equation in a way that's right for your organization.

Developing an appropriate mobility strategy entails answering three questions: What kind of mobility? Mobility for whom? And how much mobility? Your answers will depend on your company's circumstances and overarching objectives. For instance, to figure out what kind, you'll need to consider that changing a manager's function within a unit may help that person acquire the knowledge and skills to run that unit one day, whereas switching someone to a different unit may help develop broader leadership capabilities. To decide for whom, you can try "sponsored mobility," which means directing investments toward a chosen few individuals; "contest mobility," which means opening up opportunities to many; or a combination of the two. The approach you choose will depend partly on how robust a system you already have for identifying and retaining high potentials. Finally, to determine how much, you'll need a solid fix on which areas of the enterprise require the developmental benefits of mobility. Targeted analysis will show the likely impact on retention, promotions over time, and operational efficiency.

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|RISK MANAGEMENT|

86 | Six Ways Companies Mismanage Risk

René M. Stulz

Financial risk management is hard to get right even in the best of times. It can take one of six paths to failure, nearly all of them exemplified in the current crisis.

Relying on historical data. A risk manager who assessed real estate risk on the basis of statistics from the past three decades would have been sorely unprepared for the volatility of house prices in 2007.

Focusing on narrow measures. A daily Value-at-Risk (VaR) measure is commonly used for securities trading. But a daily measure assumes that assets can be sold quickly or hedged, so it doesn't apply to portfolios with which the firm may be temporarily stuck.

Overlooking knowable risks. Risk managers often distinguish among market, credit, and operational risks, which they measure differently and in isolation rather than cross-organizationally. They may also fail to assess new risks embedded in the instruments they use for risk mitigation.

Overlooking concealed risks. Risk takers may deliberately hide their risks, as happened at the French bank Société Générale in 2007. Or they may underreport them when their trading positions are complex and short-lived.

Failing to communicate. Sometimes even the most scrupulous risk manager cannot clearly explain a state-of-the-art system to the CEO and the board. In such a case, their confidence in the system's capabilities may be unwarranted.

Not managing in real time. It is difficult to hedge trading positions when their risk characteristics can change completely within a single day -- as can happen, say, with barrier calls.

The author advises practicing sustainable risk management: Never mind that catastrophic risks have extremely small probabilities; build scenarios for them and design strategies for surviving them anyway.

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|STRATEGY & COMPETITION|

TOOL KIT

101 | Option Games: The Key to Competing in Capital-Intensive Industries

Nelson Ferreira, Jayanti Kar, and Lenos Trigeorgis

All companies making big-budget investment decisions face the same basic dilemma: On the one hand, they must make timely, strategic investments to prevent rivals from gaining ground. On the other, they must avoid tying up too much cash in risky projects, especially during times of market uncertainty. The traditional valuation methods -- namely, discounted cash flow and real options -- fall short in resolving this dilemma. Neither one, on its own, properly incorporates the impact of demand and price volatility in an industry while also taking into account additional investments that the firm and its competitors may make.

In this article, Nelson Ferreira, an associate principal at McKinsey & Company in São Paulo; Jayanti Kar, an associate at McKinsey & Company in Toronto; and Lenos Trigeorgis, a professor of finance at the University of Cyprus and the president of the Real Options Group, present a valuation tool that overcomes the shortfalls of those analytic approaches. The tool, called option games, combines real options (which predict the evolution of prices and demand) and game theory (which captures competitors' moves) to quantify the value of both flexibility and commitment, allowing managers to make rational choices between alternative investment strategies. Option games will be of particular value to companies facing high-stakes decisions, such as those involving millions of dollars in capital investment, in a volatile environment in which their moves and those of their competitors clearly affect each other.

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|INNOVATION & CREATIVITY|

BIG PICTURE

109 | Tapping the World's Innovation Hot Spots

John Kao

Countries around the world are putting innovation at the top of their agendas. As a result, companies now have access to a global market for talent, capital, tax credits, and regulatory relief. Before setting up a research laboratory or a marketing office in one of the world's innovation hot spots, organizations must consider which of the emerging innovation models best suit their requirements. An astute company can also blend elements of each model in a systems integration approach.

In the focused factory model, countries concentrate their resources. Singapore, for instance, plans to increase funding for R&D in life sciences, clean technology, and digital media, and to provide benefits such as tax relief to attract companies interested in conducting research in those areas. GlaxoSmithKline and Novartis have already begun doing so at the biomedical research center Biopolis.

Countries adopting the brute force model hope to generate innovations by marshaling massive amounts of labor and capital. China, for example, is increasing funding for 10 universities in order to produce many specialists in every area of science and technology.

The goal of the Hollyworld model is to create the right environment for innovation by assembling a critical mass of skilled individuals. India, for example, is partnering the best graduates of its universities with Indians who have trained at educational institutions in the West.

Several countries have developed large-scale ecosystems combining funding bodies, research institutions, and business and academic collaboration. Finland's innovation system, for instance, is bolstered by strong governmental stewardship and the involvement of public and private players. Aalto University, scheduled to open in the autumn of 2009, will exemplify the country's holistic approach.

Source: Harvard Business Review