Seven surprises for new CEOs

As a newly minted CEO, you may think you finally have the power to set strategy, the authority to make things happen, and full access to the finer points of your business. But if you expect the job to be as simple as that, you're in for an awakening. Even though you bear full responsibility for your company's well-being, you are a few steps removed from many of the factors that drive results. You have more power than anybody else in the corporation, but you need to use it with extreme caution. In their workshops for new CEOs, held at Harvard Business School in Boston, the authors have discovered that nothing--not even running a large business within the company--fully prepares a person to be the chief executive. The seven most common surprises are: You can't run the company. Giving orders is very costly. It is hard to know what is really going on. You are always sending a message. You are not the boss. Pleasing shareholders is not the goal. You are still only human. These surprises carry some important and subtle lessons. First, you must learn to manage organizational context rather than focus on daily operations. Second, you must recognize that your position does not confer the right to lead, nor does it guarantee the loyalty of the organization. Finally, you must remember that you are subject to a host of limitations, even though others might treat you as omnipotent. How well and how quickly you understand, accept, and confront the seven surprises will have a lot to do with your success or failure as a CEO.     

The risky business of hiring stars

With the battle for the best and brightest people heating up again, you're most likely out there looking for first-rate talent in the ranks of your competitors. Chances are, you're sold on the idea of recruiting from outside your organization, since developing people within the firm takes time and money. But the authors, who have tracked the careers of high-flying CEOs, researchers, software developers, and leading professionals, argue that top performers quickly fade after leaving one company for another. To study this phenomenon in greater detail, the authors analyzed the ups and downs of more than 1,000 star stock analysts, a well-defined group for which there are abundant data. The results were striking. After a star moves, not only does her performance plunge, but so does the effectiveness of the group she joins--and the market value of her new company. Moreover, transplanted stars don't stay with their new organizations for long, despite the astronomical salaries firms pay to lure them from rivals. Most companies that hire stars overlook the fact that an executive's performance is not entirely transferable because his personal competencies inevitably include company-specific skills. When the star leaves the old company for the new, he cannot take with him many of the resources that contributed to his achievements. As a result, he is unable to repeat his performance in another company--at least not until he learns to work the new system, which could take years. The authors conclude that companies cannot gain a competitive advantage or successfully grow by hiring stars from outside. Instead, they should focus on cultivating talent from within and do everything possible to retain the stars they create. Firms shouldn't fight the star wars, because winning could be the worst thing that happens to them.     

What really works

When it comes to improving business performance, managers have no shortage of tools and techniques to choose from. But what really works? What's critical, and what's optional? Two business professors and a former McKinsey consultant set out to answer those questions. In a ground-breaking, five-year study that involved more than 50 academics and consultants, the authors analyzed 200 management techniques as they were employed by 160 companies over ten years. Their findings at a high level? Business basics really matter. In this article, the authors outline the management practices that are imperative for sustained superior financial performance--their "4+2 formula" for business success. They provide examples of companies that achieved varying degrees of success depending on whether they applied the formula, and they suggest ways that other companies can achieve excellence. The 160 companies in their study--called the Evergreen Project--were divided into 40 quads, each comprising four companies in a narrowly defined industry. Based on its performance between 1986 and 1996, each company in each quad was classified as either a winner (for instance, Dollar General), a loser (Kmart), a climber (Target), or a tumbler (the Limited). Without exception, the companies that outperformed their industry peers excelled in what the authors call the four primary management practices: strategy, execution, culture, and structure. And they supplemented their great skill in those areas with a mastery of any two of four secondary management practices: talent, leadership, innovation, and mergers and partnerships. A company that consistently follows this 4+2 formula has a better than 90% chance of sustaining superior performance, according to the authors.     

Role of Forgetting in Memory-Based Choice Decisions: A Structural Model

We propose a structural model to investigate the impact of forgetting on consumers' brand choice decisions in frequently purchased products. Forgetting results in consumers imperfectly recalling their prior brand evaluations when making a purchase decision in the category. We conceptualize the imperfect recall by positing that consumers recall their prior evaluations with noise. Based on prior research in the behavioral area, we characterize the extent of forgetting as an increasing and concave function of time. Our framework generates analytical results on the impact of forgetting on consumers' brand evaluations and their consequent purchase behavior. We calibrate our model using scanner panel data for liquid detergents. Furthermore, we obtain insights into the consumers' extent of forgetting in the category, extent of learning, predicted price elasticities and implications on state dependence and habit persistence. Our results underscore the importance of modeling consumers' ability to recall only imperfectly.     

Coordination of Design Supply Chains for Bundling Physical and Software Products*

Research on product development management has concentrated on physical products or on software, but not both. This article explores a special new product development (NPD) approach in which the internal development of core physical products is augmented by bundled and largely outsourced software features. We studied a medical device producer that has established a new medical information product group (MIPG) within their NPD organization to create software features that are bundled with their core physical products. The MIPG has conceptualized these software features as multiple software development projects, and then coordinated their realization largely through the use of external software suppliers. This case study centers on the question: how can firms effectively coordinate such product development processes? Our analysis of case evidence and related literature suggests that such product bundling processes, when pursued through design supply chains (DSC), are more complex than is typical for the development of streams of either physical products or software products individually. We observe that DSC coordination transcends the requirements associated with traditional “stage‐gate” NPD processes used for physical product development. Managers in DSC settings face a tension inherent to distributed work: keeping internal and external development efforts separate to exploit the design capabilities within a network of software suppliers, while ensuring effective delivery of a stream of bundled products. Many managers face this coordination tension with little, if any, prior knowledge of how to create a streamlined and effective DSC. Our research indicates that these managers need to make a series of interrelated decisions: the number of suppliers to qualify and include in or exclude from the DSC; the basis for measuring and modifying the scope of the suppliers' work; the need to account for asymmetric cost structures and expertise across the DSC; the mechanisms for synchronizing development work across elements of the DSC; and the approaches for developing skills—both technical and administrative—that project managers need for utilizing in‐house competencies while acquiring and assimilating design know‐how from external development organizations. When managers take a flexible approach toward these decisions based on a modular set of software development projects, they can improve their NPD outcomes through technical and organizational experimentation and adjust their own resource deployment to best utilize the suppliers' capabilities within their DSC.     

Zeitgeist leadership

Companies and leaders don't succeed or fail in a vacuum. When it comes to longterm success, the ability to understand and adapt to changing business conditions is at least as important as any particular personality trait or competency. A clear picture of how powerful the zeitgeist can be emerges from the authors' comprehensive study of the way the business landscape in the United States evolved, decade by decade, throughout the twentieth century. Six contextual factors in particular, they found, most affected the prospects for business: the level of government intervention in business, global events, demographics, shifts in social mores, developments in technology, and the strength or weakness of the labor movement. A lack of contextual sensitivity can trip up even the most brilliant executive. No less a luminary than Alfred P. Sloan was relieved of GM's day-to-day management in the 1930s because he was unwilling to meet with the new UAW. Conversely, an understanding of the zeitgeist can play a crucial but unheralded role in business performance. Jack Welch is widely credited with GE's remarkable success during the 1980s and 1990s, for example, but far less attention has been paid to his predecessor, the statesmanlike and prudent Reginald Jones, who sustained strong revenue and profit growth during the heavily regulated stagflation of the 1970s. To better understand this connection between business performance and context, the authors studied 1,000 great U.S. business leaders of the twentieth century and identified three distinct archetypes: Entrepreneurs, often ahead of their time, overcame dire challenges to build something new. Managers excelled at reading and exploiting the existing zeitgeist to grow their businesses. Leaders defied context to identify latent potential in businesses others considered mature, stagnant, or in decline. In every decade, all three archetypes were vital. It is the ongoing regeneration of this pattern in the business life cycle that ultimately sustains development and progress.     

A comparison of revenue growth at recent-IPO and established firms: The influence of SG&A, R&D and COGS

A dynamic view of the resource based theory (RBT) examines how a firm builds its resources over time, considering variations in resources' growth rates while the firm attempts to grow. Accordingly, we consider the elasticity of accumulated resources to assess conditions where these resources might serve as substitutes for rather than complements to COGS during periods of growth. We specify a production function that links aggregate resource allocation among SG&A, R&D and COGS expenses to a firm's revenue. This function yields a set of hypotheses on the elasticity of SG&A and R&D, and the productivity of COGS, while controlling for the revenue growth rate. We test these hypotheses on a dataset of 64 randomly selected firms that recently underwent an IPO, and a comparable set of 64 established public firms from four high-technology sectors. Results show that the accumulated stocks of resources can serve as substitutes for rather than complements to COGS, and the manner in which recent-IPO firms allocate and use resources differs from their established counterparts. We discuss the implications of associated elasticity and productivity results.     

The Achievements and Future of Business Education

The dean of Columbia Business School is joined by the deans of Stanford, Harvard, and Wharton in discussing the challenges and opportunities facing today's graduate business schools. Most business schools aim to provide students with a certain body of knowledge—in disciplines such as marketing, finance, and accounting—as well as some general management and leadership training and skills. The biggest challenge to this model of business education is now coming from the high cost of the traditional two‐year MBA program and the threat of disruption by “online” alternatives. But the consensus of the four deans is that the combination of training and experience provided by today's top business schools will enable them to withstand the threat from online alternatives. And thus for the leaders of these top schools, one of the main challenges in designing and maintaining a successful business school program is to find the right mix of theory and practice, classroom and “experiential” learning. To the extent the schools succeed in achieving and maintaining this balance, they should continue to produce graduates who are sought by employers that include not only companies large and small, but non‐profits and, at some points in their careers, even the public sector. What's more, the deans all sense the growing demand for business to play a larger role in addressing social problems that have traditionally been seen as the responsibility of government and non‐profits. And one implication of this demand is that business schools, besides producing talent that finds its way to the public as well as private sectors, should prepare to play a greater role in the public debate over solutions to social challenges, such as protecting the environment while at the same time trying to stimulate enough economic growth to limit rising inequality.