How to have an honest conversation about your business strategy

Too many organizations descend into underperformance because they can't confront the painful gap between their strategy and the reality of their capabilities, their behaviors, and their markets. That's because senior managers don't know how to engage in truthful conversations about the problems that threaten the business--and because lower-level managers are afraid to speak up. These factors lie behind many failures to implement strategy. Indeed, the dynamics in almost any organization are such that it's extremely difficult for senior people to hear the unfiltered truth from managers lower down. Beer and Eisenstat present the methodology they've developed for getting the truth about an organization's problems (and the truth is always embedded within the organization) onto the table in a way that allows senior management to do something useful with it. By assembling a task force of the most effective managers to collect data about strategic and organizational problems, the senior team sends a clear message that it is serious about uncovering the truth. Task force members present their findings to the senior team in the form of a discussion. This conversation needs to move back and forth between advocacy and inquiry; it has to be about the issues that matter most; it has to be collective and public; it has to allow employees to be honest without risking their jobs; and it has to be structured. This direct feedback from a handful of their best people moves senior teams to make changes they otherwise might not have. Senior teams that have engaged in this process have made dramatic changes in how their businesses are organized and managed--and in their bottom-line results. Success that begins with honest conversations begets future conversations that further improve performance.     

A question of character

For the most part, Glamor-a-Go-Go's board has been thrilled with CEO Joe Ryan's performance. Ryan, after all, had transformed the private-label cosmetics company into a retail powerhouse with flashy outlets from New York to Los Angeles. In addition to saving the company from bankruptcy shortly after his arrival in 1992, Ryan had made Glamor-a-Go-Go a fun and exciting place to work, increasing workers' wages and creating boundless opportunities for anyone willing to work hard and think out of the box. He had also brought more women and people of color on board. And he had made many employees wealthy, with generous stock giveaways and options for the most senior employees down to the most junior. Glamor-a-Go-Go's stock price had grown tenfold during Ryan's tenure. But Ryan's personal affairs were beginning to call into question his leadership abilities. The local paper's gossip column recently ran a photo of Ryan--a married man--leaving a gala event with a beautiful young woman from the company, with the headline "Who's That Girl?" Indeed, rumors about Ryan's philandering were starting to take on a harsher edge. Some people believed his secretary left because Ryan had sexually harassed her. Others believed a mail-room employee had been promoted to factory supervisor because of her affair with the CEO. Having warned Ryan several times about his alleged infidelities, the board is stuck. What should it do about Ryan's extracurricular behavior? Does Ryan's personal behavior even affect the company? Is what Ryan does outside the office the board's concern? Six commentators weigh in.     

Hiring for smarts

Yes, it's nice when a leader is charismatic and confident. And a great resume can tell you a lot about a person's knowledge and experience. But such assets are no substitute for sheer business intelligence, and they reveal very little about a leader's ability to consistently reach the "right" answer. How can hiring managers flag individuals with such smarts? Historically, the only reliable measure of brainpower has been the standard IQ test, which is rarely used in business settings because of the specific subjects it tests for-math, reading, and spatial reasoning-and because of its multiple-choice format. Despite its shortcomings, the standard IQ test is still a better predictor of managerial success than any other assessment tool companies currently use, Justin Menkes argues. It's true that there isn't a version of IQ testing that applies to the corporate world, but in rejecting IQ tests altogether, hiring managers have thwarted their own attempts to identify true business stars. The author defines the specific subjects that make up "executive intelligence"-namely, accomplishing tasks, working with people, and judging oneself. He describes how to formulate questions to test job candidates for their mastery of these subjects, offering several examples based on real situations. Knowledge questions, such as those used in standard behavioral interviews, require people to recite what they have learned or experienced; intelligence questions call for individuals to demonstrate their abilities. Therefore, the questions in an executive intelligence test shouldn't require specific industry expertise or experience; any knowledge they call for must be rudimentary and common to all executives. And the questions should not be designed to ask whether the candidate has a particular skill; they should be configured so that the candidate will have to demonstrate that skill in the course of answering them.     

Creativity under the gun

If you're like most managers, you've worked with people who swear they do their most creative work under tight deadlines. You may use pressure as a management technique, believing it will spur people on to great leaps of insight. You may even manage yourself this way. If so, are you right? Not necessarily, these researchers say. There are instances where ingenuity flourishes under extreme time pressure--for instance, a NASA team within hours comes up with a primitive but effective fix for the failing air filtration system aboard Apollo 13. But when creativity is under the gun, it usually ends up getting killed, the authors say. They recently took a close look at how people experience time pressure, collecting and analyzing more than 9,000 daily diary entries from individuals who were working on projects that required high levels of creativity and measuring their ability to innovate under varying levels of time pressure. The authors describe common characteristics of time pressure and outline four working environments under which creativity may or may not flourish. High-pressure days that still yield creativity are full of focus and meaningful urgency--people feel like they are on a mission. High-pressure days that yield no creativity lack such focus--people feel like they are on a treadmill, forced to switch gears often. On low-pressure days that yield creativity, people feel like they are on an expedition--exploring ideas rather than just identifying problems. And on low-pressure days that yield no creative thinking, people work on autopilot--doing their jobs without engaging too deeply. Managers should avoid extreme time pressure when possible; after all, complex cognitive processing takes time. For when they can't, the authors suggest ways to mollify its effects.     

Organigraphs: drawing how companies really work

Walk into any organization and you will get a snapshot of the company in action--people and products moving every which way. But ask for a picture of the company and you will be given the org chart, with its orderly little boxes showing just the names and titles of managers. Now there's a more revealing way to depict the people and operations within an organization--an approach called the organigraph. The organigraph is not a chart. It's a map that offers an overview of the company's functions and the ways that people organize themselves at work. Perhaps most important, an organigraph can help managers see untapped competitive opportunities. Drawing on the organigraphs they created for about a dozen companies, authors Mintzberg and Van der Heyden illustrate just how valuable a tool the organigraph is. For instance, one they created for Electrocomponents, a British distributor of electrical and mechanical items, led managers to a better understanding of the company's real expertise--business-to-business relationships. As a result of that insight, the company wisely decided to expand in Asia and to increase its Internet business. As one manager says, "It allowed the company to see all sorts of new possibilities." With traditional hierarchies vanishing and newfangled--and often quite complex--organizational forms taking their place, people are struggling to understand how their companies work. What parts connect to one another? How should processes and people come together? Whose ideas have to flow where? With their flexibility and realism, organigraphs give managers a new way to answer those questions.     

CREATING VALUE IN PENSION PLANS (OR, GENTLEMEN PREFER BONDS)

Pension funds are typically one-half to two-thirds invested in equities because equities are expected to outperform other financial assets over the long term, and the long-term nature of pension fund liabilities seems well suited to absorbing any short-term return volatility. What's more, U.S. GAAP currently makes it possible to take credit in advance for the higher anticipated earnings on equity investments without acknowledging their inherent risk. But by allowing the higher expected returns from stocks to reduce a company's current pension expenses, the accounting treatment conflicts with some very basic principles of finance (in particular, the idea that investors must earn higher returns on riskier investments just to "break even"), conceals systematic biases in the actuarial analysis, and gives managers considerable latitude to manipulate the bottom line.
The authors suggest a startlingly different approach. They argue that pension assets should be invested entirely in duration-matched debt instruments for two reasons: (1) to capture the full tax benefits of pre-funding their pension obligations and (2) to improve overall corporate risk profiles by converting general stock market risk into firm-specific operating risk, where corporate managers should have a comparative advantage and can generate real value. Investing exclusively in bonds would take better advantage of the tax-exempt status of pension plans and greatly reduce fund management costs, while at the same time helping o shore up fund quality and sharpening corporate executives' focus on their real operating assets.     

Employee motivation: a powerful new model

Motivating employees begins with recognizing that to do their best work, people must be in an environment that meets their basic emotional drives to acquire, bond, comprehend, and defend. So say Nohria and Groysberg, of Harvard Business School, and Lee, of the Center for Research on Corporate Performance. Using the results of surveys they conducted with employees at a wide range of Fortune 500 and other companies, they developed a model for how to increase workplace motivation dramatically. The authors identify the organizational levers that companies and frontline managers have at their disposal as they try to meet workers' deep needs. Reward systems that truly value good performance fulfill the drive to acquire. The drive to bond is best met by a culture that promotes collaboration and openness. Jobs that are designed to be meaningful and challenging meet the need to comprehend. Processes for performance management and resource allocation that are fair, trustworthy, and transparent address the drive to defend. Equipped with real-world company examples, the authors articulate how to apply these levers in productive ways. That application should not be selective, they argue, because a holistic approach gets you more than a piecemeal one. By using all four levers simultaneously, and thereby tackling all four drives, organizations can improve motivation levels by leaps and bounds. For example, a company that falls in the 50th percentile on employee motivation improves only to the 56th by boosting performance on one drive, but way up to the 88th percentile by doing better on all four drives. That's a powerful gain in competitive advantage that any business would relish.     

Inner work life: understanding the subtext of business performance

Anyone in management knows that employees have their good days and their bad days--and that, for the most part, the reasons for their ups and downs are unknown. Most managers simply shrug their shoulders at this fact of work life. But does it matter, in terms of performance, if people have more good days than bad days? Teresa Amabile and Steven Kramer's new stream of research, based on more than 12,000 diary entries logged by knowledge workers over three years, reveals the dramatic impact of employees' inner work lives--their perceptions, emotions, and motivation levels--on several dimensions of performance. People perform better when their workday experiences include more positive emotions, stronger intrinsic motivation (passion for the work), and more favorable perceptions of their work, their team, their leaders, and their organization. What the authors also found was that managers' behavior dramatically affects the tenor of employees' inner work lives. So what makes a difference to inner work life? When the authors compared the study participants' best days to their worst days, they found that the single most important differentiator was their sense of being able to make progress in their work. The authors also observed interpersonal events working in tandem with progress events. Praise without real work progress, or at least solid efforts toward progress, had little positive impact on people's inner work lives and could even arouse cynicism. On the other hand, good work progress without any recognition--or, worse, with criticism about trivial issues--could engender anger and sadness. Far and away, the best boosts to inner work life were episodes in which people knew they had done good work and their managers appropriately recognized that work.     

Work and life: the end of the zero-sum game

Most companies view work and personal life as competing priorities in a zero-sum game, in which a gain in one area means a loss in the other. From this traditional perspective, managers decide how their employees' work and personal lives should intersect and often view work-life programs as just so much social welfare. A new breed of managers, however, is trying a new tack, one in which managers and employees collaborate to achieve work and personal objectives to everyone's benefit. These managers are guided by three principles. The first is to clearly inform their employees about business priorities and to encourage them to be just as clear about personal priorities. The second is to recognize and support their employees as whole people, not only acknowledging but also celebrating their roles outside the office. The third is to continually experiment with the way work gets done, looking for approaches that enhance the organization's performance and allow employees to pursue personal goals. The managers who are acting on these principles have discovered that conflicts between work and personal priorities can actually be catalysts for identifying inefficiencies at the workplace. For example, one manager and his staff found a way to accommodate the increased workload at their 24-hour-a-day command center while granting the staff more concentrated time off. So far, these managers have usually been applying the principles without official sanction. But as the business impact of their approach becomes better appreciated, the authors predict, more and more companies will view these leaders as heralds of change.     

Time-driven activity-based costing

In the classroom, activity-based costing (ABC) looks like a great way to manage a company's limited resources. But executives who have tried to implement ABC in their organizations on any significant scale have often abandoned the attempt in the face of rising costs and employee irritation. They should try again, because a new approach sidesteps the difficulties associated with large-scale ABC implementation. In the revised model, managers estimate the resource demands imposed by each transaction, product, or customer, rather than relying on time-consuming and costly employee surveys. This method is simpler since it requires, for each group of resources, estimates of only two parameters: how much it costs per time unit to supply resources to the business's activities (the total overhead expenditure of a department divided by the total number of minutes of employee time available) and how much time it takes to carry out one unit of each kind of activity (as estimated or observed by the manager). This approach also overcomes a serious technical problem associated with employee surveys: the fact that, when asked to estimate time spent on activities, employees invariably report percentages that add up to 100. Under the new system, managers take into account time that is idle or unused. Armed with the data, managers then construct time equations, a new feature that enables the model to reflect the complexity of real-world operations by showing how specific order, customer, and activity characteristics cause processing times to vary. This Tool Kit uses concrete examples to demonstrate how managers can obtain meaningful cost and profitability information, quickly and inexpensively. Rather than endlessly updating and maintaining ABC data,they can now spend their time addressing the deficiencies the model reveals: inefficient processes, unprofitable products and customers, and excess capacity.     

Becoming the boss

Even for the most gifted individuals, the process of becoming a leader is an arduous, albeit rewarding, journey of continuous learning and self-development. The initial test along the path is so fundamental that we often overlook it: becoming a boss for the first time. That's a shame, because the trials involved in this rite of passage have serious consequences for both the individual and the organization. For a decade and a half, the author has studied people-particularly star performers-making major career transitions to management. As firms have become leaner and more dynamic, new managers have described a transition that gets more difficult all the time. But the transition is often harder than it need be because of managers' misconceptions about their role. Those who can acknowledge their misconceptions have a far greater chance of success. For example, new managers typically assume that their position will give them the authority and freedom to do what they think is best. Instead, they find themselves enmeshed in a web of relationships with subordinates, bosses, peers, and others, all of whom make relentless and often conflicting demands. "You really are not in control of anything, says one new manager. Another misconception is that new managers are responsible only for making sure that their operations run smoothly. But new managers also need to realize they are responsible for recommending and initiating changes-some of them in areas outside their purview-that will enhance their groups' performance. Many new managers are reluctant to ask for help from their bosses. But when they do ask (often because of a looming crisis), they are relieved to find their superiors more tolerant of their questions and mistakes than they had expected.     

Building brands without mass media

Costs, market fragmentation, and new media channels that let customers bypass advertisements seem to be in league against the old ways of marketing. Relying on mass media campaigns to build strong brands may be a thing of the past. Several companies in Europe, making a virtue of necessity, have come up with alternative brand-building approaches and are blazing a trail in the post-mass-media age. In England, Nestlé's Buitoni brand grew through programs that taught the English how to cook Italian food. The Body Shop garnered loyalty with its support of environmental and social causes. Cadbury funded a theme park tied to its history in the chocolate business. H?agen-Dazs opened posh ice-cream parlors and got itself featured by name on the menus of fine restaurants. Hugo Boss and Swatch backed athletic or cultural events that became associated with their brands. The various campaigns shared characteristics that could serve as guidelines for any company hoping to build a successful brand: senior managers were closely involved with brand-building efforts; the companies recognized the importance of clarifying their core brand identity; and they made sure that all their efforts to gain visibility were tied to that core identity. Studying the methods of companies outside one's own industry and country can be instructive for managers. Pilot testing and the use of a single and continuous measure of brand equity also help managers get the most out of novel approaches in their ever more competitive world.     

Manager Retention and Post-Bankruptcy Performance: Evidence from South Korea

This study uses a sample of bankrupt firms in South Korea to reexamine the effect of manager retention on a firm’s post-bankruptcy performance, with a particular focus on the attributes of retained managers. Prior studies did not clarify whether a lack of ability of the retained manager or their self-serving behavior contributes more to a firm’s poor post-bankruptcy performance. Our results show that firms that retain their pre-bankruptcy managers are more likely to experience poor post-bankruptcy firm performance than those that replace incumbent managers, possibly because of the lack of ability of the retained managers rather than their self-serving behavior.     

Is American business working for the poor?

At first glance, poverty seems to have little to do with business. When most people--managers included--think about poverty, they assume that people are poor because they are isolated from the mainstream economy, not productive participants in it. But according to Harvard University professors Mary Jo Bane and David Ellwood, this is a misleading image of the true face of poverty in the United States today. Most poor adults--and a full 90% of poor children--live in families where work is the norm, not the exception. Poor people often work or want to work. But at the low-wage end of the American economy, having a job is no guarantee of avoiding poverty. Poverty is a business issue, then, because the American poor are part of the American work force. And this poses a problem for managers. In a more competitive and fast-changing economic environment, the performance of companies increasingly depends on the capabilities of their employees. In response to this human-resource challenge, more and more managers are embracing the language of "empowerment". And yet how can low-wage employees believe empowerment when their experience of work is, quite literally, impoverishment? It is unlikely that American companies can create the work force of the future with the poverty policies of the past. Fortunately, there are some simple policy mechanisms that can assist the working poor without putting an undue burden on business. Enacting them, however, requires managers to see poverty policy as one part of a national human-resource strategy that links the strategic concerns of companies to a broad social agenda.     

The social media faces of major global financial service brands

With the advent of social media, brand management has become not only more difficult, but also increasingly critical to the credibility and reputation of firms. Moreover, consumer-generated content and its rapid diffusion takes control over advertising-intended messages away from brand managers. Financial services brand managers will not fully be able to control the destinies of their brands, but at the very least they need to be involved in the conversations that speak about their brand. This article suggests a powerful analytical tool Chernoff Faces, which can add to financial service brand managers’ arsenal.     

CEO internal experience and voluntary disclosure quality: Evidence from management forecasts

Internally‐promoted CEOs should have a deep understanding of their firm's products, supply chain, operations, business climate, corporate culture, and how to navigate among employees to get the information they need. Thus, we argue that internally‐promoted CEOs are likely to produce higher quality disclosure than outsider CEOs. Using a sample of US firms from the S&P1500 index from 2001 to 2011, we hand‐collect whether a CEO is hired from inside the firm and, if so, the number of years they worked at the firm before becoming CEO. We then examine whether managers with more internal experience issue higher quality disclosures and offer three main findings. First, CEOs with more internal experience are more likely to issue voluntary earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Second, CEOs with more internal experience issue more accurate earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Finally, investors react more strongly to forecasts issued by insider CEOs than to those issued by outsider CEOs. In additional analysis, we find no evidence that these results extend to mandatory reporting quality (i.e., accruals quality, restatements, or internal control weaknesses), perhaps because mandatory disclosure is subjected to heavy oversight by the board of directors, auditors, and regulators. Overall, our findings suggest that when managers have work experience with the firm prior to becoming the CEO, the firm's voluntary disclosure is of higher quality.     

Predicting the unpredictable

The collective behavior of people in crowds, markets, and organizations has long been a mystery. Why, for instance, do employee bonuses sometimes lead to decreases in productivity? Why do some products generate tremendous buzz, seemingly out of nowhere, while others languish despite multimillion-dollar marketing campaigns? How could a simple clerical error snowball into a catastrophic loss that bankrupts a financial institution? Traditional approaches like spreadsheet and regression analyses have failed to explain such "emergent phenomena," says Eric Bonabeau, because they work from the top down, trying to apply global equations and frameworks to a particular situation. But the behavior of emergent phenomena, contends Bonabeau, is formed from the bottom up--starting with the local interactions of individuals who alter their actions in response to other participants. Together, the myriad interactions result in a group behavior that can easily elude any top-down analysis. But now, thanks to "agent-based modeling," some companies are finding ways to analyze--and even predict--emergent phenomena. Macy's, for instance, has used the technology to investigate better ways to design its department stores. Hewlett-Packard has run agent-based simulations to anticipate how changes in its hiring strategy would affect its corporate culture. And Société Générale has used the technology to determine the operational risk of its asset management group. This article discusses emergent phenomena in detail and explains why they have become more prevalent in recent years. In addition to providing real-world examples of companies that have improved their business practices through agent-based modeling, Bonabeau also examines the future of this technology and points to several fields that may be revolutionized by its use.     

The social media faces of major global financial service brands

With the advent of social media, brand management has become not only more difficult, but also increasingly critical to the credibility and reputation of firms. Moreover, consumer-generated content and its rapid diffusion takes control over advertising-intended messages away from brand managers. Financial services brand managers will not fully be able to control the destinies of their brands, but at the very least they need to be involved in the conversations that speak about their brand. This article suggests a powerful analytical tool Chernoff Faces, which can add to financial service brand managers’ arsenal.     

The weird rules of creativity

For at least the past decade, the holy grail for companies has been innovation. Managers have gone after it with all the zeal their training has instilled in them, using a full complement of tried and true management techniques. The problem is that none of these practices, well suited for cashing in on old, proven products and business models, works very well when it comes to innovation. Instead, managers should take most of what they know about management and stand it on its head. In this article, Robert Sutton outlines several ideas for managing creativity that are clearly odd but clearly effective: Place bets on ideas without much heed to their projected returns. Ignore what has worked before. Goad perfectly happy people into fights among themselves. Good creativity management means hiring the candidate you have a gut feeling against. And as for the people who stick their fingers in their ears and chant, "I'm not listening, I'm not listening," when customers make suggestions? Praise and promote them. Using vivid examples from more than a decade of academic research to illustrate his points, the author discusses new approaches to hiring, managing creative people, and dealing with risk and randomness in innovation. His conclusions? The practices in this article succeed because they increase the range of a company's knowledge, allow people to see old problems in new ways, and help companies break from the past.     

Implicit incentives and reputational herding by hedge fund managers

Several theories of reputation suggest that managers' incentives affect their propensity to engage in herding behavior. This paper investigates these theories by tracking hedge fund managers' herding behavior over their careers. I first examine managerial incentives for herding, and show that more senior managers that deviate from the herd have a significantly higher probability of failure and do not experience higher fund inflows than their less-senior counterparts. These implicit incentives should encourage managers to herd more as their careers progress. I find strong support for this hypothesis: using a number of proxies for herding, I show that more experienced managers herd more than less-experienced managers. Finally, I examine performance differences between more and less-experienced managers, and find that while more experienced managers underperform less-experienced managers, this underperformance does not appear to be caused by differences in herding. Overall, these results are in direct contrast with studies of mutual fund managers, reflecting important difference in implicit incentives between the two industries.