Lead for loyalty.

The greater the loyalty a company engenders among its customers, employees, suppliers, and shareholders, the greater the profits it reaps. Frederick Reichheld, a director emeritus of Bain & Company, offers advice on improving loyalty that is based on more than a decade of research. Primarily, he says, outstanding loyalty is the direct result of the decisions and practices of committed top executives with personal integrity. The "loyalty leader" companies--those with the most impressive loyalty credentials--are a diverse group, ranging from Vanguard and Northwestern Mutual to Chick-fil-A, Harley-Davidson, Intuit, and Enterprise Rent-A-Car. But beneath their surface variations lie six strikingly similar relationship strategies: 1. Preach what you practice. Executives must preach the importance of loyalty in clear, precise, powerful terms. 2. Play to win-win. It's not enough that your competitors lose; your partners must win. There's a clear connection, for instance, between a company's treatment of its employees and its attitude toward customers. 3. Be picky. A truly humble company knows it can satisfy only certain customers, and it goes all out to keep them happy. Careful selection of employees also plays an important role. 4. Keep it simple. Great leaders understand that they must simplify rules for decision making. 5. Reward the right results. Many companies reward employees who grab short-term profits and short-change those who build long-term value and customer loyalty. 6. Listen hard, talk straight. Long-term relationships require honest, two-way communication and learning. Exemplary leaders break through the cynicism of the times by showing they believe that an organization thrives when its partners and customers do.     

The innovation value chain

The challenges of coming up with fresh ideas and realizing profits from them are different for every company. One firm may excel at finding good ideas but may have weak systems for bringing them to market. Another organization may have a terrific process for funding and rolling out new products and services but a shortage of concepts to develop. In this article, Hansen and Birkinshaw caution executives against using the latest and greatest innovation approaches and tools without understanding the unique deficiencies in their companies' innovation systems. They offer a framework for evaluating innovation performance: the innovation value chain. It comprises the three main phases of innovation (idea generation, conversion, and diffusion) as well as the critical activities performed during those phases (looking for ideas inside your unit; looking for them in other units; looking for them externally; selecting ideas; funding them; and promoting and spreading ideas companywide). Using this framework, managers get an end-to-end view of their innovation efforts. They can pinpoint their weakest links and tailor innovation best practices appropriately to strengthen those links. Companies typically succumb to one of three broad "weakest-link" scenarios. They are idea poor, conversion poor, or diffusion poor. The article looks at the ways smart companies - including Intuit, P&G, Sara Lee, Shell, and Siemens- modify the best innovation practices and apply them to address those organizations' individual needs and flaws. The authors warn that adopting the chain-based view of innovation requires new measures of what can be delivered by each link in the chain. The approach also entails new roles for employees "external scouts" and "internal evangelists," for example. Indeed, in their search for new hires, companies should seek out those candidates who can help address particular weaknesses in the innovation value chain.     

Unleash innovation in foreign subsidiaries

In multinational corporations, growth-triggering innovation often emerges in foreign subsidiaries from employees closest to customers and least attached to the procedures and politeness of the home office. But too often, heavy-handed responses from headquarters squelch local enthusiasm and drive out good ideas--and good people. The authors' research into more than 50 multinationals suggests that encouraging innovation in foreign subsidiaries requires a change in attitude. Companies should start to think of foreign subsidiaries as peninsulas rather than as islands--as extensions of the company's strategic domain rather than as isolated outposts. If they do, innovative ideas will flow more freely from the periphery to the corporate center. Basing their arguments on a rich array of examples, the authors say that encouraging such "innovation at the edges" also requires a new set of practices, with two aims: to improve the formal and informal channels of communication between headquarters and subsidiaries and to give foreign subsidiaries more authority to see their ideas through. The challenge for executives of multinationals is to find ways to liberalize, not tighten, internal systems and to delegate more authority to local subsidiaries. It isn't enough to ask subsidiary managers to be innovative; corporate managers need to give them incentives and support systems to facilitate their efforts. The authors suggest four approaches: give seed money to subsidiaries; use formal requests for proposals as a way of increasing the demand for seed money; encourage subsidiaries to be incubators for fledgling businesses; and build international networks. As part of the last approach, multinationals also need to create roles for idea brokers who can link entrepreneurs in foreign subsidiaries with other parts of the company.     

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.     

Creating new market space.

Most companies focus on matching and beating their rivals. As a result, their strategies tend to take on similar dimensions. What ensues is head-to-head competition based largely on incremental improvements in cost, quality, or both. The authors have studied how innovative companies break free from the competitive pack by staking out fundamentally new market space--that is, by creating products or services for which there are no direct competitors. This path to value innovation requires a different competitive mind-set and a systematic way of looking for opportunities. Instead of looking within the conventional boundaries that define how an industry competes, managers can look methodically across them. By so doing, they can find unoccupied territory that represents real value innovation. Rather than looking at competitors within their own industry, for example, managers can ask why customers make the trade-off between substitute products or services. Home Depot, for example, looked across the substitutes serving home improvement needs. Intuit looked across the substitutes available to individuals managing their personal finances. In both cases, powerful insights were derived from looking at familiar data from a new perspective. Similar insights can be gleaned by looking across strategic groups within an industry; across buyer groups; across complementary product and service offerings; across the functional-emotional orientation of an industry; and even across time. To help readers explore new market space systematically, the authors developed a tool, the value curve, that can be used to represent visually a range of value propositions.     

Spark innovation through empathic design

Companies are used to bringing in customers to participate in focus groups, usability laboratories, and market research surveys in order to help in the development of new products and services. And for improving products that customers know well, those tools are highly sophisticated. For example, knowledgeable customers are adept at identifying the specific scent of leather they expect in a luxury vehicle or at helping to tune the sound of a motorcycle engine to just the timbre that evokes feelings of power. But to go beyond improvements to the familiar, companies need to identify and meet needs that customers may not yet recognize. To accomplish that task, a set of techniques called empathic design can help. Rather than bring the customers to the company, empathic design calls for company representatives to watch customers using products and services in the context of their own environments. By doing so, managers can often identify unexpected uses for their products, just as the product manager of a cooking oil did when he observed a neighbor spraying the oil on the blades of a lawn mower to reduce grass buildup. They can also uncover problems that customers don't mention in surveys, as the president of Nissan Design did when he watched a couple struggling to remove the backseat of a competitor's minivan in order to transport a couch. The five-step process Dorothy Leonard and Jeffrey Rayport describe in detail is a relatively low-cost, low-risk way to identify customer needs, and it has the potential to redirect a company's existing technological capabilities toward entirely new businesses.     

If you want honesty, break some rules

We've all heard, or perhaps even told, the "organizational lie"; We're customer centric; everyone's performance is above average; we're the darling of our industry, coming up with one innovation after another. That last one was true of Advanced Cardiovascular Systems (ACS) in the past, but not when Ginger Graham took over as CEO. From that first moment in 1993, Graham chose to tell the truth about ACS's situation--that R&D was practically at war with product development, yields were down, and customers were disgruntled. And ever since, she's seen the benefits of exploding organizational lies. Truth telling is something that's hard to argue with but difficult to do. And, indeed, ACS instituted some radical practices to create its culture of honesty. Every senior manager was assigned a coach from the ranks who regularly solicited feedback from everyone, high and low, about the executive's performance. To get the truth, though, ACS executives learned that they had to offer it up themselves--the whole truth about the company's financial state, its problems, and its triumphs. When they did, they found that, in return, they could ask their employees for help in solving the problems, and passive complainers became active partners in the company's fortunes. ACS management spreads the word about the virtues of honesty through vivid stories of corporate history and quirky rituals. Every quarter, it holds companywide meetings in which the faults of top managers are examined--to keep them honest and tough enough to go on telling the truth. In fact, in the process of openly owning up to problems and jointly fixing them with employees, the entire company grew more powerful, nimble, and tough-minded, able to respond quickly to change, both internal and external.     

The new boundaries of the "boundaryless" company

In an economy founded on innovation and change, one of the premier challenges of management is to design more flexible organizations. For many executives, a single metaphor has come to embody this managerial challenge and to capture the kind of organization they want to create: the "corporation without boundaries." According to Larry Hirschhorn and Thomas Gilmore of the Wharton Center for Applied Research, managers are right to break down the boundaries that make organizations rigid and unresponsive. But they are wrong if they think that doing so eliminates the need for boundaries altogether. Once the traditional boundaries of hierarchy, function, and geography disappear, a new set of boundaries becomes important. These new boundaries are more psychological than organizational. They aren't drawn on a company's organizational chart but in the minds of its managers and employees. And instead of being reflected in a company's structure, they must be "enacted" over and over again in a manager's relationships with bosses, subordinates, and peers. In this article, Hirschhorn and Gilmore provide a guide to the boundaries that matter in the "boundaryless" company. They explain how these new boundaries are essential for both managers and employees in coping with the demands of flexible work. They describe the typical mistakes that managers make in their boundary relationships. And they show how executives can become effective boundary managers by paying attention to a source of data they have often overlooked in the past: their own gut feelings about work and the people with whom they do it.     

Take command of your growth

Ask senior managers to pare costs by 10%, and they know just what to do. Ask them to boost growth by 10%, and they're stymied, assuming that growth is not really something they can influence. But managers can control their company's growth if they have better information about where their revenues are coming from. Rather than sort sales by geographic market, business unit, or product line, they should break them out in a way that reveals which part of their strategy is responsible for what part of their revenue. This article presents a tool--the sources of revenue statement (SRS)--that does just that. Through straightforward calculations using data taken from a company's balance sheet, along with estimations of customer-churn and industry growth rates, the SRS enables managers to classify their revenue according to five sources of growth: continuing sales to established customers (base retention); sales won from the competition (share gain); sales that fell into their laps because the market was expanding (market position); sales from moves into adjacent markets; and sales from entirely new lines of business. Once sorted in this way, revenue can be viewed as the outgrowth of manageable circumstances. At one company, seemingly healthy 10% total revenue growth masked substantial customer defections counter-balanced only by sales in a fast-expanding market--a market that actually grew faster than the company did. Rather than doing well, the company was ceding customers and market share to competitors. Comparing the sources of revenue across divisions can uncover similarly profound insights, which can suggest smart ways to change strategy or set stretch goals. Hundreds of companies are perched atop enormous potential that they can't see and so don't exploit. The SRS can endow them with sight and, more important, with understanding.     

CORPORATE GOVERNANCE, ETHICS, AND ORGANIZATIONAL ARCHITECTURE

Effective corporate leadership involves more than developing a good strategic plan and setting high ethical standards. It also means coming up with an organizational design that encourages the company's managers and employees to carry out its business plan and maintain its ethical standards.
In this article, the authors use the term organizational architecture to refer to three key elements of a company's design:

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  the assignment of decision-making authority–who gets to make what decisions;

       
  
  

Build the co-creative enterprise

These days more companies are inviting customers to help them design products. Now a few are taking things further and including their other stakeholders--employees, suppliers, distributors, and even regulators--in "co-creation" efforts, too. By focusing on improving the experiences of everyone involved, such firms are achieving breakthrough insights, lower costs, new revenues, and new business models. Consider how this worked at France's La Poste, which wanted to expand package delivery and banking services in light of a decline in its mail business. La Poste had three obstacles: unmotivated union tellers, customers disgruntled by long waits, and frustrated local managers, who felt caught in between. The company set some high-level goals and invited all three groups to decide how to reach them together. To get tellers' buy-in, La Poste gave them a say in their schedules. In workshops, the groups figured out when each office should be open and how its space should be configured. The results: a 50% decrease in waiting time, a jump in satisfaction for customers, soaring job satisfaction among tellers, and significant growth in package delivery and banking, despite the recession.     

How Managers' everyday decisions create or destroy your company's strategy

Senior executives have long been frustrated by the disconnection between the plans and strategies they devise and the actual behavior of the managers throughout the company. This article approaches the problem from the ground up, recognizing that every time a manager allocates resources, that decision moves the company either into or out of alignment with its announced strategy. A well-known story--Intel's exit from the memory business--illustrates this point. When discussing what businesses Intel should be in, Andy Grove asked Gordon Moore what they would do if Intel were a company that they had just acquired. When Moore answered, "Get out of memory," they decided to do just that. It turned out, though, that Intel's revenues from memory were by this time only 4% of total sales. Intel's lower-level managers had already exited the business. What Intel hadn't done was to shut down the flow of research funding into memory (which was still eating up one-third of all research expenditures); nor had the company announced its exit to the outside world. Because divisional and operating managers-as well as customers and capital markets-have such a powerful impact on the realized strategy of the firm, senior management might consider focusing less on the company's formal strategy and more on the processes by which the company allocates resources. Top managers must know the track record of the people who are making resource allocation proposals; recognize the strategic issues at stake; reach down to operational managers to work across division lines; frame resource questions to reflect the corporate perspective, especially when large sums of money are involved and conditions are highly uncertain; and create a new context that allows top executives to circumvent the regular resource allocation process when necessary.     

Knowing a winning business idea when you see one

Identifying which business ideas have real commercial potential is fraught with uncertainty, and even the most admired companies have stumbled. It's not as if they don't know what the challenges of innovation are. A new product has to offer customers exceptional utility at an attractive price, and the company must be able to deliver it at a tidy profit. But the uncertainties surrounding innovation are so great that even the most insightful managers have a hard time evaluating the commercial readiness of new business ideas. In this article, W. Chan Kim and Renée Mauborgne introduce three tools that managers can use to help strip away some of that uncertainty. The first tool, "the buyer utility map," indicates how likely it is that customers will be attracted to a new business idea. The second, "the price corridor of the mass," identifies what price will unlock the greatest number of customers. And the third tool, "the business model guide," offers a framework for figuring out whether and how a company can profitably deliver the new idea at the targeted price. Applying the tools, though, is not the end of the story. Many innovations have to overcome adoption hurdles--strong resistance from stakeholders inside and outside the company. Often overlooked in the planning process, adoption hurdles can make or break the commercial viability of even the most powerful new ideas. The authors conclude by discussing how managers can head off negative reactions from stakeholders.     

Building a leadership brand

How do some firms produce a pipeline of consistently excellent managers? Instead of concentrating merely on strengthening the skills of individuals, these companies focus on building a broad organizational leadership capability. It's what Ulrich and Smallwood--cofounders of the RBL Group, a leadership development consultancy--call a leadership brand. Organizations with leadership brands take an "outside-in" approach to executive development. They begin with a clear statement of what they want to be known for by customers and then link it with a required set of management skills. The Lexus division of Toyota, for instance, translates its tagline--"The pursuit of perfection"--into an expectation that its leaders excel at managing quality processes. The slogan of Bon Secours Health System is "Good help to those in need." It demands that its managers balance business skills with compassion and caring. The outside-in approach helps firms build a reputation for high-quality leaders whom customers trust to deliver on the company's promises. In examining 150 companies with strong leadership capabilities, the authors found that the organizations follow five strategies. First, make sure managers master the basics of leadership--for example, setting strategy and grooming talent. Second, ensure that leaders internalize customers' high expectations. Third, incorporate customer feedback into evaluations of executives. Fourth, invest in programs that help managers hone the right skills, by tapping customers to participate in such programs. Finally, track the success of efforts to build leadership bench strength over the long-term. The result is outstanding management that persists even when individual executives leave. In fact, companies with the strongest leadership brands often become "leader feeders"--firms that regularly graduate leaders who go on to head other companies.     

How we went digital without a strategy

Once you say what business you're in, you put your employees into a mental straitjacket and hand them a ready-made excuse for ignoring new opportunities. So rather than dictate his company's identity, Ricardo Semler--the majority owner of Semco in S?o Paulo, Brazil--lets his employees shape it through their individual efforts and interests. "I don't know what Semco is," he writes in this first-person account of his company's expansion from manufacturing to Internet services. "Nor do I want to know." Ten years ago, Semco employees who were selling cooling towers to owners of large commercial buildings heard customers complain about the high cost of maintaining the towers. The salespeople proposed a new business in cooling-tower maintenance, and the venture is now a $30 million property-management business. That initiative led to the creation, with Semco's support, of an on-line exchange to facilitate the management of commercial construction projects. The exchange is revolutionizing the construction process in Brazil and has become a springboard for further Web initiatives such as virtual trade shows. The author shares some of the lessons he has learned along the way: Forget about the top line. Never stop being a start-up. Don't be a nanny (treat your employees like adults). Let talent find its place. Make decisions quickly and openly when it comes to reviewing proposals for new businesses. And partner promiscuously: "Our partners," Semler says, "are as much a part of our company as our employees."     

Managing for creativity

A company's most important asset isn't raw materials, transportation systems, or political influence. It's creative capital--simply put, an arsenal of creative thinkers whose ideas can be turned into valuable products and services. Creative employees pioneer new technologies, birth new industries, and power economic growth. If you want your company to succeed, these are the people you entrust it to. But how do you accommodate the complex and chaotic nature of the creative process while increasing efficiency, improving quality, and raising productivity? Most businesses haven't figured this out. A notable exception is SAS Institute, the world's largest privately held software company. SAS makes Fortune's 100 Best Companies to Work For list every year. The company has enjoyed low employee turnover, high customer satisfaction, and 28 straight years of revenue growth. What's the secret to all this success? The authors, an academic and a CEO, approach this question differently, but they've come to the same conclusion: SAS has learned how to harness the creative energies of all its stakeholders, including its customers, software developers, managers, and support staff. Its framework for managing creativity rests on three guiding principles. First, help employees do their best work by keeping them intellectually engaged and by removing distractions. Second, make managers responsible for sparking creativity and eliminate arbitrary distinctions between "suits" and "creatives". And third, engage customers as creative partners so you can deliver superior products. Underlying all three principles is a mandate to foster interaction--not just to collect individuals' ideas. By nurturing relationships among developers, salespeople, and customers, SAS is investing in its future creative capital. Within a management framework like SAS's, creativity and productivity flourish, flexibility and profitability go hand in hand, and work/life balance and hard work aren't mutually exclusive.     

Strategy and the art of reinventing value

In "From Value Chain to Value Constellation: Designing Interactive Strategy" (July-August 1993), Richard Normann and Rafael Ramírez argue that successful companies increasingly do not just add value, they reinvent it. The key strategic task is to reconfigure roles and relationships among a constellation of actors--suppliers, business partners, customers--in order to mobilize the creation of value in new forms and by new players. What is so different about this new logic of value? It breaks down the distinction between products and services and combines them into activity-based "offerings" from which customers can create value for themselves. But as potential offerings become more complex, so do the relationships necessary to create them. As a result, a company's strategic task becomes the reconfiguration and integration of its compentencies and customers. Normann and Ramírez provide three illustrations of these new rules of strategy. IKEA has blossomed into the world's largest retailer of home furnishings by redefining the relationships and organizational pratices of the furniture business. Danish pharmacies and their national organization have used the opportunity of health care reform to reconfigure their relationships with customers, doctors, hospitals, drug manufacturers, and with Danish and international health organizations.(ABSTRACT TRUNCATED AT 250 WORDS)     

Developing first-level leaders

Oil and energy corporation BP was well aware of the importance of its work group managers on the front lines. Their decisions, in aggregate, make an enormous difference in BP's turnover, costs, quality control, safety, innovation, and environmental performance. There were about 10,000 such supervisors, working in every part of the company-from solar plants in Spain, to drilling platforms in the North Sea, to marketing teams in Chicago. Some 70% to 80% of BP employees reported directly to these lower-level managers. Yet, until recently, the corporation didn't have a comprehensive training program--let alone an official name--for them. For their part, the frontline managers felt disconnected; it was often hard for them to understand how their individual decisions contributed to the growth and reputation of BP as a whole. In this article, BP executive Andreas Priestland and Dialogos VP Robert Hanig describe how BP in the past five years has learned to connect with this population of managers. After one and a half years of design and development, there is now a companywide name--"first-level leaders"--and a comprehensive training program for this cohort. The authors describe the collaborative effort they led to create the program's four components: Supervisory Essentials, Context and Connections, the Leadership Event, and Peer Partnerships. The design team surveyed those it had deemed first-level leaders and others throughout BP; extensively benchmarked other companies' training efforts for lower-level managers; and conducted a series of pilot programs that involved dozens of advisers. The training sessions were first offered early in 2002, and since then, more than 8000 of BP's first-level leaders have attended. The managers who've been through training are consistently ranked higher in performance than those who haven't, both by their bosses and by the employees who report to them, the authors say.     

Managing price, gaining profit

The fastest and most effective way for a company to realize maximum profit is to get its pricing right. The right price can boost profit faster than increasing volume will; the wrong price can shrink it just as quickly. Yet many otherwise tough-minded managers miss out on significant profits because they shy away from pricing decisions for fear that they will alienate their customers. Worse, if management isn't controlling its pricing policies, there's a good chance that the company's clients are manipulating them to their own advantage. McKinsey & Company's Michael Marn and Robert Rosiello show managers how to gain control of the pricing puzzle and capture untapped profit potential by using two basic concepts: the pocket price waterfall and the pocket price band. The pocket price waterfall reveals how price erodes between a company's invoice figure and the actual amount paid by the customer--the transaction price. It tracks the volume purchase discounts, early payment bonuses, and frequent customer incentives that squeeze a company's profits. The pocket price band plots the range of pocket prices over which any given unit volume of a single product sells. Wide price bands are commonplace: some manufacturers' transaction prices for a given product range 60%; one fastener supplier's price band ranged up to 500%. Managers who study their pocket price waterfalls and bands can identify unnecessary discounting at the transaction level, low-performance accounts, and misplaced marketing efforts. The problems, once identified, are typically easy and inexpensive to remedy.     

The 2002 HBR list. Breakthrough ideas for today's business agenda

In the last year, war broke out, the economy took a nosedive, and an alarming number of businesses went belly up. Thus it is with some urgency that we bring you this year's list of the seven best new business ideas to help you find your way through these complex times. History Returns. Many thought that the fall of the Berlin Wall marked the beginning of a new world order, one in which history didn't matter. But September 11, 2001, put an end to that theory. And it raised serious questions about globalization, security, and strategy. Enter the Everyday Leader--at Last. CEOs are used to getting all the glory, but leaders outside the limelight--middle managers and tempered radicals--are beginning to receive the attention they deserve. The Internet Is Not About You. The real value of the Internet may lie less in connecting individuals than in connecting databases, servers, and devices--a web not of people but of machines. Mind Your Behavior. Behavioral scientists are beginning to be able to accurately predict the ways individuals and crowds will respond to stimuli, and the implications for business are profound. Don't Delight Your Customers Away. Companies have wooed and coddled customers for too long. The truth is, people delight in being teased and are repelled by those who try too hard to befriend them. Games Are for Losers. Financial game playing and verbal politicking are seriously damaging businesses. Honesty is more than an admirable virtue; it's the foundation of every lasting enterprise. Three Cheers for Creativity (Sometimes). Creativity and best-practice replication are fundamentally different undertakings. Managers who mix the two achieve creativity that is merely incremental and replication that is sadly inept.