By Nik Kinley & Shlomo Ben-Hur

Talent management is built upon talent intelligence—the understanding that businesses have of the skills, expertise and qualities of their people. It is the basis of every people decision that companies make and without it, they would be reduced to just randomly hiring and promoting people. It is the fundamental foundation of modern-day talent management. And yet, the trouble with most company’s talent intelligence is that it is just not that intelligent. In this article, based on their upcoming book Talent Intelligence, the authors explain why and show what organisations can do to rectify the situation.

Almost 15 years ago now, McKinsey declared that there was a “war for talent” coming, and it seems they got it right.1 Globalisation and shifting population demographics are causing competition for talent to steadily and persistently rise and making it harder than ever for businesses to find the talent they need.

In the West, only 18 per cent of firms say they have enough talent in place to meet future business needs² and more than half report that their business is already being held back by a lack of leadership talent.³ Worryingly, 75 per cent of businesses report difficulty in filling vacancies, too.⁴ The situation is generally not as critical in emerging markets at present, but this will change. In China, for example, the predominantly manufacturing base of its economy has largely protected it from these concerns up to now. Yet as service industries and the use of knowledge workers grow and the impact of the country’s one-child policy is felt, China too will face these challenges. The war for talent is going global.

It is not actual war, of course, but there will be casualties and there will be winners. We know that those businesses that are better at talent management and more able to find and keep the best people tend to outperform their industry’s average return to shareholders by around 22 per cent.⁵ In fact, making good hiring and promotion decisions can have a bigger impact on market value than creating a customer-focused environment, improving benefits or having good union relationships.⁶ And amidst stronger competition for talent, these performance advantages for companies that are effective at identifying and managing talent will increase.

Realising this, alert organisations are turning to talent management for solutions, and investing in it, too. A recent US Department of Labour report predicted that over the next ten years the number of people in HR and talent management roles will grow at more than double the rate of the general workforce.

Driven forward by this investment, talent management is changing. Perhaps most notably—and arguably long overdue—it is becoming far more data-led. People data has become currency and big data and workforce analytics are the buzzwords of the moment. The idea is simple and compelling: To manage talent and make good people decisions you must know what you need, what you have and what is available. And to make this possible, new software systems have emerged that promise to help you gather, manage and use talent information more effectively than ever before. Indeed, the market for these systems is already estimated to be worth over $4 billion, and to be growing at a rate of over twenty per cent per year.

The power of talent intelligence
What these systems are trying to produce is talent intelligence: purposeful, targeted information that is capable of influencing businesses’ people decisions: from how many people are needed where and when, to whom to hire and fire. Most companies probably do not call it by this name, but they all use it nonetheless – they all have information about their people that they use to make decisions. The issue is just how sophisticated and effective they are in generating this information.

Take Google. Predictably, it is ahead of the curve when it comes to people data. Unsure of whether it was hiring the best applicants, the company developed a comprehensive database that captured information about current employees’ attitudes, behaviours, personality, biographical information and job performance. This data then enabled Google to develop an algorithm for predicting which applicants were most likely to succeed.⁷

Other organisations are following suit. A major UK retail bank we recently worked with linked data about the skills and behaviours of its staff with customer service feedback scores. As a result, it was better able to understand what branch managers and staff needed to do to improve customer experience and thereby sales, too.

“What many organisations are producing is not so much valuable talent intelligence, as just plain talent data: large quantities of information, without obvious utility.”

So there is a great opportunity here, but it can only be seized if companies produce good quality intelligence. And this is where things get worrying. Over the past year, we have looked at and spoken with many of the biggest firms in the world, exploring how they create and use talent intelligence. What concerns us is that what many organisations are producing is not so much valuable talent intelligence, as just plain talent data: large quantities of information, without obvious utility. And the reason for this lies in two critical challenges that all companies face in producing their talent intelligence: knowing what data to gather and how to use it.

These, of course, are matters for any data-driven enterprise, but with talent data there are some unique issues that make them particularly challenging. And for the most part, these challenges stem from talent assessment: how organisations evaluate the quality and types of talent available to them. There is no one way of doing it. Some organisations use just the intuition of their leaders and simple interviews; others employ sophisticated online tests. But one way or another, every firm assesses talent, and however they do it they all produce potentially valuable data.

Knowing what data to gather
While much of the new talent management software is undeniably impressive, like all systems they are only as good as the data you put into them. The data current being used is predominantly things like demographics and distributions—workforce composition. This type of administrative information does have its uses, but it is limited in terms of what you can do with it, the value you can add with it.

“Talent assessment may seem straightforward in its basic interview-based incarnation, but it is not. In fact, it is a highly technical subject.”

What is surprising here is that to date talent assessment data seems largely absent from this analytical revolution. In our experience, the reason for the relative absence of assessment data from the current analytical talent management revolution lies in organisations’ relationship to it. Because for the most part, they do not understand it.

To begin with, talent assessment may seem straightforward in its basic interview-based incarnation, but it is not. In fact, it is a highly technical subject, as one would expect of what is essentially an attempt to apply science and mathematics to the issues of how to accurately measure character and predict how effective people will be in certain situations. So at a fundamental level, it is difficult to understand.

To make matters worse, the assessment market is highly fragmented and awash with vendors that either have no data on the efficacy of their tools, or who make exaggerated claims. To navigate this mess you need to be an educated consumer and that means having access to independent technical expertise. Unfortunately, the people who make decisions about talent assessment frequently have little such expertise themselves and little independent expertise available to them.⁸ As a result, they often either use the wrong assessment processes for their needs or use them in ways that limit their impact.

If you think we are over-stating the issue, consider this. There are some excellent vendors, services and tools on the market, but there are estimated to be over 2,000 test publishers in the US alone and only a minority of them engages in any proper validity studies.⁹ So only a small percentage of vendors can say with any objective authority that they know that their assessment methods genuinely work.

Moreover, even when they do have evidence of the quality of their tools this cannot be taken at face value. The reason for this lies in the worrying trend of “reporting bias.” This is the tendency for people to only publish positive results or ones that further their arguments or products. Assessment is, of course, a business and we understand that in this commercial environment vendors need to present themselves well. But recent research shows that reporting bias is far more prevalent than you might expect in an industry that professes to be grounded in science, with independent studies identifying reporting bias by some of the biggest and most well known psychometric test publishers.¹⁰

All this makes the recent actions of one of the biggest test providers in the world all the more concerning. They appear to have changed their contractual terms to prevent independent research into the validity of their tests without their approval and permission. In our view, this throws any kind of pretense about objective science straight out of the window.

So not only is talent assessment a complex and technical field, but knowing who and what to trust is not easy. It may feel at this point that it is a hopeless situation and that there is simply no easy way to determine if measures and tools actually work. But all you need to know is which questions to ask and what to look out for in the answers. We go into this issue in more depth in the book (and there is further free guidance available on the supporting website: www.measuringtalent.com). For now what is important is the point that far from being helpless, organisations have the power to change how the assessment market works and make it easier to navigate. All they need to do is to apply market forces.

For example, if they stop using vendors who do not have proper validity information, those vendors will either start producing it or disappear. Likewise, if firms simply refuse to use vendors who prohibit independent research into their tools, then these vendors will soon revert to allowing it. Far from being hopeless, the reality of the situation is that armed with just a little knowledge businesses can make a big difference.

Moreover, this change needs to happen if businesses are to change their relationship with assessment data and begin to incorporate it into their talent intelligence. And they do need to do this, because talent intelligence that does not include information about the skills, attributes and characteristics of that talent, is never going to be very intelligent.

Knowing how to use this data
Knowing what data to include in your talent analytics may be the most obvious challenge facing businesses, but just as critical is how you use the information. At present, what we tend to see is organisations collecting talent data and analysing it, but without much understanding of how best to use it. And as with knowing what data to use, some of the biggest gains to be made can be found in talent assessment data.

Organisations, then, tend to be primarily focused on whether the frontline users of talent assessment information, who are typically line managers, are using this data effectively. What they tend not to do, however, is to use this data to do more than just inform individual people decisions, such as a whether to hire a particular individual. By “something more” we mean using results of talent assessment to inform and support processes such as onboarding, succession planning and organisational learning.

For instance, one of the easiest wins with assessment data collected in recruitment processes is to use this information to help tailor onboarding and initial developmental support for new joiners. Yet research shows that only 19 per cent of firms do this.¹¹ It is certainly common enough to hear talk of how important such issues are, but the reality is that all-too-often they are just an afterthought and so not implemented effectively, if at all.

The shame in all of this is that talent assessment data can do so much more than merely guide individual people decisions and development. And not doing more with the results is probably the single biggest missed opportunity that exists with talent assessment. With the advent of talent analytics, the situation is changing as businesses look more closely at what they can use assessment data for, but there is a lot of catching up to do.

As research for our upcoming book, we spoke to many companies—large and small—about how they used their talent assessment data and we found not a single one that was extensively, consistently and effectively using this data for more than just informing individual people decisions. And in our minds, this is just crazy. Not using talent assessment data to inform people strategy is like buying a sports car and then only ever using it to drive the kids to school. You can only ever enjoy a small margin of the value that the car can provide.

Doing this sort of thing may sound complicated, but you do not need specialist expertise—just a basic comfort with numbers and a good spreadsheet. That, and the will to do it. One of the key things here is to look for how connected the different types of talent data you collect are both with each other and with other sorts of information. For example, knowing the average competency ratings of new hires can be useful. Yet if you also know the performance scores of new hires one year after they have joined, you can see which competencies are most predictive of initial success. If you know who is still employed three years later, you can work out which factors are most predictive of retention. And if you know who is later promoted, it can provide insight into the types of talent valued in your business and the qualities predictive of longer-term success.

“You do not need specialist expertise for conducting talent assessment—just a basic comfort with numbers and a good spreadsheet. That, and the will to do it. The key is to look for how connected the different types of talent data you collect are both with each other and with other information.”

A few years ago, a large global business in the energy sector asked us to help it establish assessment processes to support three key people decisions: recruitment, promotion, and the identification of high-potentials. The processes created were not complex, but we were able to use this simple data to achieve lasting, significant changes in their people strategy:

• We looked at the competency ratings of new hires in each division to check whether some divisions were attracting stronger candidates and whether the qualities of new hires were aligned with each unit’s business objectives. As a result, all three divisions were able to make improvements to their attraction and hiring activities.
• We compared the average competency ratings of new recruits with those of current employees. We found that the new hires had an uncannily similar pattern of strengths and weaknesses to the current employees. This kick-started a debate in the business about whether it was “just employing clones,” which in turn led to changes in hiring practices.
• We looked at the qualities that distinguished those identified as high-potentials and those being promoted. We found that the people labelled as high-potential were generally better at performing well, being outgoing and showing entrepreneurial spirit. In a business trying to adopt a faster-paced and edgier approach, this was a good finding. But when we looked at the qualities most likely to lead to promotion we found that the people being chosen were those who performed well and were viewed as team players. For all the encouragement the business was trying to give people with the qualities it thought it wanted, the people actually being promoted were different. As a result of these findings, new criteria for promotion were implemented.
• Finally, we looked at the average competency profiles of the various groups measured and fed the findings into the learning and leadership development functions. As a result, specific development programs were created to address key competency weaknesses in particular groups of employees. The measurement data thus enabled better targeting of learning investment.

These were all simple steps, accomplished with simple data and without resorting to expensive systems. But they led to powerful findings that ultimately helped the business deliver its growth strategy. And this is the key, critical difference between plain talent data and real talent intelligence: intelligence is information that makes a difference, that adds value, that helps you to improve the bottom line of your business. Everything else is just data.

“Critical difference between plain talent data and real talent intelligence: intelligence is information that makes a difference, that adds value, that helps you to improve the bottom line of your business. Everything else is just data.”

Moving forwards
All the headlines in talent management in recent years have gone to succession plans and talent pools, to managing talent ‘on demand’ and making talent management streamlined and simple. And all of this is good and desirable. Yet none of it stands a chance of making any real difference unless it is built upon good talent intelligence.

Organisations have largely escaped being penalised for having poor or unreliable talent intelligence to date because every other firm has had the same problem. But things are changing. Business, like every other aspect of modern society, is moving ever farther forwards into an age of information and data analytics. As it does so, business leaders are expecting more from their talent data and this is driving improvements and innovation in how firms gather and leverage this information. So stand still for much longer, and you will be left behind, disadvantaged by the poor nature of your talent intelligence. It is time to get this critical, but too often overlooked foundation of talent management right.

About the Authors
Nik Kinley is a London-based independent consultant who has specialised in the fields of talent measurement and behaviour change for over twenty years, operating in both the private and public sectors and across a range of industries. He was formerly the Global Head of Assessment for the BP Group, Head of Learning for Barclays GRBF, and a senior consultant with YSC, the leading European assessment firm.

Shlomo Ben-Hur is an organisational psychologist and professor of leadership and organisational behaviour at the IMD business school in Switzerland. He has more than 20 years of corporate experience in senior executive positions including Vice President of Leadership Development and Learning for the BP Group, and Chief Learning Officer for DaimlerChrysler Services.

References
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Terpstra, D.E. & Rozell, E.J. (1997). Attitudes of Practitioners in Human Resource Management toward Information from Academic Research. Psychological Reports. 80, 403-412.
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11. MacKinnon, R.A. (2010) Assessment & Talent Management Survey. London: TalentQ.

By Majken Schultz & Steve Maguire

At the heart of any successful organisation lies a powerful conception of identity: the coherent way in which it presents itself to its stakeholders and employees, containing its purpose, goals and key characteristics. However, the traditional idea of identity as a stable, solid and reliable concept may not be the best way of approaching and managing your organisation. Rather, Majken Schultz and Stave Maguire argue that organisations would benefit from adopting a process-based view of identity, which integrates history, on-going change and market instability into its definition.

Reflections on the questions of “who am I?” and “who are we?” are as old as mankind and address something fundamental – how we understand ourselves, and how we imagine ourselves in relations with others. Increasingly, identity issues are also preoccupying organisations, leading them to pose existential questions about “why do we exist?” and “who are we and what do we stand for?” Other questions of identity, such as “what makes our key stakeholders feel a belonging to the organisation, whether they are employees or consumers?” and “what makes our organization unique and different from others?” are also relevant to organisations, as their answers underpin the practices that can make organisations stand out and become competitive in the marketplace. For example, a company like Apple has been able to attract and mobilise consumers all over the world based on an identity of being different. Time will show whether the attraction will endure, as Apple’s identity is transformed from ‘cool challenger’ to ‘global giant’ exploiting its dominant market position.

“Increasingly, identity issues are preoccupying organisations, leading them to pose existential questions about “why do we exist?” and “who are we and what do we stand for?””

Both the scholarship and practice of how organisations should ask – and seek to answer – questions of identity have changed in recent years, as theoretical and empirical understandings of the organisational processes underpinning identity have developed. In this article we outline a contemporary view of identity – one in which identity is no longer conceived as a stable, enduring entity but, rather, as an unfolding process always in the making. Our perspective is built upon an emerging process-based view of organisations, which, in challenging conventional assumptions, has important implications for management as we illustrate here.

A Process-based View of Organisations
A process-based view challenges our perception of organisations as fairly stable structures that can be managed as if they were ‘things’. The conventional view of organisations as entities underpins classic models of change, where a “burning platform” forces leaders to initiate change, embark on a period of transformation, then re-stabilise the organisation in a new enduring configuration. This unfreeze-change-freeze paradigm has influenced much thinking about organisational change and its management. In contrast, a process-based view encourages more complex and contextualized thinking about organisations as it reflects an understanding of the world as in flux and continually “becoming”.¹ Such an approach focuses on organising instead of organisations per se, and sees processes, rather than substances, as the basic forms that make up the universe. Accordingly, flux, emergence and transformation as well as creativity, disruption, and indeterminism are key themes within a process-based view. To engage with the world by seeing process as fundamental does not imply to deny the existence of states, events, entities or other “things”; it does, however, draw attention to the ways in which any “thing” can be unpacked to reveal the nature and sequence of activities and transactions that, in occurring, constitute the object.

“A process-based perspective invites us to acknowledge and absorb, rather than to reduce, the complexity inherent in the world as well as in our experiencing of the world.”

A process-based perspective thus invites us to acknowledge and absorb, rather than to reduce, the complexity inherent in the world as well as in our experiencing of the world. In providing an alternative to traditional “entitative” conceptions of reality,² it recognizes that “what is” has no existence apart from its relating to other things in time and space – what also is, what was, and what might be. In other words, objects are understood to be constituted by and in relation to other objects, and in an on-going manner, so temporality is a constitutive feature of the world and of human experience. Processes unfold in time, which means that human phenomena cannot be adequately understood if time is abstracted away, but much of our work in organisation studies to date has not directly considered temporality or questioned how time is constructed and lived in organisations.

Organisational Identity as Process
In order to elaborate what it implies to conceive organisational identity as process, we summarize the main distinctions between the conventional entity-based view and the process-based view we are advocating in Table 1. Consistent with the philosophy we are putting forward, we do not conceive these views as mutually exclusive but, rather, suggest that a process-based view challenges and expands its entity-based counterpart.

Key question for managers. Early conceptualisations posited organisational identity as those aspects of an organisation that members perceive as central, enduring and distinctive in answering the question “who are we?” in order to define themselves and their organisation.³ This is echoed in the now classic understanding of organisational identity as a system of claims expressing what the organisation is and stands for, and found in such places as the organisation’s name, tagline, statements of mission and values, and shared symbols. With this view, a change in identity is initiated through a top-down, planned and structured effort; occurs as the organisation passes through a relatively brief transient period of highly visible transformation; and is completed when the organisation’s identity is re-stabilised in a new configuration that, it is assumed, will endure for a considerable time. A process-based view, in contrast, posits that an organisation’s identity is contingent, relational and dynamic, continuously formed and reformed through on-going interactions, associations and conversations: “organizational identity is not an aggregation of perceptions of an organization resting in peoples’ heads, it is a dynamic set of processes by which an organization’s self is continuously socially constructed from the interchange between internal and external definitions of the organization offered by all organizational stakeholders”.⁴ Thus, a process-based perspective considers organisational identity to be an emergent outcome of on-going processes of organisational members interacting with each other as well as with other stakeholders. The key question for managers seeking to shape their organisation’s identity therefore becomes “what and how we are becoming?” rather than “who are we?” Further, a process-based perspective underscores how identity construction is situated in time and space: “the various categorizations that constitute identity and their meanings are not fixed but change over time, in different contexts, and as a result of ongoing language use”.⁵

Perceptions among stakeholders can be important drivers for identity reconstruction, as these perceptions can raise new – and sometimes challenging – questions about what the organisation is becoming. For example, many financial services companies experienced negative reconstructions of their identities following the global financial crisis, as key stakeholders evaluated these companies’ behaviour. US-based insurance company AIG, in response to becoming associated with “Arrogance, Ignorance, Greed” (e.g. see the numerous T-shirts for sale via the internet), began a series of self-reflections among managers and employees. A positive example stems from the difficult 2002 – 2005 period for Denmark-based LEGO-Group, when the company learnt that adult LEGO users still believed passionately in the idea of ‘building toys’ at a time when most so-called experts had predicted that children would no longer have the patience for such toys. As he explored LEGO’s past and possible future identities, the new CEO engaged in conversations with these passionate LEGO fans and became convinced there was a future for “systematic creativity”, which became the central idea of LEGO’s reconstructed identity.⁶ So far, it appears that the adult fans and CEO were right.

Core notion of identity. A process-based view challenges established notions of identity as a predetermined “essence”, “entity” or “thing” while encouraging alternative approaches to grasping identity in and around organisations. Conceptualising identity as a process suggests other metaphors to guide managers – as identity as “flow” or “narrative” or “work”. These metaphors emphasise that identity is continually under construction and not totally under the control of organisational members or even top managers. Organisational identity, then, emerges from on-going processes through which actors – both in and around organisations – claim, accept, deny, negotiate, affirm, maintain, reproduce, challenge, disrupt, destabilize, repair or otherwise influence their sense of themselves as well as others. With a process-based perspective, identity is thus an on-going accomplishment. Because processes of constructing identity are open to contestation, they can produce a fragmented, fluid self that is characterized by multiple, contradictory narratives rather than a single, convergent one.

“Conceptualising identity as a process suggests other metaphors to guide managers – as identity as “flow” or “narrative” or “work”.”

Such a fragmented and fluid identity is often found in situations of mergers and acquisitions, as shown by Maguire and Philips⁷ in their study of the merger that created Citigroup. They illustrated how the contested nature of the post-merger organisation’s identity influenced the trust that different employee groups had in their organisation. Conflicting narratives of the union – Was it a merger of equals as claimed? Was it a takeover in disguise? – gave rise to identity ambiguity which undermined employees’ identification with the new organisation. This in turn led to a lack of trust in the post-merger organisation which endured even after top management offered up a new set of identity claims in its articulation of Citigroup’s vision, mission and values. Had the company’s managers adopted a process-based view they would have been much less likely to take identity for granted and treat it as just another asset to be changed or replaced, because they would realise that employees are active and important contributors to an on-going process of identity construction.

Role of others and relations with them. An entity-based view on identity focuses attention on those aspects of a focal organisation’s identity that render the organisation different from other comparator organisations. For example, appreciating the identity of Apple would involve assessing where and how it differs from Samsung and Google, by comparing and contrasting these organisations along dimensions that, together, create a ‘space’, which can be mapped and in which organisations are understood to seek out and adopt strategic positions. In process-based thinking, in contrast, such a space is indeterminate and, as such, does not pre-exist as a stable arena in which organisations can simply plan their desired positions and manoeuvre accordingly. Rather, dimensions relevant to identity can appear, disappear and change in importance as organisations interact with stakeholders as well as comparator organisations. An organisation’s sense of self therefore derives from a relational understanding of the world that highlights the interconnectedness of self-perceptions and the perceptions of others, as suggested by the American pragmatist Georg Herbert Mead.⁸ Thus, a process-based organisational identity posits that “others” are constituted in interrelated ways that serve as sources of origin, development and transformation of the focal organisation’s identity.

A process-based view of an organisation’s identity points to the importance of appreciating how stakeholders and peers are constructed in particular ways and not others, despite alternative constructions being possible, when members of organisations define themselves as similar to or different from comparators along dimensions that they themselves have deemed of interest. Instead of seeking to define and elucidate the distinctiveness of Apple as compared with Samsung or Google, a process-based view leads managers and scholars to ask how Samsung and Google are constructed as competitors in Apple’s narrative of itself and in stakeholders’ narratives of Apple; and what is the significance of this constellation of stories. In so doing it draws attentions to the ways in which the relations that Samsung and Google have with various stakeholder groups can also influence narratives of Apple’s identity. Such a perspective expands the set of possible concepts and considerations with which Apple might engage as it tries to influence its own identity, which does not necessarily converge singularly on just one narrative.

Role of time. The discussion of time in much research on organisational identity to date has focused on whether identity is enduring or not, i.e. on debating the seminal claim by Albert and Whetten⁹ that identity is defined by those features and characteristics of organisations that endure over time. Recently, however, new conceptualisations of identity as emergent from “identity dynamics”¹⁰ and “adaptive instability”¹¹ among organisations and stakeholders have given rise to a “temporal perspective” on organisational identity, as suggested by Schultz and Hernes.¹² De-emphasizing identity as a configuration of features, i.e. a state, at a particular point in time, this perspective encourages organisational scholars and managers to develop an understanding of identity that honours the flow of time by exploring how past, present and future configurations of features are connected as the organisation transitions through them. This emphasis on the flow of events necessarily contextualises theorising about identity, grounding it in particular historic contexts and empirical settings and eschewing abstractions in time and space.

A process-based view can thus shed light on the origins and salience of organisational identity, which might stem from notable events or eras in a nation’s political, cultural or industrial history. Organisations develop their sense of selves by using vocabulary that is available to them to construct some aspects of themselves and their interactions with others as significant and meaningful. But vocabularies and concepts, as well as understandings of what matters or should matter for an organisation, evolve over time and have a history. For example, in their work on micro-breweries Kroezen and Heugens¹³ showed how contemporary microbrewers evoked and used symbols associated with the origins of beer brewing in their local communities as they built organisational identities for themselves; and how these connections between a community’s past heritage of brewing and the microbrewers’ present operations made the beers more authentic and attractive in the eyes of consumers. Ancient markers of meaning for beer were reinterpreted and given new relevance for consumers.

The relevance of a “temporal perspective” for exploring organisational identity was demonstrated by Schultz and Hernes¹⁴ in their comparative analysis of how the past was connected to the future in different ways during several identity reconstructions in LEGO Group. The mobilisation of a story of LEGO’s origins was a very important part of the turn-around for LEGO Group, as it set the direction for what kind of company LEGO eventually stated it wanted to become by refocusing itself on building toys, play and systematic creativity. In contrast with earlier attempts to learn from the immediate past, the new CEO, who was the first non-family member to lead the company, returned to the company’s earliest origins, long before the famous LEGO brick was even invented, to access and reinterpret fundamental ideas of the founder about “only the best is good enough” in relation to how children should play – in the past and in the future. This was complemented by the evoking of symbols and telling of stories about the founder, which were used by management to engage employees in the process of identity reconstruction. Also, in expanding the time scale relevant to identity reconstruction, it provided the new CEO with legitimacy, as he became represented as both a continuation of the founder’s beliefs about child’s play and a contemporary translation of these beliefs for a world where bricks and bytes were being integrated to compete in the global marketplace.

Role of management. In many companies the role of management has been understood as oversight to ensure that the organisation’s identity as well as the desired visual representation of this identity are expressed clearly and consistently in all communications reaching stakeholders, such as name, logo, trademarks and house-style. More recently notions of identity management have been expanded to include the articulation of a system of identity claims, e.g. vision, mission and values, and establishment of systems to ensure that these claims are enacted by organisational members. A process-based view does not ignore the importance of articulating such identity claims, but they are conceived as just one contribution to an on-going process of identity (re)construction rather than as its fixed and final goal. In contrast to the entity-based view, management is no longer assumed to be in full control of deciding and determining the organisation’s identity. Rather, the role of management is understood to be one of directing and facilitating continuous dialogues about what and how the organisation is becoming with both internal and external stakeholders. Such dialogue may take multiple forms, as companies develop programs for employee engagement and create new arenas and mechanisms for direct interaction with other stakeholder groups who are increasingly being invited to participate as co-creators.

“Management is understood to be one of directing and facilitating continuous dialogues about what and how the organisation is becoming with internal and external stakeholders.”

In enabling and participating in multi-stakeholder dialogue, management can probe, amplify or dampen insights and perceptions of different stakeholders in order to draw on them as valuable contributions to the organisation’s identity. For instance, when the new CEO of LEGO Group identified and engaged in meaningful dialogue with adult fans of LEGO toys he realised that they were an overlooked, but potentially very important, source of ideas for innovation and for renewal of the company’s identity and brand. Their contributions were key to innovations that helped to regain the “coolness” of the brand and paved the way for organising new forms of dialogue between consumers and employees – ways that are still expanding on-line and off-line. In this way, top management can orient (but not fully determine) the direction for identity evolution in the future by serving as a bridge to particular periods in the past and by giving these periods specific meanings; and can fuel identity evolution by initiating new forums for dialogue with stakeholders.

“Top management can orient the direction for identity evolution in the future by serving as a bridge to particular periods in the past and by giving these periods specific meanings; and can fuel identity evolution by initiating new forums for dialogue with stakeholders.”

A process-based view suggests exciting new ways for thinking about – and managing – identity in and around organisations. In positing that questions of identity are never settled because an organisation’s identity is continuously reconstructed through conversations among key internal and external stakeholders who bring different resources and experiences to the discussion, a process-based view both challenges and complements the entity-based view of organisations that is currently dominant. In so doing, it provides management practitioners with a theoretical basis for creating innovative solutions to the dual challenge of stakeholder engagement and identity management.

In writing of this article we build on “Constructing Identity in and Around Organizations: Introducing the Second Volume of “Perspectives on Process Organization Studies” by Schultz, M., Maguire, S, Langley, A. and Tsoukas, H. It is the introduction to Schultz, M., Maguire, S, Langley, A. and Tsoukas, H. (eds) (2012) Constructing Identity in and around Organizations” Oxford: Oxford University Press. Some passages of this article are directly cited from the introduction. We thank our co-authors and co-editors and the publisher for their support and permission. For the full series of Process Organization Studies see: http://ukcatalogue.oup.com/category/academic/series/business/pros.do

About the Authors
Majken Schultz is Professor in Management since 1996 at Copenhagen Business School. Her research interests are process and temporal perspectives on culture and identity, and managing organizations as corporate brands. She has published more than 50 articles in international peer reviewed journals on these topics. Her most recent co-authored monograph is Taking Brand Initiative: How Companies Can Align Strategy, Culture and Identity Through Corporate Branding with Mary Jo Hatch at Jossey Bass 2008 (also in Danish, Korean and Spanish). She is partner at The Reputation Institute, serves on several company boards and is a regular columnist. See more at www.majkenschultz.com

Steve Maguire is Associate Professor of Strategy and Organization in the Desautels Faculty of Management at McGill University. He teaches in the core of the MBA program (Markets and Globalization) as well was elective courses at both the BCom and MBA levels on topics related to his research (Strategies for Sustainable Development, Managing Organizational Politics). Dr. Maguire’s research focuses on technological and institutional change. Specifically, he seeks to understand the fates of particular technologies (i.e. whether, how and why they are adopted and enter the economy; whether, how and why they are abandoned and exit the economy) and how this is influenced by the activities and strategic behaviours of non-market actors (e.g. non-government organizations, scientists, politicians, and government organizations) in addition to market ones (e.g. firms and their customers).

References
1. See  for example Langley and Tsoukas, 2010 Introducing “Perspectives on Process Organization Studies”, in Hernes, T and Maitlis, S. (eds). Process, Sensemaking & Organizing. Oxford: Oxford University Press. 1 – 26.
2. This refers directly to our introduction drawing upon Chia, R. 1999. A ‘Rhizomic’ model of organizational change and transformation: Perspective from a metaphysics of change. British Journal of Management, 10: 209–227. Tsoukas, H. and Chia, R. (2002) On Organizational becoming: Rethinking Organizational Change. Organization Science, 13: 567-82.
3. Albert, S., D.A. Whetten. 1985. Organizational identity. Research in Organizational Behavior 7 263-295.
4. Hatch, M.J., M. Schultz. 2002. The dynamics of organizational identity. Human Relations 55(8) 989-1018
5. Maguire, S., & Hardy, C., 2005, “Identity and Collaborative Strategy in the Canadian HIV/AIDS Treatment Domain”, Strategic Organization, 3(1): 11-45.
6. For a further study of LEGO Group see Schultz, M. & Hernes, T. (2013) A Temporal Perspective on Organizational Identity. Organization Science 24/1: 1–21.
7. Maguire, S. & Philips, N. (2008) ‘Citibankers’ at Citigroup: A Study of the Loss of Institutional Trust after a Merger. Journal of Management Studies, 45/2: 372-401.
8. Mead, G. H. 1932. The philosophy of the present. Open Court, Ill.
9. Albert, S., D.A. Whetten. 1985. Organizational identity. Research in Organizational Behavior 7 263-295.
10. Hatch, M.J., M. Schultz. 2002. The dynamics of organizational identity. Human Relations 55(8) 989-1018
11. Schultz, M. & Hernes, T. (2013) A Temporal Perspective on Organizational Identity. Organization Science 24/1: 1–21.
12. Schultz, M. & Hernes, T. (2013) A Temporal Perspective on Organizational Identity. Organization Science 24/1: 1–21.
13. Kroezen, J. J. & Heugens, P. (2012) Organizational Identity Formation: Processes of Identity Imprinting and Enactment in the Dutch Microbrewing. In Schultz, M., Maguire, S, Langley, A. and Tsoukas, H. (eds) Constructing Identity in and around Organizations. Oxford: Oxford University Press.
14. Schultz, M. & Hernes, T. (2013) A Temporal Perspective on Organizational Identity. Organization Science 24/1: 1–21

By Katrin Muff, Thomas Dyllick, Mark Drewell, John North, Paul Shrivastava & Jonas Haertle

Extracts from chapter 5 of the forthcoming book “Management education for the world: A vision for business schools serving people and planet”, anticipated in June 2013, published by Edward Elgar, Cheltenham, U.K. Reprinted with the permission of the publisher.

Business schools are – at least in the public eye – key representatives of management education. Substantial material exists which describes how business schools are performing, including increasingly critical voices concerning their performance over the past decade. Interestingly, we find very little available material concerning the wider landscape of management education, in contrast to the wealth of information and critical analyses on business schools. Despite this lack of information, the vision is not limited to business schools but rather addresses the whole management education landscape, defining and developing key roles its various players can fulfill.

The 50+20 vision seeks to define areas of responsibility and opportunity, identifying clear roles which management education can play in order to assume responsibility in contributing to the creation of a society and world worth living in. These roles can be embraced by any player involved in management education, including corporate universities, consultancies, executive training centers, vocational training, think tanks or research centers – as well as business schools and management departments within the larger universities.

Thus far we examined what is needed in society and the world, and what different players in the field of management education can contribute to make the world a better place. But what about our own stakeholders? We engaged with key representatives of our broader community to better understand how various stakeholders interrelate and influence each other in the complex system of management education. During our retreats we shared and developed points of view with members of this community as equal partners. The global survey, the resultant discussions and the integration of new members into our visioning process stirred very different feelings towards these people. Our shared experience led us to identify a potential paradigm shift from a more mechanical “stakeholder involvement” to a “community engagement” approach: an emotive, whole-person collaboration similar to an animated family discussion.

The perspectives and expectations of our community point toward a very different model of management education. These views further shaped our thinking as we continued to study the challenges of the world, the economic system, business, leadership and management education. In the process we developed a sense of tapping into the higher consciousness of the broader global community concerned with the future of management education. From this larger field, a new vision slowly emerged, outlining a new type of management education.

A New Vision for Management Education
Rather than train managers for organizations that operate within twentieth century logic, management educators need to answer the call of service to become custodians who provide a service to society. The 50+20 project is searching for ways to tackle the challenge.

“Rather than train managers for organizations that operate within twentieth century logic, management educators need to answer the call of service to become custodians who provide a service to society. The 50+20 project is searching for ways to tackle the challenge.”

The management school of the future understands that transforming business, the economy and society begins with its own internal transformation. A school that embraces the vision will make the leap in a transparent and inclusive manner, leading by example by being the change it wishes to advance. More concretely, we envision three fundamental roles in management education that refine and enlarge the current purpose of education and research:

• Educating and developing globally responsible leaders,
• Enabling business organizations to serve the common good,
• Engaging in the transformation of business and the economy.

We also refer to the vision as the Triple E vision: Educating, Enabling and Engaging.

Each of these roles holds significant implementation challenges and is supported with enablers that aim to facilitate the transformation ahead for any management educator interested in embracing the vision.

The 50+20 vision is founded on the insight that providing responsible leadership for a sustainable world is first and foremost about creating and holding a space for the incarnation of these three roles. The various visioning exercises conducted in the creation process of the vision revealed a profound and multi-dimensional connectedness with a larger field – from the single individual human being to organizations, societies, animals, plants and the natural world in general. This larger field is directly related to the philosophy of creating a space.

The central feature of our vision is expressed in the collaboratory (the inner circle in the figure on the left) – a powerful space of co-creation where issues relevant to local, regional and global societies are resolved. The collaboratory represents the core mission of management educators adopting the role of transient gatekeepers who hold a space for responsible leadership for a sustainable world. Holding such a space enables an individual to connect to their full potential, while also reconnecting with all parts of society and the world. We found the circle of the collaboratory to be an appropriate symbol, representing a universal meeting place for discussing communal matters. It is rooted in many cultural traditions, such as gatherings around a large tree (the German Dorflinde), a fire (a Native American symbol for honoring future generations), and countless other examples in indigenous cultures around the world.

Educating, Enabling and Engaging
Implementing each of these new roles represents a challenge in its own right. While not every player in the landscape needs to embrace all the roles, management educators may want to use this vision to reflect on their strategic choices for the coming decades.

The realization of this vision requires individuals with a certain mindset, typified by a deep awareness and understanding of the global challenges we face, a sense of urgency to bring about change, and an unwavering belief that all of us “own” the responsibility to create change and contribute to making the world a better place.

Our vision consists of the three roles for management education (Educating, Enabling and Engaging), each of which is supported by three underlying enablers. These elements represent not only the essential roles of management education for the world but also point to three different levels of engagement:

• The Individual Level: educating and developing globally responsible leaders
• The Organizational Level: enabling business organizations to serve the common good
• The Societal Level: engaging in the transformation of business and society

Let us consider each of these roles in more detail to gain an understanding of the underlying enabling forces.

Role 1: Educating and Developing Globally Responsible Leaders
Educating globally responsible leaders is fundamentally different from what management education has achieved to date. Rather than acquiring desirable traits or isolated knowledge, leadership development is about developing the potential to act consistently on behalf of society. It requires the development of capacities that may lie dormant within a leader or an organization, including the ability to embrace complex transdisciplinary issues and hands-on collaboration with other members of the larger community. A systems-based approach is important to develop the key dimensions of globally responsible leaders. Holistic development approaches provide a healthy foundation to treat the human being, the organization and society as an open, emergent and dynamic system that progresses (and can regress) without ever acquiring a perfect state.

Our interaction with various societal groups also identified the challenge for management education: it is to assume a very different attitude towards educating potential leaders in developing countries. A key issue is that the poorest are denied access to management education, together with many more from the developed world. No comprehensive vision of the future of management education can leave this situation unaddressed.

Different cultures (simplistically defined as Eastern and Western) hold different views on what it takes to develop a leader and what roles they play in society. Insights from all approaches enable marrying the art of being and doing, bridging the interdependence with the world and the leader’s inner values into an ethical and globally responsible approach. Prolonging the dimension from me to we and to all of us, and developing a reflective awareness and a felt sense of being truly connected with other sentient beings opens up new perspectives of collaboration, purpose and direction.

“One of the goals of transformative learning is for future leaders to develop and expand their reflective awareness.”

Learning on Different Levels
We need to adopt whole person learning in order to educate our leaders. This requires pedagogies which are very different to the dominant paradigm of management education today, which is built on the “sage on the stage” and the case study method, reflecting a cognitive intellectual approach which assumes a defined set of pre-established knowledge which can be captured, packaged and shared. Traditional techniques largely focus on what others have done in the past, which might conceivably make sense in a stable system – but not in today’s world, where the challenge is to forge an entire future that is different in almost every respect from the present. The pedagogical framework for developing a whole-person human leader equipped with the required skills, competences and knowledge to “walk on the bridge as it is being built” has only started emerging recently.

Currently, we consider the three key enablers for educating and transforming globally responsible leaders to be:

• Transformative learning
Leadership development is first and foremost personal development, meaning that we need to go about developing the whole person: mind, heart, body and soul. At its core, transformative learning transforms problematic frames of reference into perspectives that provoke exploration into previously unknown solutions. The ability to consider different and new perspectives occurs through the development of consciousness, leading to a new way of relating to oneself and the world. The entry ticket for transformative learning is a powerful and safe learning environment. Such a transformation may be achieved by multiple avenues. A common denominator for any of the applied methods is that they trigger personal responsibility in co-creating a world within an evolving, interdependent movement. One of the goals of transformative learning is for future leaders to develop and expand their reflective awareness, which is considered the basis of globally responsible leadership.

• Issue-centered learning
Future learning needs to be organized around societal, environmental and economic issues both globally and locally – rather than around disciplines. A key element of issue-centered learning is a transdisciplinary, systemic approach to problems and dilemmas, potentially enabling complex decision-making processes. Another element is the active involvement and participation of societal stakeholders. Subject knowledge (such as finance, marketing, human resources and strategies) is acquired alongside issue-centered learning. When learning is conducted around issues, subject experts and teachers act as curators of knowledge and contribute relevant expertise when appropriate, favoring the integration of theory within a practical context. The collaboratory is a good example of issue-centered learning and represents a significant evolution from the traditional case study method, providing a new methodological approach to develop functional knowledge, transdisciplinary breadth and critical thinking.

• Reflective practice and fieldwork
Most learning occurs on the job, while common wisdom dictates that leaders cannot be developed without work experience. At the same time, adding fieldwork and practice to a curriculum is not enough. The path towards skilled performance in a new domain needs to be accompanied by guided reflection. The ability to self-reflect cannot be learned in one day but resembles the daily practice of personal hygiene. Fieldwork as part of a course should include exposure to different social domains, particularly in emerging and developing countries.

Role 2: Enabling Business Organizations to Serve the Common Good
Business organizations require a shift in philosophy in order to transform from the current paradigm of short-term profit maximization in the interest of shareholders to a paradigm of creating sustainable value for society and the world. Such a shift implies moving beyond the conventional triple bottom line approach of balancing issues of people, profit and planet to simultaneously create positive environmental value, positive social value and positive economic value in every aspect of a business and its related supply chains. This may require not only practical tools and methods to change practice inside organizations, but potentially includes the fundamental redesign of the modern corporations as well as the legal and other frameworks in which they operate.

Such a shift will favor the common good. We define the common good as the greatest possible good for the greatest number of individuals: a world where all citizens live well and within the limits of the planet. The common good requires that business organizations direct their economic and technical creativity towards societal progress. In the context of management education, this presents opportunities for the creation of new hybrid models between consultancy and academic research, between business schools and corporate universities, and between personal and professional development.

The three enablers for business organizations to serve the common good are:

• Research in service of society
Future management education should adjust its research orientation to serve society by encouraging the creation of businesses, business methods and solutions which address global and local challenges around environmental, societal and economic issues. Such an agenda includes a critical reflection of dominant theories in management, finance and economics. In the future, researchers should redefine their role primarily as developing, testing and adapting alternative research methodologies that allow future-oriented problem solving. They should further engage in an ongoing dialogue with stakeholders in order to jointly identify research topics and add value by ensuring academic rigor and a critical academic perspective (see the collaboratory). As a result, management education institutions would develop solutions for societal stakeholders rather than their peers.

• Supporting companies towards stewardship
Creating long-term societal value requires organizations to view their business in the context of environmental, societal, economic, political, cultural and systemic dynamics. Understanding and evaluating the potential impact of strategic choices requires a new framework to evaluate if and how companies can embrace stewardship and how they can take steps to implement the related transformational changes. Such a framework includes the development of useable and comparable measures between and within industries. One suggestion is the adoption of a hybrid model, situated between current consulting and traditional academic research, helping organizations with simulations, crowdsourcing, research action labs, reporting and analysis beyond the existing limits and the framework of day-to-day perspectives within an organization.

• Accompanying leaders in their transformation
Leadership development is a life-long learning adventure that progresses along different stages of mastery. Retraining existing leaders in positions of responsibility is a different challenge. Businesses adopt stronger leadership by enabling their managers and leaders to think “outside the box,” to determine how to make their business truly sustainable. We envision combined corporate university, business school and leadership centers to facilitate the learning process of an executive, both on the job and away in guided reflection – a concept further discussed in our framework of the “sanctuary.”

“The management school of the future has no walls that prevent a free and liberal exchange between various contributors to learning and research.”

Role 3: Engaging in the Transformation of Business and the Economy
Leadership is needed to manage the debate concerning the necessary transformation of the economic system towards a system that serves societal progress. The scale of the task across the world requires multiple simultaneous approaches across the globe. As sustainability and scenarios beyond growth gain momentum, management education providers will need to support business and other stakeholders in achieving the challenges ahead. Business and management scholars can lead the public debate concerning new economic and business models, enabling the general public to understand the stakes and direct relevant community action to drive these changes. This will require new and wider forms of collaboration between academia and the professional world. Management educators themselves must become role models supporting the concept of the common good.

The three enablers for engaging in the transformation of business and society are:

• Open access between academia and practice
The management school of the future has no walls that prevent a free and liberal exchange between various contributors to learning and research. Titles and tenure are no longer to be venerated. Both professors and practitioners will shuttle back and forth between management schools and applied work in organizations, be it in business, public office or NGOs. Likewise, the management schools’ doors are open to experienced practitioners from business and any other field of activity, to reflect on and contribute their insights, experience, and knowledge to the learning and research environment. These forms of interaction serve as a key ingredient when creating an effective platform for action-learning and research (the collaboratory).

• Faculty as public intellectuals
The far-reaching changes in our economies and societies require that scholars accept the role of public intellectuals, addressing critical developments, and providing knowledge and expertise to public debates. Business and management scholars need to move away from highly ambitious scholarly work chiefly aimed at other scholars or the scientific community. The regular tasks of all business and management faculties should be to serve as public intellectuals who are proactively engaged through their research, teaching, and public services. Further, management schools need to find ways to reward these tasks through performance appraisals and promotions.

• Institutions as role models
Management educators need to fundamentally rethink their own organizational models in order to become role models for a world seeking socially, environmentally and economically just organizations that contribute to the well-being of society. Such a change will involve new models in funding, decision making, governance, compensation and value creation. Faculty and administration are challenged to display the same levels of globally responsible leadership they would wish to see in their fellow learners and participants. As such, the organization serves as a showcase of transformation, thereby shaping the revised definitions of for-profit and not-for-profit organizations under the new paradigm of shared value creation. Ideally, management educators become role models in a learning journey that reveals new methods of leading and managing an organization.

Part 2 ( to be published in the next TEBR issue) will cover key insights with input from key stakeholder groups of management education (students, alumni, civil society, the business community, NGOs, and management scholars and administrators). It also develops the essence of the vision, the collaboratory, in more detail.

About the Authors
Katrin Muff (DBA) is Dean of Business School Lausanne (BSL), Switzerland, since 2008 (www.bsl-lausanne.ch). Under her leadership, the school expanded its vision from a focus on entrepreneurship to embrace also responsibility and sustainability into a three-pillar vision for both education and applied research. She previously worked for Schindler in Switzerland and Australia and for Alcoa in Switzerland and the United States, and as General Manager of their first Russian manufacturing plant in Moscow, Russia. She is the co-founder of Yupango, a coaching consultancy dedicated to developing start-up companies and training management teams. She can be contacted at: katrin.muff@bsl-lausanne.ch

Thomas Dyllick (Dr. oec. HSG) is a Professor of Sustainability Management and Managing Director of the Institute for Economy and the Environment at University of St. Gallen, Switzerland. He currently serves as University Delegate for Responsibility and Sustainability. He was vice-president in charge of teaching and quality development (2003–2011) and dean of the University of St. Gallen’s Management Department (2001-2003). He is the author of several books and many publications in the fields of corporate sustainability, sustainable development, and management education, and serves on a number of boards. He can be contacted at: thomas.dyllick@unisg.ch

Mark Drewell MA (OXON), FRSA is the CEO of the Globally Responsible Leadership Initiative, a worldwide partnership of companies and business schools taking action to develop the next generation of globally responsible leaders. He spent 20 years working in South Africa with Barloworld Limited where he headed Corporate Affairs, Investor Relations and Group Marketing and led the company’s move into sustainability. His contributions to society include having chaired the boards of The World’s Children’s Prize for the Rights of the Child and the Endangered Wildlife Trust. He is a frequent public speaker. He can be contacted at: mark.drewell@grli.org

John North is a next generation integrational entrepreneur. He worked as an international strategy consultant advising Fortune 500 companies and was the founding head of Accenture’s sustainability practice in Ireland. He came back to South Africa in 2009, where he combines local work as the senior advisor to the Albert Luthuli Centre for Responsible Leadership, University of Pretoria and the Project Head of UN-backed Globally Responsible Leadership Initiative. In the latter role he is focussed on a series of implementation projects of the 50+20 Agenda of management education in service of society (50plus20.org). He can be contacted at: john@hypernorth.com

Paul Shrivastava (PhD) is the David O’Brien Distinguished Professor of Sustainable Enterprise at the John Molson School of Business, Concordia University, Montreal. He also serves as Senior Advisor on sustainability at Bucknell University and the Indian Institute of Management-Shillong, India. In addition, he serves on the Board of Trustees of DeSales University, Allentown, Pennsylvania. He also leads the International Research Chair in Art and Sustainable Enterprise at ICN Business School, Nancy, France. In these roles he combines scientific and artistic approaches to sustainable development. He can be contacted at: paul.shri@gmail.com

Jonas Haertle is Head of the Principles for Responsible Management Education (PRME) secretariat of the United Nations Global Compact Office. Previously, he was the coordinator of the UN Global Compact’s Local Networks in Latin America, Africa and the Middle East. Prior to joining the United Nations, Jonas worked as a research analyst for the German public broadcasting service Norddeutscher Rundfunk. He can be contacted at: haertle@unglobalcompact.org

By Vimal Choudhary, Martin Dewhurst & Alok Kshirsagar

As Western multinationals shift their focus to emerging markets, they must adjust their structures, processes, and decision-making speed to compete successfully. This article explores the challenges presented by emerging markets and offers several approaches to successfully survive within them.

Many leading Western multinational corporations expect that their future success will depend on their ability to win in emerging markets. They project that the share of their business based in emerging markets will increase from some 20 per cent to 50 per cent or more over the next decade. While their intentions are clear, results thus far have been mixed, even for those Western multinationals that have operated in emerging markets for several decades.

Our experience and research suggests that companies are still learning how to organise for success in these markets. They are looking for better ways to allocate financial and human resources to match their aspirations. They are trying to attract and retain senior talent with the skills to align stakeholders in a global network and the entrepreneurialism to drive initiatives on the ground. They are working to innovate so they can be relevant in a local market at the prevailing price point, all while maintaining global quality standards. They are exploring how to improve risk management to accelerate the “metabolic rate” of decision making in a complex matrix organised by products, segments, countries, and functions. And they are working out when they should get into emerging markets and how they will sustain long-term commitments once they do so.

“Companies are finding ways to entice local talent, customise their innovation processes, and develop new kinds of partnerships.”

Some leading globalisers are coming up with solutions that work in emerging markets; in the face of new challenges, a few are even throwing out the playbooks that worked so well at home. Companies are finding ways to entice local talent, customise their innovation processes, and develop new kinds of partnerships. Those moves allow them to follow through on bold and public commitments to emerging markets, entrusting more power to their local organisations and simultaneously unifying the global organisation with a set of core values.

The challenges
Our research indicates that Western multinationals routinely confront five main challenges in emerging markets.

Challenge 1: Mismatched resources
Leaders often do not allocate the right resources to emerging markets—for example, one analysis showed that while leaders of large global companies saw a potential for 34 per cent of their sales to come from emerging markets in Asia, they currently have only 2 per cent of their top 200 employees in those countries, just 3 per cent of their R&D budget is spent there, and 5 per cent of assets are located there.¹

Leaders may need some convincing to change this resource allocation; the emerging-markets business heads we have talked with say that global headquarters sometimes see more risk than reward in many emerging markets, where returns can be volatile or uncertain. One business leader said, “Emerging markets will soon be 50 per cent of our revenue, but all our developed-market executives want to talk about is the risk.” And plenty of global executives, he added, are reluctant to change their own responsibilities to place more organisational emphasis on emerging markets. Even when leaders agree with the need to rebalance in principle, making it happen has been difficult for both business reasons (for instance, it is difficult to find enough local talent) and psychological ones (for example, headquarters staff may be reluctant to change the way they work).

Challenge 2: Talent
Western multinationals face a number of challenges getting the right people in the right places: a shortage of senior global leaders with sufficient breadth of experience and mind-sets, a huge shortfall of local leaders with the skills (including English language skills) needed to work both locally and globally, and strong competition for talent at all levels from local as well as global competitors. Most executive talent pools in emerging markets are small. There are simply not enough people who know the local market thoroughly, understand what it takes to execute strategies, and are credible with the country’s senior stakeholders.

Although finding such people is a challenge, a bigger one is retaining them: good executives in emerging markets no longer want to work for a “branch” of a global company, and today they have plenty of other options as local companies become increasingly global themselves. Whether people leave because of what an executive at one global bank referred to as a “local glass ceiling,” meaning they see no chance to move up in the global organisation or do not want to move overseas in order to do so, or because they are poached by local competitors offering more money and greater responsibilities, the result for a global company is the same: a shortage at the top. A further challenge is that many local executives can be daunted by the matrix structures that global firms commonly use; they do not have the usual networks of mentors and advisers needed to navigate a complex global organisation.

Challenge 3: Innovation
International products and prices do not always translate into profits in emerging markets, particularly for consumer industries. Significant differences in income, language, literacy, social diversity, and urbanisation can make it difficult for companies to offer a standard global (or even regional) product. And yet expectations are high; emerging-market customers frequently demand products with most of the same features as their developed-market counterparts, but at a fraction of the price. A one-minute mobile phone call in the US can cost 10 to 50 cents. In India, that same call can be made for less than a penny, due in large part to innovations like Airtel’s “minutes factory” approach, in which much of the capital-intensive business of network deployment is outsourced to other companies, allowing the operator to adjust its costs to match demand. Most global companies are simply not organised to support this degree of innovation; when they do try, they are often slower than local competitors. To be fully effective, however, will require radical innovation.

“Significant differences in income, language, literacy, social diversity, and urbanisation can make it difficult for companies to offer a standard global (or even regional) product.”

There is a second dimension of the innovation challenge for many global companies as, when innovations succeed in one local market, it may be highly valuable to export the concept to other markets. Although some organisations are becoming proficient at leveraging this so-called “reverse innovation,” most do not believe they are capturing the full global potential of innovations originating from emerging markets.

Challenge 4: Risk and stakeholder management
No matter how successful a global organisation is at managing risk at home, the task is larger for emerging markets: companies must manage multiple regulatory regimes, which may be less stable than in developed markets, as well as a diverse range of business practices. And operating in an ever-expanding number of regions and countries exposes the organisation, naturally, to more varied risks. These could include political complexities (which can, for example, delay decision making between the national and state or local levels), geopolitical risks (such as nationalisation of assets), a high level of government influence on the market (for example, in China, the government can influence more than 50 per cent of the relevant market for some global organisations), governance issues such as corruption, and social tensions.

“No matter how successful a global organisation is at managing risk at home, the task is larger for emerging markets: companies must manage multiple regulatory regimes, which may be less stable than in developed markets, as well as a diverse range of business practices.”

Some emerging-market risks can be difficult to assess—and easy to overestimate—given a lack of local knowledge, distance from corporate expertise, or poor connections with local stakeholders. This challenge is compounded by technology, as social media, blogs, and other new formats require increased attention and rapid responses. Indeed, the chairman of a global organisation in India said, “Anywhere between 25 and 50 per cent of our CEO’s time is spent on regulatory management.”

Challenge 5: Early and long-term commitment
Western companies’ operations in emerging markets can become stuck in what we have come to call a “midway profitability trap”: these businesses see some success but suffer from a lack of commitment to increase investments and build operations or management systems specific to a given market. Executives have told us that some senior leaders are gun-shy from previous crises, which accounts for the half-hearted commitment. Yet emerging-market policy makers and entrepreneurs have long memories, and “state visits” by the global CEO or chairman are not sufficient to maintain good relationships if a company’s commercial dedication is seen to have faltered.

How to win
Some multinational companies in emerging markets have already seen incredible success; for example, Telefónica transformed itself from a state-owned Spanish telecommunications company to a broad-based player with a deep footprint across Latin America. Throughout those emerging markets, it has close to 30 per cent market share and is either the number one or number two player. Many global companies—such as GE, Citigroup, Unilever, and P&G—also have rich histories in emerging markets with decades of experience in building large businesses and global talent pools. From our research, including conversations with executives at these companies and many others, we have begun to identify some crosscutting organisational solutions to overcome the challenges described above. Even the most advanced of these players would not claim to have solved all the issues. However, for companies that possess a strong emerging-market footprint as well as for those who aspire to, the following approaches are worth considering.

Approach 1: Manage talent with a local eye
Companies need to ensure that there are multiple paths to success for local leaders, even if they start their careers in low-profit or “less core” markets. One approach involves shifting regional or global responsibilities to emerging markets. Similarly, companies can place functional or geographical hubs in emerging markets, as GE, Honeywell, Dell, and Cisco have done. For example, Cisco’s Globalization Center East in Bangalore was established to develop local leaders in functional areas who will, in short order, account for 20 per cent of the company’s senior leadership team.

Efforts such as these can also help local executives develop deeper functional expertise, thus opening another path to success.

“Companies need to ensure that there are multiple paths to success for local leaders, even if they start their careers in low-profit or “less core” markets. One approach involves shifting regional or global responsibilities to emerging markets.”

In addition, companies must make sure their core value proposition to talent is appropriate to emerging markets. At one company, emerging-market businesses grew by double digits in one year and also had strong operating margins, while the global business unit grew by only 2 per cent. If the company had adhered to its policy of aligning incentives to global performance, the emerging markets would have received low pay-outs, undermining their accomplishment and demotivating their future performance. The company therefore reallocated its global bonus pool to raise pay-outs in the emerging markets. Unsurprisingly, questions of equity arose as the company debated the relative contributions of global support and local execution. One tactic to manage those concerns is to establish a separate bonus pool for high performers in emerging markets.

It is also important to recognise cultural differences in the kinds of incentives people value. Many young Russians who are starting their careers in sales, for example, value higher salaries, prestigious titles, and other visible signs of success more than long-term compensation such as stock options or pensions.
Skill development at all levels is crucial. McDonald’s, for example, dealt with a lack of local skills by opening a Hamburger University in China in 2010. By 2014, it will train more than 4,000 employees, from operators to restaurant managers. At a more senior level, such investments can become a source of supply for global executive talent pools: in 2010, Unilever’s India unit relocated more than 200 managers to the global organisation to run operations in other markets. The company has also brought quite a few of these leaders back to India after their global rotations, finding that the combination of global expertise and local knowledge provides the best platform for success.

Approach 2: Bring new approaches to innovation
Though some products like airplanes or pharmaceuticals do not require significant customisation to succeed in emerging markets, most others do. The challenge is to balance the best of the “global” assets (the brand, opportunities to develop capabilities, and others) with the need to tailor locally—particularly given the rapid pace at which companies want to develop progressive and distinctive value propositions in their product portfolio. For example, well-intentioned innovation systems can be counter-productive if too much emphasis is placed on global standardisation. Instead it is critical to ensure that innovation captures local insights and responds to them at pace and scale—a challenge that frequently involves radically altering the company’s historical innovation process. Leading brewer SABMiller faced this issue in Africa. The company determined that through product innovation it could reach additional consumers at the “bottom of the pyramid.” In a couple of African markets, it changed from cereal crop inputs such as barley and maize to cassava, a local root crop that is taxed at a lower rate but which yields a beverage that consumers like. The early results are promising; the company expects with this low-priced beer it can attract additional consumers who until now have not been able to afford aspirational, but expensive, “conventional” malt-based beer.

Another African brewer was equally creative. In Kenya, Diageo realised that it had to compete with the local homebrews popular with many consumers. The company wanted to ensure consumers had access to safe and affordable beer, and so it had to change the way it typically brought new products to market. In this case, that meant involving an external stakeholder early in the process. The company successfully sought a temporary tax waiver (for itself and other brewers) from the government, which was also interested in reducing consumption of the sometimes contaminated and unhealthy homebrews.² In four years, Diageo has earned revenue of $250 million from its new Kenyan beers.

It is not just brewers who are innovative. In Colombia, Telefónica partnered with Banco de Bogotá and the National Federation of Coffee Growers to develop the Intelligent Coffee Identification Card, a card that identifies the 300,000 member growers. The card gives them secure access to mobile-banking services, a new business model developed by this pioneering three-way partnership. Within a month of the service’s launch in 4 municipalities, more than 1,300 transactions were recorded.

Some companies are now also recognizing the huge potential for revenue innovation that brings insight from emerging markets to the rest of the global business, particularly for accessing new pools of consumers. John Deere, for example, developed a no-frills tractor at its R&D centre in Pune, India, at a fraction of its normal cost. With some minor tweaks, the company now also sells these tractors to hobbyist farmers in the US who do not require advanced features. This in turn opened a new market for John Deere, which now exports half the tractors built in India.

Approach 3: Build broad and deep partnerships and collaborations
Success in emerging markets requires companies to focus externally as they need to establish extensive networks and look beyond traditional types of partnerships. Given the extensive influence of the state and its agencies in emerging markets, there may be far more opportunities for public-private partnerships like Diageo’s.

“Success in emerging markets requires companies to focus externally as they need to establish extensive networks and look beyond traditional types of partnerships.”

Another model is the joint venture, which has a mixed track record. Certainly those joint ventures based on well-defined roles, a long-term commitment, a shared vision of the goals, and strong and open communication to ensure all parties are aligned have greater chances of success. For example, joint ventures such as Tata Cummins and Bajaj Allianz in India have flourished because each partner brought complementary skills and assets (like deep distribution networks, customer insights, and high brand recognition) as well as long-term commitment.

Approach 4: Create “glue” with values
Working across cultures can be difficult. But executives we have talked with agree that values can be meaningfully translated across cultures and that creating a system of shared values does help hold a global company together—improving employee attraction and retention and, often, allowing for faster decision making, even on tough issues like risk management.

Johnson & Johnson applies this idea with its annual “Credo” survey, which asks the same core questions of all employees globally, with only minor adjustments for cultural differences. The survey, which every Johnson & Johnson employee is required to participate in, consists of 130 questions (90 common questions and approximately 40 country-specific questions, as in the case of Japan). An executive at another company described its approach as asking expatriate managers to “carry the strategy and values” while “creating space to understand the local environment.” One well-publicized approach was IBM’s “values jam,” which recently allowed over 319,000 IBM employees across the globe to contribute to the process of defining their company’s values.

Approach 5: Empower local organisations
Creating the appropriate “freedom to operate” so that multinationals can compete at the same pace and with the same flexibility as their local peers is a critical element of success. As one senior Indian executive at a global company put it, “We need empowerment—we can then utilise the global pool of contacts, knowledge, and resources we have.” Another global conglomerate recently consolidated all its business units in one important emerging market under a single country head, who now has direct profit-and-loss responsibilities. He makes all major decisions, including those related to headcount, pricing, and customisation, and all business unit heads in the country report to him rather than to global business unit leaders. This has helped concentrate resources and decision making to better serve local customer needs and ultimately achieve faster growth. An empowered country head can also help build strong relationships with the government and regulators.

Empowerment also means ensuring local leaders have a clearer line of sight to global leaders. In some cases, India and China CEOs now report directly to the global CEO. Other companies are grouping their businesses by growth opportunity rather than geography, putting typically high-growth emerging-market businesses together into one or more units so that their different economics, innovation needs, and risk management requirements can be recognised. For example GE and IBM have recently created very senior roles to oversee their “growth markets.” Structure, of course, is not the only approach. It is equally critical that governance and processes create the right level of involvement and empowerment. In one instance, a leading global telecommunications company established a Latin America operating committee with strong decision-making authority on the issues that affect that region’s business.

Approach 6: Make your commitment visible and senior
Companies need to maintain their focus in emerging markets: investments, especially strategic investments, should not fall victim to short-term financial concerns. This involves the CEO and top management making a commitment to emerging markets and maintaining it, investing in local leadership and R&D, and building sustainable and healthy communities through corporate social responsibility. Novartis, for example, announced a $500 million investment in Russia in manufacturing and local R&D to demonstrate its commitment toward the market. Similarly, Wal-Mart Stores recently announced a training and education program in collaboration with nongovernmental organisations aimed at teaching critical life skills that will benefit about 60,000 women working in its suppliers’ factories in India, Bangladesh, and China. Listing shares on local exchanges, especially in bigger markets, where allowed (as Unilever and Diageo have done), can attract local investors and provide the additional benefit of demonstrating strong commitment. Companies like AstraZeneca stage “analyst days” that focus on emerging markets to highlight their operations and signal their commitment to those countries.

“Companies need to maintain their focus in emerging markets: investments, especially strategic investments, should not fall victim to short-term financial concerns.”

There are many exciting opportunities for Western multinationals as they mobilise their global capabilities, people, and technology to expand in emerging markets. Many of these companies have already made important progress. But it will not be a rising tide for all; the leaders will be the ones to make significant changes to their ambitions, capabilities, and talent management—and sustain them—to capture the full potential.

Local managers must also ensure that global leaders really understand the opportunities—and challenges—of each local market. Cisco’s Globalization Center East in Bangalore, which is primarily a leadership development centre, also acts as a closely connected extension of corporate headquarters. Holding board meetings in important emerging markets is another tactic some companies are starting to use. Leaders at Starwood Hotels have committed to spending time in the company’s most significant markets: they spend a month in China one year and in India the next. Companies can also benefit from appointing directors and creating senior advisory boards with deep, insider knowledge of these markets, which can act as a source of key intelligence and guidance.

Many companies are starting to establish big R&D centres in emerging markets to tap talent and cost advantages and to increase their ability to tailor products for local markets. Indeed, there are now 1,200 multinational R&D centres in China representing a $12.8 billion investment; 4 of IBM’s 11 research centres are in emerging markets. One heavy-manufacturing conglomerate tends to establish its global training centres in emerging markets (it recently added one in Thailand). That helps the company to both develop skills among local workers and signal a long-term commitment.

It is also important to contribute to the local community by fulfilling corporate social responsibility commitments. In China, for example, Siemens has worked closely with regional governments on energy efficiency, donated to healthcare programs, and provided advanced medical equipment to rural areas.

Finally, Western multinationals can also learn from Asian companies like LG, which is now a top three player in most consumer durables categories in India. The company’s initial entry was not particularly smooth, and it included some failed joint ventures. But it remained committed, maintained its investment, supported the local organisation, and over time attained great success.

About the Authors
Vimal Choudhary is a consultant in McKinsey’s New Delhi office, Martin Dewhurst is a director in McKinsey’s London office, and Alok Kshirsagar is a director in McKinsey’s Mumbai office.

References
1. “Multinationals in Asia: All mouth no trousers,” The Economist, March 29, 2007.
2. “Easier said than done,” The Economist, April 15, 2010.

By Luciara Nardon, Richard M. Steers & Carlos J. Sanchez-Runde

In our globally expanding economy, it is no longer enough for successful managers to have great directive skills, they must also be able to understand and adapt to the different cultures they operate in. The recently published Management Across Cultures: Developing Global Competencies (Cambridge University Press) takes a look at the ideological challenges managers are faced with and proposes different strategies for developing greater multicultural competence.

Introduction
IBM executive Michael Cannon-Brookes recently observed, “You get very different thinking if you sit in Shanghai, Sao Paulo, or Dubai than if you sit in New York.” All too often, the essence of this observation is lost on global managers—and would-be global managers—as they seek to make their way in an increasingly complex and nuanced business environment.Many managers working across borders fail to recognize that not everyone agrees with their perception of the facts; not everyone agrees on the meaning of a contract; not everyone agrees on how to lead a company; and, indeed, not everyone agrees on the proper role of supervisors and managers themselves. Uncertainty—and, more importantly, ambiguity—faces managers at every turn. And increasingly, managers realize that that much of what they believe they see around themselves is often something entirely different. Why does this occur with alarming regularity? And what can informed managers do to moderate or attenuate the impact of such contradictions?

“Many managers working across borders fail to recognize that not everyone agrees with their perception of the facts.”

We live in a turbulent and contradictory world, where there are few certainties and change is constant. Over time, we increasingly come to realize that business cycles are becoming more dynamic and unpredictable, and companies, institutions, and employees come and go with increasingly regularity. Much of this uncertainty is the result of economic forces that are beyond the control of individuals and major corporations. Much results from recent waves of technological change that resist pressures for stability or predictability. And much results from individual and corporate failures to understand the realities on the ground when they pit themselves against local institutions, competitors, and cultures. Knowledge is power when it comes to global business and, as our knowledge base becomes more uncertain, companies and their managers need to seek help wherever they can find it.

Considering the amount of knowledge required to succeed in today’s global business environment and the speed with which this knowledge becomes obsolete, developing an ability to work successfully with partners in different parts of the world is possibly the best strategy available to managers and companies that want to succeed. Business and institutional knowledge is transmitted through interpersonal interactions and, if managers are able to build mutually beneficial interpersonal relationships with partners around the world, they may be able to overcome their knowledge gaps.

We suggest that what often differentiates effective global managers from less effective ones is not so much their managerial skills – although this is obviously important – but the combination of these skills with additional multicultural competencies that allow people to apply their managerial skills across a diverse spectrum of business environments.

What is multicultural competence?
Whether relocating to a foreign country as an expatriate, traveling around the world as a frequent flyer, or dealing with foreigners in one’s home country, managers often face important cultural challenges. Different cultures have different assumptions, behaviours, communication styles, as well as expectations concerning management practices. The ability to deal with these differences in ways that are both appropriate and effective goes by many names, but we refer to it simply as multicultural competence (MCC).

MCC represents the capacity to work successfully across cultures. Being multiculturally competent is more than just being polite or empathetic to people from other cultures; it is getting things done through people by capitalizing on cultural diversity. It includes skills such as identifying cultural rules, changing and creating group cultural norms, communicating across cultures, dealing with conflict, developing trust based relationships, understanding the constraints and opportunities imposed by the micro-context of an interaction, and manipulating those when appropriate.

“What often differentiates successful global managers from unsuccessful ones is that they have developed a way of thinking about the world that is flexible and inclusive.”

Developing multicultural competence
Developing global managers is no easy task. Indeed, a pivotal question facing both training directors and managers themselves is exactly how global managers can be developed. As a result, managers often turn for advice to those who specialize in cross-cultural training and development for help in preparing for foreign assignments. But this over-reliance on others – instead of on oneself – can carry risks. Much has been written on the topic of developing global management skills, and much of what has been written is contradictory, simplistic, and sometimes simply incorrect. Successful global managers tend to rely on themselves, including their own perceptions and assessments of what is going on in the world. They often require personal insight more than outside advice. Indeed, what often differentiates successful global managers from unsuccessful ones is that they have developed a way of thinking about the world that is flexible and inclusive and guides their behaviour across cultures and national boundaries.

Google
Consider how Google is training its new generation of managers. Google is now sending its young ‘brainiacs’ on a worldwide mission.¹ One recent group of trainees began their journey in a small village outside of Bangalore, India. There were no computers in the tiny village, only unpaved roads surrounded by open fields where elephants roamed and trampled local crops at will. The visit was aimed at educating Google associate product managers about the humble, unwired ways of life experienced by billions of people around the world. On their first day in Bangalore, the visitors went to the Commercial Street shopping district for a bartering competition. Each Google manager was given 500 rupees (about $13) to spend on ‘items that don’t suck,’ with a prize given to the one who attained the highest discount on the purchase. For most, it was the first time they had to bargain with street vendors. “I usually shop at Neiman Marcus,” observed one manager, after she bargained the price of a necklace down from 375 rupees to 250. But one of her colleagues won the competition by purchasing a deep-burgundy sherwani – a traditional Indian outfit – for one-third of the original asking price. The journey continued, as did the learning.

The example of Google’s traveling managers illustrates how this and many other companies search to find unique ways to educate their managers about both the global challenges facing them and the strategies that can help them succeed. In the case of Google, managers were intentionally placed in unfamiliar circumstances where they quickly had to seek understanding and be aware of their first-hand experiences. They needed to reflect and make sense of these experiences and identify important lessons for the future. At the same time, these managers had to organize what they saw and develop theories-in-use for future actions that could be tried when they returned to the field. Note that Google went to great lengths to allow their managers to fail as well as succeed. Note, too, that there were few safety nets.

Experiential learning and informed sense-making
Google’s strategy is in line with research on experiential learning.² This body of research suggests that we learn through experience if we are able to reflect and make sense of those experiences and transfer this understanding into new theories of action that will guide our future behaviour. As illustrated in exhibit 1 (two center circles), learning is a result of observing, reflecting and making sense of experience. This “processed” experience can than be integrated into learning that will guide future experiences and sensemaking efforts.

Experience alone does not guarantee learning; the world is full of repeated mistakes. In order to learn from experience it is necessary to make sense of what happened, understand the causes of problems, the strategies that worked and the ones that didn’t, and more importantly understand why things turned out the way they did. We refer to this process of reflection and understanding as informed sensemaking, to highlight the fact that a heightened level of self- awareness and understanding of the processes surrounding the experience and the context of the experience is necessary. Inexperienced managers engaging in a cross-cultural situation may be able to notice symptoms, such as a difficulty to negotiate an agreement with a foreign partner, but may not be able to understand the causes of that difficulty or identify possible solutions.

Multiculturally competent managers are able to make sense of situations by seeking answers to two main questions: “what is going on here?” and “what should I do?” “What is going on here?” involves an understanding of the situation where the manager is – is this interaction happening at home, at the business partner’s territory, or somewhere else? It also involves an awareness of one’s own actions – how am I behaving? Is this behaviour appropriate? Is this behaviour helping me to achieve my desired outcomes? It also requires a reflection on the reasons behind what is happening. Why am I unable to reach an agreement? Is it a communication problem, or is it the result of an incompatibility of goals?

With a deep understanding of what is happening, managers can then answer the question “what should I do?” Here it is helpful to think of a simple model of managerial choice and action originally introduced by Oxford University Professor Rosemary Stewart.³ Stewart makes a cogent argument for rethinking our approach to management, global or otherwise. The model’s central argument is that all managerial work is confined in varying degrees by existing demands (what people must do) and constraints (what people must not do). However, within these limitations, managers typically have choices about what is done and how it is done. This is where managerial abilities and skills take centre stage. The challenge for the manager is to understand the constraints—cultural, organizational, and situational—within his or her environment and then act within these limitations.

As illustrated in exhibit 2, informed sensemaking relies on observations and prior knowledge as well as in an active search of information to understand what is going on. As managers try to make sense of an on going situation they rely on their observation skills to identify as many cues as possible regarding the current situation. They draw upon prior knowledge and experience in order to look for similar situations that can provide insight into the present, and they seek out the missing information through multiple means, including asking questions when appropriate, consulting with more experienced individuals, or testing alternative scenarios.

What differentiates multicultural competent managers from others is that they have sophisticated models of culture and human behaviour that are situationally dependent. They have a deep understanding of how and when culture influences behaviour and they continuously refine their models as they engage in new cross-cultural situations. The challenge facing inexperienced managers is to develop a foundation of understanding that will allow them to make sense of their first cross-cultural experiences and use them as a platform for further learning.

Strategies for developing multicultural competence
Multicultural competence is obviously not a have-or-have-not proposition; it is a matter of degree. Most managers by their very education and experience understand how behaviours can differ across cultures. The challenge, therefore, is to enhance this set of skills in ways that managers can capitalize on when the find themselves “in the trenches.” To accomplish this, we suggest three principal strategies, illustrated in exhibit 1 (outer circle):

1. Acquire foundational understanding
As a starting point, global managers can work to enhance their knowledge and awareness of human behaviour and how it can be influenced by cultural and contextual variables. This knowledge can be instrumental in facilitating sensemaking when a manager is exposed to novel situations. This understanding may be acquired through seeking information about culture and human behaviour in general, as well as specific cultures of interest, and by reflecting upon their own and others’ experiences, observations, and analyses. The goal here is to better understand why other people did what they did, not necessarily to evaluate it. As managers progress in their global career and are increasingly exposed to other cultures and contexts, this foundational knowledge will expand and become more sophisticated.

Managers can also work to enhance their own self-awareness and understanding. Self-learning may sound a little esoteric and disconnected from the business world, but it is probably one of the most critical tools for a successful global career. Being self-aware means knowing one’s own values, beliefs, styles, and patterns of behaviour, and being able to explain these to others. It also includes recognizing when they are not having the desired effect. For example, a manager that is typically highly assertive or direct when communicating may need to adjust or explain his or her style in a cross-cultural setting in which individuals from other cultures expect more subtle and indirect ways of communicating. Given the innumerable situations facing global managers on a daily basis, it is clearly not possible to learn about all individuals and situations a priori, but knowing about oneself is already half of the work.

2. Seek multicultural experiences
People learn and develop based largely on their past experiences and past mistakes. 13^th century Middle Eastern Mullah Nasrudin, once observed “Good judgment comes from experience; experience comes from bad judgment.” In our view, this is particularly noteworthy with regards to global managers. People try, make mistakes, and learn from those mistakes. This is the essence of experiential learning. Thankfully, multicultural experiences are easily available. In the world we live today, it is no longer necessary to cross the world to have a multicultural experience. With the high levels of global migration, many societies have multiple cultures represented. Seeking out different cultures in our own neighbourhood may go along way in sharpening our understanding of culture and human behaviour and developing a starting point for the development of multicultural competence. In addition, increasing arrays of short-term foreign experiences are available for aspiring global managers to hone their skills.

3. Consolidate learning: Develop theories in use or action plans
Once a manager has an understanding of what is required, the next step includes adjusting his or her behavioural strategies and creating, and then experimenting with, new action plans in the field. For example, the manager that has realized her tendency to direct and assertive communication, now needs to develop the skill to communicate more indirectly. From a managerial standpoint, the fundamental challenge is not just to learn but also to consolidate learning so it becomes an integral part of people’s daily routines.

“Managers need both managerial and multicultural competencies to succeed in today’s complex business environment.”

Conclusion
In this article, we have argued that managers need both managerial and multicultural competencies to succeed in today’s complex business environment. As noted above, global managers must succeed equally in New York, Shanghai, or Buenos Aires, requiring enhanced insight and understanding into environmental and situational differences, as well as sufficient awareness and flexibility to adjust to unique situations on the run.

This required balance is both difficult to attain and sometimes even more difficult to maintain. Situations facing managers are highly dynamic and variable. As a consequence, there is just so much that managers can learn in preparation to the difficulties of global work, and a significant part of the learning must happen on the fly, as new situations emerge and evolve. The success of any cross-cultural interaction (and mono-cultural interactions as well) is the result of some type of interdependent learning in which the parties involved learn about each other’s goals, preferences, styles, and limitations, and negotiate ways of working together. This learning is a continuous and on going activity that overtime will shape the way a manager thinks and acts, but also will shape the situation itself. Throughout this process, the manager as a critical thinker becomes at least as important as the manager as an initiator.

This article is based on the recent book by the authors, Management Across Cultures: Developing Global Competencies (Cambridge University Press, 2013).

About the Authors
Luciara Nardon is an Assistant Professor of International Business at the Sprott School of Business, Carleton University. She has taught graduate and undergraduate courses in Belgium, Brazil, Canada, Denmark, and the US. Her research explores the role of culture on management practice, with particular emphasis on identifying skills and processes required to succeed in multicultural environments. Her latest publications include the book Management Across Cultures: Developing Global Competencies and articles in the Journal of World Business, Organizational Dynamics, and Asia Pacific Business Review among others. She is currently in the editorial board of the Journal of World Business.

Richard M. Steers is professor emeritus of organization and management in the Charles Lundquist College of Business, University of Oregon. His research interests include employee motivation, leadership, and cross-cultural management. He is a past president and fellow of the Academy of Management and currently Senior Editor of the Journal of World Business. His most recent books include Management Across Cultures: Developing. He has held academic appointments in England, Japan, the Netherlands, South Africa, South Korea, and the US.

Carlos J. Sanchez-Runde is SEAT-Volkswagen Professor of Work Relations at IESE Business School. He has hold visiting appointments at universities in Argentina, Chile, Mexico, Peru, Uruguay and the US. His research centres on cross-cultural employee motivation and personnel practices. His latest work includes a forthcoming paper on cross-cultural ethics for the Journal of Business Ethics and the second edition of “Management across Cultures“, both coauthored with professors Nardon and Steers, and the teaching case “Haier in Japan” (IESE Publishing 2012, with professors Lee Yih-teen and Sebastian Reiche).

References
1. Steven Levy, “Google goes globe-trotting,” Newsweek, November 12, 2007, pp. 62–64.
2. Kolb, A. Y., and Kolb, D. A. 2005. Learning styles and learning spaces: Enhancing experiential learning in higher education. Academy of Management Learning and Education, 4: 193-212. Nardon, L., & Steers, R. M. (2008). The New Global Manager: Learning Cultures on the Fly. Organizational Dynamics, 37(1), 47-59.
3. Rosemary Stewart, (1982). Choices for the manager. Englewood Cliffs, NJ: Prentice-Hall, Global Competencies (Cambridge University Press, 2013) and the Handbook of Culture, Organization, and Work (Cambridge University Press, 2009).

By Markus Menz, Günter Müller-Stewens, Tim Zimmermann & Christian Lattwein

The chief strategy officer (CSO) position has recently been gaining prominence in European firms. However, little is known about this new executive role. In this article, the authors report some of their findings from a major research program that involved two surveys of CSOs and give a portrayal of the CSO’s role in continental European firms. The article further highlights how CSOs deal with the current uncertainty and how they professionalise their firm’s strategy activities.

Many European firms have been faced with increasing uncertainty and complexity over the past few years. The recent financial and European debt crises, fast-paced industry change, increased competitiveness, changing customer needs, new technologies, and more complex organisational structures of multibusiness and multinational corporations, are but a few examples. Owing to these developments, the need for professional strategy development and execution is now greater than ever before. As a consequence, firms increasingly often opt for a chief strategy officer (CSO), a senior executive who heads a dedicated strategy or corporate development department, which may employ more than a hundred full-time strategists.¹

We observed that the CSO position has recently become more prevalent in European firms and that there is a lack of knowledge on this new executive role. Therefore, the University of St. Gallen and Roland Berger Strategy Consultants initiated a major research program on the CSO’s role in 2011. Specifically, we conducted a survey with 90 CSOs of the 250 largest firms in Austria, Germany, and Switzerland in 2011, and another one with 54 CSOs from the same sample in 2012.² In addition, we conducted interviews and hosted several roundtables with selected CSOs from major corporations such as Daimler, Deutsche Bank, Migros and Siemens.

The purpose of this article is to give a portrayal of the CSO’s role in continental European firms and to illustrate how they deal with the uncertainties that their firm’s currently face. Since there have been first efforts to understand the CSO’s role in US and UK firms, we point out the important similarities and differences between the contexts.³ We also highlight what is generally needed to strategise effectively in these difficult times. CSOs are on the rise and increasingly qualify as future CEOs. Our findings therefore not only inform current strategists, other executives and consultants, but also practitioners and students eager to learn about this new role as a career opportunity.

“The need for professional strategy development and execution is now greater than ever before. As a consequence, firms increasingly often opt for a chief strategy officer (CSO).”

The nature of the CSO
Although the CSO position is a relatively new phenomenon, it has quickly become widespread in European firms. Almost all the firms in our study’s sample whose annual sales exceed one billion Euros have a CSO among their executive ranks. 76 per cent of the CSOs in our 2012 study report directly to the CEO and, thus, have a rather powerful position. They are, however, very rarely located on the first level of the organisational hierarchy, namely in the formal top management team (e.g. “Vorstand” or “Geschäftsleitung”). This also distinguishes the CSOs in European firms from their peers in the US, where almost 50 per cent were official members of their firm’s executive board in 2008.⁴

While we use “chief strategy officer” as an umbrella term for the strategy heads, the firms in our sample use many different titles for this position, for example, “head of corporate development”, “vice president strategy” and “senior vice president corporate strategy”. However, we also observe that European firms increasingly often use the title “chief strategy officer”. Although these variations indicate potential differences in the CSO’s role between firms,⁵ we find that several core activities are usually part of the CSO’s role and the respective strategy department (see Figure 1).

Firstly, CSOs are responsible for their firm’s corporate development activities. In our sample, 94 per cent of the CSOs consider strategy formulation/planning important or very important, and 89 per cent perceive strategic initiatives as (very) important activities that are part of their job. Moreover, CSOs often act as a sounding board for the CEO or the senior executive team. Interestingly, exploration and growth-oriented activities, for example new business (model) development, seem to be (very) important aspects of the CSO’s role.

Secondly and similarly, the CSO’s role involves portfolio management activities, such as strategic alliances, mergers and acquisitions, and divestitures. Thirdly, CSOs are typically engaged in managing their firm’s strategy process, which includes diverse tasks, such as competitive and market analyses and strategy implementation and monitoring. Finally, these executives may have an array of diverse activities that are related to other functional areas, such as marketing, corporate social responsibility and finance. We summarise these specialist tasks as “CEO assistance”.

While no standard career path seems to lead to a CSO position, several qualifications and types of experience are frequently found among the CSOs in European firms. About two third of the CSOs in our sample have a master’s degree in economics or business administration and about 40 per cent hold a doctoral degree, which is customary for senior executives in German-speaking firms. CSOs’ functional background varies; about one third has general management experience, while the rest have worked in diverse functional areas, such as strategy, marketing or finance. There is also some variance in their firm-specific experience; more than 40 per cent of the CSOs had less than two years’ experience in the focal firm when they were appointed as CSO.

The CSO’s role in times of uncertainty
CSOs in European firms currently face several challenges and opportunities. Uncertainty in the firm environment has serious implications for European firms’ and their CSO’s strategy activities. These issues affect all aspects of firms’ strategy processes and, thus, the CSO’s role itself.

Changes in the CSO’s role
A comparison between our 2011 and 2012 studies’ results reveals that CSO activities in the areas of strategy process management, corporate development and portfolio management have become more important. This is consistent with our observation that the CSO’s role has generally become more demanding. In addition, strategy implementation, which is typically at the heart of the CSO’s role, has gained importance. Conversations with CSOs in European firms revealed that, over the past few years, their role has evolved from focusing on strategic planning to being responsible for the entire strategy process, specifically implementing their firm’s strategy.

It is also noteworthy that acquisitions have become less relevant to the CSOs in our sample, while the importance of divestitures has increased. CSOs are in charge of refocusing or restructuring their firm’s business portfolio. These and activities to coordinate the firm’s businesses are becoming increasingly important aspects of the CSO’s role. This indicates that there is a need to realise efficiency synergies, for example, by means of joint procurement and supply chain management. In sum, these and other short-term shifts in the CSOs’ activities are a consequence of the increasing uncertainty and volatility in firms’ environment. They present a major challenge for these executives.

Leaner strategy process
CSOs agree that the increased uncertainty due to market volatility and other issues has a significant impact on their firm’s corporate development. Most CSOs consider a leaner strategy process key to being able to cope with the current situation. Our study shows that instead of addressing the environment’s increased complexity with an equally complex strategy process, CSOs focus on a few relevant aspects.

Accordingly, many of them, especially the CSOs of the larger firms in our study sample, do not think that the recent developments necessitate an increase in the number of strategists in their department. This is remarkable, given the small size of these central strategy departments. The average strategy department consists of about 11 full-time strategists (the Median is six employees) and only a few firms, for example, Deutsche Bank or Siemens, have many more strategists at their headquarters. Hence, CSOs do not seem to require more resources to address the recent challenges.

Megatrends as opportunity
A key task of the CSO is to consider the potential effect of long-term developments, frequently labelled “megatrends”, such as climate change, urbanisation, and demographic change, and integrate these into their firms’ strategic planning processes. Using the CSOs’ assessment of their firm’s financial performance to draw distinctions between them, we notice that the CSOs of high-performing firms are more likely to see megatrends as an opportunity than those of low performing firms. Otherwise, CSOs of low-performing firms are more likely to see megatrends as a threat than those of high-performing firms. Overall, CSOs of high-performing firms seem to be more long-term oriented and have a more optimistic view of the future than those of low-performing firms.

CSO’s collaboration with other functions
To address recent developments, firms increasingly launch strategic initiatives that involve cross-functional collaboration. There has recently been an increase in the number of centralised corporate functions and of respective functional top managers.⁶ Questions regarding which functions should and should not be centralised and how to integrate diverse functions into the firm’s strategy processes and strategic initiatives are critical.⁷ CSOs regard collaboration between strategic planning, risk management and operational planning as particularly critical to successfully dealing with current uncertainties.

Our study reveals considerable differences between high-performing and low-performing firms (see Figure 2). CSOs of more successful firms cooperate with selected growth-oriented functions, such as marketing, significantly more than CSOs of less successful firms. CSOs of low-performing firms more often collaborate with bottom-line functions, such as controlling, risk management and accounting, than their peers of more successful firms. Generally, we find that CSOs of high-performing firms are more likely than those of low-performing firms to focus their cross-functional collaboration efforts on specific selected functions.

Measuring CSO’s value creation
The CSOs in our study sample considered it important to measure the value creation of a firm’s centralised strategy department in general. However, this becomes even more relevant in times of uncertainty when there is increased pressure to justify the costs of a firm’s various centralised corporate functions. Most CSOs consider measuring their department’s value creation a (very) difficult task. They indicate that the strategy department’s value creation is primarily measured by the CEO’s perception thereof.

Fortunately, many CSOs currently professionalise their firm’s strategy activities, for example, by developing standardised methods to measure the performance of their strategy departments. While many firms still do not have a transparent and quantifiable way to regularly measure the impact of the strategy department’s value creation, CSOs are aware of the need for measures that rely on either objective criteria or the judgments of key stakeholders other than the CEO, such as divisional heads.

“Many firms still do not have a transparent and quantifiable way to regularly measure the impact of the strategy department’s value creation. CSOs are aware of the need for measures that rely on either objective criteria or the judgments of key stakeholders other than the CEO.”

The future of the CSO
Since uncertainty in the firm environment and organisational complexity are likely to further increase in the future, professional strategy activities will become more important. European firms seem to increasingly often appoint CSOs as members of their firm’s executive board, which has been quite common in US firms for a while. For example, the reinsurance firm Swiss Re recently announced: “Appointing John R. Dacey [Head Group Strategy & Strategic Investments] to the Group Executive Committee underscores the central role played by Group Strategy & Strategic Investments in advancing our strategy and exploiting our research expertise”.⁸ These firms highlight the importance of strategy by putting their CSOs in more powerful and influential positions.

In addition, the growing importance of strategizing capabilities can be observed in the increasing number of firms that appoint former CSOs – be it from inside or outside of the firm – to senior executive roles or even as their CEO. A former CSO of the electrical engineering giant Siemens, for example, became a member of the firm’s executive board. And recently, firms in different industries, such as the second-largest German airline Air Berlin, sportswear firm Puma and railway firm Deutsche Bahn, have appointed former CSOs as their CEO. In conclusion, the number of firms that select a CEO who has experience as a CSO will ultimately indicate the importance of professional strategy activities.

About the Authors
Markus Menz is an assistant professor of strategic management and the executive director of the master in business management programme at the University of St. Gallen (Switzerland). Previously, he was a visiting fellow at Harvard University. His research focuses on organisational units, teams, and individual executives involved in strategic leadership, particularly chief strategy officers. His work has been published in leading academic and practitioner journals, such as Strategic Management Journal and Journal of Management.

Günter Müller-Stewens is a professor and the managing director of the Institute of Management at the University of St. Gallen (Switzerland). His research interests centre on corporate strategy, mergers and acquisitions and the strategy process. He has co-authored several strategy books, most recently Corporate Strategy & Governance. He is the academic director of the master of strategy and international management (SIM) programme at the University of St.Gallen, which is ranked Number 1 in the Financial Times’s global ranking.

Tim Zimmermann is a partner at Roland Berger Strategy Consultants in Munich. His functional expertise covers all aspects of organisation, process reorganisation and human resources management. He has broad experience in developing and implementing management tools, processes and systems, especially in reorganisation situations such as corporate performance programmes or post-merger integrations. His specialties include modelling, benchmarking and shaping corporate management functions as part of corporate overhead.

Christian Lattwein is a senior consultant at Roland Berger Strategy Consultants in Frankfurt. His cross-industry expertise comprises corporate strategy, strategy implementation, corporate finance and valuation as well as performance management. His core competence is in quantitative and qualitative modelling of strategic scenarios and evaluation of strategic options in times of uncertainty.

References
1. Menz, M. and Scheef, C. (2013), “Chief Strategy Officers: Contingency Analysis of Their Presence in Top Management Teams”, Strategic Management Journal, forthcoming, DOI: 10.1002/smj.2104, 1-22.
2. Menz, M., Müller-Stewens, G., Henkel, C. B. and Reineke, B. (2012), “The Role of Chief Strategy Officers 2011”. St. Gallen/Munich: University of St. Gallen/Roland Berger Strategy Consultants. Menz, M., Müller-Stewens, G., Zimmermann, T. and Lattwein, C. (2013), “CSO’s Role in Times of Uncertainty, Report of the CSO Survey 2012”. St. Gallen/Munich: University of St. Gallen/Roland Berger Strategy Consultants.
3. Angwin, D., Paroutis, S. and Mitson, S. (2009), “Connecting up strategy: Are senior strategy directors the missing link?” California Management Review, 51(3): 74-94. Breene, R. T. S., Nunes, P. F. and Shill, W. E. (2007), “The Chief Strategy Officer”, Harvard Business Review, 85(10): 84-93. Menz, M. and Scheef, C. (2013), “Chief Strategy Officers: Contingency Analysis of their Presence in Top Management Teams”, Strategic Management Journal, forthcoming, DOI: 10.1002/smj.2104, 1-22.
4. Menz, M. and Scheef, C. (2013), “Chief Strategy Officers: Contingency Analysis of their Presence in Top Management Teams”, Strategic Management Journal, forthcoming, DOI: 10.1002/smj.2104, 1-22.
5. Menz, M., Müller-Stewens, G., Henkel, C. B. and Reineke, B. (2011), “Die vier Gesichter des Chefstrategen”, Harvard Business Manager, 33(11), 6-9. Menz, M., Müller-Stewens, G., Henkel, C. B. and Reineke, B. (2012), “The Role of Chief Strategy Officers 2011”. St. Gallen/Munich: University of St. Gallen/Roland Berger Strategy Consultants.
6. Guadalupe, M., Wulf, J. and Li, H. (2012), “The Rise of the Functional Manager: Changes Afoot in the C-Suite”, The European Business Review, 2012(May-June): 9-13. Menz, M. (2012), “Functional Top Management Team Members: A Review, Synthesis, and Research Agenda”, Journal of Management, 38(1), 45-80.
7. Campbell, A., Kunisch, S. and Müller-Stewens, G. (2012), “Are CEOs Getting the Best from Corporate Functions?”, MIT Sloan Management Review, 53(3): 12-14. Campbell, A., Kunisch, S. and Müller-Stewens, G. (2011), “To Centralize or Not to Centralize”, McKinsey Quarterly, 2011(June): 1-6.
8. Press Release of Swiss Re, http://www.swissre.com/media/news_releases/nr_20121019_gec.html (accessed on March 20, 2013).

Feature

By Karin Bursa

Does your company have the right S&OP process in place?

These 5 steps to success allow you to assess trade-offs between many interdependent business components: demand and market opportunities, customer service, inventory investments, production capabilities, supply availability, and distribution concerns.

The sales and operations planning (S&OP) process brings together all major operational departments—sales, marketing, inventory, procurement, manufacturing, and finance—to decide how best to manage company resources to profitably satisfy customer demand and pursue strategic initiatives. Today, companies view S&OP as a means to execute corporate strategy, which may include new markets, new product introductions, acquisitions, and much more.

Often the biggest obstacles to S&OP excellence stem from complexity—difficulty gathering data, too many meetings, a hard-to-govern process, or difficulty analysing key data. The natural tendency is to attend to the “squeaky wheel.” The change in thought process has to be towards the activity that provides the greatest impact toward reaching corporate goals and strategic alignment. Additionally, understanding the role of finance in S&OP and integrating it into the process is critical to fully understand the impact of forecasting sourcing, inventory, postponement, production and other pivotal business strategies.

So, while S&OP helps develop a plan and set priorities to maintain this focus, real success flows from practical thinking, guided by three principles: make it easy to implement, make it easy to execute, and make it easy to sustain.

“Often the biggest obstacles to S&OP excellence stem from complexity—difficulty gathering data, too many meetings, a hard-to-govern process, or difficulty analysing key data.”

5 Steps to Success
The monthly S&OP process aggregates results from connected and recurring planning processes. It allows executives to assess trade-offs between many interdependent business components: demand and market opportunities, customer service, inventory investments, production capabilities, supply availability, and distribution concerns.

A number of tasks and analyses must be completed prior to each executive S&OP meeting:

1. Innovation and Strategy Review – impact of new product introductions (NPIs)
2. Demand Review – base-line demand, demand sensing and demand shaping activities
3. Supply Review – monitor inventory levels and production capabilities
4. Financial Integration – ensure balanced demand and supply plans meet company financial objectives and are within working capital constraints
5. Executive Business Review – executives from all major departments review future plans and impact

Step 1 – Innovation and Strategy Review
Introducing new products is a key aspect of the innovation and strategy review. NPIs can significantly impact the well being of a company including inventory and lost sales. The ability to predict sales on NPIs, where there is no sales history to model, can be difficult. Companies that have been successful in managing NPIs utilise advanced techniques such as attribute-based forecasting which generates demand profiles for new products based on existing product demand tied to identifiable attributes such as style, colour, season, material type, etc.

In addition, attribute-based forecasting techniques can be used for product retirements. When retiring a product, the history for that product is no longer a reasonable indicator to predict a retirement demand profile. Attribute-based forecasting is a preferred method to predict how fast or slow the product will sell during the retirement phase by looking at how products with similar attributes have been previously retired.

Having solid forecasts for NPIs and retirements is an essential first step in preparing for the S&OP meeting.

Step 2 – Demand Review
A primary output of the S&OP process is a decision on the level of customer service the company will strive to achieve through the effective use of all of its resources. To plan to meet demand, you must know what current demand is and how it can change over time, the art and science of the forecast.

Proven forecasting techniques rely on rigorous statistical analysis of past demand including orders, shipments and point-of-sale (POS) patterns overlaid with demographics, product lifecycle projections, seasonality factors, and management judgment. These techniques abound for mature products with a sales history though each still requires consistent and accurate information. To this end, collaboration is critical and must be sought whenever possible while developing, refining and creating consensus forecasts. Customers, distributors, sales reps, and marketing all have information and insight that can augment and improve on the statistical forecast to boost accuracy.

“It is crucial during the financial integration step to balance key metrics against company financial objectives.”

Step 3 – Supply Review
Once the demand plan is finalised, the supply team needs to determine how they can meet the demand plan. Two elements are key in determining how to profitably satisfy the demand plan. They are:

1. Inventory Optimisation – how much inventory is currently available and where is it in the supply chain. Inventory is one of the largest investments that a company will make and is the primary determinant of customer service. It is therefore appropriate that inventory policy and specific inventory positioning decisions be key outcomes of the S&OP process. Where to keep product across the supply chain including raw material, WIP and finished goods helps optimise the financial investment in inventory.
2. Production and/or Procurement Optimisation – do we have the production or purchasing capability to meet the demand plan? The bottom line is about shipping product – when, where and how much. The challenge is to develop a supply plan that profitably meets company objectives.

Step 4 – Financial Integration
While the demand and supply teams have kept the company’s overall objectives in mind, in many businesses some bias creeps into the process. The financial review step helps remove that bias and reinforces the need to flexibly evaluate the S&OP plan in both volumetric and financial measures. It is at this time that all constituents agree on the final demand and supply plan and what alternative plans will be presented during the executive S&OP review.

It is crucial during the financial integration step to balance key metrics against company financial objectives. Leverage shared metrics as a technique to combat the tendency to look at objectives from a silo’d perspective.

“Successful sales and operations planning is a journey of continuous improvement that aligns an organisation strategically to execute tactically.”

Step 5 – Executive Business Review
The ultimate objective of the S&OP process is to leave the meeting with an operational plan that best achieves the company’s objectives within known constraints. The deliverable from the executive business review is a list of actions that implement the decisions and plans agreed upon.
Besides reviewing best case and alternative demand and supply scenarios, it is imperative that executives assess risks to their supply chain, including:

• Quality Issues
• Supplier Failure
• Demand Spikes
• Demand Disruptions
• Obsolescence

Understanding the impact from these and other risks and having contingency plans in place is paramount for any company. Having the supporting information from the demand, supply and financial teams makes this an informed decision as opposed to a ‘shooting from the hip’ decision.

Successful sales and operations planning is a journey of continuous improvement that aligns an organisation strategically to execute tactically. Smart companies prepare and create a defined, repeatable process executives have confidence in to develop and execute the best plan possible to drive the business toward its goals.

Ask yourself: Does your company have the right S&OP process in place?

About the Author
Karin L. Bursa is a vice president at Logility, a provider of collaborative supply chain management solutions. Ms. Bursa has more than 25 years of experience in the development, support and marketing of software solutions to improve and automate enterprise-wide operations. You can follow her industry insights at www.logility.com/blog. For more
information, please visit www.logility.com.

By Stephanie L. Woerner, Peter Weill, & Mark P. McDonald

Today’s technologically savvy firms have created an internal digital reuse culture that significantly reduces time-to-market without any extra costs. However, reuse remains an underutilized strategy in most companies because it requires a high level of organization, discipline and enterprise-wide exchange. This article explores how you can overcome these challenges by cultivating the three C’s: commitment, capabilities and communication.

During the recent global financial crisis, the Lubricants division of CEPSA, Spain’s second largest oil company, realized that it needed to change, and change fast. The division sells lubricants for industrial production in 55 gallon barrels. The one size dominated the company’s sales, yet in the face of the crisis, customers were asking for the product in various smaller sizes that the company did not support. The Lubricants Division could change its packaging line to support smaller sizes, but its systems were geared toward selling the product in a single size.

Reorienting the production line and systems was time critical as customers’ needs were changing rapidly. Leaders considered adding features to their system or installing new systems. That would take months – about the same amount of time it would take customers to switch to other suppliers. The Lubricants division found an answer in weeks, by reusing systems deployed by its sister retailing division. Was the solution perfect? No. Did it provide a solution that Lubricants needed now? Absolutely. Reusing existing digital assets was significantly faster than other alternatives and CEPSA was able to neutralize a rapidly emerging business threat.

Unfortunately too often time costs money, particularly when it comes to issues of time to market. Poor experiences condition executives to believe that realizing new capabilities quickly is costly and risky. That’s often true when everything you build is new. Digitally savvy executives recognize that apparently new problems are likely to have been solved in other areas of the business, at least in part. That recognition creates opportunities to deliver more capability in less time through reuse rather than new development. Nowhere are the opportunities for reuse as great as they are for an organization’s digital assets such as business processes, services, products, and data.¹ Why? Although you’ll spend some time and resources customizing the asset to the situation, the cost to copy a typical digital asset where you already own the rights is virtually zero.²

Reuse can sound like a ‘hand-me-down’ strategy when you can’t imagine how clothes not tailor-made for you will work. Far from it, we have recently completed a study of digital reuse (see About the Study) and the impacts are spectacular. We defined digital reuse as the use of existing business process, technologies, systems, and data to solve new business issues. Most of us now buy clothes off the rack as it’s faster and cheaper even if the items needs some minor adjustment – just imagine an enterprise-wide rack of digital assets to use and add to.

In our study of more than 1500 firms in 77 countries we found that firms achieving above average levels of digital reuse:

• Have higher revenue growth and margins (see Figure 1). The results here are stunning, with firms achieving above average reuse having over 12% more growth and 4% greater margin than below average reusers.
• Allocate more of their IT budget to growth and innovation investments. The average firm in our study spends 33% of its IT budget on new business initiatives with the rest going to run existing systems. High reuse organizations report increasing the new business initiative budget by 15 – 25% without an increase in the overall IT budget. Some leading firms like BMW and USAA have been able to reduce their run spend to 50%, freeing up the rest for new business initiatives.
• Have CIOs who better “meet business expectations,” which helps drive confidence and trust in the entire IT unit, enabling IT people to participate early in the strategy process. Among the contributions IT people can make early in the strategy process is to identify ways to achieve business goals faster and cheaper via reuse.

Digital reuse helps firms achieve profitable growth by streamlining the current operations and reducing time-to-market for new products or geographies. Firms that effectively reuse their digital resources can focus on what’s new in a business initiative and take advantage of what already works well.³

“Digital reuse helps firms achieve profitable growth by streamlining the current operations and reducing time-to-market for new products or geographies.”

For example, Woolworths’ Australia’s #1 food retailer with revenues of USD58.2B, has achieved 2.7% revenue growth (year-on-year) over the past 5 years. For new initiatives Woolworths’ digital reuse is currently 60-70% across business processes, data and technology providing cost savings and efficiency. Woolworths launched Thomas Dux, a premier grocery chain, in record time and relatively low cost, by reusing the core systems from the Supermarkets division. Dan Beecham, Woolworth’s CIO reflected on the learning: “After establishing a reuse capability and culture across Woolworths’ we helped the Thomas Dux leadership reuse Supermarket’s systems and launch the new retail format in record time.”

We found that digitally savvy executive teams know how to place a value on time-to-market and avoid the cost and complexity of repeatedly building the same solution for different divisions or situations.

Reuse Takes Different Forms
Now is the time to focus on digital reuse because firms have reached a tipping point — the business world is becoming increasingly digital and firms now have sufficient digital assets to make reuse practical and productive. When each new situation requires a new solution, rather than reusing at least part of an existing one, a company is more apt to build a digital spaghetti of enterprise-wide and local systems that are difficult to change, easily broken and costly to operate.

Digital reuse comes in many forms. Here are two brief examples of different approaches: shared services and company-wide strategy.

Procter and Gamble is a 175-year old global consumer goods company with 2012 revenues of $83.7B generating a net profit margin of 15.5% (compared to the industry median of 10.4%). A source of this industry leading performance is Global Business Services (GBS), one of the 4 pillars of P&G’s organizational structure. GBS, led by CIO Filippo Passerini, provides more than 170 shared services and solutions to the more than 300 P&G brands globally. Procter & Gamble’s global shared services organization blends business process and IT to provide a base of services for the firm’s marketing units. The shared services range from travel services and office moves to demand planning systems, payroll, on-boarding an employee and new product visualization. Shared services help P&G develop economies of scale and reduce time to market for new products and services. Using their shared services P&G was able to absorb the acquisition of Gillette in only fifteen months achieving synergy savings of over $1.2B. Now GBS is leading the digital transformation of P&G — pushing beyond shared services to digitize the company end to end.

OMV, the $44.1B Austrian oil company has saved 10-15% of operating costs and reduced cycle times by 25% via digital reuse. OMV’s digital reuse strategy is to find synergies with already existing applications and move applications developed for a specific business unit into the common applications division where the needs are common. For example, the company redeployed a Global Information System used in oil exploration to its retail operations to improve supply chain performance. Figure 2 illustrates OMV’s reuse levels of technology, data, and process; all are significantly higher than the average levels of digital reuse in our study.⁴

So why don’t all firms immediately increase their digital reuse? Because it’s hard! Not technically hard, but hard from political, cultural and structural points of view. Managers have to incorporate time-to-market and reuse thinking into innovating, investing, creating and exploiting their digital assets. They need the discipline and incentives to ask if the problem has been solved before. If it has been, then there must be the leadership and governance to compel reuse of those existing solutions. And they have to put the resources and time saved towards innovation. These are the management practices that generate the benefits of reuse.

How Good are Firms World-Wide at Digital Reuse?
The differences in the levels of reuse across firms are huge with the top third of firms reusing at nearly three times the level of the bottom third (Figure 3 highlights these differences). Reuse doesn’t just happen naturally. Because of the big differences in levels of reuse across firms when a firm gets reuse right, it becomes a source of competitive advantage.⁵

Technology reuse, such as installing standardized networks and servers, is the easiest to achieve and has the least impact.6 Reusing information and business processes are more challenging, but deliver the greatest bottom line impact.⁶ This is where we see good management practices having the greatest impact on growth and margins. The key insight is that in all industries there is opportunity for a firm to contribute to outperforming their competitors by improving digital reuse.

“Successful reuse relies on setting a shared strategy, creating a culture of reuse and implementing a set of common practices. Reuse starts top down or in a particular function or geography, and then the best firms involve everyone, at all levels.”

Increasing Digital Reuse
Successful reuse relies on setting a shared strategy, creating a culture of reuse and implementing a set of common practices. Reuse starts top down or in a particular function or geography, and then the best firms involve everyone, at all levels. Firms tackle digital reuse in different ways but there are three critical and mutually reinforcing elements – the three C’s:

• Commitment – create a culture of reuse with top-down and bottom-up discipline supported by financial models
• Capabilities – design a governance model and practices that encourage and support reuse
• Communication – of the financial arrangements, metrics, incentives and feedback that convey and reinforce the value of reuse

Commitment describes a top-down, bottom-up and enterprise-wide dedication to digital reuse. Reuse requires a different way of thinking that values time to market as part of the cost, value, and risk investment equation. That thinking starts with simply asking the question “where have we solved this type of problem before?” The commitment of business unit leaders is particularly important. Often, business unit leaders see corporate reuse efforts as a move toward global solutions, thus impinging on their autonomy and slowing down local responsiveness. That attitude keeps many organizations from realizing the potential of digital reuse. However, in savvy firms, business unit leaders, through repeated success, recognize that digital reuse provides a significant head start to achieving the results they want faster and with less risk.

Capabilities needed to increase digital reuse include governance, finance and technology models. Governance is the framework of decision rights and accountability that encourage desirable behavior like reuse.⁷ Governance mechanisms – e.g. committees, reuse gates on the project approval process etc., help build capabilities and increase reuse.

Intel, the world’s largest semiconductor company with $53.3B in revenues, developed a service catalogue, classifying their digital resources by maturity. Anything that went into the service catalogue had a guaranty that Intel IT would support it. Some of the digital assets that were candidates for reuse, however, were not as mature. Instead of leaving these assets out of the catalogue, Intel created a four-tier categorization scheme (bronze, silver, gold, platinum) so that employees would have knowledge about the assets they were reusing. Bronze-level assets are approved for reuse; platinum-level assets are approved, fully tested, supported and a shared service. Providing this level of information made reuse a more compelling value proposition to the business units, and resulted in over $100M in savings over a 4-year period.

Communication includes the financial arrangements, metrics and feedback that convey the importance and extent of digital reuse. Providing transparency in these areas is very important to supporting reuse (i.e. making clear that typically the cost of reuse is lower and time required is shorter). Explicit financial incentives for reuse signal the dedication of the firm’s leadership to reuse. And acceptance of the financial arrangements by the business unit leadership indicates an understanding that these arrangements work to benefit all.

“Who pays for use?” is a common question and roadblock that separates leaders from the rest of the pack. Firms have tried investment and cost allocation models that account for reuse potential. All of the cases we investigated abandoned these models as they ultimately worked against digital reuse by adding overhead and focusing on who pays.  In most successful firms we studied, companies created an arrangement where the first user pays for the development of the application and additional users deploy the application for free paying only ongoing operations costs. This model sets up a big incentive to take something that is already available, working, faster and less costly even if it’s only a 90% fit.

Firms high in digital reuse measure their progress. Many of the firms we studied relied on simple metrics to indicate reuse performance and benefits such as cost savings and speed of deployment. The Board of CEPSA has extended the metrics to include internal benchmarking among business units. Business units have to compare themselves to the best performer in the group and report to the process improvement board.

CEPSA: A Leader in Digital Reuse
CEPSA, now a subsidiary of IPIC, illustrates how the three C’s work together to achieve high reuse and high financial performance. CEPSA, with 7 business units and 76 operating companies, is active in both domestic and international markets and had 2012 revenues of $28.3B.

Achieving high levels of reuse did not happen overnight at CEPSA. In 2003, the company began offering the business units a shared service capability. A successful shared services organization built confidence that it was able to support the business everywhere. They consolidated infrastructure and services, implementing a common catalogue for all business and digital services that could produce synergies.

After demonstrating the power of reuse, enterprise commitment to reuse began in earnest in 2006 with the creation of a Board process improvement committee. The committee meets regularly to discuss best practices, monitor process improvement projects and track business value using ROI and productivity metrics. This Board committee drives reuse at CEPSA. For instance, the operating companies have to compare themselves to the best performer in the group and report to the Board.

CEPSA senior management dealt with political issues such as who pays and who benefits by explicitly recognizing the operating company who pays for and implements a process improvement as an innovator and leader. Then any company in the group can take that solution, pay no development costs, and benefit the whole company with faster times to market and lower cost.

CEPSA created additional capabilities, beyond the shared services organization, that work together to achieve digital reuse levels that are 28% higher than average:

• Virtual Communities of Practice: Groups of people who work together, exchange experiences, and share knowledge. They are a powerful tool for organizational learning and play an important role in promoting a reuse culture, encouraging collaboration between members who are dispersed across remote locations.
• Portfolio management: A formal governance process where demands are prioritized. Project proposals that can reuse existing solutions and project proposals across businesses that have common requirements are actively identified.
• Service catalogue: CEPSA has both a business process catalogue and an IT service catalogue. Every time a request for a new business process or IT project comes from a business unit, IT looks at the process catalogue.

Communication about reuse is a daily job at CEPSA with a focus on metrics and describing successful examples. Reuse at CEPSA has delivered lower costs and faster development. CEPSA’s percentage of IT spending to total revenues is 0.3% which is significantly better than the industry average of 0.8%. But for many executives at CEPSA the big benefit in reuse is faster time to market.

When the IT group realized that many of the 76 operating companies were interested in getting better information about their customers they designed a customer relationship management system with a common core that was then implemented with local configuration for each business unit’s different needs. For the first business unit, Marine Fuels, the configuration took 7 person months and reused only 10% of existing capabilities. By the fifth business unit, LPG, 80% of system was reused and took only 4 person months to complete. The IT group summarized this on one page and uses this compelling document to communicate their success.

Turning Time Into Money: A Manifesto for Digital Reuse
Leading companies have demonstrated that digital reuse turns time into money. Here are some of the approaches that have worked well to strengthen the three C’s:

Commitment: Top-performing firms specify who makes the decisions about reuse and which metrics are important in evaluating those decisions so that managers and groups can be compared.

• Govern at the level of the enterprise you want to reuse with mechanisms that encourage/mandate reuse (e.g. executive committees, project methodology with a reuse gate).
• Create financial models that encourage reuse such as offering lower unit costs for services targeted for reuse. Many shared-services organizations offer lower costs for reused services than new services.

Capability: Top-performing firms create units and processes that make reuse easier to achieve.

• Broker reuse with an enterprise-wide unit whose role is to create and match demand and supply. For many firms shared services play the broker role, connecting operations, process, data, and products.
• Start with technology reuse in the largest business unit and move enterprise-wide with approaches such as virtualization, cloud, and consolidation. Standards are not enough—you must build a culture of reuse to achieve sustainable results.
• Consolidate both data and reusable code into accessible forms and places (e.g. data warehouse, SOA).
• Communications: Top-performing firms expicitly communicate the value of reuse throughout the firm.
• Share reuse results widely through dashboards, information panels, case studies, and regular reviews and updates.
• Measure reuse and the resulting performance improvements. For instance, Intel catalogue its service costs and achieved an average savings of 40% the first time a digital service is reused. Use the measures to compare reuse levels across areas and encourage the laggards to catch up with the leaders.

If you have a reuse program, nurture and grow it by focusing on the C’s. As we are coming out of the recent financial crisis, it is time to prepare for the next couple of decades of growth. Firms have a big digital opportunity: virtually every interaction will become digital and reuse is a key discipline for thriving in the digitized world. If you don’t have a digital reuse program, start today – it will pay off!

About the Authors
Dr. Stephanie L. Woerner (Research Scientist, MIT Sloan CISR, MIT Sloan School of Management) studies how companies manage organizational change caused by the digitization of the economy.  Her research centers on enterprise digitization and the associated governance and strategy implications. Two current studies include i. the amount, allocation and impact of enterprise-wide digital investments and ii. how digitization is influencing the shape of next-generation enterprise.

Dr. Peter Weill (Chairman, MIT Sloan CISR and Senior Research Scientist, MIT Sloan School of Management) researches the role, value, and governance of digitization. He is a popular presenter to executive audiences and has published widely including award winning books, case studies and journal articles. His work has appeared in Harvard Business Review, Sloan Management Review and The Wall Street Journal. Peter has co-authored five books published by the Harvard Business School Press including his latest book “IT Savvy: What top executives must know to go from pain to gain”. In 2008, Ziff-Davis and eWEEK.com recognized Peter as #24 of the “Top 100 Most Influential People in IT” and the highest ranking academic.

Dr. Mark McDonald (Group Vice President, Fellow, Gartner Executive Programs) is the head of research in Gartner Executive Programs and currently working on issues related to digital technology social media, the business use of advanced technologies and management innovation.  He has authored several books including: “The Digital Edge: exploiting information and technology” (October 2012), “The Social Organization” (2011) and “The eProcess Edge” (2000). His work appears regularly in the Wall Street Journal, Financial Times, Computerworld, CIO Magazine and other publications.  His blog on Gartner.com was named in 2012 as one of the top 100 most influential in the Huffington Post.  Mark also teaches at Oxford University, UK, Columbia University of New York in its IKNS program and at the University of Wisconsin Business School.

References
1. We are broadening the definition of reuse to include all digital assets. Reuse in the field of software development has been a concern for decades.
2. See other discussions of the benefits of information technology reuse in, for example, D. M. Upton and B. R. Staats, “Radically Simple IT,” Harvard Business Review, 86(3), 118-124, 2008 and E. Benni, K.  Hartar, J. Laartz, and A. Scherdin, “Reusing IT Components in Mobile-Telecom Companies,” McKinsey on IT, Fall 2003.
3. These findings mirror those in product development. Modularity increases ability to adapt and reduces cost to experiment.  See C. Y. Baldwin and K. B. Clark, Design Rules: The power of modularity, The MIT Press, 2000.
4. See P. Weill, S.L. Woerner, and M. McDonald, “Top Performing Firms are More Effective at Digital Reuse,” MIT Sloan School of Management CISR Research Briefing, vol. X, no. 10, October 2010 for a more detailed description of OMV.
5. The benefits of reuse extend beyond cost reduction and time-to-market.  Many organizations and governments have IT reuse and recycle plans–a “green” strategy–to reduce carbon emissions and increase resource productivity.
6. For the benefits of enterprise architecture see J. W. Ross, P. Weill, and D. C. Robertson, Enterprise Architecture as Strategy: Creating a Foundation for Business Execution, Harvard Business School Press, 2006.
7. “IT Governance: How Top Performers Manage IT Decision Rights for Superior Results”, P. Weill & J. Ross, Harvard Business School Press, 2004.

Feature

Used by over half the Fortune 100 companies, BoardVantage is making the paperless boardroom a reality.

The expansion of its internal functionality to different digital platforms combined with the promise of high-calibre security is rapidly turning BoardVantage into a must-have communication tool for leadership teams across the globe.

First Steps
However, BoardVantage’s overwhelming success and reach hasn’t always been as evident as it may appear today. When they started out in 2001, board portal technology was still a niche market catering solely to the c-suites of global corporations, operating with limited mobility on laptops and providing little more than rudimentary online access to what was then called the electronic board book.

“BoardVantage’s first wave of innovation came when they noticed a significant change in demand outside of the boardroom. There was a growing need to include senior executives in boardroom conversations as well as the desire for executives to collaborate more closely among themselves.”

BoardVantage’s first wave of innovation came when they noticed a significant change in demand outside of the boardroom. There was a growing need to include senior executives in boardroom conversations as well as the desire for executives to collaborate more closely among themselves. In line with their customers’ demands, BoardVantage took its first steps out of the boardroom in 2007, making well-organized executive collaboration one of its key focal points.

From Access to Process Technology
But companies didn’t just want to expand the access to their online board book, they wanted technology that would embody boardroom interaction and offer a platform for high-speed bilateral communications. These demands gave rise to BoardVantage’s evolution from ‘access’ to ‘process’ technology: a reclassification that was an implicit acknowledgment that the innovated software could do much more than provide electronic access to board materials – it had become a portal for boardroom interactivity. This evolution raised some vital questions regarding the security of companies’ digital information, which still lie at the foundation of BoardVantage’s innovation approach.

“iPad’s iOS integration was the watershed moment that truly boosted BoardVantage’s success. Now executives wouldn’t simply use the portal during meetings or inside the office, they could take the boardroom with them to wherever they wanted to go – both on and offline.”

Despite growing demand and a large technological transformation, the board portal still hadn’t gone mainstream. For this to happen, it had to wait for a game-changing platform that would allow its software to become even easier to use, that would increase its mobility and have immediate online access: the iPad.

Game Changer: The iPad
When the iPad was launched in 2010, a whole new market opened up to the board portal and encouraged even further innovation. Its iOS integration was the watershed moment that truly boosted BoardVantage’s success and enabled it to go mainstream. Now executives wouldn’t simply use the portal during meetings or inside the office, they could take the boardroom with them to wherever they wanted to go – both on and offline. Not only did the iPad add to the mobility of the boardroom, its state-of-the-art graphics and animation were very well suited for presenting large volumes of information in a uniquely intuitive and efficient way.

“The eSignature application allows you to personally and securely sign and date documents and send them off straight away. Instead of having to print, sign, scan and send out documents, this process can now be finalised within a minute’s time.”

Three Thoughts for the Future
Since 2010, BoardVantage’s focus is on the three areas most important to companies: Security, Simplicity and Two-way Communication.

A great example of how BoardVan-tage has catered to security needs is the Briefcase application, which offers secure mobile access to enterprise repositories. To gain meaningful efficiencies, boards have to go paperless but that can’t happen without the control that exists in paper-based approaches. With the Briefcase BoardVantage extends the security of its board portal onto the iPad, which means that any board content downloaded by directors from the portal remains under the central control of the administration.

Furthermore, the software provides encrypted offline storage expiration of content including director notes, syncing to content updates and remote purge capabilities in case the device is lost or stolen.

The eSignature option embodies the portal’s simplicity. This application allows you to personally and securely sign and date documents and send them off straight away. Instead of having to print, sign, scan and send out documents, this process can now be finalised within a minute’s time. The result is an experience that is not only better than the browser, it is also better than print.

For more information on how BoardVantage can improve your boardroom and team communications, please go to www.boardvantage.com

By George S. Day

George S. Day’s new book Innovation Prowess: Leadership Strategies for Accelerating Growth is an essential guide to building a framework for superior growth through innovation. This article offers a preview on how to boost your innovation ability by adhering to the three big C’s: Culture, Capabilities and Configuration.

The 3M Company has long been recognised as a bastion of innovation prowess, and it continually outperforms other diversified industrials. At the heart is a culture that believes in customer-inspired innovation and an organisation designed to listen to customers and act on their feedback. While 3M is well known for providing time for engineers to pursue new ideas and experiment, the capacity for idea sharing and joint learning is just as important. 3M also converts a high volume of ideas into growth initiatives by providing multiple sources of funding, such as Genesis grants to fund experiments.

Growth leaders like 3M, Diageo, Salesforce.com, Celgene, and LEGO see opportunities sooner, bring more and better initiatives successfully to market, and improve innovation productivity by orchestrating the three entwined elements of innovation ability:

• Culture. An organisation’s shared values and beliefs, defining appropriate and inappropriate behaviours. It is often summed up simply as “the way we do things around here.”
• Capabilities. The combination of skills, technology, and knowledge that allows the firm to execute specific activities and innovation processes.
• Configuration. The structure of the organisation, including how resources are allocated, who bears responsibility for achieving targets, and how success is measured.

Efforts to build new innovation capabilities or improve the firm’s configuration will succeed when they are supported by the appropriate cultural attributes. Conversely, a dysfunctional culture is hard to surmount. The poster child is Sony, who missed both the iPod and the smartphone revolution. As Howard Stringer, the current CEO of Sony, who was brought in as an outsider and charged with changing the company’s culture, wryly noted, “Love affairs with status quo continue even after the quo has lost its status.”

Innovation Culture
A culture has many levels and facets. At the deepest level are the traits or values that express enduring preferences or aspirations. The more accessible expression of these values are norms, which are shared beliefs about appropriate or expected behaviour. The most obvious outcroppings of a culture are the behaviours that top managers and employees exhibit.

Values and Norms of Innovation Cultures
There are no innovative organisations with shallow or forgettable cultures; there is no end of slogans extolling the special traits of innovative organizations. Innovation gurus urge firms to “share to gain,” “always look for a win-win,” “fail fast,” and “learn from failures.” Each has merit. But all reflect an all-too-common faith in “best practices.” Innovation leaders don’t follow best practices; instead they create new practices.

One of the key cultural commonalities among innovative organisations is the belief that more can be learned from the careful dissection of failures than from successes; a failure presents an opportunity to uncover and eliminate the mistake and build something better. Three other highly interrelated cultural traits seem to distinguish innovative firms.

First, these firms are willing to cannibalise their own successful products. This requires an outside-in perspective that recognises that customers will migrate to a better solution when it emerges, regardless of who provides it.

Second, there is a different attitude toward risk. These firms are willing to embrace the very high risk of innovation failure to escape the even higher risk of competitive defeat if they stand still. The likelihood of failure for any innovation initiative, especially beyond the firm’s current capabilities, is dauntingly high, so there is a great temptation to keep investing in the core business because the risk-adjusted returns seem so appealing.

The third key trait is a focus on the future. Innovative cultures downplay past and present successes, choosing to devote their energy to pursuing the next success. For instance, part of Toyota’s culture is conducting a post-mortem on successful projects to uncover opportunities for future improvement.

Leadership and Culture
The fingerprints of the leaders are imprinted on every aspect of a culture. The tone is set by the top person but is magnified by the rest of the C-Suite. Leaders populate the organisation with people who respect the leader’s values and exhibit patterns of behaviour the leaders are comfortable with. Leaders who value innovation encourage people to take risks in pursuit of new ideas and opportunities. This gives everyone the courage to take risks because they are confident that the rest of the organisation will stand behind them.

Leaders have many ways to shape the culture. One is how they spend their time; the more they devote to reviewing projects, working with teams, and recruiting talent, the faster their decision making. By understanding the project better, they can identify weak signals and inflection points the project team might miss.

Innovation Capabilities
Culture underlies and infuses everything an organisation does. Capabilities are the sum of the skills and experience the firm collectively brings to the actions it takes. Culture and capabilities have a symbiotic relationship—one can’t function without the other.

Capabilities are bundles of closely integrated skills, technologies, and cumulative learning—exercised through organisational processes. Capabilities should not be confused with assets, which are the resources a business has accumulated. Investments in plants, patents, or systems are not capabilities because these are things, not skills. Capabilities are the glue that brings these assets together.

Three capabilities are needed to ensure a firm has a superior innovation prowess, meaning it can execute the underlying innovation processes better than its rivals.

Market Learning Capability
Useful insights into market opportunities and reactions to innovations don’t emerge easily. Instead, insights must be actively sought, shared, and acted on via market sensing, sense making, applying insights, and learning from feedback. Keep in mind that all capabilities are driven by learning, where continuous exercise builds new layers of insight.

This capability may be triggered by an impending decision or strategy review, an emerging problem, or a belief that an innovation initiative requires deeper insights into customer needs. This spark begins the active search and acquisition phase to acquire relevant and actionable information, including what is already stored in a firm’s knowledge system and what managers throughout the company know.

“Firms with a strong market learning capability actively seek and integrate lessons from what actually happened into their innovation activities and processes.”

For findings to be useful, they must be distilled to find coherent patterns and converted into usable insights. When one detergent maker decided to look for growth among non-committed users, it formed a diverse team to study these users (mostly women). The aim was to understand the pressures of their lives, their needs and wants, and their feeling about their clothes. From these deep observations, the team came up with a new way to appeal to these customers’ feminine sensibility. This ran counter to the senior managers’ beliefs about how the brand should be positioned. To overcome these beliefs, the team dramatised its findings in a one-hour “play” with scripts derived from the verbatim recordings of the consumer immersion session.

Firms with a strong market learning capability actively seek and integrate lessons from what actually happened into their innovation activities and processes. Did the market respond as expected, and if not, why not? How could the process and the methodologies be improved? When widely disseminated through the firm these lessons continue to improve practice.

“Culture underlies and infuses everything an organisation does. Capabilities are the sum of the skills and experience the firm collectively brings to the actions it takes. Culture and capabilities have a symbiotic relationship—one can’t function without the other.”

Open Network Management Capability
The term open is rich in positive connotations, including expansiveness, flexibility, sharing, and ready access. It is increasingly applied to innovation processes as a consequence of (1) advances in communication networks and deeper understanding of how to coordinate diverse players with different interests, (2) the recognition by many firms “that not all the smart people in the industry work for us”; and (3) celebrated success stories such as Procter & Gamble’s Connect + Develop innovation model.

When an open innovation network is under the control of the focal firm, it operates more like a private club. Here, you tackle an opportunity with one or more collaborators you select because they have the necessary resources without unmanageable conflicts of interest.

The interwoven nature of open innovation networks requires a new suite of skills and experience that are difficult to learn but are also difficult to copy. The benefits of accelerated innovation development, a richer array of possible solutions and more ways of sharing risk with partners make the effort worthwhile.

Mapping and Engaging the Ecosystem
The skills and activities here begin with learning about possible partners, inside and outside the firm, who can contribute to a particular innovation effort. A good way to capture this learning is by creating a map of possible partners. Once partners have been identified it is useful to pool knowledge and seek the maximum number of connections to external partners—these connections are often helpful for ensuring that selected partners will readily integrate into the innovation efforts.

Identify and Contain Risks
Open innovation networks bring a whole set of new and different risks to identify and contain. Probing the roles and linkages in the map of the ecosystem exposes two kinds of risk—each requiring a specific action plan: (1) co-innovation risk, stemming from your dependence on others to innovate in parallel; and (2) adoption chain risk, which is the extent to which partners will need to adopt your innovation before consumers can actually assess the full value proposition.

“There are striking differences among firms in their development capability. According to Arthur D. Little, the top performing firms are five times as productive as the average.”

Adaptive Development Capability
Most firms use some form of a phase-gate or stage-gate development process to bring their innovation concepts to market. This process breaks the development process into a natural sequence of steps needed to move a chosen concept to launch. Each stage begins with a gate or go/no-go decision point, when senior management reviews progress with the development teams and decides whether to proceed to the next stage. Thus there is a lot of attrition as each stage becomes another filter. This enables “pay-as-you-go” project funding, with resources available for the next step only when there is acceptable progress. It has a seemingly tidy, linear, and sequential appearance, as befits its origin in NASA engineering projects. In reality, it is iterative, halting, messy, and time consuming.

There are striking differences among firms in their development capability. According to Arthur D. Little, the top performing firms are five times as productive as the average. That is, they realise five times as much output in terms of new product revenues or profits, for the same investment in R&D and new product development costs and time.

The most capable firms have improved their development processes in many ways. First, instead of a one-size-fits-all stage-gate template, there will be heavyweight and lightweight versions. An “efficient” standard approach to each gate (appropriate for small-i projects) sets early targets, under the assumption that learning during later stages will reinforce and elaborate the early stages. This confers too much certainty to the process. In reality, as development of a BIG-I innovation proceeds, there will be surprises (both fortuitous and calamitous), and underlying assumptions will be articulated and challenged—requiring rethinking.

Further gains come from moving to “leaner” gates. Instead of the lengthy and time-consuming preparation of gate deliverables by the team, a brief document with a few backup slides is all that is expected. The gatekeepers are expected to arrive at the meeting already knowing the project, and are simply informed at the gate review about the risks and commitments to be made. Best-practice firms are simplifying their processes, and focusing more on the deliverables and clarity of responsibilities.

“The interwoven nature of open innovation networks requires a new suite of skills and experience that are difficult to learn. The benefits of accelerated innovation development, a richer array of possible solutions and more ways of sharing risk with partners make the effort worthwhile.”

Innovation Configuration
A robust culture and well-honed innovation capabilities are not enough to ensure superior innovation ability. The final ingredient is an organisational configuration that can align all the elements, allocate resources effectively, allow people to perform to their potential, and assign responsibility for achieving the results. A configuration is not complete until the entire C-Suite concurs wholeheartedly with answers to the following questions:

• Who is accountable at the highest level for reaching the growth objective? What happens when the growth objective is missed?
• How are resources (people, investment capital, and annual budgets) allocated? What happens when resources are trapped in the core?
• How do you keep score? What are the key metrics in the innovation dashboard? What incentive is there for individuals and teams to meet the targets on these metrics?
• Who is responsible for identifying, selecting, and training people, and then assigning them to teams?

Designing the Organisation to Innovate
Rethinking an organisational structure is not like zero-based budgeting or starting with a blank sheet of paper. Instead, there is a history of hits and misses to learn from and inspire improvement. This requires everyone to agree on the persistent inhibitors to growth.

“There is no room for complacency within either growth leaders or laggards about their innovation ability. Leaders should be looking over their shoulders and constantly seeking improvements to stay ahead.”

Growth Inhibitor One: Diffused Accountability
You are likely a victim of this inhibitor if you are congenitally late to market with the small innovations needed to stay ahead of competition and to adapt to new customer requirements in the core business. A frequent structural reason is unclear accountability for results, which is exacerbated by shifting priorities and too many projects competing for the same resources.

Careful diagnosis of this inhibitor will reveal whether it can be abated with proper oversight by a working committee of senior people using aggressive portfolio reviews, and by assignment of small cross-functional teams to priority projects. Although there may be fewer projects at any given time, each is completed faster, and the result is more projects completed.

Growth Inhibitor Two: Square Peg, Round Hole
Force-fitting BIG(ger)-I initiatives into the existing organisation can be a major growth inhibitor. Cargill Corp. has grown and prospered as a large-scale player in the global agriculture and food-supply chain. In common with many large, mature companies, it felt it was not fully exploiting opportunities that didn’t fit comfortably within an existing business unit. Existing incentives in the firm actually discouraged the managers of businesses from taking bigger and longer-term risks, even with the promise of high returns. For example, the Cargill division selling standard ice-melting chemicals to state road departments had mastered a low-cost supply chain. This was not a supportive setting for a novel de-icing chemical—an epoxy overlay that inhibited the formation of ice—sold for critical applications such as bridges and freeway ramps. The business model didn’t fit the existing structure, and required new skills to make a sale.

Many organisation models have been proposed for overcoming the problem of a square peg in a round organizational hole. Cargill successfully created a full-service group called the Emerging Business Accelerator, to shepherd attractive opportunities from outside the core by staffing, funding, and monitoring those opportunities until they could be spun out or folded back into an established Cargill business. This is an example of what Wolcott and Lippitz designate as “focused organisational ownership” and “dedicated resource authority.” There are many variants, depending on whether organisational ownership is diffused and opportunities bubble up within the operating businesses, or resources are dispersed in an ad hoc fashion, or there is a dedicated budget or strategic reserve for noncore opportunities. The key is to make sure opportunities are not smothered or starved of resources by being forced to fit uncomfortably within an existing operating unit.

Next Steps
There is no room for complacency within either growth leaders or laggards about their innovation ability. Leaders should be looking over their shoulders and constantly seeking improvements to stay ahead. Growth laggards need to dissect the three C’s of their ability to learn what is holding them back.

Excerpted from Innovation Prowess: Leadership Strategies for Accelerating Growth, by George S. Day, copyright 2013. Reprinted by permission of Wharton Digital Press.

About the Author
George S. Day is the Geoffrey T. Boisi Professor and co-director of the Mack Center for Technological Innovation at The Wharton School, University of Pennsylvania. Past chairman of the board for the American Marketing Association, he has served as a consultant to GE, IBM, Medtronic, Merck, W.L. Gore & Associates, and other corporations. His books include Strategy from the Outside In and Peripheral Vision, among others. Day lives in Villanova, Pennsylvania.