#05 March 2022
MASTERS OF THE METAVERSE GLOBAL v LOCAL
ibyimd.org
ETHICAL INNOVATORS
INVENTORY OF CHANGE
EMOTIONAL SKILLS
CHAIN REACTIONS VIRTUAL ARCHITECTURE
TEAM ENGAGEMENT
OLD SCHOOL DISRUPTORS
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Live. Learn. Play. It’s go time. Time to get yourself out of bed and get going, because the day belongs to those who claim it. It’s go time. Time to live, love, learn, teach, work and play on SA’s Bozza Network. It’s go time. Time to rewrite your story, stake your claim, or start that start-up. Time to slay, make your moves, and add your own unique flavour to the world. It’s go time. The time for waiting is over. The time for going is here.
*Based on MyBroadband 2020
[ Foreword ]
Cooperation in a time of conflict
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Illustration: Jörn Kaspuhl
ar has returned to Europe, the kind of war the continent has not seen in over 80 years. Russia’s brutal attack on Ukraine has led to unspeakable suffering. Yet amidst the onslaught of armor and artillery, we can see clearly the difference that leadership makes – the seemingly superhuman steadfastness of Volodymyr Zelenskyy, Ukraine’s president, has given hope to his people and inspired a degree of unity across governments, businesses, and civil society in the West that few would have thought possible. The IMD community stands with Ukraine. We condemn this war. And we know this view is shared by our many friends in Russia, who overwhelmingly reject their government’s criminal conduct. When we picked supply chains as the focus of this fifth issue of I by IMD, it was in part because the pandemic has reminded us just how many things that we take for granted depend on the seamless functioning in the background of highly sophisticated systems spanning the globe. For instance, in their contributions, Ralf W. Seifert and Richard Markoff spotlight the link between inventory management and inflation, and John Elkington and Louise Kjellerup Roper remind us that a single containership stuck in the Suez Canal, just over a year ago, led to $70 billion of unexpected costs for business. This centrality of supply chains also awards them a pivotal role in the quest for greater sustainability and more responsible business operations, as Elkington and Kjellerup Roper, as well as Ralf W. Seifert, Yara Kayyali Elalem and Işik Biçer show.
All of this leads Vivek Ramachandran, CEO of Serai, a Hong Kong-based digital B2B platform, to conclude that the data traveling up and down the supply chain is now as important as the physical goods themselves. While the experience of the past two years has made many governments and businesses wary of their dependence on overseas suppliers, it is also true that global interdependence provides perhaps the best hope of ending the war in Ukraine by exacting an unbearably high cost on the Russian economy via coordinated sanctions. Interdependence cuts both ways. Supply chains, in short, are about a lot more than just business. Thankfully, you will find plenty in this issue of I by IMD that inspires and gives hope – from spirited leadership to improve lives in Africa via insurance, to evidence of the pivotal role of women on boards, to a step-by-step game plan for bolstering your organization’s Diversity, Equity and Inclusion (DEI) performance while remaining mindful of local sensibilities. Plus, my IMD colleague Albrecht Enders and his co-authors remind us why good sleep is so important, especially for high performers, even when – or perhaps particularly when – there is so much to keep us up at night.
David Bach, Dean of Innovation at IMD
March 2022 • I by IMD 1
[ CONTENTS ] 04 [ In good company ]
Henry Ford set the template for industrial architecture in the 20th century, but today’s “virtual” landscape needs to be designed in a very different way, writes Jerry Davis.
07 [ Wellbeing ]
Lack of sleep can seriously affect your decision making as well as your health. Read our essential guide on how to wake up refreshed for the working day.
42 7 Supply chains are being disrupted around the world by disease and conflict. Over 14 pages, specialists in the field offer expert analysis and guidance on where we are and where we need to go.
12 E-commerce, sharp increases in the cost of living, and over-stocking are all driving change in the way inventory is being managed. A fresh approach is needed.
14 Responsible, resilient and regen-
erative supply chains are urgently required in order to navigate through turbulent times.
17 Cutting lead times, incentivizing
local production and repurposing surplus stock could have a hugely beneficial impact on the environment.
20 Overwhelmed by supply chain
problems? Our detailed visual guide will help you to manage your way out of a crisis. 2 I by IMD • March 2022
22 Eric Baudier, former CEO of Tetra Pak’s supply chain operations, takes stock of the good and bad initiatives of the past 20 years.
24 Vivek Ramachandran, head of
the B2B platform Serai, says companies will need effective tools to track every step in their supply chain.
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In an era of corporate scandals, hiring and maintaining an ethical workforce is vital. A multi-pronged approach to finding “good” people is needed.
32 [ Human resources ]
How good are you at reading others? The latest research can help you test and improve your abilities.
34 [ Innovation ]
Long-established companies can often find themselves overtaken by newcomers in the marketplace. But decisive action can help them to become the disruptors rather than the disrupted.
37 [ Brain circuits ]
There are many factors to consider when building a successful team. In the first in a series, Ina Toegel offers advice on how to get it right.
38 [ Leadership ]
Being a leader in turbulent times requires adaptability. Here we offer the five essential skills needed, and a way to evaluate your performance.
42 [ CEO dialogue ]
Takeshi Niinami, CEO of Japanese drinks giant Suntory, explains how he approached the cultural challenges of taking over the iconic American brand Jim Beam.
Photos: Wikipedia, Allianz, Simon Dawson/Bloomberg via Getty Images, Daniele Buso via Unsplash
[ Chain reactions ]
26 [ Hiring strategy ]
45 [ In the mind’s eye ]
In any negotiation, it is first vital to build a relationship with the person sitting across the table, writes George Kohlrieser.
46 [ Global equity ]
Values and laws vary worldwide. Here is a framework to understand local context while pushing for greater equity and inclusion.
53 [ Leaders of tomorrow ]
Hiring new talent? A survey by the Global Network of Advanced Management will help you to identify the key concerns of business students.
54 [ Leadership ]
Companies with more women on boards recall dangerous products far more quickly. Our experts look at the latest figures.
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12
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66 [ In my view ]
Solving strategic problems can be tricky. Michael Watkins offers a six-step guide to increasing team engagement.
In a huge financial gamble, the euro was introduced 20 years ago. Arturo Bris assesses the overall impact of the single currency.
58 [ New frontiers ]
68 [ The forecaster ]
56 [ The leading edge ] Photos: www.oculus.com, Shutterstock, Adidas, MyriamZilles via Unsplash
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For historical reasons, insurance take-up in Africa is low, but CEO of Allianz Africa, Delphine Traoré, sees a huge opportunity for growth. engagement.
Tech giants are struggling for mastery in the battle for the metaverse. Howard Yu takes an in-depth look at the likely winners and losers.
61 [ Build a better board ]
Good governance is vital when it comes to improving the environmental and social aspects of a company. Exploring the vocabulary used in annual reports can reveal whether or not an organization is well-governed.
72 [ Preview ]
46
Join us in June when I by IMD will investigate the nature of power and how to wield it responsibly. March 2022 • I by IMD 3
[ In good company ]
How best to design the virtual architecture of startups? Henry Ford's Model T factory in Detroit set the blueprint for manufacturing in the 20th century, but today’s enterprises require a very different set of raw materials, writes Jerry Davis
One reason for this flood of startups is that information and communication technologies (ICTs) have radically reduced the costs of starting a business. As I have described in previous columns, ICTs allow founders essentially to “rent” factories and distribution channels rather than buying them, and to rely on contractors for direct work. Markets have displaced traditional organizations in large swaths of the economy. The parts for an enterprise are like Lego bricks that one can snap together quickly and snap apart almost as easily. But what form will these new enterprises take? Will they enable innovation and variety and enrich their communities, or will they push us toward a precarious world of unstable work and popups for everything – like plastic bricks left on the floor that are excruciating to step on? The answer, I would argue, depends on how we teach design, and how we center humane values in the ways we create enterprises. We have been here before, and we can learn lessons from the past. Raw materials and architecture
Detroit has a strong claim to being the birthplace of the 20th century. The mass production methods of the auto industry spread from Henry Ford's Model T factory to nearly every country and industry on Earth, 4 I by IMD • March 2022
changing how we produce goods, grow food, educate children, fight wars, and heal the sick. And while Henry Ford receives most of the credit for refining the moving assembly line, his architect Albert Kahn was perhaps equally crucial for his innovations in factory architecture. The Model T, the car that changed the world, was conceived in a small corner workspace in Ford's Piquette Avenue plant in Detroit. The 1904 facility is tiny, constructed of lumber and brick, with a design suited to a 19th century New England textile mill. Parts arrived in batches from suppliers in the neighborhood, and teams of men assembled each car in separate bays. Completed vehicles were lowered one by one in an elevator to the yard below, where they could be loaded onto trains for distribution. For the Model T to achieve its world-changing potential required new kinds of architecture, both organizational and physical. And while Ford and his engineers schemed about mass production, Albert Kahn designed the buildings where it could happen, drawing on newly available raw materials. Kahn's first factory for Ford was the Highland Park plant, an astonishing facility where Ford's moving assembly line was born. It was vast and unshakably strong: buildings from four to six stories connected by ramps, acres of concrete flooring held up by massive concrete pillars, and so much window area the initial building was called a "crystal palace". Such construction would have been unthinkable a decade before but producing thousands of cars a day on a moving assembly line required a different kind of architecture. Innovations in materials such as machine-rolled plate glass, structural steel, and particularly reinforced concrete (with steel bars inside) opened new possibilities for designers. It happened that Albert Kahn's brother was one of the creators of cost-effective reinforced concrete, and Albert was a visionary innovator who had some practice with these materials in designing the Packard Plant. If you
Illustration: Jörn Kaspuhl
T
he pandemic has been catastrophic for people and communities around the world. And while Big Tech has flourished in an online-first world, achieving unheard-of valuations, small businesses have faced existential challenges. In spite of this, one surprising trend stands out: the rate of new business startups is booming. According to the US Census Bureau, the number of new business applications increased to over 4 million in 2020 and more than five million in 2021, jumping by over 50% compared to prior years. This is especially surprising because, by some measures, the rate of business startups in the US has been in long-term decline since the late 1970s.
have ever seen a factory from the first half of the 20th century (concrete floors, ceilings and pillars; endless windows; heavy-duty ramps from floor to floor) you have Albert Kahn to thank for its design. His Highland Park plant was visited by industrialists from around the world, and its innovations were emulated from Fiat's facility in Turin to the hundreds of Kahn-designed factories in the new Soviet Union. All a tribute to Detroit's genius for design. The new raw materials for business
We are at a similar turning point today when it comes to the design of enterprise, as innovations in information and communication technologies, from the Web to the smartphone, enable new and surprising designs for organizing business.
Photo: Wikipedia
What are the raw materials of enterprise today – the analogs of structural steel, reinforced concrete, and plate glass in 1910? To create a business normally requires a mix of capital, labor, supplies, distribution, and methods of management, ideally along with a legal form. The digital revolution has changed how business organizers can access all these core materials in fundamental ways over the past generation. In particular, it is often cheaper for entrepreneurs to rely on outside markets for inputs rather than "making" them internally. For access to capital this takes the form of financialization, in which markets displace other sources of funding such as banks. Since the JOBS Act of 2012, online crowdfunding platforms have established themselves as a vibrant new format for raising capital. And vendors such as payment processors often find that the data they gather allows them to get into the financing business, as they have far more fine-grained information about prospective borrowers than banks. The Web has enabled enterprises to shop the world for suppliers, from generic factories to providers of accounting, payroll, and IT infrastructure – a process I call "Nikefication" after the company that designs and markets sneakers but contracts out their production. Amazon and its ilk have transformed the distribution of tangible goods, enabling almost anyone to sell online. With Fulfillment By Amazon,
sellers can distribute products that they have never seen or touched. Ubiquitous quick-delivery services like DoorDash and Gopuff enable even more rapid distribution from ghost kitchens and dark stores. And for books, music, software, and video content, the Web enables vendors to sell into a global marketplace at minimal cost. Labor can now be recruited and managed virtually by the task, from getting a ride across town to virtual physician housecalls. Management-by-algorithm enables "bossless" work, from mind-numbing microtasks paid by the penny on MTurk to specialized legal work. Many businesses now declare themselves "remote first", foregoing the cost of physical facilities entirely.
‘Imagine explaining to yourself in 2015 a TikTok-based virtual restaurant enabled by ghost kitchens’ In light of these other changes, it is increasingly feasible to create an enterprise that looks more like a webpage than an organization, with management taking the form of algos that call on resources and coordinate outputs. Lastly, the available legal strictures for enterprise have exploded, from Public Benefit Corporations to e-Estonia. If you're going to incorporate a virtual business online, there is little reason to be provincial when legal vendors around the globe offer a kaleidoscope of options. New technologies, particularly the smartphone, have radically expanded the range of possibilities for organizing enterprise – for better or worse. I have written previously about the unnerving changes in the restaurant industry, where ghost kitchens and smartphone-enabled delivery ser- »
Ford’s Highland Park plant, designed by Albert Kahn, inspired industrialists around the world. But business infrastructure in the 21st century is no longer defined by concrete and glass
March 2022 • I by IMD 5
[ In good company ]
tions, marketing, management, all imagine that GM (or Eastman Kodak, or Westinghouse) is the prototypical business. But the newer enterprises may not sell shares on a stock market, own factories, employ people, or connect to consumers through Superbowl ads. It is as if business schools were training future Albert Kahns about best practices for building textile mills out of wood and brick, rather than exploring new possibilities enabled by new raw materials. Design is the new distinctive capability that business needs, both for startups and established enterprises. What are the available materials, and how do we combine them in new ways to create value? Today when I teach business students, I train them in tools of equitable design. Our flagship course draws on expertise in each of the raw materials to explore the next frontiers for recruiting capital, labor, and supplies; connecting with customers; and organizing internally. What if your customers and neighbors could also provide you with equity financing via a platform? What if employees had access to information about daily internal resource flows through a smartphone app? What if the business were organized as a Perpetual Purpose Trust and was not required to put profit first? What if your packaging were edible? What if… Model Ts on the Detroit production line in 1913
vices are creating challenges to the local restaurants that have served our communities for generations. In December TikTok announced that it was contracting with delivery service Grubhub and 300 ghost kitchens to create a national-scale virtual restaurant. The delivery-only venue would compile dishes that had gone viral on TikTok into menus each quarter for online ordering, and their creators would get a cut of the proceeds. Imagine explaining to yourself in 2015 a TikTok-based virtual restaurant enabled by ghost kitchens. Or how about flashmobs of shoplifters who descend on retailers in groups to steal specific high-value items in bulk? The business model here is enabled by Amazon, which serves as an unwitting fence for non-legal entrepreneurs. One latter-day Fagin “paid recovering drug addicts to steal razors and health products from stores such as Target, CVS and Publix and take them to his warehouse, according to court documents. The man, Robert Whitley, then sold the items online through businesses called Closeout Express and Essential Daily Discounts. He sold more than 140,000 items on Amazon’s marketplace, totaling $3.5 million, according to federal prosecutors" (New York Times, 3 December 2021).
Knowing the materials combines with a focus on equitable design practices to create enterprises with fair wages and a community orientation. Our theory is that, in an era of rampant disruption led by new technologies, design is the new essential skill in business. Instead of being shackled by approaches that venerate past success, we encourage a future orientation. A focus on design discards tradition in favor of “How might we…?” We are inspired by the new ways of building business coming out of Detroit. As Suntae Kim and Anna Kim describe it in a recent article in Harvard Business Review, the new model focuses on scaling deep, not scaling up, as a way to build stronger and more self-sufficient communities. Focusing on creating enterprises that build their community, rather than rapid but often unsustainable scaling, pays off in creating a more vibrant urban economy. It turns out Detroit still has a genius for design. ■
What should we be teaching the founders of the future? And how should current businesses adapt – what kind of talent and capabilities do they need to make the smartest use of newly available materials? The short answer: design. It is perhaps no coincidence that General Motors and Harvard Business School were simultaneously founded in 1908: GM became the iconic American corporation of the 20th century, and HBS trained people to work in and lead iconic American corporations. This genealogy is still reflected in the typical business curriculum: finance, accounting, opera6 I by IMD • March 2022
Jerry Davis is the Gilbert and Ruth Whitaker Professor of Business Administration and Professor of Sociology at the University of Michigan’s Ross School of Business. He has published widely in management, sociology and finance. His latest book, Taming Corporate Power in the 21st Century (Cambridge University Press, 2022), part of the Cambridge Elements Series on Reinventing Capitalism, will be published on 18 March.
Photo: modeltfordfix.com
Design for the future
[ Wellbeing ]
A good night’s sleep: the best decision you’ll ever make
Photo: Wikipedia
Y
Warning: late nights and early starts will lead to memory loss, illness, recklessness, lack of sociability and failure to spot a good business opportunity By Albrecht Enders, Christopher Barnes and Matthew Walker
the bottom-up impact of how well ou can sleep when individual employees accomplish you are dead. This their job, and the top-down dimilongstanding maxim nution of how effective managers remains prevalent in and CEOs are at leading teams. society and is especialWe offer a special focus on the imly embraced within the business pact to senior leaders in terms of sector. However, decades of sleep making high quality (versus poor research have demonstrated that quality) strategic decisions and if you adopt such a mentality, you conclude with ideas of preventive may be dead sooner, and the qualcountermeasures leaders can take ity of that now shorter life will be to avoid the costly dollars and cents significantly worse. Testament to traps of sleep deprivation. Stratethis fact are findings demonstratgic decisions are characterized by ing that insufficient sleep is assotrade-offs, choices and alignment ciated with all major health condiacross different activities that help tions afflicting people developed organizations to achieve a comnations, including heart attacks, petitive advantage in the marketstroke, hypertension, diabetes, place. These decisions influence the obesity, depression, anxiety, suilong-term direction of a company, cide and dementia. Beyond these including examples such as the health consequences, more recent In need of a ‘nap room’: a young woman catches up on her sleep in launch of a new important product work within the workplace context Sir Frederic Leighton's 1895 portrait line, a merger or divestiture, or an has demonstrated a simple truth: organizational restructuring. When making these types of decisions, you less sleep does not equal more productivity. Quite the opposite. need to engage in numerous different mental activities. Despite such evidence, many senior leaders believe that their years of climbing toward high-level positions have allowed them to become imFirst, given the forward-looking nature of strategic decision, there is an mune to the effects of sleep deprivation, training themselves within the element of anticipating the future to identify relevant opportunities and span of several decades to not require something that has been put in risks. To do so, you benefit from having a broad and open-minded view firm place over three million years of evolution as a biologically manabout strong and weak signals in the environment and being able to prodated, non-negotiable need. Indeed, when choosing between spending cess and evaluate these data points to determine where to focus attention. an extra hour at the office or getting an extra hour of sleep, most will choose to work, with the erroneous belief that they can “catch up” on Second, you and your team need to develop ideas how to address the sleep at some later date. In this article we describe an evidence-based opportunities or challenges you might face and make concrete choices, case that runs counter to these scientifically invalid beliefs. We outline which, in part, depends on your capacity to take note of and remember how a lack of sleep has a dramatic effect on work outcomes, including relevant insights, examples and best practices from within and outside » March 2022 • I by IMD 7
[ Wellbeing ]
Third, good strategies are defined not just by an individual choice, but by the fit that leaders achieve across different activities. Think of IKEA’s success: it’s not just the products they offer, but also the low-cost production sites, the store’s location and lay-out, the catalogue, the playground for kids (and, of course, the Swedish meatballs at the family restaurant). As a senior leader, you need to coordinate across different functions to ensure that the whole of these decisions is bigger than the sum of their parts. In other words, the decisions across various parts of the company need to support and reinforce one another, in turn leading to an advantageous position of your offering in the market. Fourth, since you don’t have a monopoly on good ideas, nor on good decisions, it makes sense to engage with your colleagues and team members throughout the process, by creating, a safe and trusted environment that allows to solicit honest input from others to help overcome your own blind spots and biases. In addition, creating trust and good will with critical stakeholders is also important to ensure that decisions do in fact get executed once they have been made. Sleep deprivation impairs our ability to think strategically
A lack of sleep substantially impairs all mental functions required to execute these strategic decision-making activities. Broadly speaking, research has shown that after one to two weeks of just five hours of sleep a night, you are as impaired as you would be if you had gone 36 hours straight without sleep. Alternatively, after remaining awake for only 20 hours straight, you are as impaired as you would be if legally drunk. Beyond these broad effects, sleep specifically influences several capabilities that are centrally important to thinking strategically. One such set of capabilities is storing, processing, and remembering facts. Sleep deprivation impairs both the ability of the brain to initially make new memories, and thereafter, the ability of the brain to effectively “hit the save button” on those new memories, consolidating and recalling them. That is, a lack of sleep degrades both short-term and long-term memory. In other words, sleep-deprived decision-makers are likely to have access to fewer strategic options, decision criteria and other information in their long-term memory. This knowledge, however, is crucial for making informed strategic decisions. Senior leaders must often connect disparate, seemingly unrelated ideas in the process of creativity and innovation. Creativity draws disproportionately from the prefrontal cortex, and the prefrontal cortex is especially vulnerable to impaired function during sleep deprivation. Thus, a lack of sleep prevents the brain from assimilating new information and extracting overarching rules, as well as solving problems through creative 8 I by IMD • March 2022
insights. There is a reason you have never been told to “stay awake on a problem”, a realization that is often absent in typical business culture. Effective strategic decision-making also requires accurately processing risk. A moderate body of research indicates that sleep deprivation distorts the manner in which people process risk. Compared to when they are not sleep deprived, people who are sleep deprived tend to be more likely to chase high levels of risk. This is especially the case in attempting to avoid losses. People often already tend to chase risk to avoid losses, but that tendency is enhanced under sleep deprivation. Moreover, these tendencies to chase risk while sleep deprived are not simply a matter of being bold; from an expected utility perspective, sleepy people chase unjustifiable levels of risk which provide insufficient potential for reward to offset the potential for loss. The strategic decisions faced by senior managers are often wrought with ambiguity which provides ripe ground for their sleep deprivation to drive them toward recklessly risky choices.
‘Research has shown that after one to two weeks of just five hours of sleep, you are as impaired as you would be if you had gone 36 hours straight without sleep’ An especially important context in which senior leaders must process risk is in evaluating new opportunities. There is an interesting asymmetry in the effects of sleep on opportunity evaluation. Especially promising opportunities are relatively easy to spot, even if the evaluator is sleep deprived. However, those who are sleep deprived are significantly less effective in evaluating opportunities which are less promising. Specifically, sleep-deprived managers are especially likely to engage in surface-level processing of an opportunity rather than examining the deeper threads necessary to fully vet the opportunity. As a result, sleep-deprived strategic decision-makers are disproportionately likely to rate a bad opportunity as a good opportunity, putting their organization at risk of wasted resources, opportunity costs, and quagmire projects. Strategic decision-makers must manage complex trade-offs over time and fight the temptation to pursue only immediate utility in the short term. This requires the use of self-control. The act of self-control also draws heavily from the prefrontal cortex, and thus suffers during sleep deprivation. Research across several disciplines shows that sleep deprivation increases impulsivity, and leaves people more vulnerable to caving in to temptations. As a result, sleep deprivation increases the probability of unethical behavior. Moreover, sleep deprivation leads people to select the easiest possible task and procrastinate on more difficult tasks. This indicates that sleep-deprived strategic decision-makers may value short-term outcomes to the detriment of long-term outcomes. On an emotional level sleep deprivation has a range of negative effects on how leaders engage with their colleagues, teams, and the wider organization. Sleep deprivation decreases the desire for social interaction. »
Illustration: Kavel Rafferty
your industry. The more diverse and creative ideas you develop, the more options you will later have to choose from. However, pursuing all the options that are on the table is typically neither a viable nor desirable path forward. Instead, to focus, you need to pick out those options that are most promising by considering multiple competing objectives, analyzing expected risks and returns to ultimately arrive at a well-calibrated decision that best manages the inherent trade-offs.
3 Avoid caffeine after noon and alcohol and large meals at night
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Scan to download poster
9 Develop a consistent sleep routine, even on weekends
10 Don’t lie in bed awake. If you cannot get to sleep after 20 minutes, get up and engage in a relaxing activity until you feel sleepy
[ Wellbeing ]
Beyond failing to make positive interpersonal connections with stakeholders, sleep deprivation can put strategic decision-makers in a position in which they form negative interpersonal relationships with stakeholders. Sleep deprivation undermines an individual’s ability to accurately discriminate emotional threats from emotionally positive opportunities. Under-slept individuals are more emotionally hyper-reactive, with erratic emotions in general but with a disproportionate bias towards negative emotions. This emotional roller coaster of those who are sleep deprived also tends to increase the degree to which people perceive threats. Sleep deprived leaders are more hostile towards subordinates, engage in more interpersonally negative behaviors toward subordinates, and suffer lower relationship quality with subordinates. This suggests that sleepdeprived strategic decision-makers will be at risk of souring important relationships with key stakeholders who are necessary to implement strategic decisions. Are you invulnerable to these effects?
A large portion of the population (and, in particular, senior managers) believe that they are impervious to these effects of sleep deprivation. You might be thinking this, too. People holding such beliefs are unfortunately, though perhaps understandably, fooling themselves. If we look at the primordial importance of sleep from an evolutionary perspective that covers millions of years of adaptation, it’s only been in the past 100 years that widespread adoption of electricity has fully enabled us to make use of night hours for activities other than sleeping. Indeed, average sleep duration has decreased significantly over the past three to four decades by about 10 minutes per decade. In the larger picture of evolution, this is a minuscule time window that does not provide any room for adaptation to the dramatic changes that we have unleashed in our sleeping patterns. In fact, we know that a small proportion of the population can continue functioning at their highest level under continued sleep deprivation, in part due to specific genetic variations causing them to require less sleep. At this point, you may be thinking, “I’m one of those people”. Sadly, this is very unlikely, since only 1-2% of the population is estimated to have this genetic mutation. Most people who believe that they can function on fewer than five or six hours of sleep a night are just not getting sufficient sleep to be as productive as they could be. Indeed, after being awake for 19 hours, you are as cognitively impaired as someone who is legally drunk. No business leader would brag about or be proud of the fact that their employees are drunk all the time, yet we do often laud an employee business warrior who is flown through three different time zones in the past 72 hours, who is on email until 2am, and then back in the office at 6am the next day. 10 I by IMD • March 2022
‘I can tell you with authority that when I’m exhausted, when I’m running on empty, I’m the worst version of myself. I’m more reactive. I’m less empathetic. I’m less creative.’ Arianna Huffington
Arianna Huffington, founder of The Huffington Post, was famous for working long hours and going without sleep. During the early days of her online site, after severe sleep deprivation she passed out at her desk, falling on her cheekbone and shattering it. Huffington now speaks frequently about the dramatic effects of sleep deprivation: “I can tell you with authority that when I’m exhausted, when I’m running on empty, I’m the worst version of myself. I’m more reactive. I’m less empathetic. I’m less creative.” Similarly, Tesla CEO Elon Musk has noted how his workload has led to severe sleep deprivation. His erratic behavior on Twitter is consistent with impulsivity created by sleep deprivation, and he acknowledges that sleep deprivation has impaired his total productivity. Margaret Thatcher, the former British Prime Minister, famously slept for only four hours each night while she was in office. Like her American ally, another short-sleeping head of state Ronald Reagan, she died of Alzheimer’s disease. Research suggests that these may be related: people who are short sleeping in mid- and later-life have a 30% higher likelihood of developing dementia. Interestingly, sleep-deprived people don’t necessarily notice to what extent their performance is impaired by the lack of sleep. Instead, research has shown that they behave like a drunk at a bar who has had six beers and says, “I’m fine to drive home”. Getting into the car to drive home in such a state is illegal and risks heavy punishment; however, making critically important business decisions that influence the success of an organization and the livelihood of thousands of employees frequently takes place under similar if not worse conditions. On the other end of
Photo: Shutterstock
Instead, sleep-deprived individuals experience social withdrawal, loneliness, lack of trust, and impairment in recognizing human emotions in other people. Overall, sleep-deprived leaders are more disconnected from the people with whom they interact, and are less charismatic when they do interact with others. This is problematic both for getting the critical input for compensating for one’s own blind spots and for winning over stakeholders.
the spectrum, you find top executives who have prioritized sleep, both for the sake of their personal wellbeing and the quality of their decisionmaking. For instance, Jeff Bezos points out the trade-offs of not getting sufficient sleep: “Say, I slept four hours a day. I’d get four so-called productive hours back. So, before I had, say, 12 hours of productive time during any waking day, now all of a sudden, I have 12 plus four — I have 16 productive hours. But is that really worth it, if the quality of those decisions might be lower because you’re tired or grouchy or any number of things? Probably not.” Others senior leaders, such as Bill Gates or Warren Buffett, are similarly focused on getting sufficient sleep every night. What can you do for yourself and your team?
There are several different measures that the current research proposes to improve both the quality and quantity of sleep. Some of this is focused on empowering individuals to improve their own sleep. For example, there are some behaviors which are consistent with a good night of sleep, and some behaviors which are inconsistent. Increasing the former and decreasing the latter is referred to as improving “sleep hygiene”. Some of the most powerful ways to improve sleep hygiene include having a consistent bedtime, enhancing exposure to bright light in the morning (daylight is best, if that is not possible, blue light is next best), keeping a cool bedroom, avoiding bright light exposure for a few hours before bedtime (especially blue light), avoiding caffeine consumption within 10-15 hours before bedtime, and avoiding alcohol consumption and nicotine use within a few hours of bedtime. These tactics help an individual shape their own behavior and sleep environment in a manner which aids consistent, healthy sleep. Rumination and anxiety make it difficult to fall asleep, stay asleep, and sleep deeply. For short-term relief, mindfulness exercises can cut the rumination loop and lower anxiety, leading to better sleep. For longer term changes which may lower baseline rumination (especially rumination about sleep difficulties specifically), cognitive behavioral therapy for insomnia (CBT-I) is an especially powerful tool. CBT-I is widely available, either face to face with an expert or online through automated versions. Beyond insomnia, there are many other sleep disorders which are prevalent and harmful to sleep. For most of these, there are very effective treatments which can dramatically improve the patient’s sleep. For example, sleep apnea can be effectively treated with continuous positive airway pressure, and circadian disorders can often be treated through structured light and melatonin use. Beyond these individual level interventions, there are more systematic factors which can be addressed. An especially powerful approach is to address work overload issues by cutting workload. This typically requires management being involved in the decision, perhaps authorizing a longer timeline on a goal, or additional personnel to share the workload. Managers themselves may need to delegate more to address their own workload issues, which only works if the rest of the team is sufficiently staffed. Employees may benefit from being empowered to use flexitime to match their work schedules to their optimal sleep schedules. Late
night chronotypes might come later and work later, while early risers start before dawn and finish earlier. Nap room infrastructure can be another layer of support for sleep. Some of these work-based solutions may involve costs which will raise the eyebrows of managers at higher levels. Those managers must appreciate the long-term benefits of a more sustainable workforce that can come from investments in workload management. In other words, leaders are key to this process, because they can be the fulcrums for positive sleep-based changes in workplaces. Leaders must understand how sleep is a human sustainability issue which is critical to maintaining valuable human capital. For most leaders, this necessitates training regarding the importance of sleep not only for health, but for work outcomes as well. With such training, leaders can avoid being the cause of poor sleep and can instead be champions for the idea that employees are only the best versions of themselves when they get the sleep they need. An example of a leader who explicitly pushed for a sleep-friendly environment is former Aetna CEO Mark Bertolini, who set up a bonus program to incentivize sleep for the company’s employees.
‘Sleep-deprived decision-makers are likely to have access to fewer strategic options, decision criteria and other information in their long-term memory’
So, what does this mean in sum? Just like you make trade-offs and choices in your strategic decisions, you also make trade-offs when it comes to sleep – both for yourself and the people you lead. We argue here that many senior managers trade off too much sleep for marginal improvements in productivity; and they do so without even being completely aware of the damaging side effects, both for their long-term health and their short-term decision-making capabilities. It’s time to wake up to this reality. ■ Albrecht Enders is Professor of Strategy and Innovation at IMD. His major research, teaching and consulting interests are in the areas of managing discontinuous change and top team strategy development processes. He is the co-author of the book Solvable: A Simple Approach to Complex Problems (FT Publishing, 2022). Christopher Barnes is Professor of Management and Evert McCabe Endowed Fellow at the Foster School of Business at the University of Washington, Seattle. Matthew Walker is Professor of Neuroscience and Psychology at the University of California, Berkeley, and is the founder and director of the Center for Human Sleep Science. He is author of the international bestseller Why We Sleep (Scribner, 2017).
March 2022 • I by IMD 11
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What now for supply chains? Inflation, e-commerce and overstocking are all driving change
Economic growth is being driven, in part, by supply chain dynamics. The confluences of forces might bring about a new paradigm in inventory management and perception of excellence, argue Ralf W. Seifert and Richard Markoff 12 I by IMD • March 2022
Inventories are front of mind
Quarterly US GDP would not normally be considered a matter for supply chain professionals, but we are in strange times. US GDP grew at an annualized rate of 6.9%, a robust figure that is being attributed in large part to inventory growth, as companies look to restore stock levels depleted by the global shipping crisis. It’s worthwhile to take this moment to consider the implications this, and other dynamics, may have on working capital levels and supply chain management as a whole in the coming months. The inventory bounce
Reconstituting inventories right now may have surprising impacts on the long, and still sluggish, global supply chains. The restocking is in fact a form of “inventory bounce”. The increased production that enabled the increase in inventory levels in turn surely increased demand from upstream supplies, their upstream suppliers, and so on. The demand signals moving up the stream may be very difficult to identify and distinguish from genuine increases in demand. The risk for confusion is higher knowing that demand for goods is at an all-time high, as consumers spend less on services during the COVID-19 omicron wave.
Photo: Ruchindra Gunasekara via Unsplash
This is a classic root cause for the bullwhip effect: the obscuring of true demand signals with changes in inventory holding policy. Surely not helping is the light being shone on just-in-time supply chains. Some companies may be looking to increase their baseline safety stock levels after the painful experience of the last few months of shortages, making for a complex blend of inventory restocking, inventory resizing and high demand all occurring in parallel. If all of this weren’t enough, there is another very understandable phenomena adding to risk of demand distortions that lead to bullwhip effects. With so many shortages over the past few months, it is not surprising that many companies have engaged in “shortage gaming”, asking for more than they need in order to secure more inventory, production capacity or even container space. The crisis in Ukraine can only serve to further cloud the picture. Inventories and inflation
There are other macro-economic forces at work to further confound supply chain visibility and drive up inventory levels. The US inflation rate just had its highest year-on-year increase in 40 years. Why is this important for supply chain managers? Well, for those that like to get into the weeds, it can hope- » March 2022 • I by IMD 13
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lessly distort calculating inventory turns, but there is a more strategic concern. In a high inflation environment, it can make more sense to build inventory now, knowing that it can be sold for more over a short period of time as its price increases rapidly. In a sense inventory can be seen as appreciating rather than depreciating in times of high inflation, a dynamic observed in the past in BRIC countries undergoing very high inflation. By squinting just a little, this looks a lot like a price speculation distortion, another classic root cause of bullwhip effects. A hidden impact of COVID-19
All of these root causes help explain the inventory increase driving GDP growth. And the result is starting to be felt. Warehouses across the US are virtually full, with free capacity of less than 4%, and this despite having more warehouses than ever before. Though inventory restocking and the adjacent demand distortions are certainly factors, there is one last element to consider: the exploding share of e-commerce during the pandemic and its accompanying consumer expectations. E-commerce now accounts for about 20% of global retail sales, and consumers are demanding ever-faster deliveries. More e-commerce with shorter transportation times inevitably leads to more warehouses that are closer to more consumers. And the growth of these inventory positions mechanically leads to more overall inventory, through a wellworn but well-proven heuristic called the square root rule. So even if there were none of the supply chain distortions we have seen recently, inventory and warehouses would still be increasing. A new era in supply chain excellence
There was time a few years ago where keeping inventories low was a sign of an efficient, well-managed supply chain. The best companies attacked bottlenecks and constraints and lowered inventory across the chain. As supply chains struggle with the impact of the events in Ukraine and the aftermath of COVID-19, it is not clear when or if that time will return. After all, inventories are not merely another cost, they do serve a purpose. ■ Ralf W. Seifert is Professor of Operations Management at IMD. He directs IMD’s new Digital Supply Chain Management program, which addresses both traditional supply chain strategy and implementation issues as well as digitalization trends and new technologies. Richard Markoff is a supply chain professor, author, coach, consultant, and entrepreneur. He has worked in supply chain for L’Oréal for 22 years, in Canada, the US and France, spanning the entire value chain from manufacturing to customer collaboration.
14 I by IMD • March 2022
Steering a path through choppy water Responsible, resilient and regenerative supply chains are needed as we head into uncharted waters, argue John Elkington and Louise Kjellerup Roper, founder and CEO respectively of the strategic advisory think tank Volans
T
here are moments when we see the world as it is, not as we had previously imagined it to be. When the large container vessel Ever Given jammed in the Suez Canal for less than a week in March 2021, the estimated cost to businesses was more than $70 billion. Even the most blinkered of consumers began to wake up to the fact that everyday products we buy with little thought often depend on incredibly complex global supply chains. Worse, the Suez traffic jam came on top of the unparalleled impact of the global pandemic, with lockdowns causing massive growth in demand for home-working technology, in turn spurring shortages in critical technologies such as microchips. As if that were not enough, rising pressures in the form of new regulations, civil society expectations, employee demands and consumer
The Ever Given jammed in the Suez Canal. The mishap cost businesses more than $70 billion
Photo: MAXAR Technologies
pressures are forcing business leaders to pay much greater attention to issues such as climate change, biodiversity loss, labor standards, modern slavery, and, wider still, new expectations around equality, diversity and inclusion. This complex, interlinked set of market shifts had been building for some time, but like all exponential developments it has been a case of global changes (to quote Silicon Valley guru Tim O’Reilly, quoting Hemingway) moving “gradually, then suddenly”. Our own Tomorrow’s Capitalism Inquiry, launched in 2018, has underscored a trend that we summarise as the 3Rs. Ever since the travails of companies such as Shell and Nike in the 1990s, in the early days of the latest round of globalization, we have seen a frantic scramble to ensure that supply chains are responsible, transparent and accountable. In parallel, waves of standards have attempted to bring order to the chaos, but if even brands like To-
ny’s Chocolonely – founded explicitly to produce ethical chocolate in an industry plagued by evidence of modern slavery – can get into trouble over child labor, as it did recently, then it is clear that pretty much every brand in the world still has some way to go. Unfortunately for business leaders seeking a quiet life, the responsibility agenda is still expanding, with issues like data privacy increasingly energetic. At the same time, we see growing evidence that two other R-words are also now coming into play — resilience and regeneration. The responsible supply chain
We have been involved with the evolution of many of the standards that have emerged to shape supply chain management. Since 2007, for example, one of us (John) has been a member of the EcoVadis scientific committee, helping steer the evolution of what is now the world’s largest sustainable business ratings platform. » March 2022 • I by IMD 15
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Today, some 100,000 businesses around the world are rated on the platform, compared with just 100 back in 2008. Procurement professionals have had to get their brains around an ever-expanding list of potential problems to mitigate, from ensuring no supplier maltreats its workforce (which may be within its remit) to stamping out illegal deforestation or fisheries (which generally isn’t). Happily, huge improvements have been made on improving conditions in key markets, from cutting negative emissions and other forms of impact through demonstrating the return on investment (ROI) for sustainable procurement practices. As Sylvain Guyoton, Chief Rating Officer at EcoVadis, told one of us (Louise): “When we started in 2005, companies came to us mostly to manage [reputational] risk, and only secondarily to find cost reductions through sustainable practices.”
And now a small but growing number of major businesses are spotlighting their commitment to a third, R-word: regeneration. Among them, Walmart, PepsiCo, Unilever and Nestlé. The regenerative supply chain
Other, less well-known business leaders moving in this direction include Patagonia, the sportswear brand, Interface, the world’s leading modular carpet manufacturer, and Acciona, the Spanish multinational infrastructure group and renewable energy company. Acciona (interest declared: a Volans client) is actively putting regeneration front and center in its corporate strategy. It has recently partnered with B Lab Spain to provide training in “measuring what matters” to support the small and medium-sized enterprises in its supply chain in making decisions related to their ESG performance.
‘The focus on resilience can only grow with geopolitical tension mounting and real-world evidence of climate chaos pressing in’
Clearly, effective procurement today is about much more than driving down costs and managing risks. EcoVadis speaks of a shift from “risk mitigation to performance and impact”. As this process takes hold and starts to drive innovation, the potential for positive change is significant.
Still, this trend coincided with a considerable surge in outsourcing to lowcost countries, which meant that many major corporations had to face up to issues in their supply chains — driving ultra-rapid growth for EcoVadis and some of its competitors. But it became clear that many suppliers had a vested interest in misleading even their main customers, so detective work was needed by activists, journalists, rating agencies and regulators. As a result, data collection, analysis and engagement have all become more challenging. And the boom in demand in relation to non-financial performance data has gone into overdrive with the huge surge in interest in environmental, social and governance (ESG) and impact investing.
Creating the conditions for the simultaneous and continuous environmental, societal and economic flourishing and value creation sits at the heart of regeneration. Regenerative supply chains are based on circular flows of material and a deeper level of engagement with the local regions and communities in which they operate than is the norm today. Rather than aiming simply to reduce or offset harm, regenerative businesses collaborate with their suppliers to develop innovative approaches and solutions that deliver social and environmental benefits by design.
The resilient supply chain
Since 2020, the resilience of supply chains has come into sharp focus. On the upside, several reports on ESG commitments were proving resilient as the pandemic’s shock waves spread. Anecdotally, too, companies that looked after their people and had adopted better-than-average social practices had an advantage. Some companies reliant on low-paid migrant workers also found it much more difficult to restart their businesses as lockdown rules relaxed in some geographies. As, inevitably, the COVID-19 crisis is followed by a global energy crisis, companies already focused on resource and energy management, and which therefore have lower footprints in terms of energy and water, will be more resilient. As the lessons sink in, combined with increased pressure from regulation across the world in terms of reporting, higher standards and lower emissions, the move to strengthen resilience in supply chains is intensifying. To date, however, we have seen a “rebalancing of supply chains, rather than a rebuild”, according to Sylvain Guyoton of Ecovadis. Yes, there are signs of a shift from just-in-time to just-in-case, but only up to a point. In Europe, for example, talk of re-shoring supply chains back to the country where a given company is headquartered has largely not happened. That said, near-shoring (moving production from, for example, Asia to Eastern Europe) has. The focus on resilience can only grow with geopolitical tension mounting and real-world evidence of climate chaos pressing in. 16 I by IMD • March 2022
There will be no true responsibility, and no longer-term resilience, without regeneration. That said, there is no one-size-fits-all model for making supply chains both resilient and regenerative. Navigating the necessary shifts will require collaboration across multiple functions within organizations and, critically, also with partners up and down the value chain. But who said tomorrow’s supply chain management was going to be easy? ■
John Elkington Founder & Chief Pollinator at Volans, described as "the godfather of sustainability" is an experienced advisor to business, and a highly regarded keynote speaker and contributor, from conferences to boards and advisory boards and the author of 20 books. John has worked with an A-to-Z of businesses worldwide, now helping the Volans team guide multinational companies to transform towards a regenerative future. In 2021, John was awarded the prestigious World Sustainability Award. Louise Kjellerup Roper CEO of Volans, is a successful entrepreneur, with a career spent in innovative businesses from tech to FMCG, pioneering cradle-to-cradle and circular business models. At Volans, Louise leads the strategic advisory think tank, which launched Bankers For NetZero and works directly with a select group of forward-thinking businesses to help unlock their vision and integrate future thinking, sustainability and innovation into strategy.
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Fairphone is designing easily repairable mobiles made from recycled materials, left, adidas is making shoes that are endlessly recyclable and, below left, Hugo Boss is increasing its production capacity in Europe and Turkey
Cutting lead times, incentivizing local production and repurposing excess stock would have a huge positive impact on the environment, explain Ralf W Seifert, Yara Kayyali Elalem and Işik Biçer
Photos: adidas.com, group.hugoboss.com, fairphone.com
Take the circular route to curbing overproduction
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here is growing recognition that we need to move away from the take-make-waste model of production and consumption towards a more circular economy where we stop waste from being produced in the first place. Much attention has been focused on how companies can prolong the lifespan of products, by making it easier for consumers to reuse, repair, and recycle goods. IKEA has rolled out a buyback program for lightly used products, adidas has designed shoes that can be ground down to be remade into another pair once they are worn out, and outdoor gear brand Patagonia has launched a repair guide for its clothing. Yet firms would do well to take a closer look at how they can re-design supply chains to reduce the amount of production-related waste that occurs when supply exceeds demand. Take for example a broken smartphone: the device can be repaired, sold to secondary markets if outdated or donated to other consumers for reuse. If none of these options is possible, the manufacturer could produce a new smartphone from some of the old » March 2022 • I by IMD 17
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parts. If remanufacturing is not an option, smartphones should be recycled. Only once all the above possibilities have been exhausted should the smartphone be sent to landfills. Many countries have passed legislation to support increased recycling efforts. For example, the Minnesota Electronics Recycling Act imposes strict collection and recycling objectives on producers as a percentage of their total sales. Companies have also adopted measures to make their products last longer. Fairphone is designing smartphones that are made from recycled materials and can easily be repaired. The company also recovers e-waste in the EU where it is based and partners with organizations that collect e-waste in African countries that lack recycling infrastructure.
Trillions of liters of wasted water Based on our calculations, the cost of excess inventory in online retailing:
179.9
trillion
liters of water
In contrast, there is a lack of business models for reusing and recycling the waste produced when supply exceeds demand due to a lack of planning or a sudden decrease in demand. Excess inventory is instead destroyed, before reaching consumers. The excessive costs of excess inventory
Until recently, it has been difficult to quantify the severity of production-related waste due to a lack of available data. In June 2021, an ITV report revealed that the online retail giant Amazon was every week destroying around 120,000 unsold items such as smartphones and other electronic devices in one of its UK fulfillment centers. Using the findings from the ITV report, we used water consumption estimates needed for smartphone production to get a rough quantitative estimate of the environmental impact of production-side waste from Amazon and then scaled this to represent all online retailers. Although these values, for reference, are in terms of water consumption estimates, CO2 consumption is highly correlated to water consumption and comprises a good portion of total carbon emissions worldwide. This makes water consumption a good indicator to measure environmental costs. This example illustrates that focusing circular economy efforts on the production-related dynamics would result in a higher payoff than focusing efforts on the consumption-side dynamics only. So, what steps can organizations and governments take to limit the waste from excess production? 1. Decrease lead times
Equivalent to
71.96
million
Olympic swimming pools or around a fifth of the total human water consumption annually
Methodology: With Amazon’s 185 fulfilment centers and 7.7% global online retail market share, the total environmental cost of excess inventory in online retailing is 179.9 trillion liters of water (assuming that around 12,000 liters of water are required to produce a smartphone). With a world population of 7.9 billion and average daily water consumption of 300 liters per person per day (assumption of average for US water consumption), online retailers waste solely due to excess inventory is estimated to be 20.7% of total human water consumption annually.
18 I by IMD • March 2022
Long production lead time due to offshore manufacturing is a major contributor to production-related waste since companies need to determine their sourcing quantities well in advance of the selling season. With ever-increasing product choices, decision-makers are faced with significant demand uncertainty. If actual demand turns out to be lower than the estimated amount, high amounts of excess unsold inventory are destroyed even before reaching consumers. To alleviate this problem, companies should cut production lead times by sourcing from local manufacturers instead of offshore alternatives. With shorter lead times, decisions about order quantities can be made closer to the selling season, when demand signals are less uncertain. While local manufacturers may be more costly, the improved match between supply and demand resulting from having ordering decisions placed closer to the selling season results in higher profits. Consequently, the cost of disposing of excess inventory can be drastically decreased even if individual item costs might be somewhat increased due to local sourcing. Hugo Boss is one example of a company shortening its supply chain. The German firm is increasing production in Europe and Turkey, which are closer to its market base, to rely less on production in Southeast Asia. Daniel Grieder, CEO of Hugo Boss, claims that having factories close to Europe has been a “massive competitive advantage” for the company. Reducing production lead time by utilizing local manufacturers would thus benefit firms both in profitability and environmental aspects. Increasing local production would also allow for a closer connection between local manufacturers and authorities, such that recycling, and remanufacturing, can be implemented near the market base. By promot-
Consumption environment
Production environment
Pro
Loop 3: Recycle
Loop 2: Remanufacture
Loop 1: Reuse
Finished goods
Disposal
Household waste
ing local production, firms would bring the facilities and know-how required to manufacture, and therefore repair and possibly remanufacture, old consumer waste products near the customer base. This would increase volumes of products passing through the circular economy loops. The advantages associated with mitigating production-side waste would therefore sustain consumption-side waste as well. Renault Group owns several factories in Europe. The car manufacturer has recently transformed its production site in Flins in France to create a Refactory, a factory for refurbishing vehicles. This has not only contributed to the company’s sustainable development but also industrialized their circular economy efforts and positioned them in a prominent position for the growing used car market.
Infographics: Theresa Schwietzer
2. Incentivize local production
Because lead-time reduction is a very effective strategy in decreasingproduction-side waste, policymakers should not only promote local production but also limit offshore sourcing to achieve environmental sustainability and net-zero goals. This can be achieved by internalizing previously ignored environmental costs due to excess storage. Less popular policies might also include increasing import and export tariffs or imposing trade barriers, to promote local production which leads to shorter lead times and hence lower waste. Such tariffs would conflict with the economic development that comes from free trade yet mitigating environmental concerns will simply not be “free” nor will it be free to ignore doing so. It is, therefore, crucial to scrutinize the trade-off between trade liberalization and environmental sustainability to achieve economic growth while preserving environmental quality. 3. Increase possibilities to repurpose excess stock
If due to unforeseeable reasons, companies end up with excess invento-
Sales
ct du
ion
Raw materials
Finished goods
Production exceeding demand Overproduction waste
ry regardless of their production locations, companies can still liquidate this inventory. Several service companies provide business-to-business marketplaces that allow companies to sell their surplus merchandise. Direct Liquidation is one example. Another example is Walmart Liquidation Auctions which is an official channel for selling excess inventory and store returns for Walmart. Items sold through this channel include electronics, furniture, and apparel and can range in size up to truckloads of overstocked inventory. Although selling excess inventory may not be the most profitable approach if it requires the selling price to be discounted, it frees up warehouses, increases capital, and remedies for otherwise destroying the inventory. ■
Ralf W Seifert is Professor of Operations Management at IMD. He directs IMD’s new Digital Supply Chain Management program. Yara Kayyali Elalem holds a bachelor’s degree in Civil and Environmental Engineering and a master’s degree in Management, Technology, and Entrepreneurship. Currently, she is pursuing her PhD in the Technology and Operations chair at EPFL. Her PhD research focuses on demand forecasting for new products and operational flexibility strategies for sustainable sourcing. Işik Biçer is Assistant Professor of Operations Management and Information Systems at the Schulich School of Business, York University, Canada. Before that he was a faculty member at the Rotterdam School of Management, Erasmus University in the Netherlands. He holds a PhD degree in Operations Management from the University of Lausanne, Switzerland March 2021 • IMD 7
March 2022 • I by IMD 19
[ Chain reactions ] Rapidly aging western population
Upcoming middle class in emerging markets
Demographic changes
Increasing city density Increasing urbanization More working out of home
Emerging-marketing metropoles Lockdowns
Accelerated growth ecommerce
Covid-19 pandemic
Bullwhip effects
Economic shifts
Reshoring from Asia Nearshoring
High inflation
Exploding fuel prices Omni-channel customer
Ease-to-use Sharing economy Virtual reality
STRATEGIC FOCUS
Global ecommerce
Internet of things
Cloud-based technology
Digital reality
Augmented reality
Industry 4.0
Mixed reality 3D Printing Robotization
Autonomous mobile robots
Technological trends
Artifical intelligence
Market trends
Machine learning Process mining Digital twin Scope 3 emissions
Footprint reduction Working conditions
ESG criteria Sustainability
Governance Renewable energy Circular economy Product as a service
Political disturbances
Cyber security Government ruling Data protection
ACT
Geopolitical disputes
Digital Chains
Digital twin End-to-end planning Demand sensing
Use of POS-data
Leading indicators
Machine learning
Control tower Forecasting 4.0 Planning & coordination
Cost-to-serve analysis
Customers
SKU reduction
CHECK
Simultaneous segmentation Different scenarios
Products Integrated business planning
Financial trade-offs
Supply chain improvements
Sourcing
Robotic process automation
Reliability Bottleneck identification
Upstream supplier identification
Stability ESG-data
EXECUTIVE FOCUS
Scope-3 Dual sourcing
Risk reduction Spare parts
Reshoring
Open innovation
Collect data about machines Use of sensors
Customized products 3D printing of Packaging
Co-development
Manufacturing
Monitor the factory by AI vision
Process mining Digital Lean Augmented reality Digital Twin of factory
Predict machine behaviour
Co-bots Robotization
Safety Ergonomics
Quality control Intelligent maintenance
Use of digital reality
Autonomous mobile robots Warehouse automation
Automatic replenishment Internet of Things (IoT) Transport conditions Sustainability measurements
Cycle counting
Drones Tracking & tracing
Customs clearance Blockchain
Dynamic ETA
High-end product tracking
Real-time transport visibility
Traffic Machine learning Weather
EXTERNAL FOCUS 20 I by IMD • March 2022
Dark stores
Bike couriers
Green delivery
Logistics
Currency exchange rates
High inflation Managing risks
Financial
Scan here for interactive supply chain mindmap
Low interest rate
Financial disconnect
Costs dual sourcing Supply chain costs increase
Unclear IT investments
Reavtive to digital changes Useless ROI calculations Growth through ecommerce Availability of sell out data
Sales
Up-selling
Existing customers Unexpected new customers Store as pick-up point
Managing pricing increases
Pull replenishment
Marketing
Pattern of consumption
No need for Nielsen
Price elasticity products
Impact companies
Product allocation
IT
Consumer genome
More buyer knowledge NPS is non-linear
Misunderstanding between
PLAN
Data privacy
EU ban on cookies
IT
Software development
HR
Market of 1
Useless for analysis
Business Waterfall
Need for better security Scarcity of talents
Apps
Scrum & agile
Bring your own device
Open source
The great resignation
ERP Legacy systems Ease of integration
Increase of salaries
DO
Working from home Experience is useless
Digital far from comfort zone Legal
Unclear IP
Open source
Outdated laws
Copyrights Product life cycle
Design for supply chain R&D
Complexity reduction
Mass customization
Increasing complexity Improving visibility
Supply chain
From necessary function
Strategic shift
To driver of growth
Supply chain challenges
Forecasting inaccuracy
Planning
Demand volatility
Difficult stock allocation
Supply uncertainty
Raw materials Components
Supply risk
Sourcing
Tier-2 and beyond
Dual sourcing
Scarce materials & components
Product selection
Reshoring
Onshoring
Banned suppliers
Nearshoring Supplier health
Governance Manufacturing Distribution
Omnichannel orders Complex order management
ESG goals
Working conditions Social Environment
Trade-off between Broader variet of product ranges
Battle for standards
From past performance To profit predictability
CO2 Energy
Poor visibility stocks Inventory allocation
Sales increase Lower costs
Exploding freight costs Transport scarcity International shipments Delivery options
Home delivery
Ship from store
Click & collect
Pick-up points
Green delivery
Stores
High returns
E-fulfilment Complex logistics execution
High in-transit stock
City restrictions
INTERNAL FOCUS
Source: Martijn Lofvers, CEO and Chief Trendwatcher, Supply Chain Media, and Carlos Cordon, Professor of Strategy and Supply Chain Management
Supply 2022
Cross-selling
March 2022 • I by IMD 21
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Tetra Pak has introduced cutting edge digital technologies to increase efficiency and speed up production and delivery
an inventory of brilliant ideas and others that failed to deliver From a focus on manufacturing to broader responsibility for the entire supply chain, Tetra Pak’s former head of Supply Chain Operations Eric Baudier discusses the highs and lows of supply chain management over the past two decades with Carlos Cordón
22 I by IMD • March 2022
The highs The broad adoption of Total Productive Maintenance
First developed in Japan in the 1970s, Total Productive Maintenance (TPM) aimed to make production more reliable and was centred around anchoring a culture of continuous improvement known as “Kaizen” in Japanese. Once the idea was exported to the West, carmakers were early adopters, and it really took off in the mid-1990s when companies such as Unilever, Pirelli, Tetra Pack, Volvo, Nestlé and Heineken started implementing it. In 1995, former General Electric CEO Jack Welch praised Six Sigma quality controls, which seek to streamline and improve manufacturing by identifying and eliminating defects, for boosting the company’s profits. But there have been many false starts. For TPM to succeed it needs to be instilled into the company’s culture. Many companies instead forgot that huge change management is required and ended up resetting their factories every few years. For example, US motorcycle manufacturer Harley-Davidson implemented TPM into their factories nine times before it finally succeeded. Those firms that have succeeded, have seen huge reductions in waste and production stoppages, as well as an overall continuous improvement in productivity.
Photo: Tetra Pak
Taking stock:
he disruption of production from smartphones to furniture wrought by the COVID-19 pandemic has brought home the importance of global supply chains to almost every consumer. But what have been the fundamental shifts and advancements in supply chain management over the past two decades? Pressure to cut costs and increase efficiencies has unleashed a range of new production processes and technologies that have turned the job requirements of warehouse managers and supply chain executives on their heads. At the same time, a desire to slash time to market and keep inventory to a minimum has left companies vulnerable to production risks. Here we discuss the highs and lows of the past 20 years.
Putting the pieces of the supply chain together
Twenty years ago, the focus was on keeping the machinery in factories humming. Other parts of the supply chain were scattered across functions; purchasing of parts and materials was the remit of the finance department, while delivering finished goods was part of sales. Consumer goods group Unilever was one of the first companies to create the role of a Chief Supply Chain Officer, recognizing the need for broader oversight beyond just the factory floor to ensure that production runs smoothly. While not all companies have followed suit, there has been a broad recognition of the need to manage processes beyond manufacturing. New simulation and operation tools
As supply chain executives came under increasing pressure to cut costs and deliver goods to customers even faster, a whole host of optimization and digital simulation tools emerged to help them do their jobs. While it used to take five experts one week to simulate three scenarios, nowadays advanced technologies, such as AI with machine learning, can simulate hundreds of different outcomes overnight. It is not uncommon to walk into a company and see a control tower – a dashboard of data and key business metrics that monitor events across a supply chain. One of Tetra Pak’s suppliers in Brazil has a huge 20 square-metre wall tracking every single truck transporting wood across its forests. From order processing to warehouse management and demand forecasting, there is a digital tool for every step of the supply chain to reduce errors and costs and increase speed. The impact of technology on supply chain jobs
Once the neglected part of the business degree, logistics has grown in popularity with more and more people completing master’s programs in supply chain management. Companies like Amazon and Ocado are deploying cutting-edge technologies in their logistical operations, putting tech-based skills in demand. An expert in managing a warehouse 10 years ago would need a completely different skillset today as everything is automated. The use of new technologies, such as Microsoft’s HoloLens smart glasses to maintain and repair machines, has also changed the way people do their jobs. While it used to take a supplier over a week to send an engineer to fix a machine in a far-flung factory, the problem can now often be solved virtually. The birth of the industrialization phase
Another quest for companies has been to smooth out the process between innovation and production to avoid costly fixes, such as being forced to reprogram factories or iron out problems too far down the track. One solution has been to introduce a step between the prototype stage and series production – the so-called industrialization phase – where firms test how to manufacture their product. Some companies have made good progress, but it has not yet been 100% successful.
The Lows Time to market pressure
With the emergence of newer and nimbler competitors, the pressure to cut the length of time from the conception of a product to when it
is launched has grown as firms rush to be first to market. Yet this has often led to compromises in the development processes, leading to costly problems to remedy further down the line. Many companies still underestimate the costs of non-quality. ‘Just in time’ versus ‘just in case’
The COVID-19 pandemic has exposed the fallacy of trying to optimize inventory too much. ‘Just in time’ supply chains emphasized keeping stocks to a minimum and using short-term flexible contracts that could be adjusted quickly to changes in demand. But this has stretched the supply chain too far and made it unable to respond to large-scale disruption such as the production stoppages and shipping backlogs brought about by the pandemic. With the cost of capital still low, there is a growing acceptance of the need to increase the amount of stock firms keep on hand. Firms should move from just-in-time to just-in-case. Structural dependencies and hidden weaknesses
When the Ever Given megaship got jammed and halted traffic in the Suez Canal for almost a week in March 2021, it was a clear signal to the world of the interconnectedness and structural dependencies of global supply chains. After a big snowstorm hit Texas in early 2021 and closed factories, customers using additive polymer realized half the world’s supply relied on one backstream supplier in the state. Firms that have outsourced some manufacturing are discovering they are vulnerable to the concentration of production in certain places. Carmakers Volkswagen and Renault have temporarily halted production at some European plants following Russia’s invasion of Ukraine due to shortage of electric cable sets. Managers should audit supply chains to uncover hidden weakness and rethink their outsourcing strategy, bringing the production of the core elements of their products back in house to help retain some elements of control. A reactive approach to sustainability
The climate emergency has underscored the need for sustainability to be the starting point of supply chains. Too often in the past, companies have taken a reactive approach, only addressing issues such as the safety of workers, or the environmental impact of sourcing certain materials when they were raised by non-governmental organizations. Executives instead have used the excuse that the supply chain’s purpose is to deliver profit, and sustainability took a back seat. As we shift towards a low-carbon circular economy, supply chain managers will need to incorporate sustainable sourcing policies into their production processes. ■
Eric Baudier is a supply chains and operations consultant. He was Executive Vice President Supply Chain Operations at Tetra Pak until December 2021 and worked in a variety of roles at the packaging giant for more than 30 years. Carlos Cordón is a Professor of Strategy and Supply Chain Management. His areas of interest include digital innovation in value chains, supply and demand chain management, digital lean and process management.
March 2022 • I by IMD 23
[ Chain reactions ]
Companies will need the tools to test every link in the chain Over the next decade, one of the most disruptive changes facing firms will be the need to take responsibility for every business in their supply chain, writes Vivek Ramachandran, CEO of Hong Kong-based digital B2B platform Serai
T
he next 10 years are going to be revolutionary for global trade. Companies will find themselves having to take responsibility not just for their own actions, but also those of every business involved in the manufacture and movement of their products.
Consumer pressure and new environmental, social and governance (ESG) regulations will force companies to not just know far more about, but also be held accountable for, what happens at every point in their supply chains. Global supply chains have evolved in complexity over decades to meet one primary objective: cost minimization. In meeting this objective, they have been amazingly successful. Products of all kinds can be shipped around the world with incredible efficiency. Yet efficiency has masked other shortcomings. One, of course, was a lack of resiliency, as the supply chain crises of the last years have shown all too clearly. But also hugely significant was that those cost savings came at the expense of transparency. Most companies have limited visibility into their supply chains and almost no way of proving the credentials of the partners they are, directly or indirectly, working with. Critically, many of the incumbent solution providers supporting global trade flows – among them sourcing agents, risk and financing providers, and logistics companies – have benefited from the markets’ lack of transparency. Newcomers wanting to offer better or different trade services have found it hard to gain access, slowing the pace of disruption.
Better partner knowledge
Nonetheless, there was clearly an opportunity here to use technology to simplify trade. So along with several other colleagues at HSBC with backgrounds in trade finance and commercial banking I decided to launch a startup centered on helping businesses find and build trusted 24 I by IMD • March 2022
relationships with new trade partners. Trade, of course, has been central to HSBC’s DNA since the bank was established more than a century and a half ago. We saw Serai as being a natural extension of the financial services offered by the bank. The bank bought in, and the company was set up in 2019 in Hong Kong, with an initial focus on the apparel sector. We soon found that as well as wanting to know about new partners, businesses also needed help learning about their current trade partners. Most businesses were familiar with the businesses that supplied them directly (their Tier 1 suppliers) and some had reasonable knowledge about their Tier 2 suppliers (businesses that supplied Tier 1). Unfortunately, there was little information about subsequent tiers of suppliers and about their credentials. In fact, a recent survey we conducted confirmed that less than one in five businesses have visibility into their supply chains. Having such information, however, is in the process of very rapidly moving from being “nice-to-have” to “must-have”. Activist consumers are increasingly demanding information on where the clothes they buy are made, the labor conditions under which they are made and the environmental credentials of their manufacturer. Officials also are starting to want to know a lot more. At the start of 2021, the US government demanded that importers prove the absence of cotton from Xinjiang in their products. Also last year, Germany passed its Supply Chain Due Diligence Act which will require all businesses with more than 3,000 employees to attest to the absence of forced labour in their supply chains. Because of such rules and pressures, businesses not only need to be aware of all the businesses involved in their supply chain, but also be required to prove their credentials and be held accountable for their practices. This pressure will only grow as issues around carbon emissions and water treatment receive the same attention that forced labour has had in the past two years. The world will become a scary place for companies armed only with the information about their supply chains they now have. To be able to operate responsibly, ethically and sustainably, as well as profitably, corporate decision makers need to see the full picture. This is where supply chain transparency comes in: the ability for businesses to have a good understanding of what is happening upstream in the supply chain and be able to communicate this information both
New businesses will emerge built around using data, information and technology. Serai’s platform is one of these, offering ways to hold and share information with suppliers, customers, officials and other organizations in all parts of the world in whatever format is appropriate. Old bottles, new wine
As this happens, we don’t expect the overall pattern of global trade to change. Asia will remain the world’s manufacturing hub. Investment will continue to flow to factories in the region. And brands will continue to source their products from suppliers based there. What will change is the internal mechanics of supply chains, with a radical shift in the way they operate. Back in 2019, before the COVID-19 pandemic, when we spoke to companies about information and data, the response of most businesses was to say that they knew they could do better, but as the system wasn’t broken, change wasn’t the imperative.
‘With the world finally acknowledging the need to make economies carbon neutral, demands for information, certification and validation are going to become an inevitable part of trade’
Vivek Ramachandran: ‘The world will become a scary place for companies armed only with the information currently available to them’
internally and externally. Thankfully the technology to simplify this herculean task is available today and ready to use, which is where Serai comes in. Disruption ahead
The answer to these new requirements combines being able to gather high-quality data with being able to put that data to work using automated processes. The digital technologies now exist that can handle all the extra work such rules will entail. What might be harder to cope with is the business upheaval that will accompany their adoption. A taste of what is to come can be seen in the changes of business-to-consumer (B2C) commerce that have taken place in the last decade, thanks to the rise of platforms and applications that have made e-commerce available to anyone wanting to start a retail business. Business-to-business (B2B) trade will go through a similar revolution as collaboration tools are developed for suppliers that both generate more information and simplify the running of their business.
Nobody is telling us that today. For the supply chains of the near future, companies are going to have to engage with their suppliers in building transparency. Relationships previously based around in-person meetings that took place several times a year will be replaced with collaboration based around a massive sharing of data. Already, some forward-looking companies have taken these ideas on board and are digitizing their processes. Hong Kong-headquartered Epic Group is one such business, working with us to build traceability and prove who is in its cotton supply chain to ensure that every piece of apparel it sells is sourced ethically and sustainably. When substantiated with data, that will be an incredibly powerful claim to make to partners, governments, NGOs and consumers. No longer will the focus of supply chains be only on the physical movement of goods. Instead, it will also be on the gathering and handling of data and information, and the use that data and information is put to vetting and auditing suppliers, guiding profit-and-loss decision-making, and ensuring full compliance with all the rules governments are going to generate in the coming decades. ■ Vivek Ramachandran is CEO and founder of Serai. Before that, he was HSBC’s Global Head of Growth and Innovation. Educated at Shri Ram College of Commerce in India and Carnegie Mellon University in the US, his career has also included spells working at Lloyds TSB and Barclays.
March 2022 • I by IMD 25
[ Hiring strategy ]
Finding the good in people: how to recruit ethical employees
E
In an era of corporate scandals, hiring and maintaining an ethical workforce is vital. But a wide range of testing is needed if companies are to effectively weed out the bad apples, argues Liz Ritterbush
very day when we turn on the news, there seems to be another corporate scandal. Someone, somewhere stole from someone else, hid their money overseas, mistreated their employees, or neglected to look out for society. And such failures don’t affect only the obvious victims – the legal and financial consequences, and the reputational damage, rebound on the companies themselves, destroying organizations and ruining careers. Demand is growing for greater corporate accountability, but it is coming from people rather than governments. Shareholders, customers, and citizens are demanding that organizations add values and ethics to the triple bottom line, and governments are under pressure to listen to this societal push and impose sanctions that act as a real brake on unethical behavior. Corrupt practices seem to be far more than a question of “bad apples”. They seem to permeate the world we live in, but why? Some would argue it’s all a matter of context: good people just act “bad” because of opportunity, pressures, or a combination of the two. Yet we all know that some people are inherently more “good” than others. We all know that person who’s willing to lend a helping hand to a stranger in need, just as we know those people that don’t bat an eye when someone else is in pain. If you are responsible for bringing new people into the company, how do you tell who is “good” and who is “bad”? Who should you hire and trust to make the big decisions? And, once you hire them, how do you get them to stay and sustain good behavior? Values and ethics: more than ‘words on a wall’
I began researching the personality and situational factors that predict ethical behavior during my doctoral degree. This informed my dissertation and now has a profound influence on my consulting work. In my studies, I found that certain personality traits can indicate whether a person is more or less likely to engage in ethical or unethical behaviour. 26 I by IMD • March 2022
It became very clear, however, that the organizational context also plays a significant role. For instance, the personality trait of conscientiousness is more predictive of ethical behavior in organizational settings and less so in social settings or when a person is engaging with other people. In situations that involve other people, the more predictive traits are honesty-humility and, on the negative side, Machiavellianism. Such studies have given me a special perspective when advising organizations on their talent management systems, particularly as they try to determine the leadership traits or attributes that are important for success in their context. Organizations should carefully consider the environment they are building when they decide which personality traits or values they want to reinforce. To ensure ethical behavior, many organizations put their hopes in a Code of Ethics, but experience shows that “words on a wall” are far from enough. In fact, no single approach can solve the problem. Organizations need a suite of measures, including public commitment to a set of values, targeted hiring, clear rules for behavior, strong internal processes, and regular training. Once people are inside the organization, they need to be nudged into making ethical choices with cultural norms, incentives to encourage ethical behavior, and sanctions to discourage violations. Values can be seen as an individual’s or organization’s guiding principles, such as security, community, honesty, and integrity. Values are important in their own right, and my research has shown that individuals who feel their organization’s values are closely aligned with their own values are more likely to collaborate with others in the organization. Ethics is a separate field that looks at what is acceptable from a societal and legal standpoint. Philosophers from Aristotle to Kant have thought deeply about ethics, yet there is no single agreed definition for the term because what is “right” differs according to culture. In Japan, for example, there is a saying that the nail that sticks out gets hammered down, »
THE ETHICS INNOVATORS... CLEVELAND CLINIC PAYS UP FOR OTHER’S ILLS
Akron General Health System in Ohio agreed in mid2021 to pay the US Department of Justice $21.25 million after admitting it overpaid physicians for referrals, then submitted claims for these illegally referred patients. In 2015, the hospital’s former Director of Internal Audit had sued AGHS, alleging she had been fired after she took her concerns to the board. Around the same time, Cleveland Clinic Foundation acquired AGHS and voluntarily disclosed the fraud to the DOJ, which accepted that the arrangements were put in place by the previous owners and gave Cleveland credit for its cooperation. The whistleblower received part of the settlement under the provisions of the False Claims Act. ILLYCAFFE BRANDS FAIRTRADE MARK UNFAIR
Illycaffe has a reputation of doing business sustainably, but chief executive Andrea Illy has no interest in ethical certification schemes such as Fairtrade, which guarantees a minimum price to coffee growers in cooperatives that pay fees for inspection and certification. Instead, Illy’s Università del Caffè offers free training to growers, so that Illy can buy direct and pay a premium for the right beans. Illy says it is fairer for the buyer to bear the burden of guaranteeing quality, and its commitment to environmental sustainability is built on its value of respect.
Photo: Unsplash
TRANSPARENT SUPPLY CHAINS GIVE FASHION A CLEAR CONSCIENCE
Charlotte Instone was studying at the London School of Fashion in 2013 when the collapse of the Rana Plaza factory in Dhaka, Bangladesh, killed at least 1,130 people. She was horrified at the deaths of the workers, many of whom were sewing for high street brands that had no idea where their products were coming from. In response, Instone launched Know The Origin, which sells fair trade, organic clothes that can be traced all the way back to India to the ginners, spinners, zero-waste dyers and women’s cooperatives who make them.
...AND THE TRANSGRESSORS BANK’S $1 BILLION BRIBERY CASE
US investment bank Goldman Sachs admitted paying $1 billion in bribes to win work raising $6.5bn for Malaysia’s sovereign wealth fund, 1MDB, then agreed in 2020 to return $600m in fees and to pay $2.3bn to regulators in the US, UK, Hong Kong and Singapore. After at first blaming rogue employees, the bank finally conceded there had been “institutional failure” and said it had ignored red flags that should have alerted higher-ups to what was going on. SACRED SITES BLOWN UP
In Australia, the CEO of international mining giant Rio Tinto, Jean-Sébastien Jacques, and two senior executives were forced to quit in 2020 after the company blew up 46,000-year-old rock shelters to get at higher volumes of high-grade iron ore. The resignations came after intense pressure from shareholders outraged by the destruction of the sites, which the company later admitted were of “exceptional archaeological and cultural significance”. VEHICLE EMISSION CHEATS
Volkswagen’s group CEO Martin Winterkorn resigned in 2015 amid a scandal over VW’s use of software to cheat on emissions tests. The deceit appears to have originated with engineers in California, but executives high in the company colluded in the cover-up and the company ultimately paid more than $33 billion in fines, penalties, compensation and buyback costs.
March 2022 • I by IMD 27
[ Hiring strategy ]
while in Western cultures, individualism and the people who are “out there” get praised. Ethical decision-making is about how you apply your values and your decision-making ability in a societal context. Talent recruitment 1,2,3
Forward-looking organizations follow the “Attraction – Selection – Attrition”, or ASA model, for recruitment. The first step, Attraction, is to make your organization’s values a key part of your public image so that you attract the right sort of candidate. This is becoming more and more important as younger people move into the workforce – they have strong values and want to be able to identify with the organization they join. A recent survey confirmed that Millennials and Gen Z are channelling their energies into holding themselves and others accountable. The next step, Selection, usually involves interviews and sometimes a variety of pre-employment integrity tests to determine if a candidate has the right ethical make-up as well as the technical knowledge and skills required. And the final step, Attrition, occurs if the employee does not feel they “fit” the organization or the role. Selection can seem like the most complex stage in the process, if only because there are so many methods, each with its own strengths and limitations. To make matters worse, the internet offers a wealth of resources that help candidates prepare, or even “fake” it. A simple web search will turn up detailed advice on how to prepare for an interview, plus answers to the most common questions. Guidance can be found on how to think and talk about your experiences and sites that offer training on standardized tests. All this makes it hard for selection panels to gauge whether they are seeing the “real” person. Interviewing to predict real world behavior
For many companies, the mainstay of the selection process is behavioral interviewing, in which the candidate is asked to talk about situations they've encountered in the past. The challenge is to work out whether they’re telling you what they actually did or if an anecdote has been borrowed from someone else’s life. A better option may be scenario-based selection methods that put candidates in a hypothetical situation and ask how they would respond. This has the advantage of presenting candidates with unforeseen challenges, making it harder for them to prep. Some interviewers use Conditional Reasoning Tests, in which candidates select how they would respond from a range of options and provide a rationale for their response. Conditional Reasoning Tests help to correct for cognitive biases related to personality types, but the disadvantage is that they are not highly predictive of job performance. An alternative with a higher predictive value is Situational Judgement Tests, or SJTs, which measure a candidate’s responses to a range of situations they are likely to encounter in the workplace. The value of SJTs is that they are context-specific – the context in the scenario can be tailored to match what the individual will actually engage with on the job. 28 I by IMD • March 2022
In the police force, for example, you might show a video of someone being pulled over, or being apprehended, and ask the candidate what they would do. Because it’s so targeted to the job, it can really test that decision-making component. Recent work has shown that SJTs constructed as part of the college admission to medical programs in Belgium have become more valid over the years, and that they hold promise for personnel selection in a multi-ethnic setting. Some organizations devise their own Situational Judgment Tests, while others turn to consultants who have already developed tests that are adapted for their industry. The key is to regularly update and refresh the tests so that they fit your business needs. The context in which your business operates is constantly changing, and so must the tests. Personality tests make it harder to ‘fake goodness’
Pre-employment integrity tests became more popular in the US after the use of lie detectors in hiring was banned by the Employee Polygraph
5 ways to create an ethical workplace
Creating a durably ethical organization may seem an almost impossible task, given the complexity of modern enterprises and the sheer numbers of people who need to be committed to the cause. Nevertheless, here are five steps you can take to maximise your chances of getting it right.
1. Develop a corporate culture that puts values and ethics at the core of everything you do. Values are your guiding principles, such as community, honesty and integrity, while ethics are the practical decision-making processes by which you apply your values in a societal context. 2. Use a combination of selection methods to get a balanced perspective on candidates when recruiting. While behavioral interviewing is the mainstay of targeted hiring for many organizations, other methods can yield valuable insights.
3. Establish clear expectations with a code of ethics or, better still, a more prescriptive code of conduct that provides strong, explicit guidelines for how to behave in a range of situations.
4. Make sure your ethics training is at least as good as your security
training – and for the same reason. Failures in either field present real risks. Best practice ethics workshops enable people to work through ethical dilemmas and receive clear directions on how to resolve them.
5. Discourage violations of ethical standards with robust sanctions, and support individuals who are committed enough to the good of the organization to blow the whistle on unacceptable conduct.
‘Organizations need a suite of measures, including public commitment to a set of values, targeted hiring, clear rules for behavior, strong internal processes, and regular training’ Protection Act of 1988. These tests fall into two categories: overt tests, also known as explicit tests, and covert tests, also known as implicit tests, that are personality-based. Overt tests ask YES/NO questions, such as: “Have you ever taken office supplies home?” or “Would you take $20 from the cash register?” Others try to test altruism by asking, for example, whether you agree with the statement: “I try to help people.” But the limitations of such questioning are obvious. If you’re being hired, naturally you’re going to say whatever shows you in a good light. In fact, the research shows implicit, personality-based tests are the most reliable
predictor of ethical behavior because they make it harder to “fake goodness”, and I encourage organizations to include them in their screening. Most personality tests are based on the Big Five personality traits, which were identified by researchers in the 1980s. The Big Five traits are conscientiousness, openness to experience, extraversion, agreeableness and neuroticism, a trait that today would probably be described as “emotionality” or “emotional stability”. Of the five traits, the one that correlates most strongly with integrity is conscientiousness. This trait is indicative of an individual’s diligence or ability to follow through with something, complete a task, pay attention to details, and follow the rules. Conscientious people respond particularly well to codes of conduct because they have a sense of obligation or duty to comply with what's expected of them. The problem with this five-factor model is that it was developed in the US using a white, male, academic sample. The model I prefer is the »
Can a nation have a moral conscience? One of the most fascinating things I have found in my research is the differences between regions around the world and the level of legislation or research that exists to enhance integrity within organizations. Some of the most thoughtful research on predicting ethical behavior has been published by researchers from Belgium, Germany and the US, but the implementation of integrity tests by culture shows a different picture. Previous research has found that organizations in countries with high levels of “uncertainty avoidance” are more likely to use integrity tests to screen managers. Canada and Belgium have some of the highest rates of integrity testing, while the US and France have some of the lowest. When considered along with laws and regulations, the trends become even more interesting. Germany, for instance, has highly regulated the selection criteria for all roles, helping to remove bias (and the potential for manipulation) from the hiring equation. Austria, Denmark, Belgium, Finland and Germany also rank as having some of the best employment laws for workers compared to the rest of the globe. Given this pro-social and pro-human approach, it is no surprise that legislation such as General Data Protection Regulation has emerged from the European Union.
frequently fail to mention their own war crimes and atrocities when discussing the Second World War in schools. Germany, on the other hand, is open about the devastation caused by the Nazi regime and has taken purposeful steps to avoid such crimes in the future. This acknowledgement of the wrongs that have been committed leads a society to introspection about how they were allowed to happen in the first place. Once the underlying factors are revealed, solutions can be implemented. Refusing to acknowledge our past misdeeds as individuals, organizations or societies leads to a harmful state of ignorance that enables unethical behavior to continue. Thus, it is no surprise to me that countries that are more open about the sins of their past also seem to be leading the way in ethics research and implementation.
Photo: Shutterstock
Although the reasons for this are unclear, as an organizational researcher, I am drawn to the idea that there may be a cultural element of learning from devastating historical events. We know that part of our individual growth comes from recognizing our own strengths and shortcomings to become better and avoid the mistakes of our past. Some societies and regions of the world also appear to be better at this than others are. It seems to me that countries who own their history of human rights violations and discuss them openly, in order to avoid a repetition of such failings, are more advanced in implementing policies and selection methods that promote integrity. Some countries, such as the US and Japan,
Wonderful Copenhagen: Denmark has some of the world’s best employment laws
March 2022 • I by IMD 29
[ Hiring strategy ]
H
sincerity greed avoidance fairness modesty
inquisitiveness aesthetic appreciation unconventionality creativity
O
emotional control
X
HEXACO
openness to experience
diligence organization perfection prudence
E
honesty humility
C
conscientiousness
anxiety dependance sentimentality fearlessness
eXtraversion
A
agreeableness
sociability social self-esteem social boldness liveliness
flexibility forgiveness gentleness patience
The HEXACO Personality Inventory has been developed cross-culturally and validated internationally. People are assessed on six ‘dimensions’ of personality
In fact, if you're trying to predict ethics, or integrity on the job, it is best to use multiple hurdles in the hiring process. In a standard personality test, conscientiousness can be easy to fake, but faking is much harder in Situational Judgment Tests. A combination of personality tests, SJTs and interviews by trained interviewers to elicit historical data will give a balanced perspective on candidates. But personality tests, like lie detectors before them, may be facing new challenges. Recent research suggests that personality tests may have difficulty distinguishing between people with psychopathic personality disorder and those on the autism spectrum. Both groups have difficulty identifying other people’s emotions and cognitive states; this manifests as a lack of empathy, even though the reasons why they present in this way are completely different. Organizations are not able to measure underlying mental processes at scale, and rely on empathy as a proxy indicator, so there is a risk that people 30 I by IMD • March 2022
with autism may be misidentified and therefore be subjected to discrimination. As well, there are always going to be individuals who can elude the tests and present themselves as something other than they are. Machiavellians are extremely skilled in this regard. The personality trait of Machiavellianism is one of the three traits included in the Dark Triad theory of personality; the other two are psychopathy and narcissism. Machiavellians appear to be exceptionally clever, cunning and ruthless. They can manipulate large numbers of people to get what they want. This “talent” extends to performance in interviews, where they are able to pick up on subtle cues from the interviewers to effectively manage the impression that they make. From policies and training to social and cultural norms
Once they are inside the organization, people need to know exactly what’s expected of them. The traditional approach is the corporate Code of Ethics, but alert organizations are moving to more prescriptive Codes of Conduct, because these provide the strong and explicit guidelines that people need. Ethics must be part of a culture that pervades the organization, not something that only one person is championing. One of the first things I look for in an organization is whether they have an internal ethics com-
Source: HEXACO
HEXACO Personality Inventory, which was developed cross-culturally and has been validated internationally. Researchers gave the tests in 16 different countries, and every time the results split into six factors, with the additional trait being honesty-humility. This trait has been shown to be predictive of personal integrity and ethical behavior, so if you get a good match for those two – conscientiousness and honesty-humility – you’re off to a good start.
mittee. This committee needs to be a cross-functional group of people drawn from different leadership levels who come together to discuss hot topics and say: “Okay, how can we make things better in the future?” and “How can we proactively avoid the scandals exhibited by others in our industry?” They don’t just discuss an issue after it has arisen, because that is often far too late. Another way to influence behavior is to transmit social norms through group pressure. Organizations can incentivize ethical behaviour by explicitly celebrating it. For example, in the tech industry, teams are rewarded for taking risks, even if they don’t pay off, because the company wants to encourage innovation. In the same way, a team should be rewarded for turning down a contract that is ethically dubious, even if it means saying no to revenue. The company needs to publicly recognise the fact that the team’s decision has supported its organizational values and prevented potential reputational damage. Another vital ingredient is regular training to maintain an ethical culture across the organization. To be effective, ethics training programs need to be at least as good as the organization’s security training programs. The training can’t just be a black box that’s pushed out by HR, with someone saying: “Let’s watch a video and answer a couple questions, done.” Bestin-class organizations conduct workshops where people work through ethical dilemmas and are trained on how to approach them. Some of the best ethics training programs also incorporate cross-cultural training, which teaches the nuances of all the different cultures an employee may interact with, both inside and outside the company. This harks back to the point that ethics is specific to culture. Even the tone of business emails can vary from one culture to another. Someone from India may write in the passive voice, while someone from Eastern Europe may be more concise and to the point, and they both need to understand that the other isn’t being rude. Teaching these cultural differences goes a long way towards teaching both ethics and societal norms.
‘There are always going to be individuals who can elude the tests and present themselves as something other than they are. Machiavellians are extremely skilled in this regard.’
Bad apples vs whistle-blowers
Despite all these efforts at attraction, selection and maintaining an ethical culture, it’s almost inevitable that problems will arise. To prevent problematic individuals or behaviors from getting out of control, some organizations have hotlines. Staffed by ethical advisors, these hotlines enable staff to call and say: “I’m concerned about something. Can you help me determine whether it’s an ethical issue?” Such reporting streams must always allow for anonymity to protect the person who raised the alarm. It’s also vital that the person receiving the call is re-
moved from the situation and unbiased, because the query could relate to a supervisor or a popular co-worker. Just as important is follow-up. Companies must ensure that anonymity is maintained and that there is no retaliation. This is particularly important in private companies in the US, because whistle-blower legislation generally applies to government agencies but not to corporations. For their employees, these laws offer no protection. In areas where legislation regarding ethical reporting and retaliation is lacking, organizations should build such policies into their Codes of Conduct and communicate them regularly. The next frontier in accountability
Despite the growing pressure for ethics in business, some organizations remain reluctant to take on their moral responsibilities. There are multiple examples of companies that are prosecuted or sued and served with large fines or bills for damages yet survive. This may give the impression that the penalties for unethical behavior are just part of the cost of doing business. One such repeat offender is McKinsey & Company consulting group. It gave strategic advice to Texas energy company Enron, which collapsed in 2001 amid the US’s largest bankruptcy re-organization and largest audit failure to that date. McKinsey also advised the South African firm that supported former President Jacob Zuma, who is embroiled in charges of corruption, racketeering, fraud and money laundering. And in 2021 it agreed to pay nearly $600 million to settle investigations into its relations with Purdue Pharma, which it had advised to concentrate on selling high-dose opioid pills despite the well-documented risks. If this seems all too hard, it’s worth remembering that children are not born with a mature sense of empathy or an innate grasp of ethics. Empathy is something that needs to be nurtured over time and reinforced through precept and experience. And if we can teach our children empathy, we can also teach them ethics. Organizations, too, can help their people to sustain a sense of responsibility towards others and to exhibit this through respectful behavior. No matter a person’s age, ethics can and should be taught. The leaders of the organization need to stand up and take responsibility for setting and maintaining ethical standards. Organizations don’t come into being by themselves or exist in a vacuum: they express the values of the humans who create and sustain them. Chairs and boards have to accept that they will ultimately be held accountable for the misdeeds of executives and staff. They must take action to preserve both their own careers and the organizations they serve. It is time to stop making the programs needed for ethical workplaces a low priority and instead start bringing them to the forefront of everything they do. ■
Liz Ritterbush has a Ph.D. in Industrial and Organizational Psychology with extensive backgrounds in performance management, project management, statistics, personality assessment, and decision making. She conducts research in the areas of cross-cultural leadership, personality, and ethical decision-making, in addition to her work as a consultant.
March 2022 • I by IMD 31
[ Human resources ]
How good are you at reading others? Put your emotional skills to the test
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We tend to overestimate our ability to judge others, but the latest assessment tests can measure our perceptions more accurately than ever before, writes Nele Dael
ave you ever reflected on how you pick up information from observing and listening to others? We come to quick and often correct judgments about other people. For example, most of us can correctly pick out the extroverts during a regular team meeting or group lunch, because we implicitly know that they tend to talk a lot and express emotion easily in their faces and gestures. Or imagine a situation where you are trying to convince someone of your point of view. At a board meeting for instance, you might be able to tell if certain members or investors like what you’re pitching even before they have spoken. This gives you crucial time to clarify or even pivot the presentation before they come to a decision. This is impressive since you probably have had no formal training on the subject.
train, select, or get external support from a proficient “social interpreter”. If you are hearing a familiar bell ringing, you are hearing it right: we are describing the same type of skill as emotion recognition, a subskill of emotional intelligence (EI). Yet social perception ability refers to a more general skill of correctly inferring traits and states from others, or accurately predicting future behavior. Like EI, social perception ability is a skill on which individuals differ and can be trained (leading for example to more positive and egalitarian economic outcomes in negotiations). And like EI, social perception ability predicts successful interactions. Interpersonally accurate leaders have more satisfied subordinates, who feel understood and cared for, creating a higher subjective wellbeing.
But before we all call ourselves nonverbal communication experts, it is worth knowing that some of us are better than others and that we tend to overestimate our own social judgment ability. Consequently, wrong interpretations from social interaction are common and can lead to bad decision-making. In the example on expressiveness, managers should be mindful of distributing talk time to different team members during meetings. Competent individuals who are less dominant than others may not share important information because others, more dominant but not necessarily more knowledgeable, will just keep on talking.
‘Social perception ability is a skill on which individuals differ and can be trained’
People often express their behavioral intentions, emotions and personality traits implicitly, and understanding these behaviors is a real asset in the workplace. It is important to assess your workforce’s soft skills from the beginning. Hiring managers are actively looking for clues in candidates’ behaviors, as shown in their preference for in-person interviews, especially for roles that require social or leadership skills (such as being a good observer). They say they can read body language better, despite the cognitive biases involved. In sum, the risk and cost of bad interpersonal judgment in selecting and working with others makes it important to know how accurate a decision-maker is in perceiving others, to either 32 I by IMD • March 2022
How do you know if you are actually good at perceiving others?
This is a tricky question because it is hard to establish what is right or wrong, and we have known for a long time that self-impressions are prone to bias. If we are interested in measuring our actual social perception skill and comparing it to that of others, we need to use behavioral assessment. Traditionally, performance-based tests validated through research in this field focus on emotion recognition ability. Coaches, HR and other practitioners may have trouble implementing tests which are often developed in the lab and stripped of relevant work context. More domain-specific tests are now being developed that have face validity and a clearly applied value. For example, a test has recently been developed that measures emotional intelligence specifically in the workplace. And now there is a new test for measuring social perception accuracy more broadly, using questions from typical workplace interactions.
Test your emotional intelligence: In two video sequences without sound, a man and a woman are seen talking to their team leader. Who has the tendency to be more easily upset or emotionally tense? Click the QR code to see how you do.
So what does such a test look like? Typically, performance-based social perception tests contain multiple-choice questions on personality, affect, intentions, future social behavior, thoughts, and social attributes (e.g., status) of targets in brief video segments. Objective criteria must be used to establish correct from incorrect responses, and questions have been selected based on responses from large samples of participants. Here are three example topics that can test your social perception ability and have been incorporated into the test. 1. First, imagine seeing a group of people coming into a meeting room to discuss a new project. Even after a few seconds watching how people enter the room, take their seats and greet each other, one can tell who the lead is. 2. You see a team leader listening to several project ideas from different team members. Based on very early listener’s response, good observers can guess which idea will be accepted. 3. You observe two snapshots of a standard negotiation between two job candidates and an HR manager. Interpersonally accurate judges are able to infer which candidate is the most conscientious from their responses to a question.
A last promising note on this recent trend in developing applied tests is that psychometric studies show their validity in multiple languages. This is exceptional because most earlier tests have been developed or validated only in English and with US samples. In addition, first practical or predictive value is being shown, such as leaders generally scoring higher than non-leaders, indicating that social perception ability predicts leadership. This indicates that social perception ability is measurable and new tools emerging from academic research will soon complement existing assessment batteries to the benefit of business and society. ■ Source: Dael, N., Schlegel, K., Weaver, A. E., Ruben, M. A., & Schmid Mast, M. (2022). Validation of a performance measure of broad interpersonal accuracy. Journal of Research in Personality, 97, 104182. https://doi. org/10.1016/J.JRP.2021.104182 Nele Dael is a senior behavior scientist studying the expression and perception of emotion, personality and social skills in organizational contexts. Together with Alyson Meister and E4S partners she develops the Workplace Wellbeing Initiative with innovative research to understand and foster mental health at the workplace focusing on stress and recovery. Before joining IMD, she worked at a startup developing behavior intelligent machine learning systems
March 2022 • I by IMD 33
[ Innovation ]
Here's how incumbents can win the disruption battle Established firms can bridge the advantages of market power, long-standing customer relations and industry insights to triumph over rivals, writeThomas Malnight and Ivy Buche
O
ver the past two decades, the astronomic growth of relatively new companies like Tesla and Facebook has prompted some corporate leaders to question whether legacy firms – often bogged down by bureaucracy, internal power plays and slow decision-making – will manage to survive and stay relevant in an age dominated by small, nimble, digital disruptors. The demise of former household names like Blockbuster, Kodak, Pan Am and Saab compounded the unease that size, once an asset, had become a liability. Yet all is not lost for established firms. Having conducted a three-year study of global companies across a variety of industries, we identified 38 organizations that had successfully fended off challenges and continued to thrive. The companies had to meet six criteria: age, market share, financial performance during downturns, ability to adapt their core business, ability to create a second engine of growth and resilience in the face of negative events. What set these firms apart from more passive rivals was an ability to convert their age, size and tradition into the advantages of market power, trusted relationships and deep insights – a mindset we call Strategic Incumbency. Instead of resting on their laurels, strategic incumbents were able to reinvent themselves and their strategies, revise their business models and create new opportunities to defend against upstart competitors. They did this through a constant questioning of their customers’ needs, a recognition of competitive threats from non-traditional players and identifying the factors that might cause brand loyalty to shift, allowing insurgent brands to grab share. They also drew upon their corporate muscle and long-standing relationships with customers to give them an edge over competitors. This
34 I by IMD • March 2022
Kodak and Pan Am were household names who failed to adapt quickly enough to changing times, but being old and established does not have to be a death sentence
included an ability to manage complexity, to maintain a long-term focus and to leverage relationships to expand into adjacent spaces.
a digital powerhouse for advertising, media, and recruitment in Japan and the world’s fourth largest staffing firm by revenue in 2020.
Scaling disruption
So how did it do this? Recruit’s mantra for serial disruption was to anticipate and respond by leveraging incumbent advantages. With the advent of the internet, Recruit’s core business was in danger of becoming irrelevant. The company decided to transition its marketing magazines to online portals. However, it had to deal with strongly entrenched views in favor of remaining a print business. Many argued that online entry barriers were much lower; anyone could curate information to launch a website. Recruit’s leaders made a concerted effort to convince employees that a steep digital transformation was imperative. Over the years, Recruit’s leaders maintained a fine balance – steadily extending the envelope on change, but not so much that the organization would buckle under.
A vital step for strategic incumbents is learning how to scale disruption. Too often passive incumbents take a defensive approach. They devote most attention to the “D” in R&D to making incremental improvements to existing products and services which can guarantee quick returns. In contrast, strategic incumbents invest in long-term research-orientated innovation. Securing investment for these ideas can be difficult as the business case is often hard to prove, and the associated risks are significantly higher. This risk-aversion means R&D is often spread too thinly across multiple projects or companies take too long to act on an emerging trend. Even when the R&D team is adept at identifying new trends, the innovations are toned down to match what the company can do with current assets. The R&D head at a multinational company told us: “The way we do new things is we’ll analyze for three years, we’ll write endless memos, and then go for a one-shot deal in a big way. Of course, when you spend $100 to $300 million on something, failure is unthinkable.” So the people involved start covering up to keep pet projects alive that should have been killed long ago. Companies end up throwing good money at bad projects to try to get innovation to succeed through brute force. There is also the issue of constantly shifting focus in a start-stop-repeat approach to innovation. Here, the expectation is to have “perfect innovation at scale” and “100% successful entrepreneurship”. Should the new product, service or solution fail to meet the scale or margin expectations within a short time frame, they are killed. Patience for a breakthrough is sadly lacking. We find that the least attention is paid toward developing disruptive value propositions and business models. Even when it is done, the standard approach is to create a clear ideological and physical separation – a new unit dedicated to disruption with a flexible structure under a new leader, supported by diverse talents, with different performance metrics (for example, incubators to seed ideas, venture funds to prove the new concepts, or partnerships with startups). The logic for this separation is to protect the fledgling ideas from being crushed by the incumbent mindset, business model, and operating processes. Such separation only underlines how large companies are hostage to incumbent liabilities. The disadvantages of separating invariably hit home when companies attempt to scale the innovations by integrating back into the core business. Our research highlights that strategic incumbents succeed in scaling disruption by following a reverse playbook, while continuing to tap into the advantages of incumbency. Three principles underscore how they turn conventional thinking on its head: bridging versus separating; risk-making versus risk-taking and championing rather than sponsoring. Serial disruption
A prime example is Recruit Holdings, one of the largest publishers of print magazines for the staffing, housing, automobile, travel, bridal, dining and beauty industries in Japan. The Tokyo-headquartered company managed to leverage its incumbent advantages by following these three principles, disrupting itself no less than four times in the space of 25 years to become
‘Strategic incumbents succeed in scaling disruption by following a reverse playbook, while continuing to tap into the advantages of incumbency’ Bridging, Risk-making and Championing
In the early 2000s, despite the advent of the internet, beauty in Japan remained a high-touch, offline business comprising small and medium-sized salons. But Masanori Michimoto, head of Recruit’s beauty division, anticipated that, “The beauty industry will evolve like travel where consumers have already shifted to transacting online.” Instead of waiting for the online beauty market to emerge, Recruit decided to create it from scratch. Michimoto worked closely with his counterpart in the travel business to frame different options and hypotheses around what it would take to develop the right propositions for the SMEs and their customers. In 2007, Recruit launched its “Hot Pepper Beauty” online platform providing search functionality and online reservations (for hair stylists, nail technicians, relaxation treatments, etc). But how could it shift the SMEs to the online model? A major advantage for Recruit was the strong relationships built by its sales representatives who had served tens of thousands of salon owners for decades. Michimoto leveraged this advantage to pitch the new online proposition. Although Recruit expected resistance, counterintuitively, it proved to be an easier sell. Recruit could demonstrate higher online return on investment (by tracking page views and click-through rates for reservations). However, onboarding SMEs on to their platform was not enough. How could it add superior value at scale to both sides of the platform, beyond optimal matching? What would Recruit’s next disruptive move be? Once again, the answer lay with its 1,000-strong sales force – an unfair advantage from its legacy advertising business – that a digital native platform would not have. The sales team visited SMEs to identify the areas of inefficiency, dissatisfaction, and inconvenience. Success would hinge on Recruit’s ability to connect this domain insight » March 2022 • I by IMD 35
[ Innovation ]
FOUR WAYS TO CHANGE AND PROSPER Here are four main action points to keep in mind when trying to activate your company’s strategic incumbency:
1. Focus on joint problem solving to address external opportunities Too often, passive companies are overly focused on maintaining the existing structures that they have built and view innovation as a way to drive efficiency rather than transform the current system. Innovation is kept separate from the main business, pushed into an incubator or venture fund staffed by different people who may not be familiar with the rest of the organization. Strategic incumbents recognize that the best innovations come from sharing expertise and experience across the company, joining together to solve problems and address external opportunities. They adopt a learning mindset and actively look for how to create new business models.
2. Adopt a more-to-gain mindset when it comes to risk
In passive companies, decision-making is often seen as a binary choice. Risk-averse executives are paralyzed by rigid thinking, putting too much emphasis on the aspects a company has to lose over what it might gain. In contrast, strategic incumbents show cognitive flexibility, exploring the opportunities that might come about because of transformation. In the case of Recruit, it anticipated the shift to online sales in the beauty industry. Once it had completed this transformation, it addressed customers’ pain points by creating a suite of digital tools that could make reservations and payments easier and cut waiting times. These innovations were then deployed across the hospitality, restaurant and travel industries, increasing its revenues.
3. Transform the core not just a part of the business
The process of scaling disruption requires leaders to be comfortable with the idea that the new business will come into head-on competition with the core business. Rather than setting out to create a new business, executives should seek to transform their existing business by building something new. Recruit’s CEO and president, Minegishi stated, “We recognize the need to cannibalize ourselves… [even though] it is extremely difficult to destroy and rebuild a system that we have meticulously built and rewrite the rules of the game.” (Case study, Recruit Holdings: Harnessing data to create value. IMD-7-1825)
4. Eliminate barriers and enhance direct engagement
Another aspect of disruption is dealing with ambiguity; innovators start with a one-page mandate to build the next $1 billion business without fully comprehending what they have set out to build. There is no “right answer” until they figure what works for their company. Instead of working in formal structures, they seek to inspire the individual passion of employees to voice ideas and chart a new path. As Michimoto explained, “I want our young people in their 20s to look back at this period in time and say, ‘The work that I did back in my 20s impacted thousands of SMEs and raised the level of the industry.’ " 36 I by IMD • March 2022
with technological expertise to solve the right customer problem at scale. However, Recruit faced challenges in “productizing” these field insights because the IT engineers, data scientists, and AI experts who would drive the next level innovation were too far from the frontline. Recruit bridged this divide by deciding that the engineers would accompany the sales team to visit and observe the SME operations. Joint problem solving enabled them to crack the code to the next disruptive idea – industry-first, groundbreaking digital tools. The engineers quickly took the lead on prototype development and in 2012 Recruit developed its first app for beauty SMEs – Salon Board, a cloud-based management system. However, successful scale-up depended on the SME employees’ ability to learn how to use the digital tool. To make this happen, Recruit transformed the role of sales representatives, from pushing advertising to becoming advisors/ consultants. Revenue for the beauty business saw sustained year-on-year double-digit growth, to reach ¥ 81.6 billion in FY2019 (fiscal year ended March 31, 2020), with 75,000 clients and 350,000 reservations daily nationwide, compared with under 100 reservations per month at inception. By 2019, Recruit had built a range of digital tools – including point-ofsale (AIR Regi), reservations (Air Reserve), waiting time management (AIR Wait), and payment services (AIR Pay) – which were deployed across other verticals such as restaurants, hospitality, travel, etc. The successful adoption of these tools and the consequent digitalization of SMEs’ businesses provided Recruit with yet another unique leverage – data. By analyzing the data, Recruit could advise SMEs (for instance, more attractive menus for restaurants, table management techniques and inventory management), resulting in higher footfall, revenue and customer satisfaction. In the process, Recruit effectively transformed its own DNA, from a passive information provider to an active service provider, successfully digitalizing highly fragmented service industries that would never have been able to digitalize as fast and as effectively on their own. This is significant because SMEs make up over 99% of Japan’s enterprises, according to an article in Japan Today. This sowed the seeds of its next disruptive move. In 2019, Recruit launched its software-as-a-service (SaaS) business model with a bundled suite of cloud-based solutions built upon the Air Business Tools to support day-to-day management and operations including reservations, CRM, POS system, payments, accounting, settlement, shift management, hiring, and others. With this move, Recruit disrupted itself once again to become a genuine SME partner, enabling every step of their value chain. Today, Recruit is an internet behemoth and Japan’s answer to LinkedIn, Zillow, Yelp, eHarmony, Booking.com, Square, and multiple others, all rolled into one. ■ Thomas Malnight is Professor of Strategy and General Management at IMD. His fields of interest are strategy, leading and accelerating transformational organizational change and the role of purpose in redefining businesses and their impact on society. Ivy Buche is Associate Director, Business Transformation Initiative at IMD. Her research areas include corporate strategy, business transformation, and bringing technology to market.
[ Brain circuits ]
Why every team needs a Ringo
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By Ina Toegel
eam performance can often be the underlying cause of success or failure within a business unit. It’s not just the bottom line that is affected by a team’s dynamics either. Overall morale, employee retention and corporate culture are heavily influenced by the way an organization’s teams are formed and collaborate. Top teams don’t happen by accident. There are factors that high-performance teams have in common, and leaders have tools they can use to affect the quality of collaboration within the group. For a good example, look no further than The Beatles – four dynamite individuals whose success in innovating offers much-needed inspiration. What can executives learn from The Beatles? 1. Set a high bar for chemistry: Aim for fireworks and magic in a bottle. Unfortunately, when recruiting team members, too many executives suffer from an excessive focus on functional competence at the expense of team complementarity. In an increasingly transdisciplinary world where employees are expected to move across organizational business units, this obsession with functional expertise will soon be outdated. And while it is certainly relevant, it is hardly the best predictor for team performance. Individually, The Beatles were perhaps not the most technically gifted musicians. This is best illustrated by the long-standing critique of Ringo’s unskilled drumming. Yet, John, Paul, and George knew exactly how Ringo’s distinctive drumming could turn a song from great to iconic. They called him a “song-serving drummer” – a guy who “sits in the song” and then plays appropriately. Many who have heard the opening beat to “Come together” will agree that it is ingenious in its innovative simplicity. 2. Provide visibility and inclusion of every team member: In each team, there are roles that by nature are more visible, even glamorous, than others. And while we cannot deny the allure of the lead singer role, teams today can learn from one of The Beatles’ deliberate choices as a band. Early on, they decided that they were not going to be a band with a lead singer in the front and some drummer in the back. Instead, fans saw a cohesive group, an ensemble of four equal players. They were the Fab Four. To achieve this visual cohesion, Ringo was elevated on the stage. Raising the drum kit was an unusual arrangement at the time – he was as much at the center of attention as the other three. 3. Address, don’t suppress: This is a lesson that executives can learn from The Beatles’ falling apart. They failed to sustain the “teamship”. Tensions rose to the point of becoming insurmountable, and individual members began to emotionally or quite literally check out. When left unaddressed, minor tensions amplify over time, and it becomes ever more challenging
to have difficult conversations. So leaders must pay special attention to early warning signals and tensions and ask whether they are proactively addressing (rather than suppressing) the issue and team emotions at hand. The most effective leaders are those who empower their teams and focus on inter-personal relationships. A healthy team dynamic is crucial to high performance: it allows teams to make effective use of their time, to be engaged creatively, and therefore to find optimal solutions to problems. How do effective leaders ensure their team performs to its fullest potential?
1. Ensure your team has the Ringo-glue: someone who connects others and who ties lose ends together. Often, their work is less glamorous and happens in the background. 2. Ensure visibility for your Ringos: find ways to shine a light on the contribution, “elevate” them, and make sure that they get airtime, whether it is meetings with top management, peers, or customers. 3. Reward connectors and their collaborative behaviors: the Ringos of today risk going unrecognized if leaders are not attentive to the “invisible” value provided by their role. Teams in business need to reward collaborative behaviors that add intangible value. 4. Surface issues and verbalize team emotions: call a spade a spade, while at the same time identifying and recognizing the individual emotions that are felt. This will validate team members’ experiences and will allow for more constructive conversations. ■
Use the QR code to join us for five-minute daily exercises focusing on issues from personal development and team building to developing an actionable sustainability plan.
Ina Toegel is Professor of Leadership and Organizational Change at IMD. Her research focuses on team dynamics, organizational change management, top management teams during corporate renewal and founder influence. She directs the new Teams Reimagined program, which supports executives in achieving team flow and transforming a group of individuals into a high-performing dream team.
March 2022 • I by IMD 37
[ Leadership ]
Toolkit for strategic leading through a crisis: here are the five skills you need 2. Communicate and keep focus 3. Play offense and defense (long-term versus short-term)
THE FIVE SKILLS
1. Align and engage
4. Manage yourself and your family
5. Show empathy and compassion
I
t’s time to tear up the textbook on what it means to be a strategic leader. Times of prolonged uncertainty are testing executives in new ways; this is particularly the case for the COVID-19 pandemic that has radically changed not only the competitive landscape, but also how teams work together and what will be expected from leaders to succeed post-pandemic. Remote working means many managers are no longer able to gauge the mood of their teams. Being stuck in crisis-fighting mode makes it harder to give the right amount of attention to long-term strategy. Have the unique features of the COVID-19 crisis really changed what it means to be a strategic leader? Based on our latest research, we believe the answer is yes. Through a survey with over 100 senior executives, we have identified the five skills that strategic leaders will need to master as we emerge from the pandemic. Here we present five skills that, when applied all at once, can enable leaders to succeed in the aftermath of the pandemic. Executives will have
38 I by IMD • March 2022
to be more ambidextrous and agile; they need to learn to juggle shortterm needs with long-term success. Crucially, they need to understand when employees, customers and stakeholders need support. We think of these five skills (see illustration) as a Swiss knife approach to ambidextrous leadership. This allows you to leverage your agility and modulate between the short-term immediate need (playing defense for survival) and a longer-term success (playing offense for prosperity). This ambidextrous approach includes being true to your values compass of integrity, accountability, fairness, and empathy while focusing on your GPS – strategic vision and execution, communications (frequent and transparent), and continuing to develop your expertise. Especially in times of crisis, “Swiss knives” are great people who can support others, who have a wide stretch zone. They are able to understand when employees, customers and other stakeholders need support and how to give direction and facilitate resources. They are agile and ambidextrous and know when to switch to achieve maximum impact. They also have a longer-term view which is critical to managing the post-crisis crisis. For example, when considering financial resilience, should we spend everything and invest heavily today or keep some reserves in case things get worse tomorrow? When no end is in sight you need the skills and capabilities to balance the short versus longer-term view. Being a strategic leader in the aftermath of COVID-19 will entail a continuous focus on these five skills, embracing change and continuing to develop one’s expertise to master these five skills simultaneously.
Photo: Shutterstock
Turbulent times have changed the rules for what it means to be a good leader. Based on extensive research and interviews with senior executives, Sameh Abadir and Niccolò Pisani say it pays to be as versatile as a Swiss knife
WILL YOU BE A STRATEGIC LEADER POST-COVID-19?
We developed a test to help you evaluate your strengths and weaknesses and enhance your portfolio of strategic leadership skills. If you score 4 or 5, then, congratulations, you are a Swiss knife leader. RARELY
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Manage your mental and physical health as a strategic leader.
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Take actions to show compassion and ask regularly what you can do for others.
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HOW OFTEN DO YOU … ALIGN AND ENGAGE Recognize that your team members perceive the same threats and opportunities in the environment.
Ensure that your team members are fully committed to tackling the strategic priorities identified. COMMUNICATE AND KEEP FOCUS Communicate strategic priorities in simple but powerful words, using shop-floor language. Ensure that your team members prioritize and avoid irrational behaviors that make them lose focus. PLAY OFFENCES AND DEFENSE Scan the environment to identify opportunities that will lead to a strategic leap in the longer term. Deep-dive to take critical actions for short-term viability, especially in turbulent times. MANAGE YOURSELF AND YOUR FAMILY
SHOW EMPATHY AND COMPASSION
A SWISS KNIFE LEADER
Here are the responses and reflections we gathered from the over 100 executives who participated in the study: How often do you align and engage?
When it comes to alignment and engagement, the survey respondents found it more difficult to recognize that their team members perceived the same threats and opportunities in the environment than they found it to ensure that their team members were fully committed to tackling the strategic priorities identified (average response: 3.33 versus 3.76). Leadership is about making sure the team is fully engaged and has a shared understanding of the challenges ahead, especially in times of crisis. COVID-19 has changed the way leaders can ensure alignment and people’s engagement. “[We must be] able to manage or lead by adapting to new ways of working, probably with smaller teams and a high level of independ-
ence,” said an executive at a chemical company. And a mechanical and electrical engineering company executive observed: “It means a paradigm change to a fully new way of driving business, with a new kind of organization where profit is no longer the primary target and where people are no longer seen as production means but are fully participating on the basis of their wholeness and the opportunity to fully express themselves as the human beings that they are.” How often do you communicate and keep focus?
Communicating strategic priorities in simple but powerful words and ensuring that team members rightly prioritize in their day-to-day activities were perceived as similarly demanding (average response: 3.58 versus 3.50). Participants stressed the importance of message framing when communicating with team members and the growing importance of people’s wellbeing to ensure that they keep focus on the key priorities identified. An executive at a utilities company highlighted the » March 2022 • I by IMD 39
[ Leadership ]
“importance of resilience, faster decision-making, greater awareness of the importance of mental health, adaption and acceptance of flexible work arrangements.”
HOW OFTEN DO YOU ... Manage your mental and pysical health as a strategic leader.
How often do you play offense and defense?
The survey results clearly show that, for executives, it has been markedly easier to focus on short-term survival when compared to finding the needed time to explore and search for opportunities that may lead to a strategic lead in the longer term (average response: 3.00 versus 3.42). “Being a strategic leader post-COVID-19 will mean reassessing more frequently the external environment and working more systematically with scenarios,” said an executive at a financial services company.
Ensure you have sufficient time and energy reserved for your family.
How often do you manage yourself and your family?
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hidden traps in times of crisis
Personal management will continue to be key as leaders adapt. Survey respondents showed a similar standing in relation to the need of (a) managing their mental and physical health and (b) ensuring they have sufficient time and energy for their families (average response: 3.22 versus 3.13). What was striking in the results we obtained is that roughly 30% of participants answered either “rarely” or “irregularly” to both statements. This reflects the challenges leaders face in today’s turbulent times to manage their health and dedicate sufficient time to their families.
Building on academic literature on the topic, as well as our extensive research and interviews, we identified six hidden traps that unprepared leaders can fall into, especially in times of crisis. 1. Entrenchment syndrome Soldiers in the trenches losing their will or ability to fight.
2.Evaporating ethics In the struggle to survive either redundancy or the collapse of business, what actions might desperate leaders resort to as base survival instincts kick in to save themselves and their businesses? 3. Our dominant characteristic prevails How can we avoid either being too caring or too daring but modulate through agility? 4. The weakest could pay a heavy price How as leaders can we bring people with us rather than throwing them to the wolves, particularly the most vulnerable? 5. Danger of toxic leaders The type of leaders we need in a crisis are those who have high trust, even if they might not be the stars of high-performance delivery. 6. Loss of informal relationship building How can we avoid or minimize the lack of informal human contact?
40 I by IMD • March 2022
When it comes to showing empathy and compassion, the executives surveyed reported a comparable inclination to show empathy for those that are suffering the most, and to take actions to show their accountability (average response: 3.66 versus 3.59). Around 40% of executives surveyed confirmed that they frequently showed empathy and compassion, although the results confirmed some variability, with only around 10% doing that irregularly. Being compassionate is a crucial trait of leadership, especially in times of crisis. Asking regularly what one can do for others is a critical trait of leadership, especially in the face of changing conditions. One transport executive noted that they would “find new ways for a more effective dialogue/communication with the team and customers while smart working is increasingly adopted”. Another executive, who works in health services, predicted that “being a strategic leader post-COVID-19 will mean preventing, detecting, and taking care of the delayed psychological consequences of the collective and individual trauma of the pandemic, identifying the most fragile team members who don't express their distress, and cultivating collective memory of what happened, what we did right and wrong, not in a 'painful' way, but to use it to better react next time.” ■ Sameh Abadir is a Professor of Leadership and Negotiation at IMD. His research, teaching and consulting focus on organizational behavior, particularly in the areas of stress management, leadership strategy, negotiation skills and business agility. Niccolò Pisani is Professor of Strategy and International Business at IMD. His areas of expertise are strategy formulation and execution as well as international business, with emphasis on globalization, sustainability and digitization.
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[ CEO dialogue ]
Takeshi Niinami, President and CEO of Suntory Holdings, oversaw the takeover of American icon Jim Beam, bottom right, to add to his company’s existing portfolio of premium spirits, bottom left
42 I by IMD • March 2022
A spirit of togetherness The Japanese CEO who forged close links with his American executives over a bottle of whisky Takeshi Niinami was recruited seven years ago by the Japanese beverage giant Suntory to oversee the $16bn takeover of the US firm behind the iconic Jim Beam brand. In a discussion with Jean-François Manzoni, he explains how he rose to the challenge of being the first Suntory CEO to be appointed from outside the family
T
akeshi Niinami became President and CEO of Suntory Holdings just over seven years ago, in October 2014. His task: to help the company manage the biggest event of its 120-year history – its purchase of the US’s Beam Inc, maker of Jim Beam and a host of other spirits, for $16 billion.
Photos: Adam Bouse via Unspalsh, Simon Dawson/Bloomberg via Getty Images
It was an audacious deal. Beam’s revenues were more than twice those of Suntory’s own spirits division, while the sum paid made it the fourth biggest overseas acquisition by a Japanese company. To help the company negotiate the new challenges it faced, Suntory hired Niinami, its first non-family-member leader. He arrived with plenty of experience. For just over 10 years he had been president and CEO of Lawson, Japan’s second-largest convenience store chain, and before that he had headed up a hospital food joint venture between Mitsubishi and France’s Sodexo.
“Always, our thinking starts from giving back to society. Are we doing anything wrong? We have to be transparent, and we have to communicate frankly with society, get feedback and then take action.” Giving back to society
Today, that giving back to society is focused more and more on the environment and creating a genuinely sustainable business, centered on the key ingredient across all its beverages. “In Japan, we’ve completed a program to replenish twice as much water as we use in production. We’re now taking this program to the other countries where we operate,” said Niinami. The company is dedicated to the circular economy, particularly when it comes to plastics. “We know that PET bottles are a huge issue. The impact on biodiversity creates a danger to humankind as well as other species.”
But rather than deciding to bring in new ways to help him through his initiation into the company, he turned to what he calls Suntory’s “founding spirits”. From the start, he said, “I asked myself: what are the core values that carried the company along over 120 years?” Various traits stood out: an obsession with quality, a focus on doing new things and taking risks, and Suntory’s strong relationship with its workers.
‘In Japan, we’ve completed a program to replenish twice as much water as we use in production. We’re now taking this program to the other countries where we operate’
Most importantly, he says, is Suntory’s relationship with the society that surrounds it. “From the beginning, Suntory always took care of the community,” he said. “It’s the community that has always given us our business opportunities, so first and foremost we have to give back to society. We’ve survived through difficult times because of the huge support of the community.
Companies cannot act alone when it comes to sustainability, says Niinami, noting that Suntory and Coca-Cola Japan have been playing a leading role in motivating the industry to collect and recycle plastic bottles for decades. » March 2022 • I by IMD 43
[ CEO dialogue ]
The two companies – number one and two in Japan’s beverage market – continue to compete when it comes to products and innovation. But for the environment, they have agreed that collaboration is far more important. “This is not the area where we fight,” he said. Integrating Beam
For the Beam integration, a challenge was expanding Suntory’s global footprint while maintaining those core values. Niinami notes that the history of Japanese acquisitions at that time was that many were not successful. “We didn’t know why, but we knew we were going to be heavily scrutinized,” he said. “The easiest thing for me to address this attention was going back to basics – to think what Shinjiro Torii, the founder, would have done if this had happened to him.” His first decision was not to try to run things himself. “Of course, I wanted to demonstrate my capabilities and talent to Suntory’s shareholders and founding family, so naturally I was tempted to go and govern all of Beam by myself.” But he rejected that approach, certain that applying Japanese practices in an American company would only cause problems, opting instead for a more collaborative approach. He established Suntory University, a series of talent development programs, to cultivate global leaders and promote the philosophy and values of the company’s founder. For three years, he brought members of Beam’s senior management team to Tokyo, giving them the opportunity to experience the company’s philosophy first-hand and see projects such as Suntory’s Natural Water Sanctuaries, now numbering more than 20 across Japan, with a total area of 12,000 hectares.
‘Can we have a new capitalism that redistributes wealth to those who are in poverty and with less use of natural resources? These are the major things we have to fix.’
“But that wasn’t discussed much. There was a class in my first year on business ethics, but it wasn’t an accredited class.” “I still believe in the value of capitalism,” he said, adding that its social and environmental costs had to be addressed. “Can we have a new capitalism that redistributes wealth to those who are in poverty and with less use of natural resources? These are the major things we have to fix.” For Niinami, leadership includes managing one’s appearance and behavior. Behind the scenes or at home with his family, he’s often exhausted. “But in front of our people, I have to be the main actor,” he said. “For me, being authentic as a CEO means being connected to values, but also managing yours in a way that means we come across as representing those values. “And this is a very important point. Too often people think that such acting is not authentic. No. It is authentic, as long as you’re still passionately connected to your values.”■
“That led to lots of dialogue between the two sides,” he said. “Then, those senior managers went back to the US and talked about their experience with Suntory in Japan – they became evangelists for our values.” At the same time, he sent Japanese middle managers to the US. “There they played a key role in linking senior management with rank-and-file staff – a function that’s a prerequisite for the success of any integration, and the big trigger for doing something new.” The outcome? In the next five years, Beam performed very well in terms of sales and profits. Promoting responsible drinking
Alcohol, the substance at the heart of Suntory’s empire, is also being rethought by the company. “We’ve been shifting toward premiumization – that’s less drinking, but better drinking: a lower amount of alcohol, but more relaxation, more comfortable drinking by drinking great brands,” said Niinami. Niinami completed his MBA at Harvard Business School in 1991, during the heyday of neoliberal capitalism and just ahead of the bursting of Japan’s asset price bubble. Looking back, he recalls being surprised that ethics didn’t feature higher on the curriculum. “When I was at Harvard, I thought ethics and greed could work together – greed being the animal spirit you need to drive innovation and create something valuable, but balanced on the other side by ethics,” he says. 44 I by IMD • March 2022
Scan the QR code to watch the full video interview
Jean-François Manzoni is the President of IMD, where he also serves as the Nestlé Professor. His research, teaching, and consulting activities are focused on leadership, the development of high-performance organizations and corporate governance.
[ In the mind's eye ]
Negotiation is a relationship not a transaction By George Kohlrieser
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he world is becoming increasingly polarized as the disruption wrought by the financial crisis and the pandemic pushes people into opposing camps. Yet if we are going to solve our most pressing problems – the climate emergency, gaping inequality and social unrest – we are going to have to learn to listen to the other side. Negotiating tactics provide us with a toolkit to start a constructive dialogue and resolve conflict – whether you may be dealing with a customer complaint, a tricky supplier, or a hostile takeover bid. The first step is to view negotiation as a relationship not a transaction. Many organizational and political leaders don’t take the time to build a relationship first, instead moving to the bargaining phase too soon. This is a mistake. By respecting the other party’s motivations and opinions and showing empathy, you have a good foundation for dialogue. What made Mikhail Gorbachev, the former president of the Soviet Union, and former US President Ronald Reagan successful, was their ability to build a bond, respect each other and find the common goal for the concessions for nuclear disarmament.
Illustration: Jörn Kaspuhl
This applies to the corporate world, too. One reason for the success of the 2006 merger of The Walt Disney Company and the computer animation studio Pixar was the tone set in early negotiations. Despite being the stronger party, Disney’s people listened to their counterparts at Pixar, accepting its employment conditions, which helped retain talent, while Disney CEO Bob Iger also reportedly asked Pixar employees how to improve Disney. Over the next decade, Pixar added significant value to Disney by helping improve computer-generated animations for the whole group. It’s important to move away from a win-lose model of negotiation and seek a mutual gains approach. Be open and curious about what you can learn from the other side. By adopting a positive mindset and establishing trust, you can override the brain’s natural urge to search for negativity. A CEO at a big pharmaceutical company urged his staff to start viewing the Food and Drugs Administration as partners rather than the enemy, by acknowledging that the regulator might know more about
their medicines than the company itself. Good disagreement often leads to better results by establishing a shared problem-solving relationship. Haier, the Chinese multinational home appliances group, has managed to innovate and take advantage of the Internet of Things by viewing its partners as idea-laden co-creators rather than just vendors. Central to this is Haier’s willingness to share the value created, rather than limit the fees paid to suppliers. The group purposefully grows the partnership for the benefit of all involved, rather than maximizing the profit gained by the most powerful partner, enabling Haier to build healthier ecosystems and in turn giving it a competitive advantage. Take time to listen to the pain points that are motivating your counterpart’s behavior and blocking any move towards concessions. Be willing to talk about the losses – past, present, and anticipated – that may be influencing how you and your counterpart respond. These can include betrayal, ostracization, humiliation and lack of respect. Former German Chancellor Angela Merkel, a rational scientist by training, famously called out Russian President Vladimir Putin after he intimidated her during negotiations in 2007. Aware that Merkel had been afraid of dogs since childhood, Putin allowed his black Labrador to enter the room. Later, Merkel revealed a deep insight of her counterpart’s character. “I understand why he has to do this – to prove he’s a man,” she told reporters. “He’s afraid of his own weakness. Russia has nothing, no successful politics or economy. All they have is this.” Once you have understood the pain points and responded with empathy and respect, you have the foundations for shared problem-solving. ■
Dr George A. Kohlrieser is Distinguished Professor of Leadership and Organizational Behavior at IMD and Director of the High Performance Leadership Program.
March 2022 • I by IMD 45
[[ Label Global] equity ]
On the road to greater freedom: since 2017 women in Saudi Arabia have been allowed to drive, but they still face many restrictions compared to their western counterparts
Think globally, act locally: introducing change in a diverse world
46 I by IMD • March 2022
E
very country has its own legacy of hurt. Every place has its history of exclusion, its discrimination, its web of attitudes and systems that fuel and justify marginalization. Every country has dominant and subordinate groups and unhealthy power structures. As I began work on rolling out diversity, equity and inclusion (DEI) initiatives globally for Sodexo (the food services and facilities management company), I learned that one of my most important tasks was uncovering and seeking to understand those legacies. Identity — the way it shows up and even the ways we define it — can differ enormously from place to place. I learned that I needed to strike a balance between rolling out a global initiative with a universal vision while at the same time allowing enough flexibility for that vision to be contextualized and take root locally. By doing this, we were able to open space for effective insider-outsider partnerships — allowing outsiders
Photo: Shutterstock
Homosexuality is illegal in 70 countries and women’s rights virtually non-existent in many others. So how can multinational organizations ensure that their values are consistent globally? Rohini Anand offers a way to understand local context while pushing for greater equity and inclusion
Don’t rain on my parade: Gay pride marches have become a colorful symbol of liberal values, but for many countries they are still a step too far
like me and other leaders to play the role of catalyst, while relying on insider change agents and the local ecosystem to determine the best pressure points and rhythm for change. To make organizations more diverse, inclusive, and equitable, we need to be willing to disrupt the status quo. Making our work local does not mean backing away from the difficult challenges, but it does require that we develop a global mindset, listen to local diversity champions, and constantly fine-tune our own self-awareness and intellectual curiosity. If we do those things, we will be better positioned to grasp the dynamics of a complex interconnected world and find ways to ensure that our efforts resonate locally and contribute to lasting change.
Photo: Margaux Bellott via Unsplash
Power dynamics: a superficial attempt to be ‘local’
Natasha Winkler-Titus, President of the Society for Industrial and Organizational Psychology in South Africa, told me of an international mining company that set up mining operations in South Africa. They invested billions, negotiated with the local chief to operate in the area, and completed the first two phases of development. But they were forced to halt the project due to local protests about the placement of the mine, corruption by the chief, and the lack of economic and job opportunities trickling down to the community. Although they had done thorough research and mapping of natural resources, what they hadn’t realized was that the local chief was not acting in the best interests of the community. Without taking the time to listen to a broad variety of voices, they stumbled into a trap of reinforcing harmful power inequities. Perhaps they believed that they were respecting local customs by negotiating
with the chief and did not probe further to get more well-rounded advice about how best to navigate the crosscurrents and history of the place. At its essence, the company’s approach was top-down: it imposed its overarching objective without taking time to unpack the local dynamics. Ultimately, the mining company tried to be local but failed because its attempt was too superficial. For me, this story epitomizes the dilemma of localizing a global change strategy. How do we understand and respect local values and simultaneously push for change? To what extent do we adapt to each context? If our initiatives are purely locally driven, might that not perpetuate the unhealthy power dynamics that already exist, as it did in the mining example in South Africa? Is it better then to enact a more universal, centralized approach to inclusion change efforts? So, if an organization comes with a top-down DEI agenda — in the same way the mining company started without true local buy-in — don’t we risk those initiatives being at best ineffective, and at worst sabotaged? And what happens when a global organization’s values come into conflict with local ways of doing things, or even with local laws? A transversal approach to global diversity management
Mustafa F. Özbilgin, a Turkish-born British sociologist and Professor of Organizational Behavior at Brunel Business School in London, talks about three different global diversity management approaches. The first is a universal approach that rolls out a centralized top-down policy across varying countries and contexts. The second is a local approach that is » March 2022 • I by IMD 47
[ Global equity ]
designed in-country and tailored to a specific context. The third is a blend of the two. Özbilgin calls this a transversal approach in which there is a global framework that shapes and guides the work, along with the flexibility and autonomy to adapt it locally. A local, universal, or transversal approach?
I found the transversal approach was most suited to implementing a successful global change initiative. Although a universal approach seeks to save time and money by using commonly developed tools and strategies, organizations can struggle to get their initiatives embedded and embraced locally. For example, a global food and package delivery company encountered challenges when the company’s US-headquartered lesbian, gay, bisexual, transgender, and queer (LGBTQ) employee resource group (ERG) asked that all employees around the globe be given a Pride rainbow badge to display in celebration and support of LGBTQ staff. This seemed like a powerful way to make allies visible and to create safety zones for employees who may not be open at work about their sexuality. But employees in Egypt balked. Same-sex relationships were illegal there. LGBTQ employees had learned to be discreet for their safety. No one wanted to carry the burden of a visible label that might endanger them.
‘A transversal approach customizes strategies to local environments while ensuring a consistent global brand and broader accountability’ This type of local approach is very appealing, but implementation can be inconsistent without broader accountability measures in place. If it is not a part of an overall global strategy, it may not benefit from triedand-true interventions nor be enriched and stretched by cross-regional exchanges, best practice sharing, and networks. A transversal approach customizes strategies to local environments while ensuring a consistent global brand and broader accountability. It is a delicate balancing act between not reinventing the wheel and, at the same time, avoiding the im48 I by IMD • March 2022
A convenience store in Amsterdam sells halal food to appeal to customers in the mainly Muslim neighborhood
position of cookie-cutter tactics that risk replicating the very dynamics of cultural imperialism that DEI seeks to challenge. Imposing aspects of a dominant culture onto another less-powerful community is an easy trap to fall into. It takes more time and up-front investment, but ultimately a transversal approach benefits from being informed by best practices without imposing them and thus has the greatest potential for lasting success. The transversal approach in action: Barilla
A transversal approach provides a frame, but also ensures that any global DEI process is consultative. Barilla Group is an Italian family-owned food company with a presence in more than a hundred countries. In 2013, Guido Barilla, the chairman, made a homophobic comment on an Italian station, Radio 24. He said, “I would never do a commercial with a homosexual family, not for lack of respect, but because we don’t agree with them.” The comments sparked outrage as people accused Barilla of homophobia and called for a worldwide boycott. Harvard University in the US pulled the pasta from its dining halls and celebrities pledged to shun the brand. This was a wake-up call for the company, and it began on a long journey to repair the damage and build a more inclusive culture. Part of their response included establishing internal employee resource groups that were organized around particular identity groups. These were first launched in the US with great success, and so Barilla decided to replicate the approach in Italy, and then worldwide. “When we want-
Photo: Shutterstock
In contrast, Subarna Malakar told me that when he led global DEI at Ahold Delhaize, they had a very local DEI strategy, in keeping with their overall segmented business model with 22 distinct local brands. Ahold Delhaize, a Dutch company, is one of the largest food retail groups with supermarkets and convenience stores that have local brand recognition —such as Albert Heijn in Europe, and Giant, Stop & Shop, and Food Lion in the US. Subarna said that to appeal to local consumers, the shops hired people who lived within a five-mile radius. They didn’t have global hiring targets; rather, needs were determined with a view toward reflecting the communities they served. The idea was that if the staff reflected the community, the shop would cater better to its customers. This meant that, for example, in a heavily Muslim neighborhood of Amsterdam, most employees were Muslim, and the shops sold halal food that appealed to the community.
ed to expand our ERGs outside the US, we learned very quickly that you cannot cut and paste,” Kristen Anderson, Barilla’s Global Chief Diversity Officer, told me. When over a hundred employees came to a high-profile launch event for an LGBTQ ERG at Barilla’s headquarters in Parma, the levels of enthusiasm and support made Kristen expect a large core group to sign up to take the new ERG forward. But by the end of the event, only 12 people had registered. “And we said, uh oh, we have a problem,” Kristen remembers. “When we interviewed employees, we discovered that it was not a problem about not wanting to work on LGBTQ inclusion and be an ally. It was more not knowing what ERGs are. There was cultural insensitivity on my part in not understanding that although in America we’re very comfortable in this idea of forming community to make some change, in other cultures it’s something new. And we took a step back and basically spent a lot of time educating employees about ERGs: the benefit for you as an employee and the benefit for the company.” Kristen and her team provided clear guidelines and governance structures, but they also ensured that there was freedom to decide the focus and the approach in each context. In fact, while in the US they had had success in developing ERGs along singular dimensions of diversity — such as LGBTQ, Black, or Latino/a inclusion — in some of Barilla’s smaller branches, they decided to form hybrid ERGs that address multiple identities, tackle issues relevant to the region, or rotate areas of focus. For example, an ERG named Respeito (Respect in Portuguese) in Barilla’s operation in Brazil focused one year on LGBTQ inclusion and the next year on race and ethnicity. In spite of the fact that Afro-Brazilians make up the majority of the population, it is surprisingly rare to find race addressed directly and substantively by companies in Brazil. Russia’s ERG focused on LGBTQ one year and then looked at breaking down hierarchical divisions — encouraging managers to work for a day on the factory line and factory workers to come to the office. Russia’s example is a reminder that our DEI initiatives can miss important dimensions and that staying open to local adaption can go a long way in correcting that. In “every major economy in the world,” according to Paul Ingram, social-class origin has a major impact on career progression, but it is taboo in some cultures (such as the US) and therefore rarely makes its way explicitly onto DEI change agendas. But some societies, such as the UK and some parts of Asia and Latin America, are much franker about class divides. Flexible ERGs leave room for the very typology of our DEI work to be stretched and strengthened. Kristen’s outsider perspective allowed her to share and even push for a strategy she believed would work well. Combining her outsider status with a flexible approach that listened to, enabled, and empowered insider diversity champions resulted in some surprising and even radical initiatives. It allowed local changemakers to judge the pulse and rhythm of what transformation might be possible, with a clear platform and firm support from Barilla’s leadership. Through its ERGs, Barilla introduced a way to address identity, but through collaboration with local staff, they discovered this new flexible and multiple dimensional approach. In recognition of their global »
Diversity, equity and inclusion: get in shape with a six-step workout By Rohini Anand
Leaders too often see diversity, equity, and inclusion (DEI) as a series of incremental initiatives that suddenly become dispensable when faced with competing business priorities or in times of crisis. The COVID-19 pandemic and economic downturn exemplify this. DEI budgets quickly evaporated. Later, disparate impacts of the pandemic on women and marginalized groups, and the intense scrutiny of systemic racism nudged leaders to turn their attention and resources back to DEI. To lead with enduring purpose and passion, leaders need to be intentional about their commitments. Public outcry over the fast succession of killings of George Floyd, Breonna Taylor, and Ahmaud Arbery in the US in 2020 spurred commitments by white male executives who still comprise 90% of all Fortune 500 CEOs in the US. These events thrust leaders into action, but a catalyst for change need not be so dire. How else can leaders access experiences powerful enough to generate self-reflection and recognize their privilege? The answer lies in leaders bulking-up and flexing the inclusive leadership muscle necessary to take any global organization from performative actions to sustainable progress. This regimen of six DEI workouts will help get you started.
1. The warm-up: assessing leadership readiness for DEI.
There are common beliefs and perspectives that impact how leaders see diversity and inclusion in the workplace. Beliefs contribute to one’s worldview. It predisposes one to take certain actions, and, ultimately, influences results. Lasting DEI change requires a shift of heart and mind, a shift in thinking and perspective. It begins with self-assessment of unconscious biases and leaders understanding where they fall on a dichotomous continuum of belief systems between: ● Denial of systemic barriers and acknowledging systemic barriers. ● Holding a diminishing returns mindset and having an expansive
mindset.
● Solving only for today and having a vision for the future. ● A closed mindset and a receptive mindset. ● Seeing diverse talent as a risk or seeing it as an asset.
Leaders may be anywhere along the continuum. Once they grasp the beliefs or points of view they hold, it becomes easier for them to shift or expand their mindset. March 2022 • I by IMD 49
[[ Label Global] equity ]
2. Cardio: seek out disruptive experiences.
Leaders must next seek out experiences to shift
their mindsets. It is essential to internalize the benefit of DEI personally, and to the organization. They can expand their world view by: ● Mentoring or sponsoring underrepresented emerging leaders. ● Engaging in situations where their experience is now in the
minority. ● Listening without judgement to lived experiences of others. ● Conversing with peers who see the value of DEI personally and to the organization. ● Humbly taking responsibility to become personally educated on the issues. ● Stepping up to sponsor an Employee Resource Group (ERG) based on an identity group they may not be comfortable with or know little about .
3. Weights: engage, disrupt and communicate.
Emily Lawson and Colin Price, in a McKinsey article The Psychology of Change Management, suggest that employees will alter their mindsets and enable change only if they understand the rationale for it. Leaders must engage with teams to communicate the rationale or the “why” of their belief that DEI is important to the success of the organization. A proven approach involves: ● Leaders getting buy-in from their teams by replicating for them
experiences that shifted their own mindset.
● Being vulnerable as they share their own DEI journey. ● Providing forums for sharing the lived experiences of marginali-
zation and discrimination, while understanding the toll it takes on those sharing. ● Ensuring that DEI is cascaded into all levels and embedded throughout the entire organization.
4. Core: establish expectations and measures of accountability Core exercises call for leaders to manage DEI as they would any business priority: setting targets, establishing behaviors, measuring progress and fostering accountability. To be effective, they ensure key performance indicators (KPIs): ● Align with local laws. ● Consider local historical contexts. ● Take into account the organization’s maturity in DEI. ● Are tied to incentive bonuses for leadership. ● Are linked to the performance management process.
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Good KPIs include lead and lag measures. Lead measures look at activities and behaviors leaders want to encourage and, if done consistently, result in desired outcomes. Lag measures are specific outcomes to be achieved, such as the number of underrepresented staff in management positions. They are retrospective assessments of whether the targets are met .
5. Stretching: empower local teams
In the stretching routine leaders are thoughtful about how to work with local country teams, who inform strategic decisions. They find success by avoiding a cookie-cutter approach that applies a “one size fits all” mentality to DEI strategy or programming. Instead, they tend to: ● Lean on a global framework that shapes and guides the work while
relying on local teams to assess and adapt that framework locally.
● Use their own outsider status as leaders to encourage change by
raising issues with teams that they do not feel empowered to discuss. ● Allow local teams to contribute to finding workable solutions and pace them so that they are more aligned with the local milieu.
6. Deep breathing: embed DEI into internal processes and systems and in the external ecosystem
Stop. Take a breath. For enduring change, DEI must inform all systems and processes, both internal and external. It cannot be a series of discrete activities operating in isolation. Internal and external stakeholders in the larger ecosystem should be engaged to anchor an inclusive culture deep within the organization and to scale it globally. How is this accomplished? ● Leaders continuously examine processes to ensure they contain no bias. ● They stay attuned to the broader community and take bold stands to address injustice. ● They engage with external stakeholders to advance DEI in their organizations and social justice in larger society.
Leadership is at a defining moment in history. Authenticity and an unrelenting commitment to sustainable progress in DEI will be its hallmarks. Leaders that steadfastly apply these exercises will find themselves fit for the challenges ahead. ■
progress in DEI, Barilla received the prestigious 2021 Catalyst Award for initiatives that have elevated inclusion. For a transversal approach to be effective, it’s critical to take the time to understand how identity is expressed in each location, listen to local change agents, build collaboration between those change agents and the organization’s outside influencers, be willing to disrupt the status quo when necessary, and remember the enablers and obstacles in the larger ecosystem. Identity is fluid and linked with power
Photo: Shutterstock
Barilla’s hybrid approach to ERGs also allowed for the intersectional nature of identities. Identity is “relational and socially constructed, not innate and fixed,” and it can shift depending on the situation. I might identify as Asian American in the US. In India I’m seen as a US American and I see myself that same way. But as soon as I go to France, I am considered Indian — until, that is, I start talking about diversity, and then I am suddenly viewed as a US American again! The truth is, I am all those things and more. Identity is multifaceted — and it responds to the external ecosystem of how others perceive you. Mary-Francis Winters and Andrés T Tapia, two thought leaders in DEI, suggest that DEI work has what they call a “fundamental genetic flaw”, a “one-dimensional view of difference.” This is important to remember when working globally, where a visible identity, such as gender or race, is often closely intertwined with language, region, religion, caste, class, or color. In every society, we will find dominant and subordinate groups based on identity. Sometimes these power systems travel with people across borders. In June of 2020, a discrimination lawsuit—the first of its kind — was filed against Cisco in Silicon Valley. Two former managers, both upper-caste Indians, were accused of discriminating against a Dalit (lower-caste) employee. In the social stratification system that divides Hindus into rigid hierarchical groups, Brahmins are the highest caste and Dalits are considered “untouchables”. After the suit was announced, Equality Labs, an advocacy group for Dalit rights, reportedly received over 250 similar complaints from Dalit tech workers in the span of three weeks from Facebook, Google, Microsoft, IBM, Amazon, and more. While some power dynamics remain fixed as they cross borders, a change in context can also shift identity power relationships. When a colleague of mine travelled to Ghana many years ago to volunteer for a Habitat for Humanity project, she found that being white trumped that of being a woman; she was allowed to work with the men, doing the easier job of bricklaying rather than the gruelling women’s task of carrying water from the stream to the building site. An African American from the US travelling to Europe might be treated poorly out on the street, but in the boardroom, they could be viewed as an instrument of US cultural imperialism, with all its associated privilege and power, and in stark contrast to their marginalized position back home. This means that we may unknowingly carry privilege or disadvantage into a new cultural context, and that can impact our access to decision makers, the receptivity to our messages, and the candor with which local change agents might be willing to share their insights. Doing global DEI work requires that we understand not only the local dynamics, but also how we ourselves are perceived as we cross borders. Those perceptions shape how we are heard and will impact how we can best use ourselves as instruments for change.
Helping hands: ‘identity is multifaceted — and it responds to the external ecosystem of how others perceive you’
Outsider-insider collaboration
One of the benefits of the transversal approach is that it allows outside influencers to serve as catalysts for change while at the same time empowering local change agents to ensure that the work is relevant and has the best chance for success. Outsiders often have the freedom to raise issues that are difficult to broach from the inside. They can really make a positive difference, but they need to balance their enthusiasm with a careful consideration of where and how to enter the conversation. Outside influence works best when it empowers and amplifies the work of local diversity champions within the organization and in the society at large. When my colleague Alain Morize arrived in Saudi Arabia in 2011 to head up Sodexo’s Energy and Resources work there, he was conflicted. Alain is originally from France but is truly a global citizen — he has lived in Boston, Los Angeles, Puerto Rico, Angola, Indonesia, and even on a ship that travelled around New Caledonia in the Pacific. “I was a guest in the country,” Alain told me as he remembered his time in Saudi Arabia, “so not there to change or judge. But I was not comfortable with what I experienced with women, as it did not align with my values or Sodexo’s values.” Saudi Arabia is ranked 146 out of 153 countries in the World Economic Forum’s 2020 Global Gender Gap report. For years, Saudi women were considered legal minors and subject to a far-reaching male guardianship system that required permission to travel, work, and more. Alain happened to move to Saudi Arabia during a time of great change. In 2011, a royal decree allowed women to vote in the 2015 elections. By 2016, a mass feminist movement was campaigning for the end of the male guardianship system. Although feminist activists have been arrested and harassed, they also succeeded in earning women the right to drive (2017), the possibility of winning custody of their children after divorce (2018), and the right to travel abroad alone (2019). Labor laws began to slowly shift, incrementally allowing women to work in some private-sector jobs. As Alain noticed things opening, he made a move to hire more Saudi women. He began reaching out — and there was no lack of qualified women.» March 2022 • I by IMD 51
[ Global equity ]
Saudi women have a high education level, and a 95.3 percent literacy rate. He found that many women were eager to advance their careers and to work hard. According to Sharia law, they had to work in a separate room with the door closed. They were not to be seen by male colleagues, and they had to communicate via an intercom. Men could not enter the space where they were working without announcing themselves, and if women were to stray from that area — say for a work meeting — they needed a male Muslim chaperone. Viewed through a Western feminist lens, these working conditions would be unacceptable. Outside change agents using a universal approach might be tempted to draw the line and insist that women be integrated fully into the workplace but setting such a top-down ultimatum in this context would be counterproductive. With those ultimatums in place, women would not have been able to work for Sodexo at all. Instead, now that he had increased the number of women on staff, Alain used his outsider status carefully, opting for slowly stretching and disrupting the status quo from within, taking care not to impose his own views.
‘At first the women were slow to speak up, but eventually, as they gained their footing and saw they had leadership support, they began to express themselves’ At first the women were slow to speak up, but eventually, as they gained their footing and saw they had leadership support, they began to express themselves. They suggested leaving the door open so they could interact with male colleagues more easily and feel part of a larger team. Soon it became clear that the women would occasionally need to meet with male colleagues. But conservative men on staff pushed back; they felt it was not acceptable for women to have work meetings with men without a Saudi or Muslim man to accompany them. Alain put the dilemma back to these men, saying, “OK, we have a business; they have to talk to people, how do you want to resolve this? You can accompany them to every meeting if you want, but if that is not realistic, you come up with a solution.” Eventually these conservative men proposed that women could meet with men, as long as they were sitting on different sides of the desk and the door was open. Alain’s approach disrupted the status quo — as an outsider he had the freedom to push for increased hiring of women — and then he invited the insiders, those with local knowledge, even those most resistant, to propose fundamental changes to women’s career opportunities. Three ways to engage
In Saudi Arabia, Alain was able to work within the laws and still push for change, but sometimes the local context is extremely hostile. In 2019, homosexual activity was still illegal in 70 countries, including 13 in which it was punishable by death. This means that initiatives promoting the rights of LGBTQ employees can be extremely dangerous for those employees and can sometimes risk organizations’ right to operate in a particular context. Sylvia Ann Hewlett and Kenji Yoshino outlined three models of engagement used by organizations in the face of these re52 I by IMD • March 2022
strictions. The first they called the “When in Rome” model — organizations keep their heads down and adhere to the laws. The second is the “Embassy” model in which companies extend policies and protections to their own employees but do not try to change the society. In Singapore, for example, Aviva — a British insurance company with a presence in 16 countries — has made sure that its employees with same-sex partners have equal benefits, but when I spoke with Anuradha Purbey, Aviva’s People Director for Europe and Asia, she was quick to recognize the limits of this approach. “This is not challenging your belief system,” she said of the policy’s impact on employees’ awareness, “but it is just to make sure that we are aligned with how we show up at the workplace. That’s all.” Barclays, a British bank, has tried to follow Hewlett and Yoshino’s third “Advocate” model, which seeks to influence the society and laws. Along with Google and several other multinational companies, Barclays was one of the first corporate sponsors of Singapore’s Pink Dot festival, celebrating the local LGBTQ community. These outsider companies used their status, influence, and money to support local insider change agents who were trying to carve out a safe space within their country. By the time the government banned foreign organizations from sponsoring Pink Dot in 2017, enough momentum had built up that more than a hundred local companies came together and were able to keep it going. The key points
The work of localizing need not be too daunting. There are two key ingredients to success. The first is to ask questions and listen to local change agents: who are the dominant and subordinate groups and what is their history? Who are the local change agents and what are their goals and strategies? What are the specific obstacles to inclusion? The answers to these key questions will lead us to finding the best entry points and approach. And they will allow us to tailor solutions to the specific obstacles in each context. The second tactic, as Wema Hoover of Sanofi said so well, is to find the freedom within the frame. A clear global vision and framework provides the necessary structure for implementation and accountability, but it should never be rigid. Creativity, flexibility, and local ownership are essential elements of any successful DEI initiative. While a transversal approach allows us to adapt our strategic DEI efforts to the local context, it takes more upfront investment and more time. It relies on the messy work of relationship building between outsiders and insiders. It requires a nuanced understanding that power dynamics and the way people construct their sense of identity shift according to context and the unique cultural, religious, historical, and legal setting. ■ This is an extract from Rohini Anand’s book Leading Global Diversity, Equity and Inclusion: A Guide for Systemic Change in Multinational Organizations (Berrett-Koehler Publishers, 2021).
Rohini Anand is a strategic global business leader, board member and an expert on organizational transformation, diversity, equity and inclusion, executive leadership, human capital and global corporate responsibility.
[ Leaders of tomorrow ]
Hiring? Here is what the next generation of leaders cares about Social responsibility and environmental sustainability are the top concerns of tomorrow’s executives, according to a survey of more than 2,000 business students around the world. The next generation of corporate leaders sees global warming as an issue that lies in the heart of business. They believe that companies must act to solve environmental and social problems, according to a survey by the Global Network for Advanced Management, which gathered opinions from 2,035 students at 32 top business schools across six continents. Executives cannot afford to ignore the priorities of this rising generation: the percentage of students who consider themselves knowledgeable about environmental and social sustainability issues has doubled since the first edition of this survey in 2015. This data comes from Rising leaders on social and environmental sustainability: a global survey of business students, published by the Yale Center for Business and the Environment, the Yale Program on Climate Change Communication, and by the Global Network for Advanced Management (GNAM), of which IMD is a member. Launched in 2012, the mission of GNAM is to drive innovation and create value by connecting leading global business schools, their resources, and their stakeholders. Learn more at globalnetwork.io
Business students believe corporate leaders should be solving environmental and social issues Environmental
Health
National Security
Business / Economic
Moral
Social Justice
Religious / Spiritual
92% 76% 66% 53% 45%
44%
9%
Business students expect sustainability to be threaded throughout corporations’ highest priorities - not treated as a stand-alone top priority Governments
Mostly government
Both equally
Mostly companies
Companies
12%
3%
12%
3%
ENVIRONMENTAL 61%
5%
19%
SOCIAL 59%
6%
20%
The majority of business students state that they would accept a lower salary to work with a sustainability-forward employer 78%
of students say they want to work for a company with good environmental practices 51%
of students are willing to accept a lower salary to work for a company with better environmental practices 26%
would not accept a job at a company with bad environmental practices, regardless of how high the salary
March 2022 • I by IMD 53
[ Leadership ]
Dangerous products recalled 28 days faster when women are on the board llergan’s carcinogenic breast implants were on the market for years, a delay that may have caused hundreds of women to develop a rare type of T-cell lymphoma, and dozens to die from it. Bayer’s Trasylol, a drug used to reduce bleeding during major surgeries, remained on the market, despite indications that it led to kidney failures, potentially causing tens of thousands of unnecessary deaths. According to a US Senate report, Olympus failed to act on information it had about how its duodenoscope (a device used to examine the small intestine) spread bacteria and caused infections, with sometimes potentially lethal consequences. Delaying the recall of faulty products not only has potentially devastating consequences for end-users; it also disrupts a firm’s supply chain, and can result in large fines, lawsuits, and reputational costs for the companies. With growing pressure on companies to act in socially responsible ways, product governance – the management of risks to a firm’s customers of using its product or services – is likely to become increasingly important for organizations. ESG analysts looking to identify companies that take care of their customers are likely to start scrutinizing a firm’s approach to informing end-users or responding to complaints about unanticipated side effects. Pressures to disclose product governance practices is also expected to rise. At Swiss private bank Pictet, product recalls are already on the ESG scorecard. So, addressing ESG risks in the pharmaceutical sector could attract more ESG investments into the industry. Having analyzed the considerable evidence about how women on boards can improve a firm’s profitability, we wondered whether female board representation could affect how a firm makes operational decisions along the supply chain. Could having more women on boards influence the timing and frequency of firms’ recall decisions? To answer this question, we conducted a study analyzing 4,271 medical product recalls from 2002 to 2013 across 92 publicly traded firms regulated by the US Food and Drug Administration (FDA). The study was based on recall data obtained via a Freedom of Information Act (FOIA) request and recall timing data provided by senior FDA leaders. To our knowledge, this is the first study to examine how women board representation relates to operations management, specifically in product recall decision-making. In the medical products industry, firms with more women directors behave very differently when it comes to recall decisions for products such as prescription drugs or life-sustaining medical devices. 54 I by IMD • March 2022
Severe product problems that injure or kill consumers are recalled much faster when there are more women on the board. Additionally, lower severity product defects that can be hidden from regulators are more likely to be recalled when there are women directors. Compared to firms with all-male boards, those that have added women as directors: • Announce high severity recalls 28 days sooner. This is a 35% reduction in the time between when the firm was first made aware of the defect and when the firm decided to recall the defective product. To be clear, these are recalls of products with the most serious, life-threatening defects. • Show a 120% increase in low severity recalls, which concern product defects such as packaging or labeling issues that firms could more easily hide from regulators. This represents, on average, an increase from 10 to 22 low severity recalls. Central to this link between board composition and product recalls is the notion that boards are established specifically to oversee and set the tone for how managers make critical firm decisions. We reasoned that boards with more women might set a tone for stricter abidance by FDA rules, have higher aversion to risk when it comes to possible product harm, and be more responsive to a diverse set of stakeholders, including at-risk customers. The experience of more likely exposure to adverse effects from product recalls may also make this issue more salient in the minds of women board members. After all, medical products and innovations often have more negative side-effects for women, most likely because male scientists are less likely to incorporate gender and sex analyses in their research. Most recently with COVID-19 vaccines, women have reported more side-effects than men. The difference in product recall decisions between firms with and without women directors is striking. One could call it a matter of life and death. Compared to firms with all-male boards, those that that have women directors announce high severity recalls 28-days faster or a 35% reduction in recall timing, which for these types of recalls, is truly a matter of life or death. Furthermore, we found that when a board has just one woman director seriously defective products are not recalled more quickly. It’s only when there are at least two women directors on the board that the timeliness of severe product recalls increases; when there are three women directors, the recall decision moves along even faster.
Photo: Myriam Zilles via Unsplash
A
By Corinne Post, Katie Wowak, George Ball and Dave Ketchen
3 ways
Add women to your boards
We found that firms with no women and those with just one woman on the board act similarly to increase (statistically speaking) on defective products. vigilance around product Adding women to your board (beyond just one or two) continues to be a defensible and governance reasonable strategy for improving your firm’s ESG. We can’t tell, from our data, what exactly changes on the boards after women join. It is possible that they bring a different perspective and express care for a wider range of stakeholders. But it’s equally possible that their presence prompts men to consider risks they may have overlooked or to voice concerns they may have otherwise silenced.
Prioritize discussion of product governance risks
If you are still working on identifying (more) women directors for your board, stay extra vigilant around your product governance in the meantime. Ask yourself how else you can develop a product governance perspective on the board. Our findings show that having more women on the board changes the recall-decision process; but we don’t really know whether women are in fact bringing in a different perspective; or if the group dynamics shift as more women join the board, so that a wider range of stakeholder risks are discussed. What are other ways to develop product governance, risk assessment and advising?
Review your product governance processes
Does it include the right information, decision-making criteria, and mix of stakeholder points of views? What are the ESG and product governance capabilities of your directors? What corporate culture metrics, internal quality processes, and information are or should be audited? What external sources of information can be tapped to make quicker and better recall decisions? What conflicts of interest may come in the way of making the right product recall decisions?
Recall decisions are risky for firms. While consumers have the most to gain by defective products being recalled faster, companies have the most to lose, because these recalls expose them to public, regulatory and stock market penalties. Such high-risk decisions that put customer safety ahead of the bottom line apparently happen more quickly when a larger number of women directors sit on a firm’s board. In contrast to high severity recalls which are difficult to hide from the public in the long run, low severity recalls can be hidden from regulators. Yet, even for these types of recalls, which are of low severity and for which executives have much higher discretion, boards with women directors announce 120% more recalls, in comparison to a board that has no women directors. That is equivalent to 12 additional recalls per firm. In this case, the addition of just one woman director causes a change in how these decisions are made, and the number of recalls of this type announced continue to increase as firms add each additional woman director.
Our study shows that there is a difference in very real and important consumer safety outcomes between firms who have added women to their boards and those who have not. Yet, we call for caution in interpreting the findings and offering prescriptions, because: 1. Our data can’t actually determine why firms with more women on their boards make different recall decisions than all-men boards. Other research suggests that women, compared to men, are somewhat more likely to be risk-averse, follow ethical rules, and care for a wide array of stakeholders. It may be that these women directors bring unique qualities to the board; but one could also argue that when women join boards, the men on those boards who are more risk-averse, rule-following, and stakeholder-conscious may feel empowered to speak up more. Additional research is needed to determine why the presence of women on boards is associated with such different product recall decisions. 2. Research on diversity and groups makes clear that “add and stir” is not just an unreliable recipe for making better group decisions; it may also have unintended consequences for women appointees, reinforcing stereotypes about gender differences. How boards and firms draw on their diversity is key, too. For example, previous studies have shown that the link between women board representation and firm outcomes becomes stronger and more positive when there is greater accountability to engage in deeper and more extensive board deliberations. More broadly, we align ourselves with recent calls for all directors on all boards to look beyond the bottom-line and be more responsive to their firm’s stakeholders, especially when defects in their products may harm or kill. ■ This article is based on the research paper The Influence of Female Directors on Product Recall Decisions which was published in Manufacturing and Service Operations Management in March 2021.
Corinne Post is Professor of Management at Villanova School of Business. Her research examines the role of diversity as enabler or impediment to group and organizational performance. Kaitlin Wowak is Associate Professor of IT, Analytics and Operations at Mendoza College of Business, University of Notre Dame. Her research focuses on strategic supply chain management and product recalls. George Ball is Associate Professor and Weimer Faculty Fellow at Kelly School of Business, Indiana University. His areas of expertise include product recall causes, effects and the recall decision-making process. David J. Ketchen, Jr is Harbert Eminent Scholar and Professor of Management at Harbert College of Business, Auburn University. His research focuses on strategic supply chain management and the determinants of superior organizational performance.
March 2022 • I by IMD 55
[The leading edge ]
Six ways to engage with your teams to frame and solve strategic problems There is no one-size-fits-all method to find the right solutions, but a ‘team engagement’ checklist will put you on the right track, explains Michael Watkins
T
he most important way executive teams create value for their businesses is by framing and solving strategic problems. There are, of course, other important things leadership teams need to do, ranging from updating strategy, doing annual budgeting and planning, reporting results, and interacting with key external stakeholders. However, to a large extent, these are routine tasks; being good at framing and solving strategic problems is the true hallmark of high-performing business teams. By strategic problems, I mean the organization’s most significant emerging challenges and promising potential opportunities. Examples include deciding whether to pursue a substantial acquisition or divest an underperforming business or enter a new market or diversify into a new line of business or make a significant capital investment. What these examples have in common are: (1) they have major impacts on organizations, their health, and prospects for growth; (2) they are complex and don’t have obvious right answers; and (3) they usually require “deep teamwork” – by which I mean integration of the knowledge and judgment of team members – to achieve good solutions. Seen through this lens, the most important role business leaders play is to guide their teams effectively in framing and solving strategic problems. Unfortunately, there is no one “best way” for leaders to do this; it depends on the nature of the problems and the context in which they are being solved. While there is not a tried-and-true recipe for doing it, leaders with whom I have worked have found it helpful to have a menu of “team engagement modes” from which to choose, as well as a set of principles for how to make the right choice.
56 I by IMD • March 2022
By team engagement modes, I mean distinct ways in which leaders can engage with their teams to frame and solve strategic problems. Specifically, there are six distinct engagement modes (see clipboard) that leaders can employ that are arrayed on a spectrum from team self-organization on one end to leader-directed decision-making on the other. Making sound decisions about team engagement modes is an important example of the power of process control. As executives move to more senior levels, leadership becomes less about understanding the substance of all facets of strategic problems (although this, of course, remains important) and more about shaping the processes that they employ to frame and solve them. This is an essential shift leaders must make as they move up, but it can be challenging when their success and even identities are deeply grounded in their technical knowledge and mastery of the detail. ■
Michael Watkins is a Professor of Leadership and Organizational Change at IMD. He is the author of The First 90 Days, Master Your Next Move, Shaping the Game, and numerous other books and articles on successfully taking new roles. A recognized expert on leadership and transitions, he coaches C-level executives as they take charge, build their teams and transform their organizations.
The Checklis t
1. Full empow erment Author ize the te am to frame th e problem, iden and as sess pote tif y ntial solutions and reac h their conc lusions wi own thout providing subs tantive inpu recommendatio t or ns. 2. Process gu idance Guide the team in (re)fr aming pr oblems and/or developing and as sessing pote ntial solutions without provid ing your views on the subs tanc e. 3. Problem fr aming Fr ame the prob lem and direct the team to iden and as sess pote tif y ntial solutions and make a recommendatio n. 4. Full fr amin g Fr ame the prob lem, spec ify th e potential solu and direct the tions, team to as sess th em and make a recommendatio n. 5. Input seek ing Get input from the team abou t ways to frame problem and id the entif y potentia l solutions, then decide on your own framing, id entif y and ev al possible solutio uate ns (if appropria te , with suppor tin analytic s from g team members ). 6. Decide and communic ate Fr ame the prob lem and identif y potential solu do your own as tions, sessment, and make a decisio without any inpu n t, informing th e team what yo have decided an u d why. Decidin g without explai is rarely an acce ning pt able mode.
How to use it
1. The problem is relatively un import ant and/ the solution is or relatively obviou s. 2. There is time pres sure, such that a decision be made quick mus t ly.
3. There are irr econcilable diffe rences among members abou team t how the prob lem should be and/or about po framed tential solutions , such that ef fo to engage the te rt s am are likely to exacer bate confl ic t. 4. The leader ha s a high level of confidence in th ability to frame eir the problem, de fin e the options and make a go od decision inde pendently. Forces pushing for lower-numbe red (more empowering) en gagement mod es. 1. There is valu e in developing the team’s prob framing and so lem lving capabilitie s. 2. The leader ha s the time and ener gy to supp this developmen or t t. 3. It is accept ab le for the team to make mis take and lear n from s them.
It’s possible fo r leader s to st ar t with more empowering en gagement mod es and move to more directive ones if the team is not mak ing sufficient prog ress. However, it’s difficult to in the opposite move direction – from more directive more empowerin to g.
Photo: Shutterstock
How should lead er s decide which mode to use? It depends on the balance among forces pushing more directive for versus more em powering enga ment modes. ge -
Forces pushing for higher-num bered (more directive) enga gement modes .
March 2022 • I by IMD 57
[ New frontiers ]
Putting a premium on African peace of mind Insurance take up on the continent is low, but Delphine Traoré, CEO of Allianz Africa, is confident that a wind of change is blowing. She tells Robert Hooijberg why she is so optimistic
W
ith its youthful population, expanding middle class, rampant smartphone adoption and a bigger diaspora migrating back home, Africa’s insurance market has newly emerging power. And, as chief executive of Allianz Africa, part of Allianz Group, the global insurer, Delphine Traoré is understandably bullish on the region’s prospects. One reason for her optimism is the continent’s relatively low insurance penetration rate: it stood at under 3% in 2019, compared with the global average penetration rate above 7%. However, the prospects for growth are immense, especially for digital insurance platforms, given recent political upheavals, natural disasters and the economic dislocation caused by the fallout from the coronavirus pandemic.
“The African insurance industry is growing faster than [most of] the rest of the world,” aside from Latin America, said Traoré in an interview at her office in Abidjan on the southern Atlantic coast of Côte d’Ivoire in West Africa. Allianz has more than a century of history in Africa, where it has built and is continually expanding its footprint, currently present in 12 countries across the continent. When it comes to insurance penetration in the region, South Africa is by far the biggest player, with about 70% of the continent’s total market share. Next is Morocco, then Kenya, Egypt and finally Nigeria, where penetration is just 0.5%. Reflecting on these huge gaps in insurance coverage between countries, Traoré sees an increasingly important role for public-private partnerships in driving up adoption and, by extension, growth and profits for Allianz. This could be especially important for the large commodity exporters, such as Nigeria and Angola. “Most of the farmers across Africa are not insured,” Traoré said. “When there’s a major drought, that pretty much paralyzes a country. You could be buying insurance, as a state, to be able to come to the rescue of your people.” 58 I by IMD • March 2022
Such a partnership would, therefore, be vital in tackling climate change risks, which are especially salient for Africa. Unpredictable weather patterns are already contributing to food insecurity and population displacement as well as putting a strain on water resources, which hits the most vulnerable the hardest. “Climate change is impacting Africa quite heavily today,” said Traoré. “People have seen the devastation of floods where people lose their whole livelihoods, and sometimes when they see the devastation is when you also explain to them that [they] could have protected [themselves] from it.”
‘Most of the farmers across Africa are not insured. When there’s a major drought, that pretty much paralyzes a country. You could be buying insurance, as a state, to be able to come to the rescue of your people’
When it comes to the major drivers of economic growth in emerging countries, she believes insurance is often overlooked, despite its role in improving financial stability and mitigating risks. In fact, she says expanding Africa’s insurance market could generate greater shared prosperity in the region. “If you increase insurance penetration, it also means that you are improving the livelihoods of people, because their assets are [protected].” While the continent’s economic prospects took a hit following the huge setback caused by COVID-19, Traoré is clear that microinsurance — a type of financial service aimed at low-income communities, typified by low premiums and coverage limits — is a potential game-changer, as it can
A friendly alliance: Delphine Traoré and Robert Hooijberg
ID
Delphine Traoré was originally from Burkina Faso — the
landlocked country in West Africa, currently making headlines for a military coup that has overthrown its president Roch Kaboré. She left in the 1990s to further her education. Her father paid her fees for a bachelor’s degree in business and accounting at the University of Pittsburgh.
Photo: Allianz
She used the US degree to launch her career in global finance. After graduating in 1996, she joined Ohio Casualty, part of the insurance group Liberty Mutual, where she worked as an underwriter, evaluating and analyzing the risks involved in insuring people and assets, and later as an underwriting manager. In 2005, she joined a division of Allianz responsible for global business insurance and large corporate and specialty risks. She was based in Canada, where she was responsible for identifying potential markets, client and broker target segments. In 2012, she became chief executive of that division, known as Allianz Global Corporate & Specialty (AGCS), and moved to Johannesburg, South Africa, before rising further up the ranks to become chief operating officer and later CEO of Allianz Africa as a whole.
expand the reach of insurance beyond the relatively wealthy. Such microinsurance is increasingly facilitated by technology adoption and innovation. Just as M-pesa, launched by Safaricom in Kenya in 2007, made banking available to the masses, Traoré said mobile insurance could help Allianz and other insurers tap a vast new audience. “Africa has a population of 1.3 billion and [nearly] half of the population is connected via mobile. The opportunity that we have there as an insurance industry is to reduce the cost of distributing our products.” Furthermore, the idea of mobile insurance would help large providers such as Allianz tackle the challenge of the public’s lack of trust in major financial institutions; the high prevalence of fraud has kept premiums relatively high in Africa. “People that have a mobile wallet do not have a bank account, they seem to trust the operator rather than the financial institutions,” said Traoré. “How do we combine our efforts with [mobile operators] and show our products through mobile [phones]? This is a big driver and change for us as far as growth is concerned in Africa.” She believes that such a mobile product would also help to reduce the complexity of buying insurance through traditional sales channels, provided it came with an easily workable user interface. “This is sometimes the challenge of insurance companies. We tend to be so complex; a motor insurance policy could be 20 pages long.” » March 2022 • I by IMD 59
[ New frontiers ]
a huge cost incurred for the countries that have already invested in their development. Traoré wants to bring the skilled diaspora back, however. She describes herself as a pan-Africanist, reflecting her belief that peoples of African descent have common interests and should be unified. “Africa tends to have a very limited talent pool,” she said. This is a major economic headache in addition to a corporate one for Allianz, given that a large chunk of development aid is spent on the salaries of expatriates filling gaps in the local workforce. It is hard to generalize as to the intentions of those leaving from the continent’s massive population size, but surveys suggest many Africans take issue with poor infrastructure, power outages and corruption. Furthermore, in the World Bank’s annual rankings on the ease of doing business, African countries score poorly.
‘People that have a mobile wallet do not have a bank account, they seem to trust the operator rather than the financial institutions’
But given the high levels of mistrust, customer education is just as important as technological innovation to Allianz's future prospects. “We need to convince low-income families to take up insurance to [safeguard their] futures,” said Traoré. “One of the major things holding them back is just unfamiliarity with insurance. They don’t have a lot of spare income to be able to give money to an insurance company.” Part of the solution is “explaining to them that the day a big claim happens, we will probably pay more than you’ve ever paid us in insurance premiums”. With this in mind, the affordability of life insurance in particular is of special concern to a youthful population. “In Africa, we don’t want to talk about death,” she said, “as it's far off for many people.“ To appeal to this typically tech savvy segment, Traoré sees an increasingly important role for influencer marketing. Influencers use their large social media followings to endorse products and affect purchasing decisions. They “would be a key driver to changing the mindsets … as a sector we need to use influencers a bit more to sell insurance”. Despite a young population, Africa has been experiencing a brain drain, with tens of thousands of skilled professionals leaving the continent annually, with 60 I by IMD • March 2022
Looking ahead, she hopes that many more people of African descent will make a similar move back to the motherland, if for nothing else than to smooth her own organization’s succession plans. “I hope to build more and more African leaders and create the pipeline of young women and young men that are entering the insurance segment. They will be the ones taking the torch from us.”■
Robert Hooijberg is Professor of Organizational Behavior at IMD. His research focuses on leadership, negotiations, team building, digital transformation and organizational culture.
Photo: Allianz
Africa’s young population has been quick to adopt technology, particularly the smartphone
However, there is also some good news: economic liberalization and increased investment have provided new opportunities. But for many who return, they do so because they want to contribute to their ancestral homeland. Traoré herself heard the call of Africa: she returned after a globetrotting early career. “I felt that it was my duty,” she said.
[ Build a better board ]
Why ESG should read GES The governance aspect of ESG is a fundamental driver of environmental and social quality. Didier Cossin and Abraham Lu outline the methodology required to ensure board-level leadership in sustainability
G
overnance is often explored and assessed from a technical and mechanical perspective (with hard criteria such as number of independent directors, size of board, diversity of the board and management, compensation structures and ownership structures) that seems detached from environmental and social dimensions. Governance metrics do not pertain directly to sustainability, carbon footprint and other environmental or social dimensions. ESG is then seen as a juxtaposition of three different dimensions (environmental, social and corporate governance), which are combined but are not necessarily related. These three dimensions are thus best measured separately, and a composite index can be constituted that cumulates or averages separate measures of the different dimensions. A fundamental alternative perspective starts with the fact of what truly constitutes governance. Put simply, Governance is the art and structure of decision-making at the top of organizations. High-quality governance will drive quality decision-making within the organizations in all areas – including environmental and social choices. It could be argued that if we were able to capture good governance – and assuming that environmental and social choices are pertinent to the future of an organization – the quality of the governance itself would be a driver of environmental and social choices.
ESG investment is also about opportunities. Investing in clean technology, renewable energy or other emerging industries will help create new growth leaders. Driven by these global megatrends that will continue for years to come, ESG companies will enjoy upside potential. An ESG approach has an impact on value and the world around us. We are living through a period in which companies are struggling with risks such as global warming, poor labor practices and board scandals. By investing in companies that seek to provide solutions, investment professionals play their part in creating a better world, in which wealth creation will be stronger and healthier. Towards an integrated ESG methodology
Although many investment firms have been trying to figure out how to include ESG analysis in their investment decisions, the integration remains inconsistent and financial returns disappointing. There are multiple challenges: it is inefficient and costly to conduct field research on individual companies; it is difficult to distinguish between firms that merely provide ESG disclosure and others that truly implement ESG »
I
However, current governance methodologies tend to focus on the mechanics of board and management functions rather than on the fundamentals of what drives good governance. Let’s begin by analyzing why ESG is a key investment dimension, then explain why an integrated solution can be successful, based on governance, and how we see such a methodology being implemented.
1. High-quality governance will drive quality decision-making within an organization in all areas – including environmental and social choices.
Why ESG?
annual report to give us insights into its positive and negative ‘personality’ traits.
A causal relationship is needed between a company’s ESG practices and risk and returns. Weak governance, environmental and social practices can damage corporate reputation, which has material impacts on market performance. Investors focusing on companies with solid ESG practices benefit the most, since investment risk is lower.
n summary
2. Using AI technology, we study the language used in a company’s
3. Our systematic approach has generated consistent alpha with lower volatility. In addition, various cross-validation test results have shown that our portfolio has a positive impact on sustainability.
March 2022 • I by IMD 61
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practices to reduce risk and take advantage of opportunities; it is hard to generate alpha using products and services from third-party ESG rating providers. Among the most widely used approaches to ESG analysis are: (1) conducting bottom-up research on individual companies; (2) relying on companies’ ESG disclosures; and (3) using third-party ESG ratings. Conducting bottom-up research on individual companies is an in-depth, fact-driven approach that leads to first-hand understanding of a company’s ESG issues, which provides the necessary insights for investment,
monitoring and active engagement. Research at this level is detailed and comprehensive, for example, quantifying the material impact of ESG issues on firms’ revenue, financing, valuation, and risk. Boutique investment firms typically do not have the resources to cover a sufficient number of companies for effective diversification. Assigning a monetary value to ESG issues is also computationally difficult with questionable results. And finally, the methodology tends to focus on the output rather than on the driver: a company may have low carbon footprint because
The power of words Highlights some words used by well-governed vs. less well-governed companies. The appearance and associated frequency of these words is obtained statistically from two groups of companies and is a good indicator of governance quality. TYPICAL LANGUAGE OF
TYPICAL LANGUAGE OF
WELL-GOVERNED
POORLY GOVERNED
Time frame language as an indication of long-term strategy.
century coming constant continually decades era future long-term old ongoing onward perpetual tomorrow year
contemporaneous currently daily dates immediate monthly overnight promptly quarterly recently
Human-capital language as an indication of collegiality and corporate culture.
career colleagues commitment compensation diversity employee empower engaged expertise grooming individual people performance promote recognize recruitment reward safety spirit staff talent team
appraisal assigned compensatory dismiss evaluated hire job nonqualified payroll postretirement qualifying replacement retention uncommitted unemployment wage
Language to stakeholders as an indication of the corporation’s commitment to environmental issues.
air carbon climate CSR dialogue ecological ecosystem energy environment footprint greenhouse human planet recycling waste water wellbeing
Language to stakeholders as an indication of the corporation’s commitment to social issues
academic aid art arts campus charitable children cities communities families female feminine friends generation immigration lawful mayor municipal roads schools scientific social society stake stakeholders university
COMPANIES.
62 I by IMD • March 2022
COMPANIES.
accusations alienated allegations appeal arbitration attorney breached claims collusion confronted controversial convicted courtroom crime criminals defendant delinquencies discharged enforceability jurisdiction lawsuits legislative litigation petitions plaintiff punitive rulings settlement suit
of its business model rather than by the will of the board to improve its impact. The risk is then to capture a status rather than a dynamic: is the organization naturally in a low carbon footprint context (industry, business model, etc) or is it actually working on improving its footprint? Returns tend to reflect dynamics rather than status. Relying on companies’ ESG disclosures in the form of detailed corporate social responsibility (CSR) reports or specific ESG policies is not a good way to obtain information. These reports or policies are not legally binding, non-standardized, hard to verify and often incomplete. As a result, a CSR report may not be a trustworthy source for understanding a company’s ESG beliefs and practices. CSR reports are often criticized as being a “window-dressing” exercise. Relying on information disclosed in CSR reports or assessing how detailed these reports are rarely adds alpha. Relying on third-party ESG ratings does not lead to quality ESG insights either. Although there are many ESG research providers selling information and opinions in the market, their ratings do not necessarily provide consensus views and often provide contradictory opinions. It requires tremendous effort from investment managers to interpret the noisy signals and filter ESG information. Applying ESG ratings from third parties does not systematically create consistent and significant alpha. Our perspective: G drives E and S
A top-down, governance-driven approach can lead to true ESG insights for many companies across industries. Several characteristics are commonly seen in successful businesses: an effective and efficient board, capable management, credible internal controls, good relationships with stakeholders, and good management of the environmental and social aspects of their business. For all these characteristics, good governance is the foundation. By good governance, we do not mean the mechanical attributes of board and management, but the fundamental values and principles that drive the quality of decisions taken at the top of an organization. Among the principal values of good governance, we see a sense of accountability and responsibility of the individuals involved and of the organization as a whole. We see also long-term orientation, resilience, agility, and concern for customers and stakeholders as key drivers of organizational success. Good governance will thus drive the long-term orientation, values and quality of an organization’s resilience and agility in environmental matters as well as in social matters. In ESG, true G drives E and S. The catalyst for a good ESG policy starts with the governance which, in addition to triggering stock outperformance, enhances impactful and transformative environmental and social policies at the corporate level. Therefore, we place great emphasis on corporate governance. Indeed, there are fundamental tenets to governance. At the very base are character and values. A sense of accountability and responsibility combined with integrity and moral authority are hallmarks of the character required for good governance. This leads to other drivers such as a long-term view balanced with short-term efficiency, an ability to build resilience, often a combination of financial conservatism and innovation, stability and agility, passion, purpose, and compassion – all essential to true success – and, of course, open-mindedness and constructive dissent
based on a diversity of views. Positive environmental and social impacts – in brief, stewardship – are hallmarks of good governance. Natural language processing (NLP) on 10-Ks
Over the past six years, we have developed a systematic approach to stewardship, governance and ESG analysis that serves as the foundation for portfolio construction and optimization. The recent rise of data science has allowed us to apply artificial intelligence (AI) and machine learning (ML) to the analysis of companies’ 10-K reports. Unlike CSR reports, 10-Ks are legally binding, standardized, complete documents that have been prepared by the top management team, approved by the board, certified by the auditors, and regulated by the US Securities and Exchange Commission (SEC). Just as many economic and financial theories find their roots in psychology, the study of the language individuals use gives insights into their personality traits. Similarly, a company can be viewed as having a personality, and studying its communications provides rich information. We used content analysis to measure the personality of organizations, which fundamentally drives key elements of how they are governed. NLP uses a word dictionary that reflects characteristics expressed to identify ways in which companies are similar to or different from one another.
‘A company can be viewed as having a personality, and studying its communications provides rich information’
We started by identifying forward-looking messages embedded in company reports. We analyzed each report computationally sentence by sentence to reveal elements that related to corporate culture, behaviors, and actions. For the word selections, we leveraged our direct experience with boards. We used both implied and explicit words and adapted to changes in business language by regularly updating the word lists (see illustration). Our approach enables us to derive stewardship, governance and ESG communicated by companies, which helps with more objective investment decisions. In our proprietary research, ESG analysis serves as fundamental analysis. We believe that this process, with its new perspective, gives us an edge – one that is not available to most investment managers. An Example of Innovative ESG portfolio construction
The portfolio construction process in terms of identifying ESG companies can be largely quantitative. We give an example designed to select the top 100 companies from an investable universe – the S&P 500. In our framework, the key is how to cluster the words and combinations of words to extract the fundamental elements of good governance. Based on our governance practice and academic research, we looked at numerous components, such as time orientation, people, and » March 2022 • I by IMD 63
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stakeholder management, as part of a broader review involving many clusters. This broad analysis is conducted on a dictionary of more than 7,000 distinct words grouped into three categories (three filters), which constitutes the body of our governance scores from reading companies’ annual reports. This review allows us to diagnose the governance quality of every company for ranking and comparison. We apply a fourth filter to exclude sub-industries that could skew the ESG profile of companies. Filter 1: classical stewardship
Classical stewardship refers to the multiple word lists that we created to represent stewardship beliefs, attitudes, values and actions. We update the word lists regularly. The dimensions that constitute stewardship beliefs include an obligation or willingness to promote good governance and take responsibility (accountability), a sense of purpose for greater achievement and social good (purposefulness) and a commitment to safeguard the future through a long-term perspective (long-term focus). The dimensions that describe stewardship attitudes include a willingness to take care of customers (care), an ability to win trust from employees (trustworthiness) and a propensity to act harmoniously with other stakeholders (harmony). The dimensions that indicate stewardship values include a strong passion to drive stewardship and lead with positive impact (passion), a sense of positive wellbeing to promote a vision of the future (positiveness), and a sense of psychological ownership or oneness to identify with the company (identification). The dimensions that characterize stewardship actions include an emphasis on innovation and creativity (innovativeness), a proactive and anticipatory approach to risk management (proactiveness), and a tendency to be conservative and prudent toward debt financing (prudence). Filter 2: resilience and agility
The resilience and agility filter refers to the multiple word lists we created to measure crisis readiness and risk management. Prudence and adaptabil-
Stewardship Orientation Beliefs
Attitudes
Values
Actions
Accountability
Obligation or willingness to promote good governance and take responsibility.
Purposefulness
Sense of purpose for greater achievement and social good.
Long-term focus
Commitment to safeguard the future through a long-term perspective.
Care
Willingness to take care of customers.
Trustworthiness
Ability to win trust from employees.
Harmony
Propensity to act harmoniously with other stakeholders.
Passion
Strong passion to drive stewardship and lead with positive impact.
Positiveness
Sense of positive wellbeing to promote a vision of the future.
Identification
Sense of psychological ownership or oneness to identify with the company.
Innovativeness
Emphasis on innovation and creativity.
Proactiveness
Proactive and anticipatory approach to risk management.
Prudence
Tendency to be conservative and prudent toward debt financing.
ity are at the heart of good governance. In well-governed organizations, the board will be better prepared for crises, adopt long-term strategies and incorporate risk management. Good governance drives agility with the view that the organization will adapt to both growth and recession, as well as unexpected shocks. The 2008 financial crisis and the COVID-19 pandemic demonstrated that well-governed companies were rewarded by the market. We observed that the share price of well-governed companies dropped less during the correction and then, thanks to their agility and better positioning, rebounded better and for the long term.
Average E and S ratings in 2019 for the top 100 well-governed companies of the S&P 500 and the 100 less well-governed, according to Sustainalytics and RobecoSAM RobecoSAM
Social percentile
Environmental percentile
Environmental dimension rank
Social dimension rank
Top 100
57.38
57.72
49.36
44.95
S&P 500 TRI
50.92
50.80
45.62
40.96
Bottom 100
48.16
50.26
43.97
34.15
64 I by IMD • March 2022
Infographics: Theresa Schwietzer
Sustainalytics
Filter 3: modern stewardship
The modern stewardship filter refers to the multiple word lists that we create annually to represent best-in-class stewardship, governance and ESG practices in the current year. Language evolves slowly. To achieve longterm value creation, we need to stay current with the changes in language and maintain our capability to select the best-governed companies. Filter 4: exclusionary screening
We apply this screening to exclude several sub-industries from the investable universe regardless of their financial performance. This step is to minimize potentially negative ESG exposures based on moral values, standards, and norms. Examples include the oil, gas and tobacco industries.
the maximum possible ESG and sustainability performance. This again confirms our NLP analysis of 10-Ks and our belief that governance drives environmental and social choices. Backtest and live performance
Our methodology reconciles the paradox that traditional ESG scores or rankings do not generate alpha consistently. When looking at the issue fundamentally, there should be a causal relationship between ESG practices and stock performance, since well-governed companies paying attention to ESG dimensions would have lower risks, notably on reputation damage, and higher upside opportunities, notably by investing in clean, renewable, and emerging technologies. The problem is not about the fundamental ESG idea, but genuine measures of ESG implementation at firm level.
Does our Integrated ESG approach work?
We created an unconventional model using NLP techniques on 10-Ks to discover ESG information embedded in corporate communications. Once we have the portfolio of stocks, we perform cross-validation to assess whether our selection will accurately capture ESG performance in practice. Cross-validation is essential to test the model’s ability to predict both financial and ESG performance with unknown datasets such as new 10-Ks.
‘Good governance drives agility with the view that the organization will adapt to both growth and recession, as well as unexpected shocks’
Validation of risk and returns
A good ESG model should deliver on its promise of high returns and low risks. Typically, a fund with solid ESG integration should be expected to have lower risk exposure and above average long-term returns. Our methodology highlights important differences between well-governed companies and their peers. Based on the words they use, we find that well-governed companies are financially more conservative (controlling for size and industry), have less debt and higher liquidity, and that they invest more in innovation and are less prone to mass layoffs. Validation of social and environmental aspects
In our model, we follow the key principle that governance drives environmental and social choices. In ESG, G drives E and S. To verify whether our selection of 100 stocks measures both environmental and social aspects, we benchmark our selection with the ESG scores from Sustainalytics and RobecoSAM. The scores from both providers range from 0 to 100, with 100 being the best performance score in social and environmental performance. We can see that well-governed companies consistently outperform the S&P 500 and bottom 100 companies across environmental and social ratings.
Generating alpha
The UN Principles for Responsible Investment (PRI) have been widely accepted in recent years. ESG investing is becoming a mainstream investment approach. However, there is a significant hurdle to ESG analysis in terms of acquiring accurate, comprehensive, comparable, consistent, and audited information. The lack of a credible ESG ranking and scoring methodology has become a challenge for generating ESG alpha. Our systematic approach has generated consistent alpha with lower volatility. In addition, various cross-validation test results have shown that our portfolio has a positive impact on sustainability. During the crises in 2008 and 2020, our investments experienced lower drawdowns and quicker recovery. For us, ESG integration goes beyond aspiration and has a positive impact on portfolio returns. This approach has become a key differentiator. ■
Total investment impact
Impact-Cubed is an independent rating company. Its ESG ratings have been used by institutional investors to report on portfolios, inform their product development and investment processes, and research and compare investment products. We used it to obtain a Portfolio Impact Footprint of our investments. To measure the overall ESG impact of our portfolio, we loaded our fund level data to match Impact-Cubed’s coverage of more than 10,000 global companies from 2018 to 2020. The comparison shows that our portfolio was in the top quartile of companies with the most positive impact in 2019, In fact, we are approaching
Didier Cossin is the founder and director of the IMD Global Board Center, the originator of the Four Pillars of Board Effectiveness methodology and an advocate of Stewardship. Hongze Abraham Lu is research fellow at the IMD Global Board Center. He specializes in quantitative research in governance, strategy and finance.
March 2022 • I by IMD 65
[ In my view ]
20 years on, it’s clear that the euro has been a force for good The common currency was a bold experiment, but there can be no doubt that its success has brought prosperity and stability to all who signed up, argues Arturo Bris
But by July 2002, the euro was already more expensive than the dollar. The relative price of both currencies is by no means an indication of which one dominates. Still, it remains interesting to recall the original skepticism with which the new currency was welcomed, especially outside of the euro area. We are, today, living through the most difficult times in Europe since 1945. How different might history have panned out if Ukraine had been a member of the EU and had it adopted the euro? Perhaps it is also useful to reflect on the reasons why the country’s accession to the EU and the euro is only being considered now that Ukraine has been invaded by Russia. We must learn from the experience of other euro members as we imagine the best possible scenario for a future Ukraine. I have written before about how the euro is one of the greatest experiments in our financial history. Let me add now, in 2022 – the 20th anniversary 66 I by IMD • March 2022
of its introduction – that there are clear positive results of this experiment. Most notably, without the euro, the economic conditions of all euro members would today be much worse, in general terms. Remember that in 1999, the monetary conditions of Europe were characterized by a set of strong currencies – particularly the German mark – in heavily exporting countries, and weak currencies in peripheral, importing ones. The Italian lira had been devalued 13 times against the German mark between 1979 and 1992 within the European Monetary System (EMS) introduced in 1979. In both cases, realignment was necessary because expensive currencies damage exporting economies, and weak currencies damage importing ones. In that sense, the European Union was a natural candidate for a common currency. It allowed Germany to gain a profitable market for its cars, while making it easy for Spaniards and Greeks to offer their services to other European countries and to buy their products. If we look back and measure the impact that two decades of the common currency has had on European citizens and companies, we can identify five major trends: 1. Price increases
I illustrated the early inflationary impact of the changeover in my working paper “Separated by A Common Currency: Evidence from the Euro Changeover.” This impact was a novel and interesting psychological effect of introducing a new currency with a difficult conversion for some
Illustration: Jörn Kaspuhl
I
still remember as vividly and if it were yesterday a lunch conversation with my colleagues at the Yale School of Management in late 2001. It was just a few months before the euro was introduced as the common currency of 12 European countries. The changeover rate between the new currency and the legacy currencies of these countries had already been fixed, on 1 January, 1999, and by then the EUR-USD exchange rate was about 0.85, meaning you would receive 0.85 USD per euro. Laughter rocked the table when someone entertained the hypothesis that one day there would be parity between the two currencies.
legacy currencies, such as the peseta and the lira. My research, which I carried out with the late Augusto Rupérez Micola, provided evidence of the significant price increases that happened as a result of rounding (typically up) to the closest cent. For instance, before 1999 the normal price for a newspaper in Spain was 100 pesetas (the equivalent to 0.602 euros after changeover). Prices rapidly increased to one euro in less than five years.
capital availability it engendered facilitated domestic investments in education, infrastructure and health, thus driving the competitiveness of euro-area country members. Today, we could not explain the impressive quality of transport infrastructure in Southern and Eastern European countries without making reference to the role of the European Central Bank and the euro, in terms of financing.
2. Lower costs of capital
This early impact of the euro overshadowed the important effects of the single currency at a corporate level: by reducing currency risk and increasing the availability of funds, the euro significantly reduced firms’ costs of capital. A lower cost of capital has direct and indirect effects. Directly, when capital is cheaper, companies are worth more. That is why euro-area stock markets displayed such a strong performance in the years following 2002. By 2007, both the Italian and Spanish stock markets had outperformed their German and US counterparts. With the emergence and dominance of digital platforms since then, this is no longer the case. Yet the original push to valuations caused by the euro was an important driver of capital attraction for some countries, especially those that had weaker currencies before the euro. As for indirect effects of the reduction in firms’ cost of capital, my research has also shown that a very important consequence of the euro, especially prior to the 2008 crisis, was a significant increase in corporate investment. As a result, European companies have caught up with those from the US and China. 3. Integrated stock markets
What about the “strong-currency” countries? Even without taking into account the reduction in currency risk that using the euro implies for these countries (which is, in any case, small), its very introduction has integrated European capital markets in such a way that a German company, say, could tap investors in France or in Italy.
‘Realignment was necessary because expensive currencies damage exporting economies, and weak currencies damage importing ones’
The EU is an imperfect union, it regularly confronts crises ranging from populism and refugee movement to debt and unemployment. But had it not been for the euro, these would have been far worse. Imagine how Russia might entertain treating Latvia, Lithuania and Estonia if they were not members of the EU and of the euro? Would Russia have invaded a member of the eurozone? Now, more than ever, those countries on the eurozone’s periphery – which are still in the early process of euro adoption – must accelerate their integration. The potential benefits of the currency are today even greater than what they were for early members. It has become paramount that Poland, Romania, Bulgaria, the Czech Republic and other European countries accelerate their convergence process because a euro that spreads wider will make Europe safer and more stable economically. ■
That is to say, the euro facilitated the integration of stock exchanges. Euronext, for example, was founded in 2000 by the merger of the Amsterdam, Paris and Brussels exchanges. To date, markets in Lisbon, Dublin, Milan and Oslo have also been integrated within it. 4. Reduced reliance on bank loans
For all countries in the Euroland, the period after 2000 has been characterized by an increase in debt financing, both at the corporate and country levels. This is good news because European institutions were previously more reliant than their US counterparts on bank loans as opposed to corporate debt – the cheaper option. The development of European debt markets is a legacy of the euro. 5. More capital, more country competitiveness
The cost-of-capital effect for companies can also be extended to countries. Not surprisingly, the 2009 European debt crisis was caused by excessive borrowing on the part of some countries. Nevertheless, the increase in
Arturo Bris is a Professor of Finance and is Director of the IMD World Competitiveness Center. His research and consulting focus on the international aspects of financial regulation, banking and financial services, national competitiveness, the future of jobs, and fintech.
March 2022 • I by IMD 67
[ The forecaster ]
Game on: Oculus’s Quest 2 augmented reality headsets are Facebook’s route to the metaverse. But there is hardly any agreement among the tech giants, with Microsoft and Google offering radically different alternatives
Existential battle to become master of the metaverse
B
ig companies generally don’t lead, they follow. They rarely make the first move. But you know something is inevitable when they finally jump. So it is with the metaverse, or virtual reality, or augmented reality—whatever you’d like to call it. Except not everyone in Silicon Valley is convinced. Elon Musk of Tesla, for one, thinks of it as “more marketing than reality.” He contends that the consumer experience remains flaky. You can certainly put a TV on your nose, Musk said in an interview. He just wasn’t sure that would qualify anything as part of the metaverse.
That skepticism hasn’t stopped tech giants from betting big. At IMD, we’ve been tracking future readiness among companies. And in the technology 68 I by IMD • March 2022
Illustration: Jörn Kaspuhl, Photo: www.oculus.com
All of the tech giants are searching for the next big thing. Howard Yu sifts the evidence to find the likely winners and losers in the fight for future dominance
sector, practically all the top players have either directly been working on or indirectly involved in projects related to the metaverse. Google, Microsoft, Apple, Nvidia, AMD, Amazon, and Alibaba are all in it. Chief among them, of course, is Meta, which has been rebranded from Facebook. The push is hardly coincidental. It turns out it’s harder than most people think for a tech giant to disrupt the traditional industries. The promise that Silicon Valley would quickly master autonomous driving, telemedicine, financial advisory, and legal services hardly panned out. So tech companies are still searching for new growth. And the euphoric rise of their share prices during the pandemic is ending. Revenues are now slowing. The Nasdaq has been on a plunge. It’s in this context that the battle for the metaverse is playing out. Companies are colliding on the same course. Who has the right competence to scale?
You may like to ask, who is great at product innovation? Graph 1 displays the relative position among the tech giants. We’ve created graphs like this by running large-scale text analyses at IMD’s Center for Future Readiness. We’ve downloaded more than 10 years of records from more than 60 news sources. We’ve written an algorithm to unpack companies’ behaviors. We’ve fed it the text data and asked the computer to score companies along various constructs. Is the company focusing on near-term opportunities or long-term prospects? Is the management team risk-adverse or risk-seeking? In the graph, we aim to know which company focuses the most on new product innovation; that when compared to its peers, it focuses on pioneering the development of novel products and services. And this reflects on the vertical axis. On the horizonal axis, we ask, which
company focuses the most on new market entry in terms of geographic territories with new distribution channels. Of course, no research method is perfect. Even an annual survey can be biased. But we think leveraging the large-scale reports across a decade will provide us a realistic measure of how things evolve. The result shouldn’t be surprising. Microsoft is a poster child for corporate reinvention. When Satya Nadella became the CEO of Microsoft, the company was almost in a free fall. Product flops were common — Zune, Vista, Kin, and Bing. The software giant took a $900 million write-down on unsold Surface tablet inventory. It was losing out to Amazon, Apple, and Google in music players, e-readers, and smartphones. And the PC market was in decline. Today, Microsoft has made the transition to a subscription for Office 365. It’s broken into cloud computing with Azure. It’s strengthened its leading position in the gaming sector via Xbox. In November 2021, the company was valued at all-time high. Then you have Apple succeeding in new market entries because of its commercial discipline. Tim Cook is the true master of scaling up excellence. And Apple is a scaling machine that has brought the iPhone not only to the US and Europe, but to China as well. Not just in good times, but also during the depth of the pandemic, when there has been a shortage of chipsets. What this shows is that you can’t run experiments forever. At some stage, success requires commercial discipline and a strong execution plan to realize meaningful results. When it comes to hardware and software integration, no tech giant has so far been as successful as Apple in capturing the upswing opportunities at a global scale. » March 2022 • I by IMD 69
[ The forecaster ]
How the metaverse strategy diverges based on core capabilities
Tech giants have no time to spare. They don’t predict the future; they make it. Facebook’s Oculus says you’ll get to metaverse through Quest 2. Microsoft say you should wear a HoloLens 2. Google these days focuses on image recognition for augmented reality. There’s hardly any agreement. In fact, it’s a fight for a dominant standard.
It explains why Microsoft’s HoloLens is now veering towards industrial application. Each industry has its distinct flavor. The use-case scenario of a mining operation implementing augmented reality will be infinitely different than that of a warehouse operator. The remote assistance provided to workers retooling production equipment has little resemblance to that required for a healthcare worker. Compared to gaming, for instance, the use-case scenario for industrial application of a metaverse is vastly varied. The implication here is when the usage requirement becomes exceedingly complicated, a company needs to partner with many others to deliver useful solutions. To do so, it needs to behave like a trusted partner or at least a [ xxx ] giant. Apple’s notoriously closed approach could mean that it might benign miss out on a broad-based adoption in the enterprise sector. But this way of working can also be a strength, especially when the product remains novel and user experience remains unstable. Remember that when Google Glass was released in 2013, Google touted the benefits of augmented reality to the masses. Priced at a premium of
2
0.2
New Product Innovation
They approach the opportunity differently because they are limited by who they are, or what they are good at. Some companies are better at forming strategic alliances and undertaking joint ventures than others. In Graph 2 we look at the propensity of companies forging relations with other organizations.
1
Microsoft Corp
0.1
Google (Alphabet) Apple Inc
0.0
Tech Average
- 0,1
- 0.2
Facebook (Meta)
- 0.1
0.0
New Market Entry
$1,500, the product was pitted against other top-end smartphones. Consumers naturally thought they would see information of all kinds with their gaze fixed upon anything and be able to pull that information from sources like Twitter, Facebook, and Wikipedia. When futurist Robert Scoble brought home the prized item, his wife asked eagerly: “Can I look at someone and see something about them?” Predictably, Google Glass fell short of all expectations. The technology wasn’t ready yet, not even for Google. What this early example illustrates is for a new technology to take off, market demand
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Microsoft Corp
100
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2017
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Google (Alphabet)
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difficult problems. For a product that is novel and new, problem solving cannot be outsourced yet. It requires the leaders and employees of an organization to wrap their heads around all the nuances. To do it right, they need to do it themselves. Now What About Facebook?
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is driven by its relative performance in relation to existing alternatives. Unless the immersive experience delivered by a headset becomes compelling enough, the metaverse has no use case. This doesn’t mean the next version of the internet is not arriving. It doesn’t mean tomorrow’s cyberspace can’t be immersive, 3D, and all folded together. It doesn’t mean that disparate websites and online services and NFTs and cryptos can’t come under one roof. It just means that won’t come in the current form of a headset that straps around your skull.
‘You can’t run experiments forever. At some stage, success requires commercial discipline and a strong execution plan to realize meaningful results’ The late Harvard Business School professor Clayton Christensen, who coined the term “disruptive innovation,” once explained the imperative of such vertical integration. When the product was still “not good enough”, which is the current state of metaverse, performance is driven by integrated architecture. Like that of Tesla, which also packs batteries, writes firmware, and builds charging stations, in addition to developing its own electric vehicle. Like that of the smartphone in its nascent stage some 15 years ago, when it was pioneered by Apple. Only when a product becomes “good enough” does modular architecture become more effective. This is when companies can specialize in a smaller scope of activities. Some make software, some make hardware, and still others make third-party applications. This parallel effort delivers greater speed of innovation with lower cost. But it requires a standard that’s already proven to work. So if you want to predict the winner, you can bet on the one that integrates firm activities to solve
All these things do not bode well for Mark Zuckerberg. He is best known for his relentless pursuit of near-term opportunities. He set up a growth team and drove them to come up with every feature possible to attract new users. That’s how Facebook’s Newsfeed was invented. That’s how Instagram and WhatsApp were acquired. Still, Facebook has strangely remained in its original form as a social media app, despite its size, by mostly exploiting what it’s good at. That growth has had enormous costs. Chief among them has been the plunge in Facebook’s likeability. Executives became used to acquiring new users indiscriminately. They ignored public outcries over data scandals. They lost their focus on the younger generation. They failed to develop a deeper relationship with their users. Meanwhile, Amazon has branched out to AWS and Prime membership. Google has evolved far beyond a search engine. Microsoft has turned software into subscription services, going into cloud technology and games. So today, even when Facebook wants to move fast, it really can’t (see Graph 3). It’s ability to innovate is hampered by its lack of likeability among the public. Everywhere it turns, regulators are saying no. That’s how Facebook’s early crypto initiative got derailed by central banks — not because of its lack of technical competence, but because of its lack of reputation. Facebook can no longer move fast when compared to its peers. All the regulatory oversight, public hearings, and media scrutiny are adding weight. The company is carrying tons of feathers. But Zuckerberg is a wild card. More than anyone else, he is standing on a burning platform. At the last company earnings announcement, Meta’s CFO foresaw a loss of $10 billion in revenue in 2022 due to Apple’s privacy change in iOS. Its share price promptly dropped by more than 20% and has yet to recover. Other tech giants may see the metaverse as a new opportunity for incremental revenue. But for Zuckerberg, it is an existential crisis. Here is a CEO who has the absolute control over Meta and can single-handedly channel corporate resources to where they’re needed, with no board members or investors who can veto his directives or get him fired. And he has chosen the metaverse as the solution to restore the future prospects of the company. He has even renamed the company for that. He has burned all bridges without looking back. Regardless of the outcome, Meta will forever be an iconic case study in the corporate annals. ■
Howard Yu is LEGO® Professor of Management and Innovation at IMD Management and Innovation at IMD, where his research is focused on technological innovation, strategic transformation and change management. He is also Director of The Center for Future Readiness, which measures how prepared industries are for a reality of constant disruption. Zuriati Balian, who contributed to the article, is the data scientist intern at IMD’s Center for Future Readiness.
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