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151

Winter 2018

Where ideas and people meet

Business solutions for a fractured world


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Staff #151

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Contents #151

REPORT

Global

certainty

8

Your guide to facing the future with foresight, intelligence and empathy

4 keys to improve Europe’s security and defense Interview with European Defense Agency Chief Executive Jorge Domecq

The multipolar century

Interview with Harvard Business School Dean Nitin Nohria

Openness and competitiveness can and should coexist Which countries are pro-growth and inclusive?

28

22

Economic performance and peace are mutually reinforcing

26

Are we perceiving more polarization than there actually is? IESE’s Kate Barasz tests our cognitive biases 34

32

“I’m optimistic that the inherent creativity of business leaders can generate answers to many of today’s most pressing economic and political challenges.”

Are our inferences about Trump supporters accurate? The more extreme the position, the more we may jump to conclusions.

“Europe must assume greater responsibility for its own security and defense. (We need to) engage with European industry, at all levels, to support innovation.”

Nitin Nohria

Kate Barasz

Jorge Domecq


THE BIG PICTURE Alternative ways to fund your business

38

SMART PICKS The truth of fiction

Remembering James G. March

HACK How not to lose your head in a bidding war

40

Flexibility for the sandwich generation

41

What kind of corporate venturing is right for you?

42

Opening the black box of artificial intelligence

In first person with IBM’s Marta Martinez 

Positive partnership

Search funds gain ground outside the U.S.

How we took our business global

The case of Kids & Us

Today’s leaders recommend how to get ready for tomorrow

Critical qualities necessary for the future

Buildings for education must be flexible

Designing workspaces that work

“The more information AI receives, the more it learns. Feed it poorly, and the system learns poorly. This makes it all the more important to know how the system is taught, in an ethical way.” Marta Martinez Alonso

KNOW How prepared is your business to make the most of AI?

64

The brains behind your choices

74

Rethinking the funnel for the omnichannel age

78

The 5+1 behaviors of innovation

84

By Javier Zamora and Pedro Herrera

+IESE

44 48

By Elena Reutskaja

By Guillermo D’Andrea

52

60

By Paddy Miller and Thomas Wedell-Wedellsborg

54 FULL STOP 58

Chef Joan Roca reveals his recipe for success

92


EDITOR’S NOTE

Antonio Argandoña Editorial Director of IESE Business School Insight AArgandona@iese.edu

Efficient, imaginative & supportive I

f life is a journey, then uncertainty is our traveling companion. And its reach, today more than ever, is global. Uncertainty touches all sectors, in all countries, and just about every aspect of our business lives.

But we can’t afford to let uncertainty stop us. The stakes are high – and not just concerning next quarter’s results. In many cases, it is the very survival of our com-

panies and the livelihoods of the people who depend on them that are at stake. Yet, the solution to many of the problems currently facing the world is in our hands. Today’s socioeconomic problems are not so much the fault of globalization, politics or technology as a failure of leadership. As our main report makes clear, a better brand of leadership could help us manage uncertainty better. It requires making a few course corrections: clarifying your company’s purpose and mission; surrounding yourself with diverse team members who aren’t afraid to tell you what they really think; thinking about people’s potential, not their cost, and developing their capabilities; working as a team, always remembering that you form part of a wider community; and rounding it all out with a healthy dose of optimism. Another sound piece of advice comes from the late, great professor James G. March: before you can truly know any situation, you first have to know yourself and have clear ideas of your own. Customers, suppliers, business partners and leaders will constantly confound us: why do they do the things they do? The answer to that requires keeping an open mind – a willingness to understand the logic of what, from your point of view, may appear to lack any logic. Helping business people to break free of preconceived ideas and gain fresh perspectives on their challenges was the life’s work of IESE professor Paddy Miller, who passed away in September 2018. In loving tribute to him, we republish one of his classic articles, in which he advised us on how to help our employees not only to think differently but also to change their behaviors for the sake of innovation. To face the challenges that arise from working in an uncertain environment, we have to take new actions. Actions that are efficient but, above all, imaginative and supportive of people and communities.


The future starts now Watches that calculate calories, mechanical arms that cook for you or robots that teach you languages. Yes, the future is here and Gas Natural Fenosa is starting to write its own with more energy than ever. As a new company. More flexible, more agile and more attentive.

Gas Natural Fenosa is now Naturgy.


REPORT


The big idea of the 20th century is under fire in the 21st. How to respond with foresight, intelligence and, above all, empathy.


REPORT

Global uncertainty

T

oday is the slowest day of the rest

demand that are driving this turbulence. All

of your life. That’s the maxim that

around the world we see widening inequality,

Nokia board chair Risto Siilasmaa

soaring public debt, tightening liquidity and

lives by. “You probably thought

threats of an all-out global trade war. The Unit-

that the pace of change has never

ed States under President Trump seems bent on

been as fast as it is today,” he told a crowd gath-

upending the status quo by withdrawing from or

ered in New York City for IESE’s Global Alumni

renegotiating international trade deals, imposing

Reunion. “But you’re thinking about it the wrong

tariffs and adopting protectionist stances in pur-

way. Change will never be as slow as it is today.

suit of an unapologetically nationalist agenda.

If you think about it this way, you have more of a feeling that, ‘I need to act right now, and if I don’t

In this report, we draw upon the research of IESE

act today, it’ll be more difficult tomorrow.’ That’s

professors and the real-life experiences of three

the only way to navigate in this world.”

top executives from leading companies around the

Taking decisive action is key to surviving today’s geopolitical turbulence

world to suggest some of the ways that business people can act fast – but also coolly and wisely – in a world that is changing, as Siilasmaa puts it, “in more complicated and unpredictable directions.”

Building, developing, learning

What gets you out of bed in the morning? For Laxman Narasimhan, CEO of PepsiCo Latin America and Europe Sub-Saharan Africa, it’s the story of a Guatemalan farmer who he says told him, “I want to thank you for the fact that you help us grow potatoes here and you buy from us. What this does for me is that it prevents my son and his children from trying to migrate elsewhere. He can stay here and make a living.”

Siilasmaa should know. He joined Nokia in 2008 when the company was at its peak and by 2012

Narasimhan adds, “When you hear stories like

“the press was speculating about the timing of our

that, you realize the privilege of the platform you

bankruptcy. Not if, but when.”

have as a business leader. You can make a big difference in the lives of others.”

“It’s easy to say that Nokia was caught by surprise, but that’s not true,” Siilasmaa insists, noting

Guatemala serves as PepsiCo’s regional hub,

that Nokia “was very early with all the technolo-

where roughly half of the 6,000-plus people that

gies that ended up disrupting us. We can’t say we

PepsiCo employs in Central America are based.

didn’t foresee all this. We did; we just didn’t act.”

As PepsiCo’s Daniel Moisan told a Guatemalan newspaper recently, “You always have to think

Taking decisive action is one of the keys to surviv-

about the long term.” If you only manage thinking

ing today’s geopolitical turbulence. And it’s not just

about what may be expedient in the short term,

technological innovation and shifting consumer

“in the end that may take you to a place you don’t

10 | IESE Business School Insight | Winter 2018


What effect will Brexit have on investment?

want to go. With the long term, there’s no conflict between the social agenda and the business agenda. We have to think more about what’s coming, about what’s best for the future.”

While it may take a few years for the real impact of Brexit to reveal its true

Such thinking reveals an alternative way of tack-

effect, indicators so far predict that

ling perceived global problems. You can either re-

the attractiveness of the U.K. for ven-

treat, or you can follow Narasimhan’s stated mot-

ture capital and private equity inves-

to of “building, developing and learning,” which

tors is going to take a hit. Assuming

he explains means embracing new opportunities;

U.K. GDP growth of 1 percent below

recognizing the impact of your actions on others

what it would be without Brexit, a 20

and taking that responsibility seriously; and im-

percent haircut on U.K. capital market

proving yourself by, for example, learning anoth-

depth, and a 2 percent increase in

er language, such as Spanish, as Narasimhan has

U.K. unemployment compared with

committed himself to doing. In short, “it’s the ex-

what it would be without Brexit, the

perience of being out there and observing what’s

U.K. drops four positions from second

happening in the world.”

place, according to IESE’s ranking. Admittedly, the U.K. could adopt

Beware the globaloney

In observing, make sure you get your facts right.

measures to improve investment

This is a point that IESE’s Pankaj Ghemawat has

conditions between now and the

repeatedly stressed. “Don’t let the debate about

official withdrawal date of March 29,

globalization turn into guesswork. Study the data,”

2019. Still, a future loss of position

he writes. “Much of the rhetoric around globaliza-

seems inevitable.

tion has been hyperbolic, so the reactions we are now seeing need to be put into proper perspec-

RANK

COUNTRY

1

United States

2 3

2018 POSITION

4 5 6 7 8 9 10

SCORE

100

Canada

92.6

Hong Kong

91.2

tive. Before jumping on the bandwagon and pulling up the drawbridge, business leaders should make sure they have an accurate picture of what’s actually happening in the world today.”

Japan

91.2

In his article “Globalization Under Fire: How

Singapore

90.7

Should Leaders Respond?” Ghemawat presents

United Kingdom

90.6

convincing evidence that many of the claims on

Australia

90.2

which leaders are basing some drastic decisions –

Germany

87.7

from restricting immigration to repatriating busi-

New Zealand

87.2

ness activities – are simply unfounded, or what

Denmark

84.3

he calls “globaloney.” The ills of globalization were never as bad as some people made them out to

source:

2018 Venture Capital and Private Equity Country Attractiveness Index prepared by Alexander Groh, Karsten Lieser, Markus Biesinger and IESE professor Heinrich Liechtenstein.

more info:

be. And certain immutable “laws of globalization,” such as two countries sharing a common culture, language or border, will continue to be decisive

http://blog.iese.edu/vcpeindex

Winter 2018 | IESE Business School Insight | 11


REPORT

Global uncertainty

Many of the claims on which leaders are basing some drastic decisions are unfounded

However, Ghemawat adds, “Closing borders does nothing to prepare a country to deal with automation and technological progress, which are the bigger threats to jobs than globalization. My research suggests that more international openness, connectedness and integration, coupled with domestic policies that remedy the side effects, would lead to more prosperity and well-being overall.”

A blend of global and local On a practical, managerial level, much of what we

factors that condition international business ac-

see and discuss as globalization isn’t, strictly speak-

tivity, regardless of the politics of the day.

ing. “A lot of what we see today is really a blend of global and local,” says PepsiCo’s Narasimhan. “At the

Citing data he helped collect for the last DHL

end of the day, we are local players in 200 countries

Global Connectedness Index (www.dhl.com/gci),

around the world. So, we need that local face. We

Ghemawat writes: “It seems odd to blame global-

need to be Nigerian in Nigeria, Kenyan in Kenya,

ization for the high levels of inequality in the U.S.

Peruvian in Peru, Brazilian in Brazil. We really have

economy. Compare the U.S. with the Netherlands,

to find a way for us to ensure that we represent not

the most globally connected country according to

just global but also local, which requires getting very

our index. The Netherlands has a trade-to-GDP

deep in terms of what we need in that country.”

ratio six times that of the U.S., yet the Dutch still manage to preserve a more reasonable income

In this regard, Narasimhan seems to be describing

distribution. What’s going on? I’d say that domes-

one of three time-tested strategies identified by

tic policy is the primary driver of distributional

Ghemawat for a global company to boost revenue

outcomes within countries. And even if globaliza-

and market share: adaptation of your products and

tion were to blame, it doesn’t follow that protec-

services to local tastes and needs. (Aggregation and

tionism would be a better or less expensive solu-

arbitrage are two other strategies.)

tion to address economic inequality.” “In order for us to compete in a place like China,”

This is not to say that income inequality isn’t real

Narasimhan explains, “first we have great Chinese

or that business leaders don’t have to pay atten-

talent that powers our business, but also local part-

tion to the anger that’s feeding anti-globalization

ners who help us work through local ecosystems to

sentiment. “A large swath of the population in ad-

be relevant in the many Chinese sub-geographies

vanced economies fears getting left behind. At the

beyond Shanghai and Beijing. Consumers do like

same time, corporate profits are running at historic

strong global brands that communicate quality but

highs. Clearly there are some distributional issues

you can’t just be a ‘global’ global brand. Some of our

that need to be fixed. This requires policy changes

advertising is extremely Chinese and appeals to the

related to government safety nets, the minimum

Chinese consumer in ways that are very relevant to

wage, taxation and job retraining programs.”

their culture and how they live.”

12 | IESE Business School Insight | Winter 2018


A global strategy framework According to Pankaj Ghemawat, the right strategy is often a mix of three strategies, depending on industry conditions, competitive factors, firm capabilities and organizational structure.

Adaptation

Aggregation

Arbitrage

according to local requirements or

scope by creating regional or global

national or regional markets; e.g.,

preferences.

efficiencies; e.g., standardizing a

leveraging lower labor costs or

portion of the value proposition, or

better tax incentives in one country

grouping together development and

versus another, as is done through

production processes.

outsourcing or offshoring.

Create value by changing your offer

Achieve economies of scale or

Exploit the differences between

Winter 2018 | IESE Business School Insight | 13


REPORT

Global uncertainty

Managing in the midst of global uncertainty

In addition to being a paranoid optimist, Risto Siilasmaa offers these tips for managing in today’s climate. 1. BEWARE OF THE TOXICITY OF SUCCESS

2. TRY TO MEASURE IT

Metrics and KPIs create a common vocabulary, so you can talk about the issues openly.

Be careful if you start to focus on secondary topics rather than the core of your competitiveness. What are your greatest assets? What are your customers thinking? Spending less time on those topics should be a red flag.

3.THINK LONG TERM

Don’t fall into the trap of just putting out fires. Stop to think, what does this mean? What are the actual big things that I should be worried about?

4. ALWAYS HAVE ALTERNATIVES

If you only have one plan, nobody wants to give you bad news about it, because then you’ll have nothing left. But if you have five plans, it’s only one of five.

credit :

Juan Ude

14 | IESE Business School Insight | Winter 2018

5. DON’T BE CAPTIVE TO ROLES

Can the CEO be challenged? It’s so important to be able to challenge everybody, with respect, in a trusting environment.


“You’ve got to find that appropriate balance (be-

Ever since the ’80s when companies began adopt-

tween local and global),” he stresses. “This is certain-

ing lean approaches to inventory management to

ly one of the big things we’re keeping our eye on.”

boost efficiency and reduce waste, a just-in-time logic has taken hold across many areas of man-

As the Executive Board member responsible for

agement. At times this logic may manifest itself in

SAP’s Global Customer Operations in Europe, Af-

less helpful ways: a short-term bias in manageri-

rica, Middle East and China, Adaire Fox-Martin

al decision-making, quarterly capitalism, reduced

describes how SAP structures things both locally

CEO tenures, and the reduction or elimination of

and globally. “It’s important that each geography

country-level managers, and with that, the loss of

predominantly features local talent. The team

invaluable local market insights. Consequently,

must reflect the community they serve. That team

today’s geopolitical climate – where global supply

needs to take an element of corporate strategy

chains and freedom of movement are suddenly be-

and then decide how to localize the corporate pri-

ing disrupted – may come as a shock to the system.

orities in a locally relevant context.” To minimize the fallout, traditional strategic planBut it’s not just what happens at the local level:

ning is not enough, Rosenberg says. All too often,

“People also want to understand what their peers

strategy development is reduced to an annual ex-

across geographies are doing to streamline busi-

ercise dictated by urgent operational concerns.

ness, digitalize a process or transform customer

Or it might get outsourced to a consulting firm,

engagement.”

whose recommendations are treated as additional “food for thought” on top of a strategic direc-

This is where the cross-pollination or aggregation

tion already decided. Frequently missing is any

of know-how “really adds value for everybody,”

profound reflection on management’s and the

Fox-Martin believes. “The global sharing process

board’s assumptions about the current state and

and the thought leadership that we bring in speak

future direction of the world.

to what our customers would like to learn from us. We always do it in a context of the jurisdiction

As such, Rosenberg recommends scenario plan-

in which we operate. Even though global, for SAP

ning – not to be confused with forecasting. “Fore-

deep local relevancy is imperative.”

casting can be an outstanding tool for projecting

Scenario planning

demand in relatively stable environments,” he says. “But when it comes to strategic planning,

Having this deep (local) and wide (global) expertise

forecasting is woefully lacking. For proof, look no

is vital for detecting signals in the market that might

further than the failure of the business communi-

have major ramifications for your business. IESE’s

ty to foresee Brexit or Trump’s election.”

Mike Rosenberg has written extensively about this aspect in his book, Strategy and Geopolitics: Under-

Siilasmaa describes how scenario planning helped

standing Global Complexity in a Turbulent World.

the board bring Nokia back from the brink of

Winter 2018 | IESE Business School Insight | 15


REPORT

Global uncertainty

Deep (local) and wide (global) expertise is vital for detecting signals in the market that might have major ramifications

bankruptcy: “On the old board, if we saw the future as a dark, unknown landscape, we’d look for one well-lit path and that would become the official plan. But when that plan failed time after time, we realized that the well-lit path was the one not to follow – we’d have to go outside the path. With scenario planning, we identified various ways that we could go forward; the dark landscape was crisscrossed by several paths. And even if we didn’t walk down any of those paths exactly, we could go close to some of them and see what the terrain was like.

“The global sharing process and the thought leadership that we bring in speak to what our customers would like to learn from us. We always do it in a context of the jurisdiction in which we operate. Even though global, for SAP deep local relevancy is imperative.” Adaire Fox-Martin

SAP Executive Board member responsible for

Global Customer Operations in Europe, Africa, Middle East and China credit :

Juan Ude

16 | IESE Business School Insight | Winter 2018


Global talent by numbers Culturally intelligent leaders

It meant thinking and talking about the worst outcomes, and preparing for them.” He calls this “paranoid optimism” – which forms part of the title of his new book on Transforming Nokia: The Power of Paranoid Optimism to Lead Through Colossal Change. In it, he details the company’s remarkable reinvention as a leading player in the global wireless market. “Paranoia actually creates a reason to be optimistic,” he explains. “Whenever you’re making a major decision, you should always appoint a Red Team or a Cassandra who has the right to say negative things and the duty to find the holes in the logic. It’s a good practice. At the same time, because you’re taking actions to preempt and prevent the worst outcomes, you can be optimistic that you’ll achieve some good outcomes.” Doing this is also a good means of making sure

AXA surveyed employers in eight countries on the need for a globally mobile workforce. The conclusion? More, not less, globally proficient talent is needed.

63

“To build and manage global supply chains capable of weathering even the most turbulent geopolitical storms, companies need to take big steps in their people management,” says Rosenberg. In particular, it’s about recruiting, training and developing people with different backgrounds, not just those with the requisite business skills but also people

%

with liberal arts backgrounds, versed in history, po-

saw it as important

Ghemawat writes: “Firms should strive to cultivate

35% saw it as critical

litical science or Asian and Middle Eastern studies, for example.

a cosmopolitan corporate culture that can serve as connective tissue across a far-flung corporation. Partly it’s about formal culture-building activities, but it’s also about how you recruit, assemble teams, manage diversity internally, support specific initiatives and side projects, and encourage mobility (not just in terms of jobs, but traveling, living and working abroad). Education is a lever for boosting

that bad news reaches the right ears. One of the

cosmopolitanism both at the corporate and the

problems at Nokia, he explains, “was that bad news

societal levels. Multiple studies have shown that

didn’t flow to the top. People were afraid to deliver bad news. The top management didn’t know where the fires were burning or whether there were any fires at all. And the board definitely didn’t know.” Siilasmaa adheres to this new twist on an old re-

The desire to work abroad has fallen from 64% in 2014 to 57% in 2018, according to a Boston Consulting Group survey of 366,000 workers in 197 countries.

levels of nationalism and suspicion of outsiders are higher the lower the levels of education in a country. Given this, it makes sense to delve into educational content that can support a more cosmopolitan outlook.”

frain: “No news is bad news, bad news is good

The more divided the world becomes, the more we

news, and good news is no news.” He unpacks what

need culturally and emotionally intelligent busi-

this means: “No news is the worst kind: you’re shut

ness leaders able to build bridges of understand-

out. And bad news is actually good news, so when

ing. B. Sebastian Reiche, head of the Managing

somebody comes to you with bad news, be careful that you don’t let your frustrations show, because next time that person may think twice before telling you. Instead say, ‘Thank you for coming to me. Now we can think about what to do.’ And if you’re

decline in those willing to go abroad

People in Organizations Department at IESE, has researched and written about the need for more culturally sensitive leaders able to navigate the complexities of our increasingly polarized world.

doing things right and getting good results, that

SAP’s Fox-Martin is a good example. Original-

really shouldn’t be news at all.”

ly from Dublin, she began her career in London

Winter 2018 | IESE Business School Insight | 17


REPORT

Global uncertainty

before moving to Australia. She worked for nearly

your customer’s shoes, but in the shoes of your

two decades in Asia before moving to Germany in

customer’s customer, and understand how that

2017 to take up her current role. “These cross-cul-

person is experiencing the business. And then,

tural experiences give you a completely different

based on that experience, bring insights into

lens,” she says.

your conversations with the customer as a way of helping them achieve a better outcome. That,

“There might be things that you don’t like about

I believe, will become a differentiating element

country A, B or C, but it’s important to focus on

going forward.”

the positive elements of each society. I’ve always adopted a position of being very observant, lis-

All of this requires more executive education and

tening more than I would speak and trying to

training, not just on specific cultures and languag-

understand the nuances. Because if there’s an im-

es, but increasingly to “help people become more

plementation of a strategy that you want to drive

conscious about their own cultural identities,” says

globally, you have to be culturally aware and a lot

Reiche. In research conducted with IESE colleague

more sensitive to understanding the local ele-

Yih-teen Lee et al., he suggested that cross-cultur-

ments that are essential to making that strategy

al training could include “modules that help peo-

effective in given markets.”

ple make sense of ‘who they are culturally,’ seeing alternative ways in which identity can be experi-

The more divided the world becomes, the more we need culturally and emotionally intelligent business leaders able to build bridges of understanding

enced, and understanding the impact of context and upbringing on their own identity development, so that individuals can develop and display desirable identity patterns in multicultural teams and in global work more broadly.” Issues of identity have moved to the fore, something that the political scientist Francis Fukuyama discusses in his latest book Identity: The Demand for Dignity and the Politics of Resentment. “For the most part, 20th century politics was defined by economic issues. Politics today, however, is defined less by economic or ideological concerns than by questions of identity,” he writes in Foreign Affairs. “All over the world, political leaders have mobilized followers around the idea that their dignity has been affronted and must be restored. (This) resentment over indignities has become a

Leading in the world today, perhaps more than

powerful force… Identity politics is no longer a

ever, requires a high degree of empathy. “I

minor phenomenon… Instead, identity politics

think an empathetic approach is essential,” says

has become a master concept that explains much

Fox-Martin, “to be able to put yourself, not just in

of what is going on in global affairs.”

18 | IESE Business School Insight | Winter 2018


Given these undercurrents, it’s paramount that executives are sensitized to the delicate dynamics inherent in multicultural teams and global work environments. Reiche stresses this point in Readings and Cases in International Human Resource Management: “One of the greatest problems is the lack of a global perspective on the part of a firm’s managerial cadre. As a member of one culture, the manager tends to see life from that perspective, to judge events from that perspective, and to make decisions based on that perspective. In an increasingly global business environment, such a perspective breeds failure.” What’s needed are more leaders prepared to take a cooperative rather than me-first approach to help rebuild the foundations of society. In this effort, global businesses should take the lead. This is a point that Klaus Schwab, founder and executive chairman of the World Economic Forum, made at Davos 2018. The world is experiencing a social crisis “every bit as threatening to the health of our future as the financial crisis was a decade ago,” he

Where will you be in five years? PepsiCo’s Laxman Narasimhan says the answer to this question greatly depends on the people you bring with you, paying attention to these five keys:

1. Unrelenting curiosity

Not just being curious enough to

detect patterns across countries, but unrelenting in going beneath the surface to find the deeper reality.

2. Humility

Knowing which of the 10 plates you’re spinning to let drop, and when inaction is, in fact, action.

3. Communication

Particularly the way the new genera-

stated. “If the system is broken and the social con-

tion of workers express themselves,

tract is failing, business leaders around the world

including nonverbal forms.

must play a leading role in repairing them.” Schwab issued this rallying cry: “Over the past de-

4. Balance

Not just between work/life but

cade, the concerted international effort to deliv-

increasingly between performance

er quantitative easing to our economies has been

and purpose.

successful in rescuing us from the worst excesses (of the global financial crisis). This time, to create a shared future in a fractured world, we must focus

5. Resilience

Recognizing “the beauty of strength”

on the qualitative impact of our decisions. What we

that comes from leading in turbulent

truly and urgently need is a new social contract that

environments.

provides real ‘qualitative easing’ for all those who have been left behind. We have it in our power to

credit :

Juan Ude

address the perils of a fractured world, but we will succeed only if we join our forces and work together – as joint stakeholders in our global society.”

Winter 2018 | IESE Business School Insight | 19


REPORT

Global uncertainty

Further reading

What’s needed are more leaders prepared to take a cooperative rather than me-first approach to help rebuild the foundations of society As Reiche has written in his blog on cross-cultural

Read the executive dossier “Globalization Backlash: How to Stay Grounded” in IESE Insight Issue 35, Fourth Quarter 2017, containing the articles “Globalization Under Fire: How Should Leaders Respond?” by Pankaj Ghemawat, “3 Keys to Shockproof Your Global Supply Chain” by Mike Rosenberg, and “Tips for Nurturing Global Leadership Talent” by B. Sebastian Reiche. Available from www.iesepublishing.com.

management and global leadership, the backlash

C

we’re experiencing today is not so much a fail-

“Navigating Between Home, Host and

ure of globalization as a failure of leadership – of

Global: Consequences of Multicultur-

failing to bring people along with us as our busi-

al Team Members’ Identity Config-

nesses change and evolve with the times. Business

urations” by Yih-Teen Lee, Aline D.

MY

leaders must do better.

Masuda, Xin Fu and B. Sebastian

CY

Reiche. Academy of Management It seems obvious that closing borders is not a re-

Discoveries 4, no. 2 (2018): 180-201.

cannot be rolled back, it’s just as obvious that it

Readings and Cases in Internation-

does need a course correction. “Hence, leaders

al Human Resource Management:

need to work together to distribute the benefits of

Sixth Edition, edited by B. Sebastian

globalization more equally and deal more explic-

Reiche, Günter K. Stahl, Mark E. Men-

itly with the costs of globalization,” Reiche says.

denhall and Gary R. Oddou (Rout-

“It starts by regaining people’s trust, restoring a

ledge/Taylor & Francis, 2017).

positive outlook and creating a future vision that Transforming Nokia: The Power of Paranoid Optimism to Lead Through Colossal Change by Risto Siilasmaa (McGraw-Hill, 2019). www.paranoid-optimist.com.

20 | IESE Business School Insight | Winter 2018

Y

CM

CMY

K

alistic, long-term solution. Yet, while globalization

includes everyone.”

M


C

M

Y

CM

MY

CY

CMY

K

Winter 2018 | IESE Business School Insight | 21


REPORT

Nitin Nohria

Global uncertainty

Dean of Harvard Business School since 2010. Co-author or co-editor of 16 books, including the Handbook of Leadership Theory and Practice with Rakesh Khurana.


The 21 century will be a multipolar century st

P

eople have said that the 19th century was the European century, the 20th century was the American century and the 21st century will be the Asian century. Harvard Business School Dean Nitin Nohria doesn’t buy into that. He

thinks the 21st century will be “a multipolar century.” Here he comments on globalization’s accomplishments and short-

comings, and calls upon business leaders to focus their energies on coming up with entrepreneurial solutions that offer hope and a future to those who feel left behind. What do you mean by a “multipolar” world? It is a world in which multiple economic powers will end up being simultaneously important. This is very different from a world in which the Western economies used to dominate. How do we get ready for a world like that? First and foremost, we all need to have intellectual humility. If we only focus on American or European management practices, we aren’t preparing ourselves for innovation that is coming from China, India, Brazil, Africa, and other parts of the world that are fast emerging on the global stage. We need to be much better at sensing and embracing innovation that can occur anywhere in this changing world.

credit :

Quim Roser Winter 2018 | IESE Business School Insight | 23


REPORT

Global uncertainty

The global economic crisis and the rise of technology and automation have opened up fault lines in the success story of globalization. Is erecting barriers to protect your own labor the answer to the problems of inequality we’re experiencing? I don’t think that encouraging protectionism will help. The

behind by globalization. Moreover, they now are facing a

forces of technology and globalization are too strong and

future with AI and machine learning that looks even worse.

too beneficial to be disrupted in this manner. We need to re-

We have to find a way of presenting these individuals with a

member the lessons from economic theory and economic

more hopeful picture.

history that trade barriers will only make things worse. We will have to ask, “Do we have a responsibility to provide You can’t protect workers from global competition without

a living wage for our employees?” Because in the absence of

making the nation as a whole worse off. If someone else is

holding our feet to the fire and saying, “We’re going to pro-

going to be more productive or cost competitive, there’s no

vide a living wage,” it’s easier to say, “I’m just going to shift

reason for anyone to pay higher prices for products that are

production offshore. I’m going to have a call center and do all

made (and can be bought) much more cheaply than if they

my manufacturing outside of Europe or the United States.”

were made locally. The real problem is that we haven’t seen

We have to be more imaginative than that.

sufficient productivity growth in the advanced economies. That is the issue we should be trying to address.

What do you mean by imaginative? Think of Henry Ford. He created the assembly line at Ford

But if labor keeps getting a declining share of the total

Motor Company. He also raised the minimum wage of his

pie of economic opportunity, won’t we end up with a se-

company’s workers significantly. He did so voluntarily and

ries of political concerns that will actually constrain the

then found a way to make sure that the wage increase was

license that business needs to operate?

sustainable by matching it with growing productivity and the

Many are beginning to ask this very important question.

rising demand for cars.

We can’t ignore those who at one point enjoyed growing prosperity but now feel they have stagnated and been left

That’s entrepreneurship. We tend to think of entrepreneurship as creating a new company, but entrepreneurship also is creating a new business model or a new management practice.

“The societal problems we’re facing today require creativity and imagination”

What might such an innovation look like today? I’m not sure, but we have to find a business model that allows us to increase productivity so that we can grow wages for labor in the advanced economies – particularly labor that has low and middle skills. So, what is it we can do? We need to start analyzing jobs not in terms of starting salaries but in terms of their advancement potential. Much of what we’re teaching today may get people placed in jobs but doesn’t allow them to make upward progress. We need to start creating jobs and helping people develop the relevant skills over time that provide greater prospects for upward mobility. We also need to start asking how we can help people who feel stuck today feel more hopeful. We must help the people who

24 | IESE Business School Insight | Winter 2018


“We must help the people who feel left behind find a path toward a future in which they can see a rising tide for themselves”

Southwire operating in one of the industrial towns in the heartland of the United States. It has actively partnered with a local community college to develop the skills of the local workforce – to make these individuals more employable in its own plants and in other companies. Southwire’s investment in reskilling the workforce in its local economy (rather than just moving to another location) has led to an economic revival that makes everyone in the region feel more hopeful. We have begun to study and write cases on many other such examples of local economic revitalization. We’re trying to determine to what extent these case studies are generalizable. Are partnerships between community colleges and companies a way to regenerate middle skills, or is this a limited solution? How many other parts of the Unit-

feel left behind find a path toward a future in which they can

ed States might this work in? What models might work in

see a rising tide for themselves.

other countries?

This is the dark side of the globalization story. Not every-

We need to scan the world to see what experiments compa-

one has perceived the benefits. Is this something that

nies are running. I’m optimistic that the inherent creativity

our political leaders understand?

of business leaders – and the role of business schools in tap-

No, I don’t think so, otherwise we wouldn’t have been sur-

ping into that creativity to study and spread it – can gener-

prised by recent election results in so many different coun-

ate answers to many of today’s most pressing economic and

tries. In all these countries, there is a significant group of

political challenges.

people who feel that globalization made them worse off and less hopeful about their futures. Now that group has started to

What’s your recommendation for business leaders?

exercise its political voice – and not just in the United States.

Business leaders need to recognize that they have a real stake

We’re seeing similar reactions with Brexit, in recent European

in solving the thorniest social problems. They can no longer

elections, in Brazil, and even in some Asian countries.

leave these problems to governments or civic organizations. Indeed, they must take the lead to actively partner with other

It’s not enough to point to the aggregate benefits of global-

institutions to help solve these social problems.

ization – to the hundreds of millions of people around the world whose standard of living has been raised in the last

The societal problems we’re facing today require creativity

three decades. That means nothing to the individual who no

and imagination; they’re neither unsolvable nor someone

longer has a job and has seen his or her once thriving com-

else’s responsibility. We must view them as part of our jobs

munity devastated. Now these individuals are exercising

and apply our utmost energies to overcoming them.

their political voice in every part of the world and we had better pay attention. Do you see any signs of hope? Yes, the most hopeful signs come from innovative leaders and their companies. For example, there’s a company called

source:

From “Pressing Issues in Today’s World,” one of a series of events organized to commemorate the 60th anniversary of IESE, in which Nitin Nohria, IESE Dean Franz Heukamp and Núria Mas, head of the Economics Department at IESE, discussed the role of companies and top executives in facing challenges such as globalization and inequality.

Winter 2018 | IESE Business School Insight | 25


REPORT

REPORT

Global uncertainty

Global Competitiveness

WEF: Openness must be “Openness must be compleme complemented by inclusion WORLD ECONOMIC FORUM

To promote innovation, market efficiency and economic growth, the WEF cites key indicators of openness – including low tariffs, a lack of trade barriers and the ease of hiring foreign labor. Yet, high tariffs, trade barriers and restrictions on foreign labor are currently being adopted by some governments to tackle the adverse effects of globalization – often, ironically, in the name of national competitiveness. The WEF acknowledges that globalization has coincided with growing income inequality within some countries, but argues that one doesn’t necessitate the other. Openness and competitiveness can and should coexist with strategic measures to make sure certain workers are not left behind.

The WEF Global Competitiveness Report 2018 and The Inclusive Development Index 2018. IESE’s International Center for Competitiveness provides input on the situation in Spain for preparation of the annual report in collaboration with the World Economic Forum.

COMPETITIVENESS

Global Competitiveness Index 2018.

Global Median

SCORE (0-100)

1

83.5

Singapore

2

82.8

Germany

3

82.6

Switzerland

4

82.5

Japan

5

82.4

Netherlands

6

82.3

Hong Kong

7

82.0

United Kingdom

8

81.7

Sweden

9

80.6

Denmark

10

80.3

Finland

11

79.9

Canada

12

79.3

Taiwan

13

78.9

Australia

14

78.8

South Korea

15

78.2

Norway

16

78.0

France

17

77.5

New Zealand

18

76.6

Luxembourg

19

76.6

Israel

20 21

76.6

Belgium

76.3

Austria

22

75.7

Ireland

23

74.5

Iceland

24

74.4

Malaysia

25

74.2

Spain

26

73.4

UAE

27

72.6

China

28

Czech Republic

29

Qatar

30

71.2 71.0 0

20

40

60

RANK

United States

85.6

sources:

26 | IESE Business School Insight | Winter 2018

ECONOMY

80

100


The WEF report insists there’s “no inherent trade-off between

ented by inclusion”

competitiveness and inclusion... it is possible to be pro-growth and inclusive at the same time.” With that in mind, the WEF launched a

new metric, the Inclusive Development Index, to measure countries’ progress on sustained economic inclusion.

INCLUSION

Inclusive Development Index 2018.

Although 16th in global competitiveness, Norway is the best performing advanced economy in terms of making broad-based progress in living standards.

Australia, 14th in global competitiveness but 9th in inclusion, is the only non-European economy in the top 10 for inclusion.

The most globally competitive economy, the United States, and the United Kingdom don’t even make the top 10 for inclusion.

RANK

ECONOMY*

SCORE (1-7)

1

Norway

6.08

2

Iceland

6.07

3

Luxembourg

6.07

4

Switzerland

6.05 Switzerland, the

5

Denmark

5.81

6

Sweden

5.76

7

Netherlands

8

Ireland

5.44

9

Australia

5.36

10

Austria

5.35

11

Finland

5.33

12

Germany

5.27

13

New Zealand

5.25

14

Belgium

5.14

15

Czech Republic

5.09

16

South Korea

5.09

17

Canada

5.06

Netherlands, Sweden and Denmark make the top 10 in both rankings, for competitiveness and inclusion.

5.61

18

France

5.05

19

Slovenia

4.93

20

Slovakia

4.90

21

United Kingdom

4.89 4.74

22

Estonia

23

United States

4.60

24

Japan

4.53

25

Israel

4.51

26

Spain

4.40

27

Italy

4.31

28

Portugal

29

Greece

Small European economies dominate the inclusion index.

UK wealth inequality has been increasing over the past five years.

3.97 3.70

N/A Singapore

N/A 0

7

*ADVANCED ECONOMIES


REPORT

Global uncertainty

Cross-border terrorism and tensions in the East, not to mention the United States’ changing priorities and growing isolationism, have put regional defense issues higher on the European agenda. “Europe must assume greater responsibility for its own security and defense,� Jorge Domecq asserts. Here are four action items to build a stronger European defense.


Quim Roser

1. Integrate and collaborate

“The current fragmentation of the European defense indus-

credit :

try and market is a big problem,” Domecq says. For example, while the U.S. military has just one type of frigate warship, one type of main battle tank and one type of armored vehicle, European armed forces use a large number of different frigates, tanks and armored vehicles. “We (in Europe) spent a little more than a third of what the U.S. spent (in 2017), but, according to some estimates, on the ground, we’re only capable of deploying about 15 percent of what the U.S. can deploy,” Domecq explains. Which is why the issue of more cooperation in Europe “is an existential issue,” in Domecq’s view. “If Europe wants to be a global actor going forward, we have to have greater defense integration.” Nevertheless, Domecq clarifies that he is totally against industrial consolidation in Europe by decree. “It will never work,” he says. Success happens “when member states come together, agree on capability priorities and military requirements, and then turn to the industry to develop them.” For a positive example of this kind of collaboration, Domecq cites the Meteor missile. “At present, there is one European company involving six countries with missile

Jorge Domecq

European Defense Agency Chief Executive since 2015. Previously, he served as Ambassador of Spain to the Philippines and director of the Private Office of the NATO Secretary General, among other roles.


REPORT

Global uncertainty

defense technologies. That has ensured that Europe has a third of the global share of the business of building missiles. If they hadn’t cooperated, we’d be out of business.” Now, as a further means to deepen defense cooperation, 25 EU member states have signed up to the Permanent Structured Cooperation (PESCO). Only Denmark, Malta and the United Kingdom have decided to opt out. Launched in December 2017, PESCO is a key step forward because of the binding nature of the commitments made by the partici-

“In defense, we spend too much on personnel and too little on innovation”

pating countries to align and synchronize defense plans and

missile collaborations. By contrast, there have been “no new

maximize the effectiveness of spending. Countries enter

major collaborative defense programs in the last decade.”

into PESCO projects and the attached commitments voluntarily but, “like in a marriage,” with an ambition to respect the

The result is “lower investment levels and fewer collaborative

commitments and make it a success.

projects.” Meanwhile, European armed forces spend almost

2. Keep pace with technology

“New emergent technologies will change how we organize defense and its industry,” says Domecq, citing these examples:

50 percent of their budgets on personnel. “In short, we spend too much on personnel and too little on innovation.”

4. Open up to nontraditional players

In many cases, SMEs and nontraditional defense companies

C

M

• Artificial intelligence will be incorporated into both mil-

“are the source of new innovative research and cutting-edge

Y

itary and commercial unmanned and autonomous sys-

technologies.” This makes it “more urgent than ever to draw on

CM

tems, which could, in the future, make them capable of

and attract SMEs and nontraditional defense companies into

MY

undertaking tasks and missions on their own.

the industrial base,” says Domecq.

• Big data can help with simulation designs and results. • 3D printing will revolutionize the way we produce tools

However, there’s hard work ahead. For defense, Domecq ex-

and parts as well as how we organize logistics by provid-

plains, when you’re in a warfare environment, you can’t af-

ing parts on site and on demand.

ford to have a faulty switch: “It has to work.” That can mean

3. Invest more in innovation

onerous trials and lead-times that go against the usual frenetic rhythm of startups. Moreover, will the same companies

“Research and technology (R&T) are key for any modern de-

on the cutting edge today still be around to help with updates

fense,” says Domecq, noting that this requires investment and

and support in 20 years’ time? Another issue is the global na-

prioritization. A surprising fact is that, while overall defense

ture of today’s supply chains, where some links in the chain

spending is increasing, total defense-related R&T expenditure

might not comply with all security requirements.

fell by 22 percent from 2006 to 2016. (Meanwhile, total R&D spending is down 6.5 percent over the same time period.)

“Innovation can bring a lot, but there are many questions to be answered,” he says. What the European Defense Agency

Looping back to his earlier point about collaboration, Domecq

needs to do, in his view, is “engage with European industry,

laments that “in 2015, not even 8 percent of Europe’s defense

at all levels, to support innovation.”

R&T was spent collaboratively. This is the lowest figure in a decade.” (On a positive note: in 2016, Spain spent almost a

At this crossroads, Domecq believes that “if we can make Eu-

third of its defense R&T in collaborative projects.)

ropean cooperation the norm, based on agreed priorities, sufficient funding and innovative technologies, then there will be

It wasn’t always this way. The decades from the 1960s to the

a real step-change toward a European defense union.”

1990s saw various countries collaborating in many programs, including the Panavia Tornado and Eurofighter Typhoon combat aircraft as well as several successful helicopter and 30 | IESE Business School Insight | Winter 2018

source:

Based on remarks made by Jorge Domecq during a visit to IESE’s Barcelona campus in 2018.

CY

CMY

K


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REPORT

Global uncertainty

PEACE

Good for business

Economic performance and peace are mutually reinforcing: better economic performance assists in building peace, and vice versa.

The global state of peace The 2018 Global Peace Index (GPI) shows the world is less peaceful today than at any time in the last decade. For a country to move up the ranking, there must have been improvements across a broad range of pillars, whereas a fall could be triggered by just a few factors,

Score Change

Rank Country

Score Change

Rank Country

Score Change

1096

-

79. GREECE

2020

-

148. NIGERIA

2873

+1

NEW ZEALAND

1192

-

80. BURKINA FASO

2029

+14

149. TURKEY

2898

-1

3.

AUSTRIA

1274

+1

81. CUBA

2037

+8

4.

PORTUGAL

1318

-1

82. GUYANA

2043

-

83. ANGOLA

2048

+9

84. NEPAL

2053

+4

86. MOZAMBIQUE

2056

-6

87. MACEDONIA (FYR) 2058

+16

5.

DENMARK

1353

-

6.

CANADA

1372

-

7.

CZECH REPUBLIC 1381

8.

SINGAPORE

1382

9.

JAPAN

+3

1391

-1

10. IRELAND

1393

+2

14. SWEDEN

1502

+3

88. HAITI

2064

-1

90. JAMAICA

2068

+3

122. MYANMAR

2302

-15

123. KENYA

15. FINLAND

1506

2354

+3

16. NORWAY

1519

-

124. ZIMBABWE

2326

-1

17. GERMANY

1531

-

125. SOUTH AFRICA

2328

-1

18. HUNGARY

1531

-2

127. MAURITANIA

2355

-

19. BHUTAN

1545

+5

128. NIGER

2359

-2

20. MAURITIUS

1548

-1

129. SAUDI ARABIA

2417

+1

21. BELGIUM

1560

-

130. BAHRAIN

2437

+2

22. SLOVAKIA

1568

+3

131. IRAN

2439

-2

23. NETHERLANDS

1574

-1

132. AZERBAIJAN

2454

+2

32 | IESE Business School Insight | Winter 2018

VERY LOW

ICELAND

2.

MEDIUM

1.

LOW

HIGH

VERY HIGH

Rank Country

such as political unrest. Low peace countries are not necessarily places to avoid, provided they are making improvements on the pillars supporting peace. Of 163 countries ranked, we highlight 10 countries from each block, to give a snapshot of the global state of peace.

150. NORTH KOREA

2950

-

151. PAKISTAN

3079

+1

152. UKRAINE

3113

+2

153. SUDAN

3155

+2

154. RUSSIA

3160

-1

157. LIBYA

3262

+1

158. YEMEN

3305

-1

159. SOMALIA

3367

-

source: Business & Peace 2018 and Global Peace Index 2018, shared as part of the IESE Global Leadership Series “Peace: A Macroeconomic Driver,” featuring Steve Killelea, entrepreneur and founder of the Institute for Economics and Peace. Go to http://visionofhumanity.org/ indexes/global-peace-index/


Peace by numbers

Pillars of peace

71 92 IMPROVEMENTS

A robust business environment springs from a background set of eight interconnected conditions.

DETERIORATIONS

countries were more peaceful in 2018 than in 2017

countries were less peaceful in 2018 than in 2017

0.27 OVERALL AVERAGE CHANGE (%)

GPI deteriorated 0.27 percent, the fourth successive year of deterioration

1. Well-functioning government

5. High levels of human capital

2. Equitable distribution of resources

6. Acceptance of the rights of others

3. Free flow of information

7. Low levels of corruption

4. Good relations with neighbors

8. Sound business environment

Effects of peace on business More peace increases efficiency on both the supply and the demand sides. Increased trust in governance and third-party arbitration is one of the main effects on the supply side. That means greater participation of businesses and labor, and improved logistical efficiency due to reduced corruption. On the demand side, more

peace translates into reduced frequency and impact of unexpected events, and greater incentive for investing and purchasing. That’s important because, looking back over the past 70 years, per capita GDP growth was around three times higher in highly peaceful countries versus those with very low levels of peace.

Long-term growth trend for low and high peace countries

VERY HIGH HIGH LOW VERY LOW

As the graph shows, very high peace countries have sustained higher growth, with fewer and smaller fluctuations over the long term. GDP PER CAPITA GROWTH (%)

15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Average per capita GDP growth (%)

2.8 2.0 1.6 1.0


REPORT

Global uncertainty

Kate Barasz

Assistant Professor of Marketing at IESE. Visiting Assistant Professor at Harvard Business School.

Are we perceiving more polarization than there actually is?


W

hen Donald J. Trump was elected president of the United States, many people fixated on what could have motivated voters to choose him. Was it the promise to build a border wall to keep Mexicans out? Mass deportations of undocumented migrant workers? A ban on Muslims entering the country? Voters must have been swayed by his extreme views on immigration, people speculated, and therefore all Trump supporters must be racist xenophobes, they surmised. Is this generalized inference about Trump supporters accurate? Or, putting political leanings aside, might we be seeing a more basic cognitive heuristic at work? This is essentially what prompted a study by IESE’s Kate Barasz – working with Tami Kim (Darden School of Business at the University of Virginia in Charlottesville, U.S.A.) and Ioannis Evangelidis (Bocconi University in Milan, Italy) – to test cognitive biases in both political and nonpolitical contexts. In psychology, heuristics are those simple, efficient rules we tend to lean on in order to help us form judgments and make decisions regarding complex matters. Research has found that these sorts of mental crutches can produce erroneous inferences and influence broader beliefs, which makes understanding them important. For their paper, Barasz et al. designed seven studies to learn more about what they call the “value-weight heuristic” – that is, a tendency to overweight more extreme positions to arrive at quick judgments. In their first study, they looked at the assumptions that supporters of Hillary Clinton made about Trump voters, and vice versa, and considered their accuracy, just five days after the presidential election. Using Amazon’s Mechanical Turk crowdsourcing site to screen participants, 300 Clinton and Trump voters were asked about their reasons for voting and their assumptions about why others voted the way they did. The results offered initial evidence of a value-weight heuristic and its possible consequences. So, Clinton voters tended to believe that Trump’s extreme immigration policy was important in his supporters’ decision to cast their votes, yet Trump voters themselves put more weight on his economic policies, a less extreme issue. Winter 2018 | IESE Business School Insight | 35


REPORT

Global uncertainty

Ask yourself… What business positions or people have I

What’s more, Clinton voters who surmised that Trump vot-

dismissed for their apparent “extremity”?

ers put more weight on immigration viewed Trump voters less favorably overall.

Might I have made erroneous inferences about them?

Consider: if someone believes in the border wall and a Muslim ban, they may well have voted for Trump. But it’s weaker,

What additional research could I

logically speaking, to assume that if they voted for Trump, they

do to gain a deeper understanding?

must support his extreme views on immigration. This is essentially turning the tables on cause and effect. Trump voters may, in fact, care more about his infrastructure spending promises. Yet, when extreme views are in the mix, here the co-authors

the availability of jobs, family ties or other factors are less

find evidence that people have inferential blind spots.

important in Florida moves? They find, once again, a tenden-

From political climate to actual climate

cy to conflate value and weight, supporting their main finding that a value-weight heuristic is at play.

To remove politics from the equation, Barasz et al. turned to a more neutral topic: the weather. Their second study asked

Five other studies, involving more than 2,000 participants,

more than 200 participants about the climate in Fort Lauder-

corroborated the main finding that, whether it’s a political

dale, Florida, and Fort Worth, Texas, and how important that

stance or the weather, the more extreme the feature, the eas-

weather was to a hypothetical person’s decision to move there.

ier it is – and the more confident and likely we, as human beings, are – to assume we know what motivated that choice.

As expected, participants who considered the weather more extreme in either location were also likely to give it more

Why is this important? For one thing, political polarization

weight in someone’s decision to move there. Does that mean

seems to be growing, not just in the United States but all around the world. How we come to perceive others’ attitudes – and what we believe they prioritize – may contribute to our

If people infer an entire group is singularly motivated by an especially extreme or divisive policy issue, perceptions of political polarization are only likely to grow

observations of further polarization. This research suggests that the value-weight heuristic may be especially relevant and consequential where extremity, such as intense policy stances and conspicuous platform issues, can distort observers’ perceptions, regardless of party affiliation. That can render observers insensitive to other factors – in addition to or instead of – that could have motivated their choices. In sum, if people infer an entire group is singularly motivated by an especially extreme or divisive policy issue, perceptions of political polarization are only likely to grow. And the more that happens, the less likely it becomes to really understand where the other side is coming from. Making people aware of their inference blind spots or over-inference tendencies could actually help reduce political polarization. Now wouldn’t that be nice?

source: The paper “I Know Why You Voted for Trump: (Over) Inferring Motives Based on Choice,” by Kate Barasz, Tami Kim and Ioannis Evangelidis, is forthcoming in the journal Cognition.

36 | IESE Business School Insight | Winter 2018


Executive

MBA MUNICH

A challenge with purpose The Executive MBA is an intense journey of personal and professional transformation. It prepares you to face challenges in any business scenario, in any company, anywhere in the world. Give us 18 months. We will give you a lifetime of impact.

Come and experience IESE! Next Open Day: March 24, 2019, IESE Munich More information: www.iese.edu/emba/munich Email: embamuc@iese.edu Tel. +34 93 602 44 54


THE BIG PICTURE Crowdfunding

A new perspective

Crowdfunding Crowd-based funding is among the fastest growing segments in the financial industry. Which funding alternatives are available? And might one be right for you?

How it works

Crowd-based funding is among the fastest growing segments in the financial industry. Which funding alternatives are available? And might one be right for you?

%

%

How it works Entrepreneur

Moderating organization

Donors or investors

Seeks funds from the crowd to finance a project, cause or venture.

Usually a platform that provides information about funding opportunities and facilitates the contact between parties.

Provide small sums of money to collectively support their chosen project, cause or venture.

Entrepreneur

Seeks from the crowd to Types offunds crowdfunding finance a project, cause or venture. DONATION-BASED

Moderating organization

Usually a platform that provides information about funding opportunities and facilitates the contact between parties. LENDING-BASED

Donors or investors Provide small sums of money to collectively support their chosen project, cause or venture. EQUITY-BASED

Types of crowdfunding Individuals give loans, not donations, with the expectation of the Individuals make charitable

Individuals give with the expectation of getting something in return, usually in the form of REWARD-BASED goods or services rather than money. Examples: Individuals give with the Indiegogo, RocketHub, expectation of getting Kickstarter. something in return, usually in the form of goods or services rather than money. Examples: Indiegogo, RocketHub, Kickstarter.

Peer-to-Peer (P2P): (P2B): Individuals give loans, not donations, withPeer-to-Business the expectation of the Platforms match lenders and to lend to loan being paid back, with interest, whichEnables can thenpeople be re-loaned. borrowers, often for the established Potentially the most disruptive for supplanting the rolebusinesses of banks. or purpose of setting up a evenare to two co-invest with Examples: Kiva, Ripio Credit Network. There main kinds: microenterprise, depending government funds. on their preferences: Peer-to-Peer (P2P): Peer-to-Business (P2B): Platforms match lenders and Enables people to lend to borrowers, often for the established businesses or purpose of setting up a even to co-invest with microenterprise, depending government funds. Active: Lenders want on their preferences: detailed information on the borrower so they can pick who they want to invest in. Active: Lenders want Passive: Lenders detailed information indicate the levelon of risk the borrower so they they are willing to can assume pick whoand they want are to invest in. an enterprise allocated

accordingly. Passive: Lenders indicate the level of risk they are willing to assume and are allocated an enterprise accordingly.

38 | IESE Business School Insight | Winter 2018

â‚Ź

REWARD-BASED

loan being paid back, with interest, which can then be re-loaned. Potentially the most disruptive for supplanting the role of banks. LENDING-BASED Examples: Kiva, Ripio Credit Network. There are two main kinds:

â‚Ź

donations to support a good cause, with no DONATION-BASED expectation of receiving anything in return. Examples: GiveForward, Individuals make charitable FirstGiving, GoFundMe. donations to support a good cause, with no expectation of receiving anything in return. Examples: GiveForward, FirstGiving, GoFundMe.

Individuals invest in a project in return for a stake in the business, similar to EQUITY-BASED the way stock or venture capital works. Examples: AngelList, EarlyShares, Individuals invest in a Crowdcube. project in return for a stake in the business, similar to the way stock or venture capital works. Examples: AngelList, EarlyShares, Crowdcube. INITIAL COIN OFFERING (ICO) Individuals purchase shares of an enterprise in the form of a virtual currency like INITIAL COIN to gain bitcoin or ethereum OFFERING (ICO) access to deeper, more liquid secondary markets. Individuals purchase shares of an enterprise in the form of a virtual currency like bitcoin or ethereum to gain access to deeper, more liquid secondary markets.


Traditional banking vs. crowdfunding Different factors work in each one’s favor. Strong point

Weak point

Bank

Crowdfunder

Transaction value worldwide Current and predicted funds raised through crowdfunding.

Extra liquidity in market Trust Advanced technology

$11.9

Personalized services

billion

Regulated Established legal status Security Privacy protections

$5.3

Niche market

billion

Strong distribution networks Independent from existing network operators Emerging market contexts Helps unbanked poor

2018

2023

Entrepreneurial

Success factors for crowdlending For borrowers

Borrowers are more likely to win financing when:

1. They’re in the same geographic region as the lender.

2. They’re women.

For lenders

Default rates are lower when loans:

Support education, housing or personal use.

3. Their funding needs are

humanitarian (related to health, education, housing or personal use).

For non-humanitarian enterprises, borrowers are more likely to win financing: • the less they ask for. • the faster they repay it (shorter terms, regular intervals). • the better their reputation and the lower their credit risk.

Involve one person rather than a group of borrowers.

sources: “Crowdfunding Entrepreneurial or Humanitarian Needs? The Influence of Signals and Biases on Decisions” by M. Moleskis, I. Alegre and M.A. Canela. “Crowdfunding Success: The Case of Kiva.org” by M. Moleskis and M.A. Canela. “Could Crowdfunding Be Right for Your Business?” by Christian Eufinger. Statista (accessed Dec. 2018).


HACK How not to lose your head in a bidding war How much would you bid for a $20 bill if you faced competition in the auction and both the winning and losing bids had to be paid out in full? In this simulation of a real-life business scenario – like a patent race or corporate merger involving sunk costs and a bidding war – losing hurts, too. How to avoid a competitive escalation? The $20 auction game, involving 1,229 participants, revealed the following:

• Pre-setting a bidding limit, or agreeing beforehand when to exit, is simply not enough to prevent an escalation. • Managers may be experienced, but if their experiences lacked escalation, it won’t help.

• Managers with direct experience of competitive escalations fare better. • Learning from others with direct experience of competitive escalations also improves results.

There’s a hot/cold empathy gap that prevents people from anticipating how they’ll react in a hot situation when they’re feeling calm, cool and collected. Put simply, what you don’t know can hurt you. This is why past experience and vicarious learning are so important, so you can face the competition prepared.

“Competitive Escalation and Interventions,” by IESE’s Sebastian Hafenbrädl with Jan K. Woike, appears in the Journal of Behavioral Decision Making.

40 | IESE Business School Insight | Winter 2018


Flexibility for the sandwich generation

Work like everyone is watching

How family-supportive is your organizational culture? Personalized

toring? New research shows

work arrangements could be the answer for members of the so-

high-status workers may devote

called “sandwich generation” – middle-aged employees who find

less effort to tasks that aren’t

themselves caught between taking care of children as well as aging

visible to others. Give them an

parents. But to what extent do supervisors’ own caregiving respon-

audience, however, and they

sibilities influence them in letting their subordinates strike “idio-

put in more effort, leading

syncratic deals” or “i-deals”? Does having a similarly sandwiched

to better team performance.

supervisor help? Not always, according to a recent study.

Doing the work out in the open

Are you the type of manager who thinks your star hires don’t need constant moni-

rather than behind closed doors raises expectations – and with it, effort levels. So, it’s not just working in a team that can make people work harder but the visibility of that work that’s key, especially for certain high-status workers.

Caring for parents Supervisors who took care of aging family members were more likely to grant i-deals to employees.

Caring for kids Supervisors with children under age 14 were not as predisposed to grant i-deals to employees.

Remember: granting some degree of workplace flexibility doesn’t just help employees have an easier time of it at home. Research shows that satisfaction with work-life balance affects everything from turnover to productivity. For sandwiched workers, i-deals can boost commitment to and motivation levels at work, helping to retain talent. And that’s something all supervisors, regardless of personal circumstances, can appreciate. “Handle With Care: The Mediating Role of Schedule I-deals in the Relationship Between Supervisors’ Own Caregiving Responsibilities and Employee Outcomes,” by IESE’s Mireia Las Heras et al., appears in the Human Resource Management Journal.

“Only When Others Are Watching: The Contingent Efforts of High Status Group Members,” by IESE’s Sebastien Brion et al., is forthcoming in Management Science.


HACK

What kind of corporate venturing is right for you?

Corporate venturing sees large companies partnering with startups for mutual benefit. To be successful, big-firm managers must consider what’s in it for the startup, considering their objectives and culture, and offering them a clear and, in some cases, tailored value proposition, to keep their interest and commitment. There are various options out there. Which one of these might be right for you?

scouting mission. Go out and meet with startups, inventors or university researchers in search of innovations that align with your company’s strategy, offering potentially valuable networking opportunities along the way. hackathon. Hold a workshop for software developers to come up with tech solutions to a specific innovation challenge within a restricted time frame. sharing resources. Get closer to the startup ecosystem by networking with other ventures to find areas of mutual interest. challenge prize. Run a contest to incentivize innovators to propose solutions to a specific issue that taps into the latest tech trends. accelerator. Support startups via a highly structured program of mentoring, training and providing workspace and resources, including money, to give startups a rapid-fire boost in just a few months, sometimes in exchange for equity.

incubator. Like an accelerator, but here focus on providing viability and commercialization to a promising innovation. excubator. Use an external venture builder to get a minimum viable product (MVP) outside the regular structure of the corporation. corporate venture capital.

Steer equity investment toward startups that are of strategic interest beyond financial returns – to access new distribution channels or know-how. strategic partnership. Form an alliance with a startup to define, develop and pilot innovative solutions together. venture client.

Offer to purchase the first unit of a startup’s product, service or technology when the startup is not yet mature enough to be a client.

acquisition.

Purchase the startup outright to get its commercially ready products, complementary technology and/or capabilities.

M. Julia Prats and Josemaria Siota from IESE’s Entrepreneurship and Innovation Center interviewed the innovation directors of 44 companies for their report Open Innovation: Building, Scaling and Consolidating Your Firm’s Corporate Venturing Unit. 42 | IESE Business School Insight | Winter 2018


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+IESE Marta Martinez Alonso

General Manager of IBM Spain, Portugal, Greece and Israel. Member of the Alumni Executive Committee that oversees the IESE Alumni Association.

pade ’05

Opening the black box of artificial

44 | IESE Business School Insight | Winter 2018


IESE & me

I

n 2004, IBM launched the Blue Gene/L, a supercomputer that soon became the fastest in the world. Marta Martinez, with more than 10 years’ experience at Hewlett-Packard, had recently joined IBM Spain. Since that time, IBM has quit the hardware business

THE BASIS OF BUSINESS… …is the person. You can learn from cases and from how others have managed change or risk. But the personal element and the role of values will always be there. If that base is not solid, many plans can go awry.

to focus on artificial intelligence (AI) and cloud computing.

Translating these disruptive technologies into valuable services and strategies for companies is a core task for Martinez, who was appointed general manager of IBM for Spain, Portugal, Greece and Israel in 2013. With time, she says, you gain experience and, above all, perspective. For this mathematician who now finds herself in a senior executive role, the impact of technology on business and society has never been greater. It changes everything, she says, from your business offering to your customer approach.

Today, everyone’s talking about digital transformation, big data and AI. How are companies responding? All companies are realizing that technology can contribute much more to the business than before, but there’s still a long way to go. Our studies show that only 20 percent of com-

credit :

Nani Gutiérrez

panies are making the necessary shifts. Some pilot projects are being carried out with AI, cloud computing, and so on,

LEARNING AND WORKING TOGETHER Networking, collaborating and listening to others are essential for improvement, exposing us to different points of view. It’s important to open up the debate, get people to speak their minds, and listen to your colleagues and teams. Business is not a problem with one clear solution. I’m a mathematician, and it’s not that easy. It’s not a theorem to prove. The conclusions you come to can be as diverse as there are points of view.

but when it comes to strategy, much more work is needed. Unlike startups that can launch straight on the cloud, medium- and large-sized companies have legacies that make their transformation more complex. These companies need to be clear about where they’re going and how to get there.

intelligence Winter 2018 | IESE Business School Insight | 45


+IESE

In first person

What about for non-tech, non-digital companies? Digital transformation is not an end in itself but a means to achieve what you couldn’t do before, both internally and externally. This is not something that only concerns the IT department, but overarches the company as a whole. And it’s not just a question of technology – it’s also about culture. You can bring in new talent but you also have to work with the people you have already. For digital transformation to succeed, the corporate culture is fundamental.

How do you reconcile the need for innovation with sticking to a mission?

To what extent do you need to understand AI to be able work with it? Technological know-how is important. You need profession-

It’s one thing to have a corporate vision – which you still need

als who know how to program with new languages and who

– but the level of detail in the execution of that vision is an-

know how to create and implement AI projects. This is an

other thing entirely. Before, a strategic plan used to be very

important area in high demand.

long term, outlining the major milestones to hit over the next five to 10 years. Today, with technology, you have to be agile, to

Apart from specific skills necessary to work with the technol-

be able to change things on the go. To capture a new market,

ogy, keep in mind that it’s the information – the data – that’s

to reach a new type of customer or to internationalize your

core to the current technological transformation. So, more

operations, you need to keep your strategy and part of the ex-

than knowing about technology, you have to know how to

ecution somewhat general, while continuing to work on other,

evaluate the information, whether it’s for marketing or for

less ambitious projects, so you can monitor and respond to

HR purposes, for example. You don’t need to be a tech whiz,

changes more easily. Projects that used to involve a lot of time and money now take months, rather than years, cost a lot less, and show returns much sooner. It’s what we call getting a minimum viable product (MVP). The moment I have something to show, I show it. I launch these small projects and spark change, both among employees and customers. It’s not about achieving some grand transformation, but rather about making small, incremental changes. I plan more or less where I want to go, but I’m ready to adapt along the way. That’s the flexibility that technology allows. 46 | IESE Business School Insight | Winter 2018


“Digital transformation is not an end in itself but a means to achieve what you couldn’t do before”

but you do need to understand that information is becoming increasingly relevant and ask yourself what you can do with it. This is key, and perhaps the greatest change for the entire organization to grasp. Regarding those highly sought-after employees you mention, how do you retain talent in this context? There are two important factors. First, employees must see that they have a clear career path in which they’ll have a say in which countries they’ll work in and what kind of projects they’ll be assigned. The second issue relates to the company’s wider impact, in terms of undertaking projects that leave a

going?) as well as to the corporate one (what am I involved in?).

intelligence to a greater or lesser degree. But the first step is being aware of, and fully appreciating, the value of information.

So they can identify with certain shared values?

So, what does the future hold? And how can we prepare

Exactly.

ourselves for it?

positive mark on society. As such, you have to let employees contribute on two levels: to the personal project (where am I

Both the speed and the impact of current technological How do you distinguish between what’s relevant and

changes are tremendous. There are many issues at stake.

what you can do without? How do you know whether it’s

Most of the public discourse has been around how em-

time to bet on AI?

ployment and privacy are being affected. But ethics and

The new technologies allow you to do many things that were

transparency are also crucial – something that we at IBM

previously impossible, but the level of complexity is high.

strongly defend.

How can we take advantage of them as a company of any kind, from any sector?

AI should not be an impenetrable black box nor something magical. We want people to know what and how informa-

What matters is understanding that the company should

tion is used. The more information AI receives, the more it

be extremely information-focused. The digital world gains

learns. Feed it poorly, and the system learns poorly, with bi-

strength because data start to be important, because the vol-

ases. As business people, we must never forget that, of all the

ume of information we have, both structured and unstruc-

information that exists in the world, 80 percent of it is in the

tured, is relevant. If information starts to be core for your

hands of companies like ours. And that is the information

company, then you need the right technological architecture

we will use to train our systems. This makes it all the more

for it.

important to know how the system is taught, in a transparent and an ethical way.

Making sure data are secure, orderly and accessible may seem trivial, but it’s not a simple undertaking. First, you need a system in which the information is really well organized. From there, you can add all the layers of intelligence you want. You can apply advanced AI or analytical

article by :

Jose Carlos Sánchez

Winter 2018 | IESE Business School Insight | 47


+IESE

Entrepreneurship

POSITIVE PARTNERSHIP

Search funds – matching seasoned investors with young entrepreneurs – may be little known outside the United States, but they are fast growing internationally. Munich-based investor Jürgen Rilling and U.S.-based entrepreneur Jean-Paul Destarac discuss how their partnership works. The investor

What are the challenges? Being in Munich while Jean-Paul is

How did you get started?

in the U.S. makes the role somewhat

I studied mechanical engineering at

more challenging than if it were a Eu-

the Technical University of Munich and

ropean search fund. I’m always avail-

then worked for Roland Berger before

able for him, but we do have to deal

doing an MBA at IESE. After gradua-

with different time zones.

tion, I worked for the optical company Rodenstock. After two years, I decided

What do you look for?

I wanted to buy my own company. I

Typically, we invest in companies that

launched a self-funded search and, to-

have some kind of succession problem

gether with a partner, bought Grundig

and run the risk of a lack of growth due

Business Systems, in the area of digital

to changing ownership. This is where

speech processing and recognition.

search funds can play a big role, ensur-

How did you get into search funds?

and creating employment. Obviously,

In 2010, I started investing inde-

as an investor, I’m interested in the re-

pendently, beginning with startups.

turn, but there’s also the motivation of

And I was an early adopter when it

creating employment. Of five search-

comes to European search funds. Since

fund acquired companies, we’ve dou-

ing that a company can keep expanding

2015, IESE has hosted an International

bled the overall workforce. I think that

Search Fund Conference. It was at that

does a lot of good.

conference that I met Jean-Paul. Our

Jürgen Rilling

Owner & CEO, Mirablau Private Equity & Venture Capital Investments. Advisory Board Member, IESE International Search Fund Center.

mba ’99

paths continued to cross and we built

Why are you doing this?

up a good relationship over the years.

Search fund investors typically enjoy working with young talent. I’m com-

How does the relationship work?

ing into contact with people so much

My role is to give Jean-Paul the support

brighter than me. But being a little bit

he needs to find a business to acquire.

older and more experienced, Jean-Paul

Once he has found something, he comes

accepts me as a sparring partner. I feel

to me for coaching. Since I have an in-

I learn as much from the searchers as

dustrial background, it helps for when

they learn from me. They’re sharp and

things get a little too heavy for him.

it helps me develop myself.


The searcher

What do you get out of it? I find it’s a way to put myself in the

What did you do before IESE?

front seat of a company, at a very

After studying economics and sociolo-

young age, supported by a very suc-

gy, I worked for Merrill Lynch in Dallas

cessful and experienced group of in-

and the LVMH group in Europe. Then, I

vestors and operators who want me to

spent three years in New York working

succeed. That’s incredibly exciting! I

for Stelac, a multi-family office.

also like the mentorship approach: investors don’t just give you money, they

How did you end up going to the In-

give you their time, which for me is like

ternational Search Fund Conference

doing another master’s degree.

at IESE before you were even at IESE? I met an IESE graduate who was running a search fund and told me about the

4 stages of search funds 1. Fundraising: a group of investors pool their capital to back a searcher. 2. Search and acquisition: locating and taking over a business. 3. Operations: searchers lead and grow the business. 4. Exit: the searcher and investor achieve liquidity.

conference. It sounded so interesting that I bought a plane ticket to Spain. I met Jürgen there and we stayed in touch.

* The time between acquisition and exit is 4-10 years

How does the search-fund process work? There are three different ways we’re trying to find a business: the first is through brokers; second, a proprietary outreach system, where we look at an industry that we like and home in on businesses; and third, through networking with lawyers, contacts, advisers and friends. How do you focus your search? Right now, I’m interested in healthcare, one reason being that my father is a doctor. I think it’s easier to be a busi-

Roger Rovira

ness owner in an industry you have some connection with. What do you look for in an investor?

credit :

Someone you click with. Also, someone who is able to go see the businesses with you. I think most search-fund investors like to be actively involved, not in the sense of “I want to see every single thing you’re doing,” but, “I want to know how best to support you.”

Jean-Paul Destarac

Managing Director, NexuPartners. Founder, IESE Search Fund Club.

mba ’18


+IESE

Entrepreneurship

IESE leads in global search fund research Through their partnership and joint research activities,

is strongly aligned with IESE’s mission,” says Eddy Zakes,

IESE and Stanford University have become pioneers in

director of IESE’s Entrepreneurship and Innovation Center.

tracking the investment area known as search funds. At the International Search Fund Conference held at IESE “While search funds began in the United States, they are

in October 2018, IESE and Stanford released the results of

clearly gaining momentum elsewhere, and IESE is com-

their latest study on search funds outside North America.

mitted to advancing the model internationally, especially as search funds’ capacity for making a positive social impact

INTERNATIONAL PRESENCE Search funds are steadily gaining ground outside the United States. Of the 83 international search funds formed as of December 31, 2017, the vast majority were based in Latin America and Europe, and a quarter of them had appeared in the last year alone.

Here are some highlights...

40 in Latin

35 in Europe

America

UK: 13

Mexico: 22

Spain: 10

Brazil: 8

Germany: 4

Colombia: 4

Italy: 3

Chile: 2

Austria: 1

Dom. Rep.: 2

France: 1

Argentina: 1

Poland: 1

Guatemala: 1

Portugal: 1 Switzerland: 1

3 in the Middle East Israel: 2 UAE: 1 3 in Asia India: 2 Indonesia: 1

2 in Africa Kenya: 1 Morocco: 1

INTERNATIONAL SEARCHER PROFILE

90%

73%

26-43

$84,000

have an MBA

Age range

Eddy Zakes

raised their search fund within 2 years of graduation

Median salary in Europe

Director of IESE’s Entrepreneurship and Innovation Center, which houses the International Search Fund Center, a hub for investors and entrepreneurs.

$95,000

mba ’17

PERFORMANCE As an asset class, international search funds have achieved:

Median salary in Latin America

IRR: 33.3% article by :

50 | IESE Business School Insight | Winter 2018

Larisa Tatge

$9.3 million

Median purchase price for international acquisition

ROI: 2.3x


Some care only about numbers. We care about much more. At IESE Business School we invest time, passion, ideas and effort in something greater than numbers: People. The Financial Times knows this, ranking us #1 in Executive Education worldwide for 4 years in a row. What they don’t know is that since 1958 our real #1 is you.

www.iesenumberone.com

www.iese.edu Barcelona · Madrid · Munich · New York · São Paulo


+IESE

How we did it

HOW WE TOOK OUR BUSINESS GLOBAL

How do you ensure that fast growth doesn’t

Quim Serracanta and Natalia Per-

compromise quality?

arnau founded Kids & Us to teach

Put simply, you have to establish a code of best

English to children using a special

practices and then make sure it’s being followed.

learning methodology they had de-

In our case, we carry out regular inspections, sim-

veloped. Inspired by the natural process that chil-

ilar to follow-up sales and marketing, to check

dren’s brains go through in the first years of life

quality via online teacher audits, mystery shop-

for mother tongue acquisition, their method im-

ping, satisfaction surveys and ongoing training.

itates that process for the acquisition of a second

We also offer variable compensation to reward

or third language. As their methodology caught on

franchises that follow the methodology rigorous-

in Barcelona-area schools, they began to license

ly. You also have to make sure that fast growth

it wider. Eventually they decided to franchise the

doesn’t undermine the product’s value. In this,

business, so they could maintain tighter control

master franchisees can be very useful.

over the teaching methods, branding and business growth.

What’s required? To become a master franchisee, you must first

Licensing vs. franchising: why the latter?

run your own center, so you know the model in-

Licensing to third parties may be easier and more

side-out. Next, you must have extensive knowledge

convenient, but it can be harder to control the

of the network of centers in your country. Then you

application and evaluate the results. Franchising

are in a position to act as an intermediary between

gives you more control over business processes

the head office and other franchises, ensuring that

without having to overextend your resources by

the methodology is being applied correctly and

opening centers yourself. Instead, you can focus

consistently across the whole network. A master

on continuing to develop your product or service.

franchisee must also have the financial ability to

You can also bring it to market more quickly.

set up the first franchises in a country, as well as

52 | IESE Business School Insight | Winter 2018

credit :

F

ifteen years ago, the married couple

Kids & Us

With nearly 400 franchises in eight countries, Kids & Us is proof of how a homegrown business can take off globally. But why has it been successful in some countries more than others? Quim Serracanta and Natalia Perarnau explain the bumpy road of internationalizing a business.


the business expertise to manage them. They must

crack China – the premier league for centers like

build a strong team capable of managing all as-

ours – we simply couldn’t do it. The legal frame-

pects of the business. This is something we learned

work is extremely restrictive, making it harder to

the hard way in Portugal.

operate as a foreign company, particularly one dedicated to teaching children. When we finally

Is there room for improvisation?

found a master franchisee willing to partner with

We provide manuals on corporate image, sales,

us and make a big investment, we were told we

operations, services, finances and people devel-

had to live in China for a minimum of two years,

opment. We used to offer them as suggestions, but

which we weren’t in a position to do.

now they form part of the contract. That said, we encourage each franchisee to use their own initia-

Cultural perceptions matter, too. For example, in

tive, but it’s important to weigh up the time and

Italy we struggled because the notion of teaching

effort involved. Head office must respond to the

English to children from an early age wasn’t so

needs of all the different centers and keep them

ingrained. Even in other countries with a simi-

from venturing too far into uncharted territory.

lar culture and educational system to Spain’s,

The masters are free to set pricing, but we insist

such as Mexico, the results weren’t as good as we

that, although cheaper prices may seem to sell bet-

thought they would be. In Belgium, on the other

ter, they don’t always attract more customers. Even

hand, parents had a similar mentality to learn-

if they did, the profit margins are likely to be small-

ing English as we did in Spain, and we achieved

er, and that can cause difficulties down the road.

spectacular results there. Above all, choose your master franchisees wisely, as they

What other factors are key?

hold the key.

You can’t underestimate the huge personal sacrifice that international expansion sometimes demands. When we tried to

article by :

Roger Perelló

Natalia Perarnau & Quim Serracanta

Co-founded Kids & Us after becoming parents in 2000 and getting interested in linguistics. Today, their daughter is proficient in English – as are the kids who began the process with her.

pade ’16


+IESE

Leadership

TODAY’S LEADERS RECOMMEND HOW TO GET READY FOR TOMORROW


A lot has changed since business schools first launched programs 100 years ago to train managers primarily concerned with engineering problems. Today’s leaders have vastly different outlooks and aspirations. They’re more globally minded, their concerns are increasingly tech-related, and they greatly value mentoring and teamwork. Here we talk to three up-and-coming leaders about the critical qualities necessary for the future.

Ana Fitzgibbons, Ricardo Hellmund and Nicholas Wells, pictured with their Driving Leadership Potential classmates on IESE’s New York City campus. www.iese.edu/dlp


+IESE

Leadership

Ricardo Hellmund

Multi Family Office Adviser. Miami, Florida

Tech aware

How is technology affecting your field? nicholas:

I began my career at the tail end of the finan-

cial crisis. There was a pivot after the crisis, and a good portion of my classmates ended up working in the tech-

Ana Fitzgibbons

Corporate Communications Strategist. Norwalk, Connecticut

nology sector. The financial industry has recovered since then, but the jobs today are different from back then. Fintech is changing the industry and, in our case, allowing us to contain costs. The general expectation is that we’ll be able to accomplish a lot more with a lot less.

Nicholas Wells

Head of Investment Risk, Americas. New York City

ricardo:

Fintech is already reshaping some financial ser-

vices for the better, but perhaps less so in certain niches of wealth management. In this space, client portfolios can be extremely complex, so personalized relationships remain key. In our case, we use technology to enhance how we analyze client portfolios, gather market and in-

Future-proof leaders are...

vestment information, and improve client communication and services.

Globally minded

ana:

States, France, Germany and Singapore, and speak

job measurable, allowing me to define clearer goals and

multiple languages. How do such global experiences

giving me a structure to work against and a numerical

shape the way you lead and interact?

framework that senior stakeholders understand.

Between you, you’ve lived in Venezuela, the United

ricardo:

They help me appreciate and respect people’s dif-

ferent values, working styles and ways of interpreting things. But more than that, I believe international exposure equips you to manage differences better in team settings. ana:

We’re all basically mash-ups of our life experienc-

es. I think mine have made me less risk-averse and more open to change. They’ve also instilled a “go for it” attitude and greater self-confidence.

56 | IESE Business School Insight | Winter 2018

People perceive communications as a soft skill, but

it’s actually quite analytical. Technology has made my


Engaged & team-oriented

What are the challenges you see that leaders aren’t

addressing? ana:

Few people dedicate enough time to communica-

tion issues. As leaders, we need to become much more passionate about “employee engagement.” By this, I don’t just mean getting everyone to get along. It’s more about strategic alignment. It’s hard to bring people on a journey, or give them a vision of something, if you, as a leader, aren’t articulating it. Whether you’re launching a campaign or initiating corporate change, you need to know how to bring people along with you.

Humble, passionate, adaptable, empathic, curious

What are the top leadership qualities managers need to stay relevant?

nicholas:

People tend to work independently and try to

resolve issues on their own, but as projects scale up, you

ricardo:

have to rely on teams. You can’t have one person doing

humble allows us to recognize we’re imperfect by nature

everything. For me, leadership is about hiring good peo-

and always have something to learn. The second thing

Humility is the first quality I would stress. Being

ple, trusting them, and giving them the freedom to do

I would tell people is “find your passion” because that’s

their jobs.

where you’ll find the most success. It might take a while to find and it might change over the years, so you have

Mentored & supported

What’s the role of mentorship in shaping career paths today? ricardo:

to be flexible. You have to adapt: that’s another key. You always need a Plan B since things rarely work exactly the way you initially envisioned them. ana:

Empathy.

Sometimes mentors offer a listening ear or

constructive criticism. Other times they introduce you to

nicholas:

people who are able to help you at inflection points in

to learn. As managers become more senior, there’s this

your career. When mentoring others, the first thing I tell

sense that they should know everything already. That’s

them is, “I don’t have all the answers!” If they come to me

simply not true. Learning should be constant and contin-

The most important quality is continuing

with an issue that’s not my strong suit, we work together

uous, especially in today’s economy. Things are changing

to find someone with more expertise. I also urge them to

faster than ever, so you have to keep up with the latest

be proactive and seek out multiple mentors, since there’s

developments or you’ll be left behind.

no such thing as a perfect mentor and their needs will change over time. ana:

article by :

Suzanne Hogseth

A mentor should be supportive, always pushing you

to do your best and make the tough choices. nicholas:

My mentor and I meet regularly for lunch. He

gives me insights and tips on career progression. He really pushes me to challenge myself in my current job, to question my future outlook, and think about how to get there. Winter 2018 | IESE Business School Insight | 57


+IESE

Quick take

Buildings for education must be flexible

A

rchitecture of passion and subtlety, not of the past nor of the future but of its time. This is how the celebrated French architect Jean Nouvel characterized the work of Josep Ribas Sr. in the foreword to a book on

the Barcelona-based architecture agency, Ribas & Ribas.

The same could be said of Josep Ribas Jr., who today carries on his late father’s vision with the help of his sister, Inmaculada, and niece, Adriana (pictured, right). All three generations have had personal and professional ties to IESE, designing its buildings and taking its Executive Education programs, from Ribas Sr. earning a PADE in 1974 to Adriana earning an Executive MBA in 2017. Ribas Sr. said the light of his native Ibiza inspired his work. He set up his own firm after graduating with a degree in architecture in 1957. With Josep Lluis Sert, he designed the emblematic Miró art museum in Barcelona. Ribas Jr. started out in his father’s firm, becoming a partner in 1987. Inmaculada joined in 1994. And in 2010, a year before Ribas Sr. passed away, Adriana became the newest addition.

58 | IESE Business School Insight | Winter 2018

credit :

Ribas & Ribas


Together, they have executed a wide variety of projects – from a village church in the Pyrenees to Columbus Tower, one of Barcelona’s first high-rises. Ribas & Ribas has designed everything from office buildings and hotels to homes and schools, including several for IESE Business School in Barcelona. The family firm’s relationship with IESE began under former dean Carles Cavalle. Their first project was to build the south campus library. That was followed by a succession of other projects, not only on the south campus but also the stunning north campus and, most recently, the new H building for research and doctoral students, which opened in 2018. The year 2019 marks 30 years of Ribas & Ribas collaborating with IESE.

One art, infinite uses

Striking the right balance between form and function is the hallmark of any good design, as Ribas Jr. explains: “In the

case of an educational institution such as IESE, it’s vital to create spaces that are multifunctional. They have to be more

credit :

María Dias

flexible than other buildings, because there’s more movement in them.”

The building plot marks the boundaries, but the rest is up to the imagination.

The relationship that people have with a building also changes over time. Today, environmental considerations are increasingly important, along with having dedicated spaces for rest and interaction.

“Architecture, deep down, is sculpture with content,” says Ribas Jr. “You adapt from there, not without difficulties, always taking into account urban and functional parameters, the location, and aesthetics.”

“Such things were not so valued before,” says Adriana, “but now elements like having lots of natural light are key. It makes the space more pleasant, which enhances workers’

Following the light

“Architecture ends up permeating your entire life. You talk

well-being.” Today, you have to pay equal attention to the

about it over lunch and dinner. You spend your weekends

building’s interior and exterior, she adds.

visiting projects.” For Ribas Jr., family tradition inevitably plays a role in this. But vocation also plays a part, as it did for

This holistic approach to architecture is evidenced in the

Adriana, who decided to pursue architecture even though

Ronda de Dalt Funeral Home that Ribas & Ribas designed for

everyone told her not to. “We hope the saga continues.”

the Altima group. “It’s a bright, modern building designed to be as uplifting as possible, given the circumstances. We

As for Ribas Jr., he dreams of building an airport as well as a

designed every element, inside and out, right down to the

church, admitting that he’s working on an idea for a modern

furniture, so that every bit makes sense,” says Ribas Jr. He

chapel in Ibiza, but he refuses to disclose any details. Adriana

highlights it as a special work, though he’s quick to add that

is thinking about the future of architecture, in which func-

picking just one is as impossible as choosing a favorite child.

tional spaces for people must be thoughtfully integrated into the surrounding environment. Between them, they’re keeping

“All our projects are important,” says Adriana. “We treat

the Ribas family trademark of passion and subtlety alive.

each one as something unique, whether it’s for Real Madrid (soccer club) or a family home.” Breathing life and light into buildings as grand-scale as stadiums and skyscrapers or as simple and functional as a home or an office, architecture is perhaps the most versatile of art forms.

article by :

Juan Fernández

Winter 2018 | IESE Business School Insight | 59


Food for thought

SMART PICKS 4 classics worth reading

Based on lectures by James G. March, compiled in the book On Leadership.

Othello William Shakespeare Apart from enduring themes of love, jealousy

The truth of fiction Fiction can give us a good dose of reality. So believed James G. March, a professor at Stanford University for almost 50 years, who died on September 27, 2018, at the age of 90, one month after the death of his wife of 71 years. In addition to pioneering new theories on organizational behavior, March was known for taking an interdisciplinary approach that blended humanities with business research, and he frequently drew lessons for leadership from literature. Despite starting his classes with the warning, “I am not now, nor have I ever been, relevant,” he was, in fact, a highly relevant scholar, penning such management must-reads as Organizations (1958) and A Behavioral Theory of the Firm (1963), considered among the most influential management books of the 20th century.

and betrayal, March saw in Othello the leader torn between his private life and public duty. Iago represents the dark side of ambition and the lengths to which some people are prepared to go to get ahead. To what extent are leaders “manipulated to serve as instruments to settle other people’s scores”?

Don Quixote Miguel de Cervantes March saw the deluded knight as a celebration of “imagination, commitment

photo of james g . march courtesy of :

Stanford Graduate School of Business

60 | IESE Business School Insight | Winter 2018

and joy. He reminds us of how


FROM MY DESK ambiguous reality is and how it can be subject to numerous interpretations.” Where Don Quixote went wrong was in focusing only on himself at others’ expense. He

By Josep M. Rosanas Professor Emeritus of Accounting and Control

had the best of intentions but his actions had adverse consequences. A reality check for leaders.

War and Peace Leo Tolstoy For those who believe in stability and order, there’s nothing like war to remind us that the only constant is change. People deal with adversity in different ways. Tolstoy’s view of history as “a flood of events that nobody can immediately judge to be significant or not … that does not follow any defined structure, but arises from the complex interaction of countless insignificant events” will be familiar to leaders in VUCA times.

Saint Joan George Bernard Shaw This play about Joan of Arc exemplifies the problem of genius – those nonconformist types who are driven by a compelling vision. They may be on the right path, but they’ll upset the establishment and threaten the powers that be. Institutions need geniuses – but go too far and the institution will abandon them. There’s a fine line between genius and heresy.

Do I know who I am? For James G. March, Don Quixote has a lot to teach us about decision-making. In situations of ambiguity and change, our identities need to be factored into our decision criteria. According to March, rational decision-makers tend to follow the logic of consequences, weighing the alternatives and considering the consequences of each alternative. The problem is, we aren’t capable of evaluating all of the possible alternatives rigorously enough, or even saying a priori what we actually want. Yet we still strive to make the “right” decisions. But there is another logic – that of appropriateness. When Don Quixote declared, “I know who I am,” he was essentially affirming this logic of acting in accordance with his character. Applying this logic to your business life means answering three types of questions, as March explained. The first is about recognition: what kind of situation is this? The second is about identity: what kind of person am I, and what kind of organization is this? The third addresses the rules to follow: what should a person like me, working for an organization like this, do when faced with a situation such as this? Using a logic based on identity can be an efficient decision-making shortcut. However, we must remain alert to how our natural tendencies can lead us in familiar directions, when an entirely different course of action might be called for. This is another caveat that March took from Quixote when making decisions: the need to strike a balance between the exploration of new things and the exploitation of what we already know. Winter 2018 | IESE Business School Insight | 61


Even the bravest heroes need an ally to succeed Meet our Alumni Career Advisors and Coaches

More information: alumnicareers@iese.edu


KNOW

By J. Zamora and P. Herrera

By E. Reutskaja

By G. D’Andrea

By P. Miller and T. Wedell-Wedellsborg

How prepared is your business to make the most of AI?

The brains behind your choices

Rethinking the funnel for the omnichannel age

The 5+1 behaviors of innovation

Page 64

Page 74

Page 78

Page 84


To make the most of AI, you need to know the basics: what data do you need, and do you have the right people in place?

How prepared is your business to make the most of AI? By Javier Zamora and Pedro Herrera


illustrations :

RaĂşl Arias


KNOW

How prepared is your business to make the most of AI?

A

rtificial intelligence (AI), once the sole preserve of dystopian novels and sci-fi movies, is now a hot topic among business leaders wondering how it might trans-

form or impact their business models. But what does “artificial intelligence” mean? The late John McCarthy, credited with coining the term in the 1950s, defined AI as “the science and engineering of making intelligent machines, especially intelligent computer programs.” But what is intelligence? And can it be separated from human intelligence? McCarthy’s contemporary, Marvin Minsky, believed this was extremely difficult, partly because “words we use to describe our minds (like ‘consciousness,’ ‘learning’ or ‘memory’) are suitcase-like jumbles of different ideas formed long ago, before ‘computer science’ appeared” and which are inextricably linked to human beings. For our purposes, we will use psychologist Howard Gardner’s definition of intelligence as “the ability to solve problems, or to create products,

make machines use language, form abstractions

that are valued within one or more cultural set-

and concepts, solve kinds of problems now re-

tings.” This definition expresses how AI can help

served for humans, and improve themselves.”

organizations create new value propositions, as we will explain in this article.

A brief history of AI

During AI’s formative years, researchers focused on developing “expert systems” – computer programs that took data and information and then

In 1950, the English mathematician Alan Turing

made if-then inferences, similar to human reason-

first devised a method of inquiry – known as the

ing processes, to do basic problem-solving. While

Turing Test – for gauging whether or not a com-

expert systems form the basis of some applications

puter was capable of thinking like a human being.

used today – for prediction, diagnosis or monitor-

The official beginnings of AI as a discipline didn’t

ing – they still relied on trained programmers to

arrive until six years later, however, when a select

encode the rules. And given the infinite number of

group of scientists and academics, including Mc-

real-life scenarios that could arise, it became vir-

Carthy, Minsky and Nobel laureate Herbert Simon,

tually impossible to program a system that would

gathered at Dartmouth College in Hanover, New

work in every possible scenario. By the 1980s, re-

Hampshire, over the course of a summer to ad-

sults had fallen so short of expectations that the

vance a research agenda on artificial intelligence.

period became known as an “AI winter,” as funding

Among their lofty ambitions was “to find how to

and interest in the field dried up.

66 | IESE Business SchooI Insight | Winter 2018


Where to start?

Subsequent evolutions and technological improvements, both in computing capacity and learning algorithms, have brought us to the current situation. We are seeing an important resurgence of AI, based mainly on “statistical learning,” that is, learning from data obtained through observation. Vitally, this alleviates the impossibility of anticipating everything that could happen when modeling a scenario and the changes that could occur over time, and makes it easier to model solutions to a problem.

Artificial neural networks try to mimic the brain’s plasticity

Like any technological solution, AI must be aligned with your overall strategy. Ask yourself these basic questions:

1.

2.

How does AI help me deal with the problem I want to solve?

Do I have the necessary data to train the AI system?

3.

4.

Do I understand the limitations of current AI systems when it comes to incorporating their results into decision-making?

What new capabilities does the company need in order to interpret the results of AI?

Most of the AI systems used by companies today are based on statistical learning – or what is called “machine learning.” Like any automatic learning

new action it carries out – facilitates continuous

process, machine learning tries to learn from ex-

learning. Artificial neural networks try to mim-

perience – the data – to model, predict or control

ic these two features of the human brain. Most

something using computational, mathematical

interesting is their ability to engage in parallel

based algorithms. These systems are useful for

computing and “backpropagation” (the backward

classifying input data, such as recognizing and cat-

propagation of errors). When differences are

egorizing images, or making predictions like how

detected between the result obtained and the

much money a customer will spend over time or

expected result, the system is able to adjust itself

the likelihood that he or she will stop being a cus-

and modify the approach it takes next time.

tomer. Still, because their use is limited to the problem for which they were designed and trained,

Machine learning algorithms based on neural net-

these systems are known as “narrow” or “weak” AI.

works have evolved to the point of being able to perform very complex learning processes. This is

More recently, machine learning algorithms have

called “deep learning,” and it allows for applica-

come closer to imitating the functioning of the

tions such as visual or speech recognition. With

human brain. The neuronal interconnectivity of

ever more advanced algorithms, like convolution-

the brain allows us to solve complex problems,

al neural networks, deep learning allows you to

while the brain’s plasticity – the endless process

resolve highly complex, multidimensional prob-

of training and adaptation it undergoes with each

lems involving very large volumes of data. Winter 2018 | IESE Business School Insight | 67


KNOW

How prepared is your business to make the most of AI?

Despite these advances, current machine learning and AI tools in general still have limitations when it comes to reasoning or abstract thought – what would be considered “strong” AI. Getting the machines to be able to solve complex problems and act with plasticity in a fully automated way is extremely complex and, without doubt, AI’s greatest challenge. The consensus is that for AI to surpass human intelligence – a moment known as “singularity” – new ideas are needed to overcome the restraints holding back perception, learning, reasoning and abstraction, on the path toward true “strong” AI. Ray Kurzweil, director of engineering at Google, predicts this will occur in the next 30 years – but people have been saying “within 30 years” for the last 30 years.

The boost of digital density

AI is wholly dependent on the ability to store and process large volumes of data efficiently. Without the confluence of the following factors, the recent advancement of machine learning tools would have been unthinkable. customers by type. Such big data is very useful in increase of computational capacity.

Thanks to

training machine learning systems.

the exponential function of Moore’s Law, it has algorithms.

New programming tech-

become easier and cheaper to develop the high-

better

ly sophisticated and complex computing needed

niques that distribute processing work across dif-

to run machine learning systems. In addition, the

ferent nodes or computing units offer constantly

use of graphics processing units (GPUs) instead of

scalable performance and make it easier to train

central processing units (CPUs) is better suited to

complex models with many variables and many

the distributed computing of neural networks.

layers of neurons (deep learning). The quantity of learning data needed for AI models can be signifi-

digitization of the physical world.

The reduc-

cant both in terms of depth (the number of events

tion in technology costs also led to a surge in the

under analysis) and dimensions (the number of

quantity of data being produced by organizations,

variables that can a priori determine a result).

people and objects through the internet of things. This is what is known as “digital density.” Think of

open software.

all the data generated just for an online purchase.

tized access to AI applications, some of which are

We can know who buys what, at what time, and how

now driven by large user communities, such as

they paid for it; what they looked at before buying,

OpenAI or scikit-learn. Others are being developed

how many times they checked back before buying,

by companies that want to create large user ecosys-

and numerous other variables that can feed pre-

tems, such as Google’s TensorFlow or Microsoft’s

diction models of purchasing behavior and classify

Cognitive Services.

68 | IESE Business SchooI Insight | Winter 2018

This has significantly democra-


Speaking the language of data

language, distributor, etc.). The training data can

As a manager, you need a basic understanding

also come from public access databases, such as

of the concepts behind machine learning so that

ImageNet, which contains more than 14 million

you can communicate effectively with the experts

images, each with a description to train image rec-

who implement AI projects in your organization.

ognition systems.

Here are the essentials: training data. These are the values obtained from

supervised vs. unsupervised learning.

To ex-

plain the relationship between input and output

past cases or those that are happening in real

variables, we use supervised models. If, on the

time. They will differ depending on the variables

other hand, we want to detect patterns of behav-

selected. In fact, the selection of variables will de-

ior using an available set of variables, we use un-

termine how good a set of data is and is key to

supervised models.

obtaining an efficient automatic learning system. Most companies employ supervised learning proImagine you want to develop a prediction system

cesses that respond to a specific business prob-

for how much someone might like a particular

lem. For example, in an email app, a supervised

movie based on the films he or she has already

model can classify emails that are junk or not in-

enjoyed. The training data would be the previ-

teresting, and separate them from the rest. The

ously viewed films, sorted by the degree of satis-

model is fed further information by the users

faction they produced. Each film would contain a

themselves whenever they correct a wrongly clas-

series of description variables (genre, length, year,

sified email. Winter 2018 | IESE Business School Insight | 69


KNOW

How prepared is your business to make the most of AI?

In innovation processes, unsupervised models are

it requires training data.

usually used that do not respond to any concrete

ing techniques essentially involve training a model

objective, such as detecting groups of similar cus-

with data. Although there are learning systems that

tomers to improve personalization in the design

generate their own training data, such as AlfaGo

of new products for different segments.

Zero (an AI program that taught itself to play the an-

Algorithm-based learn-

cient Chinese game of Go), they are limited in their learning by reinforcement.

This technique is

scope and not suitable for most business situations.

similar to supervised learning but with one major difference: the algorithm uses a reward or punish-

Managers often wonder how much information

ment system. It is often used when there are few

they need to train a model. That usually depends

training data or when the data are generated by

on the particularities of the case and the complex-

interacting with the environment. A case in point

ity of the algorithm they want to use. Working with

would be to program a machine to learn a game

large volumes of data does not guarantee good re-

to the point that it can obtain the maximum score

sults. Also important are the selection of variables

without explicitly teaching it the rules.

and the quality and reliability of the training data.

An altogether better question to ask is what problem you can solve with the data available prediction vs. classification.

An altogether better question to ask is what problem you can solve with the data available. If you have little information, it’s better to use algorithms that are “resistant” to learning with few data, which logically tend to be less reliable. The key is to use common sense. For example, to build a model that forecasts the future weekly demand of certain products, you need not only the historical weekly sales data for each product but also the time series of variables such as holidays, weather, macroeconomic indicators or the sales channel. it’s not very plastic.

Even an AI system trained

Supervised learn-

correctly with past data may fail in the present

ing processes differ according to the type of vari-

if circumstances change. For example, a regu-

able you want to obtain. When the variable is a

lar customer may stop buying your products if a

characteristic, it is called a classification model;

competitor offers a better service at a lower price.

when you want to predict a number or value, it is

AI systems still have limited capacity to adapt to

called a prediction or regression model. The latest

circumstances like that, due to their lack of cere-

advances in machine learning have significantly

bral plasticity.

reduced the cost of prediction and classification, leading to new value propositions.

The limits of AI

it can be overfitted.

All supervised learning pro-

cesses allow you to measure the degree of reliability of a resulting model, by comparing the predic-

Knowing the real possibilities of machine learning

tion with past reality. The more the two coincide,

helps not only to spot promising investment op-

the more a model can be trusted. To gauge a mod-

portunities, but also to carefully manage expecta-

el’s reliability, data can be subdivided into sever-

tions about AI-related projects, thereby mitigating

al groups according to the stated purpose, such

the disappointment the results can often produce.

as training, validation or testing. But total confi-

Here are some of the limits of AI:

dence today does not guarantee total reliability

70 | IESE Business SchooI Insight | Winter 2018


Is AI right for me? Use this example, shown here for a customer service process, to make a similar evaluation for your own business problem.

Are the data structured?

YES

Can the automation be done easily, using predefined rules?

YES

NO

YES

NO

Can we use data structuring techniques?

Are the data digitized?

NO

YES

Is it feasible to digitize the data?

Don’t use AI, opt for simple automation

YES

NO

Can we do a learning algorithm test, using previous results to give an acceptable margin of error?

YES

It’s possible to apply AI

NO

It’s not possible to apply AI

NO

tomorrow. Many models suffer from “overfitting,”

combination: (1) automation, to eliminate manu-

whereby your model becomes too well-adapted to

al processes; (2) anticipation, to predict events; (3)

the random “noise” of your specific training data,

coordination, to participate in heterogeneous plat-

leading to misleading insights or faulty predic-

forms or ecosystems; and (4) customization, to bet-

tions that fail to take account of the variance in

ter meet customer needs.

new, real-world circumstances.

The importance of ends

Before adopting machine learning in your company, you must determine whether it plays an im-

Merely employing AI technologies, such as machine

portant role in any of these four interactions. This

learning, does not make a company an AI organiza-

analysis should be carried out during an initial

tion, just as having a website does not make you an

learning phase. Next comes the implementation

online business. What matters is not so much the

phase, in which the new value proposition – to re-

technology per se as its impact on the business mod-

place or improve existing processes, reduce costs

el and how it can enable the organization to achieve

or generate new revenue – is put into action. Then

a particular goal. Clearly, machine learning – like the

comes the discovery phase, in which other value

internet of things, big data, mobility and the cloud

propositions are explored through a process of

– should be treated as another manifestation of our

unsupervised learning.

increasingly digitally dense world, one that allows organizations to redefine their value propositions

During the learning phase, you must define the

and, by extension, their business models.

new value proposition and decide which processes to make more efficient with the applica-

New value propositions can use technology for four

tion of machine learning. To do this, you must

main types of interactions, which can be used in

answer these questions: (1) what processes can Winter 2018 | IESE Business School Insight | 71


How prepared is your business to make the most of AI?

KNOW

What roles do I need? To implement machine learning, you’ll need people in these positions.

Business clients

Business challenges

Data sets

Business translator

Corporate data

Data scientist

Data engineer Data requirements

Business questions

Model integrator Models

APPLICATIONS

be improved or replaced by new ones? (2) what

can take years to grasp the subtleties of every

training data sets do you need? (3) how can you

business area and the different opportunities

measure whether these techniques are being

AI can provide to each.

correctly applied?

• Communication barriers. It is important to know how to explain the possibilities and limita-

The next step is to build a minimum viable prod-

tions of AI in simple terms and at the same time

uct to learn from metrics and validate the origi-

interpret the real needs of business associates.

nal hypothesis, iterating throughout the process.

• Access to data. Most of the training data will

Normally, at this stage, you should use super-

consist of the information generated by the

vised learning methods to obtain prediction and

company’s different applications. Accessing

classification models.

these data requires detailed technical knowl-

What talent do I need?

edge of how and where to obtain them.

Just as you evaluate the suitability of AI, you must

To improve your chances of success, we recom-

also evaluate your organization’s readiness and

mend developing the following roles and profiles

ability to undertake AI projects. In recent years,

within your organization:

the role of data scientist has gained importance but faces several challenges.

business translator.

A key figure, the business

translator must interpret business challenges, • Lack of knowledge specific to your business.

opportunities and areas of improvement, and

A data scientist hired by a large company may

translate them into actionable proposals that can

have a broad knowledge of the sector, but it

be addressed through AI learning. The business

72 | IESE Business SchooI Insight | Winter 2018


The authors

translator is also responsible for communicating the results to each relevant business area and serving as an interpreter for lay users, using visuals to show how AI is being used and suggesting possible new uses. data scientist.

This post requires training in ap-

plied mathematics as well as sound knowledge of programming languages and database management. The ideal profile should have strong practical and creative skills, especially when it comes to

Javier Zamora is a senior lecturer in the Department of Information Systems at IESE. He earned a PhD in electrical engineering from Columbia University and co-founded InQBarna, a company specialized in developing mobile apps.

Pedro Herrera is director of NovaQuality, a tech consultancy. He holds a degree in economics and business studies from the University of AlcalĂĄ, Madrid, and an Executive Education diploma (PADE) from IESE.

selecting the data sets. data engineer. This person provides the data scien-

tist with access to the necessary training data. This work is usually easier when the company has a centralized repository of information. Even so, the task of combing through the myriad business concepts, features and data points can be daunting. The data engineer also needs to have a clear understanding of the regulatory requirements for personal data processing, for which he or she will need to work closely with the company’s data protection officer. model integrator.

Supervised learning process-

First, you need to prepare your technological infra-

es generate models with rules that allow you to

structures to systematically and appropriately cap-

tweak the input variables in order to obtain the

ture and store data in a central repository. Second,

desired output. If we adopt standard formats for

you must rethink your strategy and make sure data

these models, we can include them in transaction-

are being used to inform your value proposition.

al applications, such as enterprise resource planning (ERP), and thus apply machine learning to any

Finally, you must work on data governance. This

process in the company. This responsibility falls to

will require new profiles and knowledge to under-

the model integrator, who must have an in-depth

stand the implications and scope of data manage-

knowledge of both the model and the company’s

ment. In this way, you will be able to generate a

applications. He or she must oversee this pro-

virtuous circle and get the most out of AI.

cess of integration, as well as upgrade the model through a process of continuous learning.

Data, your most precious resource

AI algorithms are already available to most companies. Soon they will become an abundant commodity, as has already happened with other information systems. This is why data are the most precious resource of all. This has several implications. Winter 2018 | IESE Business School Insight | 73


The brains behind your choices A By Elena Reutskaja

famous study in a California gro-

(ACC) and the stratium – objectively proving not

cery store, by Sheena Iyengar and

just that choice overload exists but which parts of

Mark Lepper from Columbia and

the brain are responsible for it.

Stanford, found that too many jam offerings tended to result in

customers leaving the store without buying any-

The neuroscience of choice

Volunteers were put into large magnetic reso-

thing. More specifically, a table offering 24 jams re-

nance imaging (MRI) machines and presented with

sulted in many shoppers stopping for samples, but

images of scenic landscapes (mountains, lakes,

only 3 percent decided to buy. Meanwhile, a table

beaches, etc.). They were told they could choose

of just six jams resulted in fewer tastings, but 30

one image to emblazon onto a mug, T-shirt, bag

percent of those tasters decided to buy. The jam

or other piece of merchandise. The choices were

study forms part of a sizeable body of academic re-

presented in sets of six, 12 or 24 images.

search that supports the idea of choice overload – when having too many options becomes debilitat-

While volunteers were deciding which imag-

ing. Yet some refute that this phenomenon exists.

es to choose, we monitored their brain activity. We found that activity in some cerebral regions

To help settle the debate, I embarked on research

– mainly sensor and motor regions of the brain

with Rosemarie Nagel, of Pompeu Fabra University,

– reflected the cost of choice. Activity in those re-

and Axel Lindner, Richard A. Andersen and Colin

gions increased with the number of choices: low-

F. Camerer, of the California Institute of Technolo-

est activity for six alternatives and highest for 24

gy (Caltech), to try to understand what happens in

choices. In other words, we could show the neu-

the brain when people choose from sets contain-

rological basis for more choice becoming more

ing different numbers of options. Unlike behavioral

costly for decision makers.

studies, in which participants might think they’re being nice by telling us what they think we want to

Scans of blood flowing in the brain also revealed

hear, we sought an objective, biological measure

significant neurological activity in two regions: the

that participants could not control: observing their

ACC, where the potential costs and benefits of de-

actual brain activity. In doing so, we discovered bi-

cisions are weighed, and the striatum, where value

ological markers of choice overload in two specific

tends to be determined. This activity, we believe,

parts of the brain – the anterior cingulate cortex

represents the choice overload.


illustrations :

Jojo Cruz

Choice is good but too much choice can be paralyzing. By using MRI machines, we can actually see when too much choice overloads the brain. The ideal number of options to present to a consumer may be fewer than marketers think.


KNOW

The brains behind your choices

The author

In those two key regions, we found brain activity tended to be highest when our test shoppers had 12 options to select from. Brain activity was lower when there were only six images – but also, interestingly, when there were 24 options. When presented with 24 images, the average brain in our study appeared to shut down – there was a marked decrease in ac-

Elena Reutskaja, associate professor of Marketing at IESE, uses brain-imaging, eyetracking and other techniques to study consumer behavior and decision-making. In 2017, this former fencing champion from Belarus was selected as one of the Best 40 Under 40 Professors by the B-school website Poets & Quants.

tivity in the regions that reflect value, reward or net benefits from the choice process. This indicates that medium-sized choice sets seem to be more valuable for decision makers: they experience all the benefits

bad, because we miss the feelings of freedom and

of choice without becoming overwhelmed.

control that come from the act of choosing. If we only have a couple of options, the outcome – the

As a control, we eliminated the cost of choice from

product selected – may not match our preferences.

the decision process by telling volunteers that a computer would choose the best images for them.

Ideally, we would find the golden middle. Think of

In this case, we saw no drop in ACC or striatum

it as an inverted U: the net benefits of choice ramp

activity, even when browsing larger choice sets.

up as long as they outweigh the costs, but there

In search of the golden middle

The idea that less can be more, and vice versa, is

comes a point when the effort, time and stress involved in making a choice becomes too much, and the net benefits start to decline.

important at a time when we’ve never had more choices. Faced with too many choices, potential

Our golden middle would be somewhere between

customers can feel stressed out and may later re-

8 and 15 items. Depending on certain variables such

gret their choice. Having too few choices is also

as culture, gender, age, expertise and product type, that number could be higher or lower. For example, older patients may be able to evaluate a greater number of hospitals, but the same group might be overwhelmed by four options of new apps. For good choice architecture, managers should look at how best to present their business offerings so that customers feel they have adequate choice, experience freedom and control, and are able to match their preferences, without feeling overwhelmed by the whole process. So, dresses could be organized by colors or, like restaurant listings, in similar categories. Such things help customers choose better. And by better I mean that people can choose what they really want. Remember: it’s your responsibility as choice architect to make the process as friendly and desirable for your customers as possible. source:

Reutskaja, E., A. Lindner, R. Nagel, R.A. Andersen and C.F. Camerer. “Choice overload reduces neural signatures of choice set value in dorsal striatum and anterior cingulate cortex.” Nature Human Behaviour (2018).

76 | IESE Business SchooI Insight | Winter 2018


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Lupe Cruz illustrations :

What’s the best way to reach today’s constantly connected consumers? An omnichannel model is now essential to respond to shifting consumer patterns. As successful firms like Zara, Mango, Uniqlo, Apple and Amazon show, the keys to survival in this new age are unforgettable customer experiences and efficiency.


Rethinking the funnel for the omnichannel age By Guillermo D’Andrea

I

n little more than a decade, smartphones

advantage of this sweeping digital transformation.

have radically reconfigured how we social-

In this article, I highlight some defining traits of

ize, engage politically, stay informed, study

the future consumer and suggest how brands and

and consume entertainment, providing a

businesses ought to be adapting to them.

big boost to many sectors and putting at

risk those that don’t keep up with the times. Peo-

ple born after 1995 have never known a world without internet connectivity and mobile devices,

The new consumer

Consumer patterns are shifting at a dizzying pace. Here are the hallmarks of the new consumer:

though we are all, to some extent, part of what’s being called the Mobile Generation.

constantly connected.

In most places, even in

the remotest corners of the world, consumers This technological revolution has already left a

own a smart device with full 24/7 access to news

trail of corporate corpses in its wake, including

and information.

such household names as Kodak. Newspapers have been forced to redefine their business mod-

In 2015, Apple launched the Apple Watch, which

els, and bookstores and music stores are increas-

quickly became the first-ever mass-consumed

ingly becoming a rarity. Television broadcasters

wearable device. If recent trends are any indica-

have also had to reconsider their business mod-

tion, the wearable revolution is almost upon us.

els, having been forced to shift from terrestrial to

According to Forbes, the number of wearables

cable and now live streaming.

shipped could double by the year 2021.

How does all this affect consumers? And how can

More and more market players are joining the

brands and businesses adapt to these changes?

revolution. Levi’s has designed a jacket with Goo-

Over the past few years, I have conducted several

gle tech woven into it, and Callaway has intro-

studies whose findings point to a number of strat-

duced smart sunglasses to its range of premium

egies that would enable companies to take full

products for golfers.


KNOW

Rethinking the funnel for the omnichannel age

Evolution of the consumer journey

Traditional consumer journey: funnel-shaped

Both journeys start as consumers search for products by exploring different options. Now, rather than ending with the purchase, consumers go on to share opinions about their experience online.

The more companies automate,

consumption, splashing out on flashy goods or ex-

the more free time they open up for consumers.

more free time.

pensive status symbols to display their new acquisi-

While automation at check-ins/checkouts or call

tive power. However, in many advanced economies,

centers may still be relatively new to us, factories,

particularly among millennials, the trend is toward

warehouses and distribution centers are near fully

socially meaningful consumption, personal im-

automated, with robotics increasingly supplant-

provement or wellness. People prefer to spend their

ing the human workforce. The hours freed from

hard-earned cash on an evening class or an art exhi-

work affords more hours for other activities.

bition. It’s substance over style that matters.

Cars are another area undergoing automation,

The new consumer journey

transforming the hours we spend behind the

It’s not just the consumer that’s changing; so, too,

wheel. Uber has agreed to buy 24,000 self-driving

is the sales channel. Today’s consumers begin

cars from Volvo, while numerous other carmakers

their search for products with an unclear need to

are integrating Amazon’s Alexa virtual assistant,

satisfy. The need gradually becomes more defined

which can order your shopping and have it waiting

as they gather more information about the differ-

for you by the time you get home.

ent options available along their way to the purchase. Most of this journey is digital.

higher-level skills.

It is becoming less and less

useful to memorize dates, events and other en-

Traditionally, the consumer decision journey has

cyclopedic information. More relevant is know-

been presented in the shape of a funnel, in which

ing the right questions to ask and interacting well

the options narrow the closer you get to the point

with other people. For this reason, education sys-

of purchase. Now, that journey looks rather differ-

tems are increasingly focusing on teaching stu-

ent. As soon as you express an interest and start

dents critical thinking and social intelligence.

weighing up your options, rather than narrowing down, the choice sets open up and go extremely

experience-focused.

As people gain more dis-

wide, as new windows pop up or you consult dif-

posable income, they may engage in conspicuous

ferent sources on different screens. The journey

80 | IESE Business SchooI Insight | Winter 2018


New consumer journey: fish-shaped

only closes with the purchase. However, it opens

customers who, with each passing day, are aban-

up again as you share opinions, swap stories, offer

doning traditional channels.

advice or give ratings about your experience online. For this reason, the market research agency Kantar has presented the new consumer journey not as a funnel but as a fish (see above).

Tips for the omnichannel era

Where does this leave traditional stores and brands? Above all, what can they do to keep up with this rapidly changing environment?

From retailers’ point of view, they can connect with consumers through multiple points of con-

strengthen your capabilities.

tact, including email, physical and electronic

tions must encourage their teams to develop bet-

First, organiza-

catalogs, websites, call centers, social networks,

ter analytical capabilities to understand customer

television, computers, mobile phones, tablets

interests and needs, optimize their store capital

and home deliveries. Although the physical store

and adjust their stock to meet demand – all while

remains one of the key points of contact, its im-

offering an attractive, friendly experience that

portance is diminishing. As markets continue to

complements the digital channel offerings.

adapt to technology, visiting a physical establishment will become a voluntary rather than manda-

think exponentially.

tory choice. As such, stores will have to become

is one way of growing exponentially. But more

Working through networks

much more attractive places for customers to jus-

than leveraging a network, companies should try

tify a visit instead of buying online.

to transform themselves into open, flexible, interactive organizations – or what the Canadian tech

This multiplicity of contact points – called omni-

entrepreneur Salim Ismail termed “exponential

channel – represents a revolution in the consum-

organizations.” Traditional companies have limited

er journey that is forcing retailers to offer a fully

resources and tend to grow linearly. Exponential

integrated consumer experience so as not to be

organizations, on the other hand, aren’t asset heavy

left out of the game. Joining them are the manu-

but operate according to a principle of abundance.

facturers of branded products that need to reach

So, rather than investing in hotel rooms, Airbnb Winter 2018 | IESE Business School Insight | 81


KNOW

Rethinking the funnel for the omnichannel age

Stores will have to become much more attractive places for customers to justify a visit instead of buying online

Stores are also incorporating technologies that drastically improve the customer experience. Can’t find the exact size or color you were looking for? Just place your order on a large-screen touchpad, as Kiabi and Mango are offering in their stores. Want to see how that garment looks on you in another color without changing clothes again? Uniqlo has a “magic mirror” that lets their customers do just that, by modifying the reflection using special display technology. Zara’s new flagship store in London combines several of these features. The store is essentially a showroom where customers try on clothes but buy them online. If the order is placed before 2 o’clock, it will be available to pick up the same day at the store of the customer’s choosing.

taps the abundant supply of homes for tourist accommodation. By tapping into such abundance,

It is this kind of multichannel versatility that con-

exponential organizations are disrupting, disinter-

sumers ultimately want. In a world of empowered

mediating and transforming business models, sec-

consumers, stores need to provide high-quality,

tors and industries.

positive service experiences at every stage of the decision journey, from the initial online search to

make the shopping experience unforgettable

the final physical purchase. It’s no longer a ques-

In this customer-

tion of “What can I sell you?” but rather “How can

(for

all the right reasons).

centric environment, the quality of the shopping

I help you achieve your goal today?”

experience becomes all the more important. Consumers often start their journey online but

accompany customers on their journey.

finish offline with a store visit. This visit needs

digital tools make it possible for brands to accom-

New

to be as engaging and convenient as possible;

pany customers throughout the entire decision

otherwise, customers will just order the product

journey, from when a need first appears, through

from the comfort of their own home. To make cus-

the various phases of exploring, finding and pur-

tomers feel at home, the retail setting must be as

chasing the product, to finally complementing the

stimulating and inspiring as going to the theater, a

purchase with related products.

people-focused space for experimentation, observation and learning.

A physical presence is no longer enough. Customers expect virtual, round-the-clock attention. And

Ultimately, the final purchase must become the

the focus should be on the customer’s needs, not

defining memory of the experience. To that end,

just on scoring a sale.

stores have begun to complement their usual offering with social activities, such as group classes, art

It is the shopping experience, not the product per

exhibitions, cultural talks or a party with friends.

se, that really matters. “What can I buy?” becomes

82 | IESE Business SchooI Insight | Winter 2018


The author

“What can I achieve?” In this new paradigm, businesses that are more empathic – drilling down into their customers’ interests and needs, and doing everything they can to satisfy them – will be better positioned to shift from a B2C to a C2B model. By doing so, they will reap huge competitive advantages and sustainability benefits. prioritize efficiency.

Guillermo D’Andrea is a professor of business administration at IAE Business School in Argentina, where he specializes in services marketing and international marketing. He has been a visiting professor at Harvard, Babson and Darden, as well as at IESE, where he teaches on the Focused Program “Retail for Retailers: Keys to Success in an Omnichannel Business.”

All of the above requires a

substantial financial commitment. Price transparency and employees working fewer hours will squeeze revenues and margins. In such an environment, efficiency becomes key. It’s no coincidence that Zara, H&M, Uniqlo, Starbucks, Ikea and Walmart are global leaders for their disci-

and behavior, making it possible to offer a more

plined approach to process efficiencies that like-

tailored customer experience.

wise generate value for customers. Another key component in the efficiency equaAs such, comprehensive, flexible planning is an ob-

tion is logistics. From the agile design of Zara’s

ligation, not an optional extra. The goal should be

“fast fashion” operations to the sophisticated

three-pronged: optimize inventory management;

processes of online behemoths like Amazon or

cover growing operating costs; and improve cash

Alibaba, logistics plays a pivotal role in on-time

flows. With regard to stocks, make the most of hot

delivery for customers, the optimal movement of

sellers and “hook” products, enhance low-turnover

inventories, cost reductions, and the maximiza-

products, and use low-margin, low-volume prod-

tion of turnover and cash flow. By fine-tuning and

ucts to introduce new features that make the store

streamlining your logistics, you can offer more at-

visit more attractive for customers.

tractive prices while at the same time providing a better overall shopping experience. It’s arguably

Encourage continuous improvement, such as reg-

the most important factor behind the spectacular

ularly exchanging best practices, empowering in-

growth of distribution firms.

dividual stores, and aligning the firm’s operations with its logistics, supply and brand strategies. In-

In short, we are witnessing the formation of a rad-

stead of trying to play hard ball or squeeze suppli-

ically different consumer reality, brimming with

ers and manufacturers, retailers will have to work

opportunities, threats and challenges for both

much more closely with them to generate a supe-

retailers and distributors alike. The good news is

rior shopping experience.

that, for some time now, the markets have been signaling the way with greater clarity. They also

Companies need to strengthen their “retail brain”

provide the necessary tools – namely technolog-

– the IT systems that help managers track what’s

ical ones – to ensure that we all join the sprint

happening in their stores and anticipate future

from the same starting line. In that sense, the fu-

demand. Thanks to artificial intelligence, it’s now

ture of retail is already here.

possible to see beyond the store’s walls and incorporate data from online and offline channels being used by customers. The end result is a more nuanced understanding of customers’ interests

source: D’Andrea, G. “Rethinking the Funnel for the Omnichannel Age.” IESE Insight Review, no. 36 (2018): 53-58.

Winter 2018 | IESE Business School Insight | 83


How can leaders make innovation happen in their business? It’s not so much about getting people to think differently as it is about getting them to behave differently. To do that, practice these five key behaviors, plus one more: leveraging personal motivation.

The 5+1 behaviors of innovatio By Paddy Miller and Thomas Wedell-Wedellsborg


on illustrations :

David C. Herreros


KNOW

The 5+1 behaviors of innovation

In memoriam

We are pleased to reprint this article as a tribute to Paddy Miller, an indelible presence in IESE classrooms around the globe for 35 years, whose ideas on innovation, leadership and organizational change made him an inspirational professor, charismatic speaker and much sought-after leadership consultant. He passed away on September 14, 2018, at the age of 71.

company used various methods, from suggestion boxes to workshops, to collect their ideas. No limits were set on their creativity; quite the contrary, their motto was “there’s no such thing as a bad idea.” When Felix Previdoli became head of R&D, he noticed something was wrong. While the “everything goes” philosophy generated a stream of interesting ideas, hardly any were game-changing. So he tried something different: instead of asking people for whatever ideas they could come up with, he specified the kinds of ideas he wanted to see.

P

An opportunity presented itself to test the new approach. For decades, Lonza had reaped healthy profits from a product we’ll call Thiamin. But now, art of your role as manager is to

foreign competitors with lower labor costs were

be an innovation architect. Like a

threatening to price Thiamin out of the market.

real architect, this implies shaping

Thiamin plants might have to close down unless

the physical environment in which

they could find a way to lower their costs. To that

people work, but it goes beyond

end, Previdoli invited proposals from the compa-

that to include all the factors that influence peo-

ny’s personnel, stipulating that the ideas must fo-

ple’s behavior at work – the systems and struc-

cus on improving the Thiamin manufacturing pro-

tures, processes and places, strategies and poli-

cess and delivering at least 30 percent cost savings.

cies, shared habits and routines. Such a highly focused brief paid off. Within In researching and writing our book, Innovation as

weeks, Previdoli and his team were testing the

Usual, we discovered some key factors behind inno-

most promising idea. The trial results exceeded

vation – what we call the 5+1 behaviors of innovation.

expectations: productivity doubled and the man-

Use these behaviors as a diagnostic tool to identify

ufacturing cost of Thiamin was slashed by 75 per-

the biggest behavioral bottlenecks to innovation in

cent. The operation was saved and shareholders

your own firm and then work on fixing them.

were delighted.

1. Focus

This shows the power of focus. It shows the differ-

Contrary to what many managers believe, focus

ence leaders can make when they act as innovation

tends to trump creative freedom as a foundation of

architects, directing the search for innovation and

business innovation. Innovators succeed when their

setting clear, limiting goals for their people.

leaders give them a clear, limiting focus, directed at something that can create value for the company.

2. Connect

People don’t often get good ideas when they’re isoConsider Lonza, a life sciences supplier. Recog-

lated in their offices. New insights tend to come

nizing employees were a source of creativity, the

from outside. They’re a bit like a puzzle whose

86 | IESE Business SchooI Insight | Winter 2018


pieces are distributed across vast terrains and they get put together in novel ways – what University of California professor Andrew Hargadon calls “recombinant innovation.” To expose people to these building blocks of innovation, leaders must help their people connect to outside input. Your customers are one such source but not the only one. People can also find new ideas by connecting with colleagues from other departments or even with domains indirectly related to their business. A memorable example of this was when a major broadcaster adopted a no-smoking policy. Suddenly, various divisions that normally had little contact with each other were brought together daily as the

Innovators succeed when their leaders give them a clear, limiting focus, directed at something that can create value for the company

smokers gathered outside and exchanged information on their own business areas. The no-smoking policy inadvertently spawned a creative space for exchanging ideas. One random interaction led to the development of a technology that eventually be-

within certain limits and with no need for docu-

came a major new source of revenue.

mentation, created a strong sense of loyalty.

Stories like this abound. Often, it’s merely a ques-

However, this free rein was balanced with com-

tion of rearranging office spaces. Innovation ar-

munication. Every three months, regional manag-

chitects must constantly seek similar, structurally

ers would spend three days in an offsite meeting,

supported ways to help their people connect to

helping each other solve problems and sharing

new worlds.

best practices. This not only fostered cross-fer-

3. Tweak

Ideas aren’t born perfect. At their inception, most are flawed and need serious tweaking. Unfortunately, most people feel uncomfortable with the notion of prototyping. As such, it’s up to innovation architects to help people test and challenge their ideas, exposing them to frequent feedback, and promoting a culture of constant learning and experimentation.

tilization but also ensured that managers weren’t wasting their time on risky experiments, effectively balancing their freedom with a healthy level of sanity-checking. And it worked. Toledo delivered consistent annual growth rates of 15 to 20 percent. His region went from representing 10 percent to representing 22.7 percent of global sales in just two years. By promoting a mix of responsible experimenta-

We saw this in action when we shadowed Heinrich Toledo (not his real name), the regional manager of a European conglomerate. Because he worked with many different country managers, he enforced a policy of rapid, constant experimentation. His willingness to let his country managers experiment with pretty much any idea,

tion and frequent feedback sessions, innovation architects must help people tweak their ideas and work on bringing them to life rapidly.

4. Select

Given that most ideas start out bad, companies must master the discipline of filtering them, selecting Winter 2018 | IESE Business School Insight | 87


KNOW

The 5+1 behaviors of innovation

which to invest in and which to discard. The selec-

The 10-hour group was led by an extremely

tion process, though, comes with pitfalls. Research

goal-oriented manager. Under his leadership, the

has revealed the cognitive biases that people suf-

group had speed-filtered the list, rapidly discard-

fer from when evaluating new ideas, making them

ing everything but the top 25 ideas. They discussed

prone to bad judgment calls. For this reason, com-

these in depth, and then force-ranked them into a

panies must strive to optimize their filtering pro-

final list of 10 recommendations. The leader of the

cesses, creating strong support systems that can

other group, by contrast, wanted to achieve con-

help the gatekeepers make better calls.

sensus and believed that all ideas merited the same level of attention. He asked his group to analyze

People don’t often get good ideas when they’re isolated in their offices

each idea through a longer process of follow-up interviews, research and meetings. From this experiment, the head of the business unit realized it was necessary to approach the gatekeeping process more systematically. However, he also felt that using only the most efficient approach would risk missing out on long-term opportunities. Eventually, he created two different gatekeeping processes: a primary one that was fast and aimed at quick wins; and a secondary one that was more meticulous, aimed at exploring less obvious ideas that might have hidden potential. In this way, the business unit dramatically shortened

Choosing who to appoint as your gatekeepers and

the time to turn quick-win ideas into results, while

how they work together will have a crucial bearing

also protecting the more vulnerable long-term

on the success, or otherwise, of your company’s

ideas against overzealous gatekeepers.

ability to filter ideas. The business unit head of a large auto-parts manufacturer learned this when he held a contest to generate ideas internally. As an

5. Stealthstorm

Many innovators don’t like to play office politics,

experiment, the ideas were divided into two batch-

preferring to place their faith in the perceived

es. The job of evaluating them was assigned to not

soundness of their ideas. However, many great

one but two different groups of gatekeepers.

ideas have been killed by organizational forces. It’s key to understand that politics, like power, is

Within 10 man-hours, one group had completed

not just a negative force; when used right, it can

its filtering work and recommended how to im-

move ideas toward fruition. It’s the job of the

plement the top ideas. The second group took

leader to create the political space for innovation,

more than 100 man-hours to evaluate the same

paving the way for people to succeed. We call this

ideas and still hadn’t completed their filtering

process “stealthstorming.”

process. To his surprise, the business unit head found that the quality of each group’s recom-

We saw this dynamic at work when Jordan Co-

mendations was largely similar. Why had it taken

hen, an HR manager at Pfizer, launched pfizer-

the two teams such a different amount of time to

Works. Cohen had noticed many gifted workers

filter the ideas? The primary difference was the

were spending too much time on menial tasks

groups’ leadership.

like vetting spreadsheets or creating PowerPoints.

88 | IESE Business SchooI Insight | Winter 2018


The 5+1 Framework What are your bottlenecks to innovation? Use this tool to identify and fix them.

BOTTLENECKS • Innovation is pursued at random • Innovating in “wrong” or non-essential areas

KEY BEHAVIOR

1 Focus

• Unoriginal ideas lifted from the latest thing someone read • Employees don’t understand their customers

2

Connect

• People polish ideas for ages before testing them out • Ideas prove unworkable only after heavy investment was made

3

HOW TO FIX IT • Link the pursuit of innovation to business objectives • Direct people’s creative efforts to areas that make a difference

• Facilitate regular contact with people from other departments or unrelated business areas • Exploit existing points of contact with customers to learn more about them

• Use testing as a learning tool, not just for go / no-go decisions • Allow new ideas to change course – don’t force fuzzy ideas into ambitious five-year plans

Tweak

• No clear system for filtering ideas • Suggestion boxes are “idea graveyards”

4

• Link the selection criteria to strategic aims • Review and adjust existing gatekeeping practices

Select

• Good ideas are killed by organizational forces or turf wars • Long-range ideas are killed off before they’ve had a proper chance

• People lose steam and give up • Employees don’t own innovation – it’s someone else’s job

5

Stealthstorm

+1 Persist

• Help employees navigate office politics – map who’s key and who to avoid • Connect innovators to higher-up sponsors with resources

• Examine the rewards or punishments for people who try to innovate versus those who don’t • Ask people to innovate in areas they’re personally passionate about (obviously in keeping with overall business aims)

Winter 2018 | IESE Business School Insight | 89


KNOW

The 5+1 behaviors of innovation

Given that most ideas start out bad, companies must master the discipline of filtering them, selecting which to invest in and which to discard

90 | IESE Business SchooI Insight | Winter 2018

He came up with the idea of outsourcing those jobs so that Pfizer’s most valuable employees could dedicate more time to high-impact work. After running a pilot, he faced the challenge of winning senior management support in order to roll out the initiative across the organization. Cohen turned to a mentor, David Kreutter, who helped him navigate the organizational terrain, providing advice on how best to position the initiative internally and helping him secure a meeting with the vice chairman. Through deft political maneuvering, the project gained traction. The idea for pfizerWorks was Cohen’s, but without the


The authors

support and air cover that Kreutter provided, it would have taken far longer for pfizerWorks to get off the ground and may well have gotten lost. Likewise, innovation architects must help their people

Paddy Miller was a highly popular professor in the Managing People in Organizations Department at IESE. He was the author of two books, Mission Critical Leadership and Innovation as Usual.

navigate the politics of innovation.

+1: Persist

Ultimately, creativity is a choice. Your job as a leader is to facilitate people’s choice of the previous five behaviors, and encourage them to persist in the

Thomas Wedell-Wedellsborg is an entrepreneur, management consultant, speaker and co-author of Innovation as Usual.

face of adversity until these behaviors become an ingrained part of what they do. This entails leveraging the power of personal motivation, combining individual interests and reward systems in a way that drives people to persevere. An interesting case is the subsidiary of a European company which for a number of years had been underperforming. Enter a new country manager we’ll call Marc Granger. The business was fighting battles on several fronts: growth was down; employee satisfaction was at an all-time low; employee turnover was double the industry average. Granger’s approach was to give people more free-

Granger, like many other managers we encoun-

dom. Employees, not management, decided the

tered in our research, understood an essential truth

office layout. People could set their own work

about business innovation: it’s not whether people

hours, so long as they delivered results. Most im-

have the ability to be creative (most do, to varying

portant, projects would not be chosen by man-

degrees); what’s important is that they choose to

agement. While everybody had to pick something,

use that ability.

each employee was free to choose the project that appealed to them most. The only requirement

How easy do you make it for potential innovators

was that it supported the overall aim of making

in your company to choose the creative path? Are

the subsidiary a better, more innovative place to

innovators within the firm fairly rewarded? Are

work. In essence, Granger was tapping into one of

failed innovators not treated badly? So long as

the most potent sources of persistence: people’s

people aren’t made to go through hell, they might

personal interests and priorities.

just embrace innovation as usual.

In just a few years, the subsidiary was transformed from one of the worst performing into one of the most profitable. Employee morale improved so

source:

Miller, P. and T. Wedell-Wedellsborg. “Clearing the Path to Innovation.” IESE Insight Review, no. 16 (2013): 52-59.

dramatically that the company was eventually voted the best place to work in the country. In fact, other European subsidiaries were inspired to adopt a similar approach, with equally strong results. Winter 2018 | IESE Business School Insight | 91


FULL STOP

92 | IESE Business School Insight | Winter 2018


Joan Roca, the celebrated chef of the three-Michelin-starred restaurant El Celler de Can Roca, reveals the ingredients necessary for achieving world-class innovation.

W

hen Joan Roca decided to

to achieving breakthrough innovation, what is the

open a restaurant with his

recipe for success?

brothers, Josep and Jordi, he didn’t have any grand ambitions. Growing up in his

Keep calm and carry on

Restaurant kitchens have the reputation of be-

parents’ modest bistro, Can Roca, it just seemed

ing highly charged atmospheres, where profani-

a natural thing for him to do. The brothers knew

ties are shouted along with the orders, as food is

they didn’t want to just take over their parents’

quickly plated and dishes fly off the counter. Not

business, but they didn’t want to stray too far from

so at El Celler. “We’ve never been like that,” says

home, either. They opened El Celler de Can Roca,

Roca. “There has always been a calm atmosphere.”

a small place next door, in their working-class

This, he believes, is more conducive to the con-

neighborhood on the outskirts of Girona, the me-

centrated effort needed for creation.

dieval city in the Catalonia region of northeastern Spain. This was in 1986, long before the area be-

Keeping calm may have something to do with the

came a mecca for foodies and a film location for

training sessions the team holds every Tuesday,

Game of Thrones. Roca can’t even recall the exact

when the restaurant closes its doors at lunch-

day the restaurant opened. “All I can remember is

time so they can receive coaching from a spe-

that it was late summer,” he says. “It was small and

cialist in the psychology of high-performance

cramped, and we used our mother’s crockery. At

teams. While closing at lunchtime means losing

the time, a restaurant guide named us ‘the shab-

the business of 50 paying customers – represent-

biest gourmet restaurant in Spain’.”

ing more than 40,000 euros in lost revenue every month – the benefits of these sessions are price-

In 1995, this “shabby” restaurant earned

less, as he explains. “You have to understand that your customers are

that Restaurant magazine included it in

internal as well as external. So, all staff, including

its prestigious ranking of the World’s

us, the bosses, are present. We talk to the team

50 Best Restaurants, in fifth place. It

but, more important, we listen to what they have

climbed to fourth in 2010, and came

to say. We create an environment where any issue

second in 2011 and 2012, before finally

can be aired and addressed. We think together as

claiming the No. 1 spot in 2013 and

a team. In this way, we protect ourselves from our

again in 2015.

own success.”

How did a restaurant with such in-

Running a large restaurant, as El Celler has be-

auspicious beginnings become the

come, is not the same as running a small family

best in the world? When it comes

bistro: “When you’re a small restaurant, with four

photos courtesy of :

2002 and its third in 2009, the same year

El Celler de Can Roca

its first Michelin star. Its second came in


FULL STOP

The recipe for success

or five employees, you can deal with issues as they

constantly question things in order to find new

arise. But when you have more than 75 people

ways to transform products and get the presenta-

working for you, you need to take some time out,

tion right.”

have a breather. Sometimes it’s best to take two steps back before charging forward again, with a

El Celler dedicates thousands of hours to experi-

clearer mind and a freshened team.”

mental research. In 2014, for example, 12,000 hours

Thoughtful use of space

of research resulted in the introduction of 58 new dishes. This creative know-how has made El Celler an

In addition to all the preparation, organization and

attractive partner for businesses in other fields. Cor-

training, Roca says “it’s important to think carefully

porate sponsorships, which the Rocas have agreed

about the use of space – in the kitchen, the flow

to sparingly, have led to several mutually enriching

of people and materials – to make sure that every-

experiences. BBVA, for instance, invited members of

thing is in the right place, so that your team can

the restaurant team to visit places where the global

perform at its best.”

bank has operations and where there is a rich culinary tradition – from Hong Kong and Turkey to Latin

“When you know nothing and so you’re forced to listen, it’s very healthy”

America and the southern United States. “We did three summer tours, traveling the world, cooking with local people, looking for and finding inspiration,” says Roca. “We grew as individuals and forged stronger ties with each other, which helped make the whole team more cohesive. Traveling is one of those things that make you realize you still have a lot to learn.” Going to a market in Bogota or Bangkok and discovering fruit you have never seen before is “an amazing learning experience,” he says. The same goes for reading and speaking with local cooks and producers, “with people who know more about the land and the ingredients than you do.”

This is not as obvious as it seems: “In many restaurants, the kitchen is tucked away in a remote corner

“When you know nothing and so you’re forced to lis-

or in a basement, because some architect consid-

ten, it’s very healthy. And this feeling of acknowledged

ered it inappropriate from the point of view of the

ignorance – at a time when people are calling you

customers. But that placement is not so good for

No. 1 in the world – is a powerful driver of personal

actual cooking.” This is one of the great changes that

growth. It serves as a tool to ‘attack’ your success, and

French nouvelle cuisine brought about. “The chef de-

helps keep you active and alive.”

cided where and how the kitchen should be built, because it was his home.”

Creativity as a discipline

Creative freedom

Besides researching, devising and preparing new dishes, restaurants such as El Celler have also trans-

Another key ingredient for innovation is creativi-

formed the way food is consumed. It’s no longer the

ty, which Roca associates with nonconformity. “It’s

customer who chooses from the menu, but rather

not just about cooking well. We encourage teams to

it’s the menu’s creators who guide the customer.

94 | IESE Business School Insight | Winter 2018


6

Six star ingredients

The success of each dish is underpinned by these key elements. Passion for what you do

an architect takes basic materials and

key issue. Say we’re working on a

When starting out, “it wasn’t easy,”

builds structures that have to be both

new dish containing peas. By the time

says Roca, “but it was fun! We were

useful and beautiful – that make you

the dish is ready, and we’ve decided

eager to work and enjoy ourselves,

feel good. If everything is united, things

how it’s going to be and what kind

doing what we love.” That spirit is

flow that much better.”

of platter we’re going to serve it on,

Seeing through multiple lenses

signed and -made, the pea season in

what keeps them going, to keep “adding new touches to a project that continues to excite and enthrall us to this day.”

Work, work and more work

The path toward innovation starts from a multidisciplinary dialogue

involving creative professionals from a host of fields: designers, botanists,

which may have to be custom-dethe local region may already be over.”

Staying true to your roots

“We’re still in the exact same place

“We work a lot. Yesterday I was here

chemists, artists. “We try to ensure

where we were born and grew up.

until 4 a.m. when the last customer

there are as many lenses as possible.

There’s a deep connection with

left.” Success comes only after years

Through this rich dialogue, we look

our roots that has prevented us

of “just working hard to constantly

for new ways and new formulas to

from moving, despite the numerous

improve, learn new things, perfect

improve the customer experience.”

offers we’ve received.” Roca sees

your craft – like slowly chipping away at stone.”

Timing is everything

those who have compromised their authenticity by straying too far from

The amount of time that can elapse

their roots: “When you go to a famous

between the conception and prepa-

restaurant and you notice that not a

Spaces are key for creativity. Roca

ration of a new dish can last anywhere from a month to a year. “The

single customer is from the area, you

draws parallels with architecture: “Just as we make dishes from ingredients,

seasonal nature of the product is a

Ideal spaces

can’t help feeling this is not real.”

Winter 2018 | IESE Business School Insight | 95


FULL STOP

The recipe for success

“The customer comes with an open mind, an adventurous spirit, and puts his or her trust in us”

“This is one of the great changes,” says Roca. “Restaurants like ours are fortunate because the customer comes with an open mind, an adventurous spirit, and puts his or her trust in us.” This freedom has enabled the kitchen to progress. Without it, “we wouldn’t have come so far in terms of creativity, because we’d be restricted by what each customer orders on any given day. This eases product flows, since we already know what we’re going to offer. It’s more sustainable and less wasteful.” Of course, this only works once you’ve achieved a certain status and people come looking for an experience – and one that Roca doesn’t consider inordinately expensive, since “the effort, the product and the human team behind it are extraordinary.” The price of a meal with wine pairings ranges between 250 and 300 euros per person, somewhat

To preserve their freedom, the Roca family has

less than in other world-class restaurants such

embarked on a series of associated ventures: Es-

as Osteria Francescana in Modena, Italy, or Elev-

pai Mas Marroch, Rocambolesc and, opening in

en Madison Park in New York City. Although they

2019, Casa Cacao. These allow the family to gener-

could easily charge more, Roca insists on keeping

ate additional income through catering, ice cream

it within the realms of possibility for local people.

and chocolate ventures. They also publish best-selling cookbooks and have developed popular online cooking courses, or MOOCs. The latter is a demonstration of how they have been able to take “what we have always done and what we have always been committed to” and leveraged new technologies to share that knowledge more broadly. For Roca, opening up knowledge to others is crucial for two reasons: “It spurs your colleagues to evolve, but it is also a way of establishing your authorship and turning your accomplishments and knowledge into a shared heritage.” As innovators collaborate, like many of the great chefs in Spain have done in recent years, that is how a field makes a collective progression.

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96 | IESE Business School Insight | Winter 2018

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