June 13, 2009 | Refinancing

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Can Small Changes Save Your Business, and the Planet?

June 13th, 2009

At a recent executive education program on sustainability, I spoke about the many tactical ways to reduce environmental impacts and save money quickly in areas such as facilities, fleet, IT, telework, and waste (these are the main topics in a free special report I put out recently on green cost cutting). To fit the current economic climate, my focus was specifically on short-term, quick wins. After I finished my talk, an interesting challenge came from one of the program faculty: Given the scale of environmental challenges we face, shouldn’t we be talking more about systematic, disruptive changes in how we do business?

After the session, one of the attendees, Mike Desso, Head of the Operations Environmental Sustainability Council for Nestle USA, told me he wanted to ask the group a simple question: “Has anyone here done all the things Andrew suggested?” His point was basically that there are still many simple things companies can do — so why debate whether we’re doing the “big” things when we haven’t even acted on all the “small” ones yet?

The whole discussion got me thinking a lot about the perceived commerce offs between incremental and systematic approaches or, similarly, between incremental and disruptive change. The question is not an idle one given the legitimate concern about whether traditional eco-efficiency approaches will be enough to tackle large-scale environmental challenges.

It would appear on the face of it that incremental approaches won’t get us there. So after some thinking, I come down conclusively and firmly…in the middle. In essence, none of these ideas of change and innovation — incremental, systematic, or disruptive — are independent. Instead, they’re pieces of the same strategic and tactical puzzle. Arguably, the concepts are inextricably linked: Don’t incremental changes spur thinking about — and if they save money fast, perhaps even fund — the larger shifts we need?

When I talk about the incredible value in getting lean, of course I’m channeling Amory Lovins (and many other efficiency proponents). The big idea here is that there are not only low-hanging fruit, but fruit on the ground. Many companies that have aggressively pursued efficiency have found vast amounts of money waiting to be picked up, even if the large-scale savings result from adding up many small changes. For example, Wal-Mart improved the fuel efficiency of its entire fleet by over 25% in just a few years with a range of efforts — from new tires to aerodynamic improvements such as side ‘wind skirts’ to a larger investment in new auxiliary power systems that eliminate idling. (Note that all the improvements paid back in at most two years, the company’s internal hurdle rate for investments.)

So does an incremental approach really conflict with a systematic one? Not if it’s done right. An incremental improvement in packaging design, for example, will reduce costs and impacts throughout the value chain, from production to shipping to inventory and storage. One part of the business can make a moderate change that can create outsized effects. As much as we want to think holistically, companies are still organized around functions; the person designing packaging is not responsible for shipping and procurement. But coordinating between these functions and making sure people understand the larger picture will help inspire them to move beyond the incremental changes and drive toward larger, systematic improvements.

Moreover, you can’t always get to systematic without going through incremental. At another event I spoke at, during a talk by an exec from Frito-Lay about the SunChips brand, some attendees were on Twitter criticizing the company for saying it was solar powered when only one of seven manufacturing plants was converted yet. But what business is going to invest in seven retrofits at once? That’s just not the way companies operate. I quite often come back to one core, evocative image from Jim Collins’ Good to Great. Picture that heavy “flywheel” that everyone pushes a little bit until it really gets moving. A mass of coordinated, thoughtful incremental changes can create larger change than you think.

The best path is to operate on two levels. In some sense, business strategy is all about managing tensions — balancing investments in competing parts of the business. Do we optimize current operations and products or invest in R&D and future markets, even if it threatens our bread and butter business (the now-classic “innovators dilemma“)? Of course, successful firms manage this tension carefully rather than pursue any one aim with blinders on.

So go after disruptive innovations that radically change how you do things and leapfrog the competition. But at the same time, pursue the quick incremental wins — they may add up to something much more.

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Finance News

A.G. Lafley, Judgment, and the Re-do Loop

June 13th, 2009

noel-tichy.JPGJudgment is the genome of CEO leadership. The selection of a new CEO is a bet on a leader who can make great people judgments (who is on the team or off the team), strategy judgments (where we go to make money) and crisis judgments (how we deal with the inevitable tempests threatening the organization). In our forthcoming book, Chris DeRose and I look at successful and unsuccessful examples of CEO judgment and develop frameworks that help Boards ensure that their companies won’t be at a loss for senior executives with seasoned judgment. The case of A.G. Lafley at Procter & Gamble helps illustrate one key idea — what we call the “re-do loop.”

We have yet to find a CEO who says that one of his or her most important judgments unfolded exactly as planned. In 2000, A.G. Lafley took over at Procter & Gamble, a company deep in crisis at the time. During his time as CEO, Lafley brought P&G stock from per share to per share. He had to make numerous judgment calls, initially focusing on people judgments. And, when Lafley announced his move from CEO to full-time Chairman on June 10, 2009, Lafley was able to pull from within by selecting a 30-year company veteran, fully prepared in brand management, market development, and global operations to lead the company after his departure.

One of Lafley’s judgments in particular highlights the importance of the re-do loop. As Lafley took over he famously put the consumer at the center, over employees and shareholders, which gave him a framework for subsequent decisions.

He quickly identified the problems that most needed solving, chief among them a serious slump in baby care, the company’s biggest category after laundry. From Lafley’s point of view, baby care was failing to delight the consumer, and that’s because, as he put it, “the machine guys and the plant guys were running the show…The machine was boss.” The people in charge didn’t have a relationship with the consumer.

Lafley then made the tough call to find a leader who could connect with the consumer, regardless of technical know‐how. The candidate he selected, Deb Henretta, had come up through laundry, with no experience in baby care. She didn’t care about how the machines worked. What mattered to her was an understanding of what the consumer wanted, and then making the machine work for her. She also had a reputation for brand‐building and effective marketing.

Lafley felt sure of his call, but he skipped over a vital part of the preparation phase: mobilizing and aligning the team. Henretta hadn’t been in the candidate pool. Lafley didn’t seek his team’s advice, and the reaction to Henretta’s appointment amounted to, as he said, “almost a revolt.”

Here’s where the re-do loop comes in. Lafley invited his top team to a meeting where each had a chance to make a case for a favored candidate over Henretta. He took their input seriously, but at the end of the day he still believed he’d made the right choice. He then he explained his reasoning in detail — solidly grounded in his consumer-focused storyline, which he had relentlessly drummed into their heads. The outcome may not have satisfied everybody, but Lafley had neutralized their resistance. The important thing is that he did not try to ram through his decision. He made time to set the stage for success before moving on.

In the grand scheme of remaking P&G, it would have been easy for Lafley to avoid opening the staffing decision up to debate, or to have simply labeled some of his team members as resisters and ignored their criticism. However, Lafley understood that his people judgment was connected to essential strategic change at one of P&G’s biggest businesses — a move that would ultimately impact the company’s overall success. He also knew that without the support of his team, Henretta was destined to fail. By calling a timeout and engaging his team in a re-do loop, Lafley set the necessary conditions for Henretta to revive the business and her eventual promotion to lead all of P&G’s Asia operations.

As complexity and uncertainty increase, the importance of re-do loops also rises. Like Lafley, CEOs in the future will need increased sensitivity to know when to reconsider or revise their judgment calls.

Knowing when to stop the music, instead of letting the band play on, relies on a leader’s knowledge of her industry, markets, and stakeholders — it also relies on her judgment.

A leading authority on management and leadership development, Dr. Noel Tichy is a professor of organizational behavior and human resource management at the Ross School of Business at the University of Michigan. He is also the director of the Global Business Partnership and heads up the Global Leadership in Healthcare Program working with CEOs and their senior teams from major medical centers in the U.S., along with teams in Europe and India. The former head of General Electric Co.’s famed leadership development center, Crotonville, Noel led the transformation to action learning at GE and has worked with CEOs around the world to develop leadership development capacity. He was also manager of Management Education for GE, where he directed its worldwide development efforts. For more, please visit his profile page at Monitor Talent.

Finance News

Four Lessons from Y-Combinator’s Fresh Approach to Innovation

June 13th, 2009

A central tenet in The Silver Lining is that the tough times today are actually a hidden boon for innovation — scarcity will drive discipline, forcing innovators to focus on critical assumptions and make quick decisions.

One organization that is trying to live these principles is Y Combinator. For those who haven’t heard about it, the company was founded in 2005 by Paul Graham, who sold a beginup venture to Yahoo in 1998 for about million.

In just a few years, Y Combinator has funded 150 different software and Web services beginups. Well known Web 2.0 companies Scribd, Xobni, and Loopt are Y Combinator alums, and me-too funds are springing up across the United States. Sequoia Capital invested million in the business earlier this year.

Y Combinator’s basic approach is to give promising ideas a small amount of seed capital (the average investment is less than ,000), then house those beginups for a short period of time. The beginups get the capital, strategic input from the Y Combinator team (Graham and his wife), access to a robust network of potential investors, and the opportunity to learn from other Y Combinator–funded beginups. In return Y Combinator gets a slice of the business.

In essence, Y Combinator is trying to develop a process to systematize early-stage angel investing. As Fred Wilson, a well known venture capitalist, told Inc. magazine, “Y Combinator is transformative. Paul gives these kids money, but he also gives him a methodology and a value system.”

There are four lessons that corporate innovators can draw from Y Combinator:

  1. You can do a lot for a little. It amazes me when corporations complain that they lack adequate financial resources for innovation. With open source software, online market research tools, and the ability to create virtual prototypes, you can do a enormous amount for ,000. A lack of financial resources is very rarely a rate limiter.
  2. Tight windows enable “good enough” design. Most Y Combinator–funded companies are expected to release a version of their idea in less than 3 months. That tight time frame forces entrepreneurs to introduce “good enough” software packages that can then iterate in market. This approach contrasts to efforts by many companies to endlessly perfect ideas in a laboratory, only to fail the real test of being exposed to real market conditions.
  3. Business plans are nice, not necessary. Y Combinator doesn’t obsess over whether entrepreneurs have detailed business plans. Again, the focus is getting something out in the market to drive iteration and learning. After all, if you are trying to create a market, most of the material in a business plan is assumption-based anyway.
  4. Failure is an option. One of the benefits of the Y Combinator approach is it forces quick decision making — if the team can’t produce a prototype, or the prototype bombs in market, the end comes quickly. And the low, up-front investment makes it easier to wind down ideas. Corporations that say they lack resources often have those resources tied up in the wrong projects. Saying no is not a bad thing.

One open question is whether Y Combinator has the right up-front screens to make sure it is picking the right businesses. The best process in the world can only do so much if inputs are sub par. Nonetheless, corporations seeking to improve their ability to innovate should carefully consider the merits of Y Combinator’s approach.

Finance News

Audio Debate: Are Executives Paid Too Much?

June 13th, 2009

Arguments over executive compensation typically pit populism (“The kind of money these jerks make is obscene!”) against pragmatism (“Financial incentives for individuals are the best way to create value for the entire organization”). But do executive pay schemes, at least as currently structured, in fact work in the best interest of companies and their shareholders, not to mention the economy and society?

That’s the subject of the current HBR Debate: How to Fix Executive Pay. The first two experts to post their arguments–Ira Kay and Anne Sheehan–engage in some real-time verbal sparring on that issue in this moderated debate.

Kay, global practice director of executive compensation consulting at Watson Wyatt Worldwide, argues that, contrary to conventional wisdom, the current system isn’t inherently flawed. There is no evidence that it led to excessive risk-taking among top executives or in some other way contributed to the economic crisis, he says. Executive pay goes down as well as up, and in the past year has actually fallen farther than the stock market. The perception of the problem is fueled by peripheral issues, such as overly generous severance packages, that companies should eliminate because they tend to serve as rallying cries for shareholders, employees, and other critics.

Sheehan, director of corporate governance for the California State Teachers’ Retirement System, a major investor in many public companies, says that the outrage over executive compensation signifies deeper problems with the system and a loss of trust in business that could create a dangerous backlash. She says companies need to, among other things, give shareholders a “say on pay” and better explain to shareholders and the public the whats, whys, and hows of senior executive compensation schemes. This transparency will help curb financial incentives that can push executives to maximize short-term financial performance at the expense of long-term value.

The debate is civil, but Kay and Sheehan do have a few choice words for one another as they expand upon their written arguments and grapple with one of today’s most emotionally loaded business issues.

Listen to their arguments and then weigh in with what you think below.

Finance News

A Framework for Building Customer Experiences

June 13th, 2009

In helping a client understand how to reframe their internal conversations to support delivering customer experiences, we shared with them the following framework that has helped our thinking.

framework1-200.jpg

Systems: Companies have core systems that serve as the foundation for their efforts. The most apparent example are IT systems — ERP, accounting, CRM, and the like. Perhaps less apparent, but in certain cases quite crucial, would be facilities — such as real estate, architecture, and infrastructure.

Procedures: The policies, processes, and business rules that provide the “logic” for how the business is run. Some of this is embedded in the systems, some of this is taught to employees.

Touchpoints: The liminal spaces where engagement with customers occurs. Typically considered through channels such as in-store, call center, postal mail, or online.

Interactions:
The activities in which customers engage. Any business supports dozens, if not hundreds of interactions. With a bank, you can deposit money, withdraw money, write a check, pay a bill, move money between accounts, open or close accounts, apply for a loan, etc. etc.

Experiences: The sum of what the customer takes away from the interactions they’ve had with you.

Many companies don’t deliberately plan their customer experiences, and as such, design from the inside-out.

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This is especially true when companies consider CRM initiatives. One would hope that something focused on “customer relationships” would take the customer to heart when being developed. Instead, as Edmund Tribue points out, “Most companies have concentrated on automating processes for their internal users… But what about the customer? This mindset is perfectly illustrated by the most common CRM objectives: increase sales, drive cross-selling, minimize resources, reduce ancillary expenses, and lower the number of costly channel interactions. Those objectives indicate an inside-out view that implicitly treats the processes and internal metrics as more important than the customer.”

Customers have no idea what’s going on in those layers below “interactions”, and just end up feeling insulted and abused by these mercenary mindsets.

Instead, companies need to identify what makes for a delightful customer experience, and coordinate their interactions, touchpoints, procedures, and systems to support that.

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This harkens back to the my last post about Target’s ClearRx. By begining with a prototype, an embodiment of an experience, Target was then able to align the appropriate interactions, touchpoints, procedures, and systems that would support it.

And as the Target story pointed out, it’s not a one-way street. Reasonable limitations with the systems, regulatory restrictions on procedures, those are going to ripple back up and ultimately affect the experience. But by beginning outside-in, you make better decisions when you deploy from the inside-out.

(Thanks to my colleague Brandon Schauer whose work helped shape this article.)

Finance News

Can We Please Stop Saying the Market is Efficient?

June 13th, 2009

The economist Jovanovic wrote, about a quarter of a century ago, “efficient firms grow and survive; inefficient firms decline and fail”. What he meant is that the market is Darwinian; it will rule out the least efficient firms, with habits and practices that make them perform comparatively badly, and it will make sure efficient firms prosper, so that only good business practices prevail.

Yeah right.

When you look around you, in the world of business, one sometimes can’t help wonder where Darwin went wrong… How come we see so many firms that drive us up the wall, how come we see silly business practices persist (excessive risk taking, dubious governance mechanisms, corporate sexism, grey suits and ties to name an eclectic few), and how come so many – sometimes well-educated and intelligent – people continue to have an almost unshakable belief that the market really is efficient, and that it will make the best firms prevail if you just give it time?

That’s because the logic is not entirely wrong. The market is Darwinian, and the firms with the highest level of “fitness” are the ones most likely to prevail. However, our Darwinian view of business is also so incomplete and simplistic that I am unsure whether it would make Mister Charles Robert Darwin cringe, burst out laughing, or pull the hairs from his famously bulging beard in agony. Darwinian mechanisms – or market mechanisms if you prefer – namely work at different levels. And sometimes they conflict. Let me explain.

Some business practices, like the ones mentioned above, will actually reduce the fitness levels of the firms that adopt them, and make them less efficient, yet they persist. That’s because these practices have a fitness level of their own. They survive just like viruses survive among humans. The flu kills many thousands of people every year, and at first glance it appears a slightly flawed strategy of this virus to kill one’s host, yet it persists. Why is that? That’s because it spreads quicker than it kills. It doesn’t matter much, for a virus, that it reduces the fitness of its host, as long as it jumps to someone else before the host snuffs it! And in a way that is what bad business practices do too. They spread easily and kill slowly and stealthily.

Moreover, the flu doesn’t kill everybody that gets it; it often just makes them perform worse. And that is what bad practices do too. Just like an extremely lethal virus dies out – because it kills its host before it can spread – terrible business practices also never quite see the light of day. It is these stealthy, annoying, nasty, creepy, sneaky, and irritating, pains-in-all-sorts-of-bodyparts practices that tend to persist. They don’t kill instantly, but gradually wear a firm down.

And there is another advantage to that – for the practice that is. Firms don’t quite know that the practice is bad. Very bad practices are easy to spot, so nobody adopts them, but not these ones! They’re like a sneaky virus – you catch it before you realize it, and the negative effects only become apparent in the long run.

An example you say? Well, take the management quality standardization scheme ISO 9000 and apply it in a very innovative industry. Research – by professors Benner from Wharton and Tushman from the Harvard Business School – has shown that ISO 9000, in the long run, can have a severe negative impact on a firm because it hampers innovation. Yet, the short-term benefits are clear; adopting ISO 9000 often comes with some good reputational effects, an immediate increase in customers, and satisfied stakeholders. However, the negative effect on innovation, in the long run, may outweigh all of this.

Nevertheless, firms adopt the practice because they do see the short-term benefits, but are quite unaware of the long run detrimental stuff. To managers in charge of improving their firms’ performance now, the practice appears attractve because they noticed that companies in other industries (perhaps not so reliant on innovation) benefited greatly at the time they adopted it, many of the firm’s competitors are currently adopting it, and they all see a surge in customer applications too! Of course it looks attractve!

Moreover, once we begin to suffer from a shortage of internal innovation, many years will have passed, and no-one quite realizes that the creeping troubles were originally triggered by the adoption of the ISO9000 practice a long time ago. The practice gets adopted by many many firms and continues to persist, despite the fact that everybody would be better off without it.

The same may very well be true for quite a few of our popular governance mechanisms, the practice of excessive risk taking as we saw it in investment banking, many forms of performance management systems, and certainly for corporate sexisms, and pin-striped suits with purple ties on hot summer afternoon. It is not that Darwin is wrong – and the mechanisms he discovered do not rule our markets – it is just that they’re just as difficult to shake off as a common cold. And that they are just as annoying.

Finance News

What a Little Blue Stone Can Teach You about Leadership

June 13th, 2009

Recently on a visit to Toronto I stayed in charming boutique hotel, the Cosmopolitan. Guests who stay in this Zen-styled retreat receive a complimentary gift of polished blue quartz.

A description that accompanied the stone read “blue quartz is a healing stone that helps develop intuition, enhances creativity, refines communications skills, eases tension, and strengthens the immune system. It signifies power, success, idealism, increased perceptions and healing, spirituality, wisdom, psychic awareness and strong protective energies.”

While I cannot attest to the transformative powers of blue quartz, I can say that its description, aside from strengthening one’s immune system, pretty much describes what and how leaders need to be doing for themselves and their followers. And with the stone as “our guide” let’s explore this idea further.

Intuition and perception. Managers need to tune into what is going on with their people, especially in tough times. It is not enough to monitor progress toward goals; managers need to find out how people are doing it. For example, are they logging excessive overtime to meet a deadline? Or are they sitting around finding make work projects? How are people feeling about what they are doing? Tense, anxious and nervous? Or unfocused and apathetic? Some managers can sense the mood intuitively but good managers make a habit of talking to their people frequently. You respect personal boundaries, but you can ask questions about how people feel about their jobs.

Creativity. As entrepreneur and Harvard Press author, Scott Anthony, has been teaching us, there is no time like the present to encourage creative expression. Creativity begins by stimulating the thought process. Managers who put people into positions where they have some time to think may benefit. For example, give people an hour a week to think about their job and how they might do it differently. You might also arrange for a field trip to an art museum, science exhibit, or even a sporting event.[ Yes, I know you are not in sixth grade but breaking the routine can stimulate creative thinking]

Power. Leadership rests on authority, that is, the power to make things happen. Responsibility dictates that such power will be used to effect positive outcomes. That does not mean that everyone will be happy with the application of power. Organizational leadership requires hard decisions that will not satisfy every need but are intended to ensure organizational success.

And while I did make an exception for the immune system, on second thought I could be overlooking something. Perhaps good leaders do improve immunity, maybe not physically but certainly organizationally. Effective leadership protects the organization from the kind of internal strife that tears so many organizations apart. Good leaders will not tolerate behaviors that denigrate individuals. Such leaders are those who seek to lead by example and thus hold themselves accountable for ensuring that people do right by one another. This is no protection against recession certainly, but it does ensure greater levels of harmony (immunity perhaps) that helps an organization function more effectively by cooperating.

Certainly if a little blue stone promises us so much, we as human beings can do our part by acting on those expectations. We can lead our teams more effectively and accomplish our goals in ways that enrich lives as they add value to the organization.

Finance News

How to Recognize Your Green Business Deficits and Solve Them

June 13th, 2009

lurie-110.jpgSustainability is here to stay as a central business issue, yet many corporations do not have the right resources or organization to comply with the new demands efficiently or, more importantly, to turn them to business advantage. I have found that companies not ready for this challenge typically show one or more of these five traits:

  • Responsibility for sustainability issues is fragmented. Many organizations scatter responsibility for sustainability so thoroughly — in operations, legal, compliance, government affairs, corporate communications — that it only comes together at the CEO level (or, worse, in an ad hoc group set up by the CEO).
  • No one at the top understands the potential for competitive advantage in sustainability. The company’s leaders view sustainability as a set of technical compliance issues (for energy systems or smokestack scrubbers, for example) and delegate them to lower levels to execute.
  • There is no sustainability tab in the business plan binder. There are no explicit processes making sustainability a business issue, leaving no one responsible for pursuing such a strategy. Sustainability, if it makes the business plan at all, is an add-on issue.
  • There is a lack of green metrics to measure progress on building a sustainable business. The company doesn’t have the means to measure sustainability and doesn’t build green metrics into its business plan.
  • Relationships with key NGOs are episodic (at best) and self-referential. Nonprofit groups such as WWF International and the Sierra Club are important, long-term voices in the ongoing green business discussion. Many corporations lack any kind of ongoing, substantive relationship with these nonprofit groups who can lend credibility to — or create problems for — a corporation’s green business efforts. Episodic interactions aren’t enough, nor are interactions based solely on what your company would like to see happen.

Chances are if you nodded in recognition at one or more of these points, your business is not engaged in a serious sustainability effort. In such organizations, sustainability issues may arise unexpectedly, causing decision-makers to scramble in response. Sustainability should not be a crisis to manage. Here are four ways to address such deficits:

1. elevate sustainability to a C-Suite post responsible for coordinating both capability and accountability. Laudably, many firms have created a chief sustainability officer. But they need to upgrade the role, and think carefully about who fills it. Sustainability is a business issue, not a compliance issue, so it is better to appoint an operations expert than to elevate an environmental health and safety compliance manager to the role. (Think of the difference between second generation CIOs, who are business people with above-average knowledge of IT, and first generation CIOs, who were MIS managers.) This leader must assemble a team with expertise in legal, public relations, government affairs, marketing, technical and operations issues. That team needs to work together on a regular, permanent basis.

2. Treat sustainability as you would a product or service. Incorporate the “triple bottom line” of pursuing economic, ecological and social returns for your enterprise. You want people to say, “We’re producing an outcome and we’re responsible for that outcome.” Treating sustainability like a product makes reducing the enterprise’s environmental footprint part of the regular operating plan. The is the output of this sustainability product? Measurable progress, both for the company and society.

3. Establish permanent, value-added partnerships with critical members of the sustainability community. This means treating each of these important organizations like a critical customer account. You have to identify those NGOs that have a say in your field. Then understand their needs and their goals. Foster relationships that enable you to communicate clearly about what you can and cannot do to help advance their agenda, and identify win-win solutions to problems where your different interests intersect. It takes a dedicated team, like having a special sales force devoted to an important client, to manage these important relationships.

4. Make green crisis management part of your ongoing commitment to sustainability. It is inevitable that there will be important, one-off issues and events. Sometimes it will be a crisis (for example, a product material turns out to be worse than thought for the environment), sometimes an opportunity (such as a especially difficult site licensing effort). Your new C-level sustainability leader will need a devoted group to tackle unexpected crises, whether it’s an industrial accident, new scientific data casting a harsh light on a business process, or a PR assault on your brand.

The benefits of these steps are real. Wal-Mart has famously made sustainability a centerpiece of its business strategy, begining in 2004 when it partnered with Conservation International to evaluate the retail giant’s environmental impact. Now Wal-Mart is a recognized leader for its efforts to reduce its energy use and decrease the use of packaging and materials throughout its supply chain of products.

These efforts require investments akin to any meaningful operation. But as Miranda Anderson, Wal-Mart’s sustainability director, noted at a recent Aspen Institute event: “What we have discovered is this whole sustainability thing, and looking at energy and climate, actually fits in perfectly with our company’s core mission to save people money so they can live better. Every single thing we do is done through that lens. What sustainability has [done is] unlocked the true potential of linking up both saving money and living better.”

Bob Lurie
is Director and Managing Partner of Monitor Group and leads the company’s corporate sustainability practice. Monitor Group is a global strategy consulting firm and has a strategic partnership with Esty Environmental Partners to help clients build sustainability into their growth and competitiveness strategies.

Finance News

R&D 2.0: Fewer Engineers, More Anthropologists

June 13th, 2009

Recently GE made a big splash by announcing a billion R&D investment over the next six years to develop low-cost healthcare equipment targeted at underserved populations — who primarily live in emerging markets like India, Brazil, and South Africa.

With most Western economies staying in the red through 2010, expect more Western firms to emulate GE and bet their organizations’ future on emerging markets like China, India, and Brazil whose resilient economies keep growing. To enable this global expansion strategy, these multinationals are poised to dramatically beef up their R&D capabilities in developing nations.

While I am happy that Western CEOs are finally putting their money where their market mouth is by broadening their R&D footprint in emerging nations, I worry that they may not be investing in the right R&D model, and especially not in the appropriate talent mix. Let me elaborate a bit.

In recent years, I have visited dozens of R&D labs of multinationals in India that are staffed with brilliant engineers and scientists, many of whom have PhDs in technical fields. They all represent version 1.0 of the global R&D model, still in practice, in which MNCs use low-cost but high-quality technical talent in emerging markets to crank out products and services that either get exported back to developed markets or are targeted to middle-class buyers in local markets.

But this 1.0 model will no longer be appropriate if MNCs like GE wish to cater their offerings to the 5 billion people who form the middle and the bottom of the economic pyramid in places like India, Brazil, and South Africa. Indeed, to effectively identify and address the explicit and unmet needs of the broader consumer base in emerging markets, I believe MNCs must adopt a new global innovation model. Let’s call it global R&D 2.0.

This global R&D 2.0 strategy calls for a talent recalibration in MNCs’ R&D labs in emerging markets. I suggest that multinationals, besides employing technically-oriented engineers and scientists, begin to staff their R&D units in developing nations like India with two other types of experts, namely:

Anthropologists and ethnographers. By having anthropologists study and interact with end-customers in their natural settings, Western firms can learn to tailor their business models and offerings to match users’ socio-economic and cultural context. For example, Intel’s People and Practices Research (PaPR) employs sociologists and ethnographers who spend months in emerging markets embedded in grassroots communities to identify the latent needs of local consumers. Dr Genevieve Bell, one of PaPR’s anthropologists, traveled extensively across China and India observing people in their homes to find out how they use and what they want from technology. Her ethnographic insights shaped Intel’s groundbreaking pricing models and partnership strategies for Chinese consumer market.

Development economists. Since the 5 billion people who form the middle and the bottom of economic pyramid earn very low incomes, they can’t afford the expensive goods and services designed for (upper) middle-class consumers. Multinationals are reacting to this market reality by having their local R&D engineers design trimmed-down, low-end versions of their high-end products. But that’s not enough. To effectively lure low-income buyers into procuring their low-end goods and services, multinationals need the help of development economists who can concoct creative pricing and financing mechanisms, such as microcredit schemes. For instance, Whirlpool is working with development economists at RTI International and the University of North Carolina to create new microfinance models that will enable Whirlpool to cost-effectively commercialize its appliances to millions of low-income households within emerging markets like India and Mexico.

To effectively carry out their global R&D 2.0 strategy, CEOs of multinationals must give themselves a target of staffing at least 40% of their R&D labs in emerging markets with sociologists and micro-economists by 2015. To promptly accomplish this goal, MNCs need to cast their recruitment net a bit wider. In India, for example, in addition to hiring the cream of engineering students from the Indian Institutes of Technology (IITs), MNCs’ local HR directors should also recruit bright graduates from reputed social sciences institutions like Jawaharlal Nehru University (JNU) in New Delhi.

Goldman Sachs predicts that the bulk of the global economic growth over the next three decades will occur in emerging markets like India, China, and Brazil. But multinationals can’t capture this explosive growth unless they first upgrade their technically-skewed innovation model to a multidisciplinary R&D approach.

Finance News

When to Ignore the Big Picture

June 13th, 2009

Since I quit my job last fall to pursue long-neglected professional interests, people have been gently urging me to focus on the big picture and set a long-term course. It’s curious because most of them already know me to be the kind of person who sees both the forest and the trees. I’m genuinely interested in both, and so the dual perspective tends to come naturally.

Yet somehow the unease that characterizes the current economic climate has led even the most “live in the moment” folks I know to urge caution, or at least what they perceive as caution. With all due respect to these well-intentioned advisers, I think they’re missing something big, not just about me but about uncertain times in general.

The most important thing to do in a period when there are no rock-solid answers is to allow time for the evidence to accumulate — and to permit yourself the time to evaluate it all on the merits. That apparently doesn’t mean dillydallying while your mortgage goes unpaid or your kids go hungry. But it does mean giving your intuition the chance to take in all the raw data so that your next significant move ends up being in the best interest of your home, your children, or whatever and whomever you value most.

In these tough times, it’s vital to distinguish between making a practical decision to cope with a short-term crisis and quickly seizing upon a course of action just because uncertainty is getting the best of you. The former is common sense; the latter runs you the risk of overlooking important details that, if you’d taken the time to absorb them, might have led to a better long-term decision. In that respect, uncertain times are not unlike science experiments: The results are ultimately more useful if you don’t rush to faulty conclusions.

I might have been foolish for, in a time of global uncertainty, throwing myself headlong into a personal experiment that made my life less secure. But I’m getting the chance to study many trees — and keeping quite busy at it — never forgetting for too long that I’m in an unknown forest. The greater danger would be, in haste, to misidentify that forest altogether and find, upon arriving breathless at an unknown clearing, that it’s not at all where I want to be.

What are you doing in this forest? Please take a moment to sit under this tree with me.

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