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Business and Privacy…page 33 The War Against Piracy…page 72 www.hbr.org December 2004 60 The HBR Interview: Leading Change When Business Is Good Samuel J. Palmisano 72 How Market Smarts Can Protect Property Rights Bharat Anand and Alexander Galetovic 82 Beyond Offshoring: Assess Your Company’s Global Potential Diana Farrell 92 How to Grow Great Leaders Douglas A. Ready 104 The 21st-Century Supply Chain [Part 3 of 3 ] HBR Spotlight 104 Building Deep Supplier Relationships Jeffrey K. Liker and Thomas Y. Choi 114 We’re in This Together Douglas M. Lambert and A. Michael Knemeyer 16 Forethought Feeding the Fire …page 60 33 HBR Case Study None of Our Business? Roberta A. Fusaro 47 Big Picture Best Face Forward Jeffrey F. Rayport and Bernard J. Jaworski 125 Best Practice The Path to Corporate Responsibility Simon Zadek 134 Tool Kit Making Real Options Really Work Alexander B. van Putten and Ian C. MacMillan 146 Executive Summaries 152 Panel Discussion TLFeBOOK TLFeBOOK TLFeBOOK HBR 92 Features 104 December 2004 60 The HBR Interview: Samuel J. Palmisano Leading Change When Business Is Good 60 Interviewed by Paul Hemp and Thomas A. Stewart Would you ask your employees to determine the core values that define your company and guide their decisions every day? Would you listen to them if you did? IBM’s CEO maintains that’s the only way to manage a big, broad company. 72 How Market Smarts Can Protect Property Rights Bharat Anand and Alexander Galetovic Intellectual property comprises an ever-increasing fraction of corporate wealth, but what’s the good of that if an ever-increasing fraction of the property is copied or stolen? Six market-based strategies can help companies protect their innovations. 82 Beyond Offshoring: Assess Your Company’s Global Potential HBR Spotlight The 21st-Century Supply Chain [ Part 3 of 3 ] 104 Building Deep Supplier Relationships Jeffrey K. Liker and Thomas Y. Choi When it comes to building strong relationships with North American suppliers, automakers Toyota and Honda have the Big Three beat hands down. So how do they do it? Six steps are the key. Diana Farrell There’s no question that globalization will save your company costs. But what about using it to generate new revenues as well? Here’s how. 114 We’re in This Together 92 How to Grow Great Leaders Douglas M. Lambert and A. Michael Knemeyer Douglas A. Ready More than ever, companies must synchronize units’ actions with broader enterprise goals. The challenge is to develop leaders who can manage the inherent tensions between the two – and that may require a strategic overhaul. Even when a full-blown partnership with a supplier seems impeccably justified, it can fail if the partners harbor mismatched expectations. A focused day-and-a-half session of frank talk can ensure the relationship’s longterm success. 82 COVER ART: STEPHEN SWINTEK continued on page 6 72 4 TLFeBOOK harvard business review TLFeBOOK HBR D e pa r t m e n t s December 2004 8 FROM THE EDITOR 102 S T R AT E G I C H U M O R 125 BEST PRACTICE Burning to Be Great When it comes to managing change, the consensus is that most people won’t jump until they feel the flames of disaster licking their ankles. So what do you do if business is pretty good? 16 8 The Path to Corporate Responsibility Simon Zadek FORETHOUGHT Investors’ herd instinct…Are business school curricula falling short on ethics and leadership?…Like open source, open corporate suggestion boxes…Why employee engagement is so important… Information law as the new competitive playing field…Citizenship means different things to different companies…Who’s winning in women’s international sports and the implications for business…The consequences of not adjusting cost-ofcapital calculations to reflect pension risks…Tips for competing against WalMart…Insurance programs for independent workers…Marketing your expertise, not just your products…How to become more politically savvy. 33 Intense pressure from activists in the 1990s forced Nike to take a long, hard look at the way it was doing business. Here’s how the company transformed itself from the poster child for corporate irresponsibility to a progressive leader that cultivates and champions ethical business practices. 16 134 Making Real Options Really Work Alexander B. van Putten and Ian C. MacMillan Discounted cash flow analysis is a great way to protect yourself from the downside of a risky growth opportunity, but it doesn’t do justice to the potential gains. Real options can capture that upside yet can underplay the risks. Rather than apply one method or the other, it’s far better to combine the two. There’s a simple way to do it. 47 HBR CASE STUDY None of Our Business? Roberta A. Fusaro KK Incorporated, a teen clothing manufacturer and retailer, approaches Raydar Electronics about integrating tracking technology into its products. Raydar’s CEO is intrigued by KK’s plan but troubled by the Big Brother implications for customers’ privacy. 47 143 LETTERS TO THE EDITOR Transferring wisdom is a huge issue for preserving human capital. But often the incumbent gurus are not willing to share what they know – because by keeping it to themselves, they maintain some degree of job security. 125 BIG PICTURE Best Face Forward 146 EXECUTIVE SUMMARIES Jeffrey F. Rayport and Bernard J. Jaworski 152 PA N E L D I S C U S S I O N First Among Unequals Optimizing your customer interface requires the right mix of people and machines on the front lines – and a sometimes surprising division of labor between them. 6 TOOL KIT Don Moyer 134 TLFeBOOK Far more people consider themselves above average in intelligence and skills than the definition of “average” allows. harvard business review TLFeBOOK FROM THE EDITOR Burning to Be Great anaging change is leadership’s greatest challenge. Nothing is more perilous or uncertain, Machiavelli wrote. Nothing is harder, Jefferson implied when he noted that mankind is disposed to suffer for a long time before rising up against the causes of suffering. Within modern management literature, there is consensus that leaders need a “burning platform” to overcome resistance to change. People will not jump until they feel flames licking their ankles. Managers even tell an Aesop-like little fable about this: the one about the frogs on the stove. The frog in the pot of cool water is boiled alive because he senses no peril as the temperature rises slowly, while the other frog, dropped into seething water, leaps to safety. That is biologically false; both frogs will probably die. (The simmered frog will be tastier and more tender.) But the story rings true. So what do you do if business is pretty good? How do you maintain energy for change when the water feels fine? Sam Palmisano faced this challenge when he became CEO of IBM in 2002. Under the hard-driving leadership of Lou Gerstner, IBM had survived a near-death experience and was outperforming most of its competitors. It would be natural for employees to want a breather – and also suicidal. Palmisano put it this way: “People say, ‘The leadership may be different, but the strategy is fundamentally sound. Why do I have to change?’ This is a challenge everyone running a successful company wrestles with.” Palmisano was talking to me and HBR senior editor Paul Hemp at IBM’s headquarters as we conducted the interview in this month’s issue. What you’ll read here is surprising and, I think, important on two levels. First, it is the story of a leader who created a case for change not by pointing to a crisis but by stoking the fires of ambition-to-be-great that burn in employees. Prodded by Palmisano in a companywide intranet conversation, tens of thousands of IBMers poured out nearly one million words calling upon the company to become more than it is. This was an extraordinary mandate for change. It is also the story of IBM’s search for a way to manage itself without heavy-handed supervision. Palmisano cites 8 an old business saw: “People don’t do what you expect; they do what you inspect.” That served IBM well enough when it was a simpler organization where most employees had unambiguous jobs and worked a few feet away from their bosses. With knowledgeintensive jobs that require independent decision making and two-fifths of employees reporting for work at nonIBM locations, IBM needed an operating system that performs when managers aren’t around. Palmisano believes he has found one in values – not a banal list of aspirations on glossy posters, but meaningful statements arrived at after a rigorous process meant to become, truly, a management system. While others have written ably about IBM’s revitalization and strategy under Gerstner and now Palmisano, the CEO believes that this is the most fundamental work he is doing. It is, as you will see, unlike anything you’ve ever read about corporate values. This month’s HBR comes with a bonus, our first-ever Reader’s Guide. In the past, we have devoted about ten pages of the year’s last issue to an index of the year’s articles. This time we go one better. The 2004 Reader’s Guide is a separate publication that includes the index plus executive summaries of every article published this year. (December’s executive summaries are also in their usual place in this issue.) Many of you, we know, rely on executive summaries to plan your time with HBR. The guide makes it easier for you to use your library of back issues and to order reprints. Subscribers can also use the Reader’s Guide in conjunction with HBR Online. Once you register, at www.hbr.org, you can get the Reader’s Guide in electronic form. You can also call up the previous 12 months’ worth of articles for no cost. ROBERT MEGANCK M Thomas A. Stewart TLFeBOOK harvard business review TLFeBOOK editor Thomas A. Stewart deputy editor Karen Dillon executive editor Sarah Cliffe art director Karen Player senior editors Leigh Buchanan David Champion Diane L. Coutu Bronwyn Fryer Ben Gerson Paul Hemp Julia Kirby Gardiner Morse Ellen Peebles Anand P. Raman associate editor Eileen Roche consulting editor Louise O’Brien manuscript editors Christina Bortz Lisa Burrell Roberta A. Fusaro Margaret K. Hanshaw Andrew O’Connell Andrea Ovans editor for business development John T. Landry executive editor and director of derivative products Jane Heifetz A SPECIAL ADVERTISING SECTION COMING IN MARCH 2005 MBA/Executive Education Directory Graduate business education has become more and more of a necessity for those who want to advance their careers. Whether you are considering education for yourself or your employees, the 2005 Harvard Business Review MBA/Executive Education Directory will be a valuable tool for identifying and contacting the right institutions. It’s also an excellent opportunity for providers of business education to reach a targeted and motivated audience. SPACE CLOSES JANUARY 20, 2005 To advertise, callTLFeBOOK (212) 872-9280 senior production manager Dana Lissy associate production manager Christine Wilder senior designers Kaajal S. Asher Jill Manca Annette Trivette production coordinator Josette AkreshGonzales communications manager Cathy Olofson editorial coordinator Kassandra Duane editorial assistant Siobhan C. Ford contributing staff Amy L. Halliday Amy N. Monaghan Annie Noonan Kristin Murphy Romano editor-at-large harvard business school publishing Walter Kiechel a note to readers The views expressed in articles are the authors’ and not necessarily those of Harvard Business Review, Harvard Business School, or Harvard University. Authors may have consulting or other business relationships with the companies they discuss. submissions We encourage prospective authors to follow HBR’s “Guidelines for Authors” before submitting manuscripts. To obtain a copy, please go to our Web site at www.hbr.org; write to The Editor, Harvard Business Review, 60 Harvard Way, Boston, MA 02163; or send e-mail to hbr_editorial@hbsp.harvard.edu. Unsolicited manuscripts will be returned only if accompanied by a self-addressed stamped envelope. editorial offices 60 Harvard Way, Boston, MA 02163 617-783-7410; fax: 617-783-7493 www.harvardbusinessonline.org Volume 82, Number 12 December 2004 Printed in the U.S.A. TLFeBOOK publisher Cathryn Cronin Cranston manager, marketing and operations Marisa Maurer business director Edward D. Crowley direct marketing manager Bruce W. Rhodes advertising production manager Catharine-Mary Donovan assistant subscriber services manager Elizabeth Sottile senior business analyst Adrienne M. 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For advertising contact information, please visit our Web site at www.hbradsales.com. subscription service information u.s. and canada 800-274-3214; fax: 902-563-4807 Rates per year: U.S., $118; Canada, u.s $128 international 44-1858-438868; fax: 44-1858-468969 Rates per year: u.s.$165; Mexico, u.s.$128 subscribe online www.hbr.org reproduction Copyright © 2004 Harvard Business School Publishing Corporation. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without written permission. TLFeBOOK TLFeBOOK T H E N E W C A D I L L A C ST S STS V8: With available performance-tuned all-wheel drive, engine power turns a corner. TLFeBOOK While elementary, the notion that FOUR IS GREATER THAN TWO has led to a better performing vehicle. The appeal of having a 320-hp 4.6L Northstar V8 four wheels will seldom find exactly the same VVT driving all four wheels would seem obvious degree of traction, thus opening the door to wheel enough. It is generally acknowledged that all-wheel spin and the subsequent loss of power and control. drive translates into all-weather, all-road capability. We close that door with the STS chassis control But the new Cadillac STS is, first system, which integrates the and foremost, a performance vehicle, control strategies of the engine, and performance drivers are attached transmission, ABS, traction to the more traditional rear-wheel- control, and the StabiliTrak drive configuration, for reasons more stability enhancement system compelling than nostalgia. Having to minimize wheel slip and to the front wheels steer while the rear help keep STS moving in the wheels generate forward thrust direction the driver intends. produces perhaps the most thrilling aspect of performance driving — accelerating out of a corner, using the throttle to shape your exit line. How might one craft an all-wheel-drive system that would satisfy the performance driver? But what the performance driver will note is that engineers have given the AWD system in STS a 40/60 front-to-rear torque split, meaning that 60 percent of engine Available on STS V8, the Cadillac performance-tuned output is directed toward the rear AWD system makes extensive use of aluminum wheels. Just enough, it turns out, to to enhance vehicle capability without adding make STS with AWD feel more rear-wheel-drive- excessive weight. Care was taken in the design, selection, and mounting of components to minimize noise and vibration, thus preserving a premium ride experience. It is in every way an elegant system, but its primary focus is the delivery of power — to all four wheels. like when power is applied in corners. Toe the throttle coming out of a corner, and everything — lightweight components, sophisticated controls, and 60 percent of driving force directed to the rear wheels — comes seamlessly into play. Being “on rails” is far too passive a metaphor. You might well call the experience thrilling. For But during cornering, particularly performance, four is greater than two. Cadillac during aggressive cornering, all STS V6 starting at $40,995.* cadillac.com *MSRP. STS V8 as shown $62,510 MSRP. Tax, title, license, dealer fees and other optional equipment extra. ©2004 GM Corp. All rights reserved. Break ThroughTM Cadillac® Cadillac badge® Northstar® STS® StabiliTrak® TLFeBOOK A survey of ideas, trends, people, and practices on the business horizon. Ian Ayres (ian.ayres@yale.edu) is the William K. Townsend Professor of Law at Yale Law School. Larry Downes (larry@larrydownes.com) teaches law and strategy at the University of California, Berkeley. Francesca Golfetto (francesca.golfetto@ uni-bocconi.it) is a professor of marketing at Bocconi University in Milan. Bradley Googins (googinsb@bc.edu) is a professor of organization studies at Boston College and the director of BC’s Center for Corporate Citizenship. Dan Haas (daniel.haas@bain.com) is a partner in Bain & Company’s Retail practice. Robert D. Hormats (rdhormats@am .ibd.gs.com) is a vice chairman of Goldman Sachs (International). Michael W. Klein (michael.klein@tufts .edu) is a professor of international economics at Tufts’ Fletcher School. David Mazursky (msmazur@huji.ac.il) is professor of business administration at Hebrew University. Robert C. Merton (rmerton@hbs.edu) Philip Mirvis (pmirv@aol.com) is an organizational psychologist and senior fellow at Boston College’s Center for Corporate Citizenship. Barry Nalebuff (barry.nalebuff@yale .edu) is the Milton Steinbach Professor of Management at Yale School of Management. Peter Navarro (peternav@uci.edu) is an associate professor of economics and public policy at the Graduate School of Management, University of California, Irvine. Darrell K. Rigby (darrell.rigby@bain .com) directs Bain & Company’s Global Retail practice. 16 g r i st Born to Herd by robert d. hormats One evening around 40,000 years ago, on the steppes of Central Asia, a small group of our distant forefathers prepared to hunt down a woolly mammoth. There was, of course, enormous risk in pursuing such a large beast. But these hunters belonged to a band of about 40 men, women, and children who had endured a hard winter. A single mammoth could feed them all for many weeks, so the prize seemed well worth the risk. The men spent that evening sharpening their spears and building up their courage; the next day, they recited incan- TLFeBOOK tations passed down from their ancestors and dabbed their faces with colorful paint. The knowledge that a few might be sacrificed on the tusks of the mammoth was largely forgotten in the excitement of preparation and the anticipation of reward. Surprisingly, that scene from the mists of time tells us quite a bit about investor behavior today. Many human social and emotional drives emerged over millions of years of evolution. Our species’ earliest survival instincts, inherited from prehuman ancestors, drove them to hunt in harvard business review CHRIS SHARP is the John and Natty McArthur University Professor at Harvard Business School and winner of the 1997 Nobel Prize in Economic Science. packs – especially when they preyed on much bigger species – and to aggressively defend their band. Strong herd emotions helped prehistoric peoples summon the will and courage to take risks, to join such hunting parties, and to collectively protect their families and villages. To act individually would have been exceedingly irrational. To act as a group was vital to survival and thus highly rational. Each and every one of us is descended from those who took such joint risks and survived. Modern cultures still incorporate some of these behavior patterns. The same herd instinct – those strong and emotional group impulses, the collective exuberance and excitement of the hunt or of battles against marauding predators or rival groups – has been passed to us. It often manifests itself in our investment decisions. And while at times investor herd behavior has been highly destructive, it has also produced many of capitalism’s great achievements. Participants in economic bubbles join the crowd, even though, in the final analysis, individual losers often vastly outnumber individual winners. But just as the herd instinct allowed the prehistoric hunting party to accomplish something significant for the group – something that no individual could do on his own – so it has occasionally hastened major developments that benefit whole economies. The railway booms of the nineteenth century revolutionized transportation in America and Western Europe and helped to open the American West. The Internet frenzy created a revolutionary aid to communication and commerce. Yes, such booms and busts often cause economic instability and massive investment losses, with no commensurate benefit for many. And yes, in recent years, they have spawned some outrageous betrayals of investor trust. But by fueling investments in high-risk, high-return ventures, they also have produced broad december 2004 benefits for society that might not otherwise have occurred, or at least not as quickly. This is a twist on the traditional view of economists, who typically define the individual’s behavior as irrational in the context of group behavior. In Manias, Panics, and Crashes: A History of Financial Crises, economist Charles P. Kindleberger noted that “mob psychology or hysteria is well established as an occasional deviation from rational behavior”; in such situations,“the action of each individual is rational – or would be – were it not for the fact that others are behaving in the same way.” The economist Robert Shiller, in Irrational Exuberance, argued that herdlike behavior,“although individually rational, produces group behavior that is, in a welldefined sense, irrational.” In neither view does it make much sense for individual investors to enthusiastically join the “irrational” pack. And yet investors frequently do, and they have done so repeatedly over the centuries. Something more instinctual than economic logic must be at play. John Maynard Keynes recognized the primal origins of these “irrational” economic forces.“Our decisions to do something positive,” he wrote in The General m a n a g e m e n t e d u cati o n Why Johnny Can’t Lead by peter navarro With the savings and loan crisis of the 1980s and the much more recent corporate scandals at MBA-laden companies, business schools have been scratching their heads about how, exactly, to fortify their ethics curricula. And with the information technology revolution radically revamping management practices, the top-ranked schools have likewise struggled with whether to require IT in the core. Then there’s the question of how to strike a better balance between the traditional number-crunching management science courses like accounting, finance, and operations management and the often-neglected soft skills like leadership and negotiations, which can make or break executives in the real world. So, how well are business schools doing in reconfiguring their curricula? In a survey of the core curricula of the top 50 U.S. business schools, my colleague Darlene Carver and I found that only 40% require an ethics or social responsibility course while only 50% require IT. Moreover, less than a third require soft-skill courses like human resource management, leadership, negotiations, and entrepreneurship while only a little over half require organizational behavior or management communications. One likely culprit for this slow progress is the antiquated organizational architecture of the typical business school. As Nobel economist Herbert Simon warned almost 50 years ago, there is a natural tendency for business schools to organize around functional silos such as accounting, finance, or marketing. These silos then engage in a perennial contest to build coalitions and protect turf. The result appears to be, at many schools, an unbalanced core curriculum that doesn’t fully meet corporate or social needs. Reprint F0412B TLFeBOOK 17 Theory of Employment, Interest, and Money, “…can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” These “animal spirits” developed over millions of years of evolution. They gave early man the courage to migrate out of a small patch in East Africa to populate unknown lands and the cohesion to survive enormous adversity – several Ice Ages, massive droughts, predatory beasts, and hostile neighbors. Today, the residual, instinctual legacy of these prehistoric peoples drives herdlike, “irrationally exuberant” investment decisions that, while often harming individual investors, may collectively benefit society. As descendants of those successful mammoth hunters, we do what over eons we have become hardwired to do. Reprint F0412A i n n o vati o n Encouraging Suggestive Behavior by barry nalebuff and ian ayres The company suggestion box poses a becareful-what-you-wish-for dilemma. You want lots of ideas, but what happens when you get them? Responding to each suggestion is costly, especially if someone has to identify the right person to evaluate it. If one idea in ten is worth pursuing, that’s a great outcome for management but a demoralizing one for the large majority of employees whose brainchildren are rejected. And because employees don’t know why their ideas failed, they don’t learn how to come up with better ones. Instead of funneling suggestions to designated experts, why not borrow a page from the open source movement and turn your workforce into critics and codevelopers of their peers’ ideas? Several universities, as well as companies such as Telcordia and Biosense Webster, have built “open” suggestion boxes on their networks and invited their whole organizations to weigh in. Staff evaluate, comment on, and improve their peers’ 18 submissions. Employee rankings then filter those ideas to help management focus on the most promising. Rejection is more palatable when served with a reason: Employees who see colleagues’ feedback will know their ideas were taken seriously, even if the ideas failed to ignite. An open suggestion box requires the enthusiastic participation of innovators and constructive critics; fortunately, their incentive is baked into the model. As with open source development, these boxes – which are like a communityinnovation blog – attract the kinds of people who enjoy solving problems and sharing their solutions. Participants earn a reputation for brilliant ideas, for insightful commentary, for taking an idea that merely hums and making it sing. Then there’s the shot of egoboo (that’s hacker lingo for “ego boost”) that occurs when an idea is implemented and its inventor gets the credit. Not every idea belongs out in the open, and so corporate suggestion boxes are naturally restricted to employees. Interested organizations can find models on the Web. Whynot.net, for example, is a public site we developed that is based on the same software that some companies use internally, and gives the flavor of how discussion improves ideas. Take the simple notion that brake lights should shine brighter when the driver slams down his foot. The Whynot community has suggested scores of improvements. TLFeBOOK Should the brake lights change color? Should they flash? Should there be a rear-facing horn as well? More inspiration can be found at Halfbakery.com, which specializes in slightly off-kilter ideas, such as presliced cream cheese patties with a precut hole to put on bagels. There’s also Thinkcycle.org, Premisespremises.com, Shouldexist.org, Globalideasbank.org, and Creativitypool.com. Corporations’ own open idea boxes have produced such improvements as expense reimbursements being added to payroll deposits; a central reservation system for meeting rooms; and HR-sponsored classes in reading and understanding monthly financial reports. There is no one-size-fits-all suggestion box, and companies can customize their own categories, with employees’ help. For example, Yale University’s internal idea site invites users to point out dumb stuff it does under the heading “Broken Processes.” (Management responds either by fixing the process or by explaining – to everyone at once – why the process isn’t so dumb after all.) The heading “Unsolved Problems” identifies questions that would be valuable to solve. Two headings should appear in every open idea box: “We’ve Done It” and “We’re Doing It.” That’s how management demonstrates it has created an incubator, not another black hole. Reprint F0412C harvard business review h u m a n r e s o u rc e s The Things They Do for Love Ask your employees to define work. If they say,“It’s what I do for money,” you could be in trouble. Company leaders won’t be surprised that employee engagement – the extent to which workers commit to something or someone in their organizations – influences performance and retention. But they may be surprised by how much engagement matters. Increased commitment can lead to a 57% improvement in discretionary effort – that is, employees’ willingness to exceed duty’s call. That greater effort produces, on average, a 20% individual performance improvement and an 87% reduction in the desire to pull up stakes, according to the Corporate Leadership Council, which surveyed more than 50,000 employees in more than 59 organizations worldwide. (The CLC – www .corporateleadershipcouncil.com–is a division of the Corporate Executive Board, an executive network for leaders of the world’s largest public and private organizations.) The CLC divides engagement into two flavors. Rational commitment results when a job serves employees’ financial, developmental, or professional self-interest. Emotional commitment, which has four times the power to affect performance as its more pragmatic counterpart, arises when workers value, enjoy, and believe in what they do. About 11% of the workforce, called “true believers” by the CLC, demonstrate very high degrees of both commitment types; another 13% demonstrate depressingly little. Workers on the bad end of the bell curve are four times more likely to leave the organization than average employees, says the report, which dubs this group “the disaffected.” The remaining 76% are moderates, who generally exhibit a strong commitment to one person or element of their jobs but can take or leave december 2004 by larry downes First, Empower All the Lawyers Your company’s legal department is broken. At best, it is an expensive bit of overhead, an evil made necessary by our litigious society. At worst, it is your biggest roadblock to innovation. In most organizations, the legal staff is isolated and paid too much just to say no to the most interesting ideas and strategies. But in a global marketplace fueled by information, law and regulation increasingly determine winners and losers. That means company leaders must work more closely with their legal departments. And they must hire lawyers who know how to use law as a strategic weapon. Intellectual property, licensing, antitrust, trade, securities, privacy, and employment – these are some of the new laws of the competitive jungle. Today, you cannot innovate without understanding patent, copyright, and trade-secret law. You cannot outsource without knowing the employment laws of other countries. You cannot convert to a Web-centric IT architecture without reading the fine print of shrink-wrap licenses and the default rules provided by the Uniform Commercial Code, NAFTA, GATT, and others. And you cannot mine value out of your data warehouse and use it to collaborate with internal and external stakeholders without an appreciation for the increasingly complex regulations regarding data rights. European privacy law, for example, recently defeated General Motors’ effort to produce a directory of employees’ office telephone numbers. Today, governments are debating and passing sweeping legislation that will dictate how your company can use a wealth of new transaction data that tomorrow’s technology will make available. Yet many corporate lawyers are ill equipped to pursue their employers’ interests in this new world. With rare exceptions, counsels know little about their companies’ business. Most lack a basic education in information law. They see their jobs as telling other senior executives what cannot be done, what should not be done, or what to avoid doing just to be safe. That role was probably inappropriate in the last century. Today it can only lead to disasters that will flow straight to the bottom line. We need a new breed of corporate lawyers – including house counsels, lobbyists, and outside attorneys – with both the expertise in emerging regulatory regimes and the management skills to use that expertise. We need lawyers who use the law offensively rather than just defensively. The new corporate counsels must act as coach, adviser, and strategist, embracing their companies’ most innovative plans. Law is the last great untapped source of competitive advantage. To extract it, the culture of business, not to mention the cultures of law schools and business schools, will have to evolve mighty fast. At your company, start with education. Send your corporate counsel to management boot camp. Bring the legal department up to speed on your industry and business. Give yourself a crash course in business law, and start hiring managers from MBA programs that make such courses a core requirement. Show your lobbyists where your strategy intersects with new legal and regulatory priorities. Fifteen years ago, another member of the executive team stood in comparable disregard, his value a matter of doubt. That person was the CIO. We all know how that turned out. TLFeBOOK Reprint F0412E 19 the rest. This group neither shirks nor strives; its intent to leave is variable. Obviously, employers want to shift as many moderates as possible into the true-believer column. But first, companies must identify them, and that’s not easy. Observable performance factors are of little use in predicting an employee’s engagement level, the CLC found. Nor are demographics a good clue: Employees of three years are as likely to be committed as employees of ten years; salespeople as likely as administrators; parents as likely as nonparents; people in their twenties as likely as people in their fifties. But if employee types tell you nothing, employers speak volumes. The differences among individual companies is enormous, with the percentage of committed, all-out-effort employees at the highestscoring organizations nine times that of the lowest. And what distinguishes these high-engagement companies may not be what you think. According to CLC managing director Jean Martin,“Some organizations are enjoying up to 20% higher levels of employee performance not because they pay more or provide better benefits but because they let each employee know how important they are to the success of the business, give them lots of opportunities to contribute, and help them believe in the worth and credibility of the organization. Employee engagement is not only crucial to building a high-performing workforce, it is also an essential defense against attrition for all companies worried about tightening – Leigh Buchanan labor markets.” Reprint F0412D social responsibility The Best of the Good by philip mirvis and bradley googins One way to distinguish companies that talk about social responsibility from those that live it is to observe what employees do about it. You would expect a pharmaceutical maker such as Novo Nordisk to have a charter full of noble visions and values – which it does. But the company also requires all employees to spend at least one day a year with some- 20 Management Lessons from Women’s Soccer by michael w. klein Fa c t: Countries that provide greater economic opportunities to women are more successful in women’s international sports competitions. The exhibit below shows the link between a country’s performance in the 1999 Women’s Soccer World Cup and the labor force participation rate of its women relative to its men, controlling for other factors that also affect success in an international sports competition.The upward-sloping line shows that, among the 15 countries that qualified for the finals of the 1999 Women’s Soccer World Cup, those in which women were afforded more economic opportunities were ones whose women were more successful on the soccer pitch.This relationship is statistically significant, and a similarly significant relationship is also found when considering the wider set of countries that attempted to qualify for the Women’s Soccer World Cup that year, as well as when looking at the performance of women in the 2000 Sydney Summer Olympics. 25 Norway China Canada World 20 Cup points in 1999 15 Germany Denmark Russian Federation Italy Japan Predicted correlation between World Cup points earned and labor force participation rate Brazil 10 Sweden Australia United States Nigeria Ghana Mexico .5 .6 .7 .8 .9 1 Relative female labor force participation rate1 Controlling for income, population, birthrate, women in government, and men’s points in 1998 World Cup 1. Percentage of women, ages 15–64, in the labor force relative to the percentage of men, ages 15–64, in the labor force Societies that provide more opportunities to a wider set of women draw from a bigger pool of talent, and this may give their women’s teams an edge in the highly competitive world of international sports. Likewise, a firm that offers opportunity to a wider set of its workers and draws them from an applicant pool without regard to gender (or race, or ethnicity, or other factors that should not be allowed to influence advancement) can expect to outperform firms that arbitrarily, or even unconsciously, limit opportunities. Source: Michael W. Klein,“Work and Play: International Evidence of Gender Equality in Employment and Sports,” Journal of Sports Economics, August 2004. Send Data Point chart proposals to Edward E.Leamer (leamer.hbrgraph@anderson.ucla .edu), the consulting editor of Data Point. Leamer is a professor of management, economics, and statistics at the University of California, Los Angeles, and the director of the UCLA Anderson Forecast. Reprint F0412G TLFeBOOK harvard business review
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