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Whom to Trust …page 82 Where to Compete …page 68 www.hbr.org March 2004 48 It’s Time to Retire Retirement Ken Dychtwald, Tamara Erickson, and Bob Morison 58 The New Rules for Bringing Innovations to Market Bhaskar Chakravorti 68 Strategy as Ecology Marco Iansiti and Roy Levien 82 The Geography of Trust Saj-nicole A. Joni 90 A Real-World Way to Manage Real Options Tom Copeland and Peter Tufano 16 Forethought 29 HBR Case Study Taking the Cake Ben Gerson 41 Managing Yourself Reclaim Your Job The Fate of the Boomers? …page 48 Sumantra Ghoshal and Heike Bruch 105 Best Practice How You Slice It: Smarter Segmentation for Your Sales Force Ernest Waaser, et al 112 Tool Kit Lofty Missions, Down-to-Earth Plans V. Kasturi Rangan 124 Executive Summaries 131 Panel Discussion High-performance marketing, delivered. Offering 14 categories of consumer electronics products in more than 200 countries, Samsung wanted to develop a way to optimize its global marketing budget for maximum return. Partnering with Accenture, Samsung undertook an intensive 18-month data gathering and analysis project using Accenture’s strategic prioritization methodology. By reallocating approximately $150 million of its marketing budget to high-opportunity categories and countries, Samsung’s worldwide sales have moved from unranked to 8th in portable DVD players, from 10th to 3rd in digital music players and from 8th to 2nd in LCD monitors and TVs in just two years—establishing Samsung as one of the world’s fastest-growing brands. The ongoing project is an important first step in transforming the company from a low-cost supplier to a high-performance business. Wyeth High-performance R&D, delivered. Determined to boost its output of innovative new medicines, Wyeth’s research & development leadership teamed with Accenture to reengineer the way the pharmaceutical company discovers new molecular entities and moves them through preclinical development and clinical trials. The companies designed and implemented vast changes to streamline operations and dramatically improve the effectiveness of Wyeth’s proven R&D organization. Now, three years into the initiative, the productivity of Wyeth’s drug discovery effort has risen 400 percent, early clinical trial cycle times have been cut by 60 percent, and a new high-performance model for outsourcing clinical data management is substantially reducing costs by about 50 percent. © 2004 Accenture. All rights reserved. Samsung In every field of endeavor, there are the timid, and there are the tigers. Go on. Be a Tiger. Inside the mind of every high performer is a relentless urge to improve, to innovate, to prevail. To see how we help high-performance businesses reach their goals, visit accenture.com ESCALADE HAS GONE PLATINUM Escalade ESV Platinum Edition is the world’s most powerful full-size SUV*— and then some. 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How do you like to invest? 1-800-711-5502 schwab.com over 300 locations nationwide HBR 48 Features 82 March 2004 48 It’s Time to Retire Retirement Ken Dychtwald, Tamara Erickson, and Bob Morison 68 In most companies, the people-management systems are designed to push older workers out the door while lavishing investments in hiring, training, and leadership development on crowds of eager youngsters. As baby boomers head toward retirement, that model is foolish and even dangerous. 58 The New Rules for Bringing Innovations to Market Bhaskar Chakravorti The more networked and interdependent an industry is, the harder it is for a company to innovate unilaterally. For new products and services to succeed, the whole network has to get involved. 68 Strategy as Ecology Marco Iansiti and Roy Levien There’s more than a metaphorical link between business and natural ecosystems. You can gain powerful new strategic insights by looking at the roles you and your rivals play in your industry’s environment. Are you predator or prey? A keystone species or a niche player? 82 The Geography of Trust Saj-nicole A. Joni As you rise through the organization, it isn’t enough to ask about a trusted source,“Who is he?” You need to ask, “Who is he in relation to me?” 90 A Real-World Way to Manage Real Options Tom Copeland and Peter Tufano 58 Options theory can be an ideal tool for analyzing nonfinancial decisions, such as whether to build a new plant. But until now, the applicability of “real options” has been narrow and the math behind them daunting. Here’s a simpler, more flexible method that can improve the timeliness of your decisions. COVER ART: RACHELL SUMPTER continued on page 8 90 6 harvard business review HBR D e pa r t m e n t s March 2004 10 80 FROM THE EDITOR S T R AT E G I C H U M O R Older and Wiser Demographic changes are almost always visible for years before they hit. And so it is now, as the oldest baby boomers near 60. Unless companies anticipate this age wave – and what it will mean for the workforce – they will face enormous problems. 24 105 How You Slice It: Smarter Segmentation for Your Sales Force Ernest Waaser, Marshall Dahneke, Michael Pekkarinen, and Michael Weissel Three years ago, medical-equipment supplier Hill-Rom faced weakening revenue growth and strengthening competition. Moving ahead of the storm, the company redesigned its sales force – with outstanding results thus far. Here’s how Hill-Rom did it. FORETHOUGHT 16 Don’t Just Do Something, Stand There! 18 How’s Your Return on People? 20 Let Me Take You Down 22 Venture Out Alone 24 Fixing the Pension Fund Mix 26 Books in Brief BEST PRACTICE 29 112 TOOL KIT Lofty Missions, Down-to-Earth Plans V. Kasturi Rangan 29 HBR CASE STUDY For nonprofits to succeed, their altruistic ideals must be made of stronger stuff – namely, a systematic method for linking good ideas to great programs. Taking the Cake Ben Gerson Legislators, litigators, and consumer groups are suddenly taking aim at Southland Baking Company for simply doing what it’s always done: providing fat-filled snacks that its customers adore. With lawsuits in the air, is it practical – and wise – for the company to recast its product lines? 41 41 120 A recent article on expensing stock options may raise more questions than it answers. MANAGING YOURSELF Reclaim Your Job Sumantra Ghoshal and Heike Bruch LETTERS TO THE EDITOR 105 124 EXECUTIVE SUMMARIES 131 PA N E L D I S C U S S I O N The Sin in Synergy Most managers complain about having too little freedom in their jobs when, really, they’re just afraid to take action. To become truly productive, effective managers should adopt three strategies that can help them trust their own judgment. Don Moyer Strategies are ideas: pure and clean. Organizations are things: messy and complex. No wonder mergers often don’t go as planned. 112 8 harvard business review Upgrades subject to availability. American Airlines reserves the right to change the AAdvantage program without notice. Complete AAdvantage details at AA.com/aadvantage. ? How can you upgrade to First Class if you’re on an airline that has no First Class Michael Mauldin, Atlanta, GA, AAdvantage® member, upgrade fanatic Ahh…that magic word: Upgrade…Wide. Leather. First on. First off. “Hot towel?” kind-of-upgrade…Why settle for less? And now you can request and purchase those upgrades at AA.com. So next time you fly, get a lot more airline. ® AA.com FROM THE EDITOR Older and Wiser emography is the very air that business breathes. The rate of population growth underlies every economic statistic, for example; until the Industrial Revolution, it was practically the only determinant of economic growth. Even today, population growth (actually, the lack of it) is a major reason that the economies of Western Europe and Japan struggle to expand. Demographic change is almost always visible for years before it hits. There was no excuse for the high school I attended to have been caught so unaware by the baby boom that it had to set up temporary classrooms in reconfigured mobile homes while a new, second campus was being built. The school district should also have known to design that campus so it could easily be converted to a community center when the baby bust arrived. The necessary information had been baked into the demographic pie long before. And so it is now, as the oldest boomers near 60 years of age. Investors and marketers are starting to recognize the opportunities the boomers’ old age presents – greater demand for cosmetic and knee surgery, for health care and insurance products, for new or redesigned products that are friendly to arthritic fingers, for geezer-friendly holiday resorts, and so on. But the acuity with which foresighted companies have scanned the market has not been matched by a similar introspection. An aging population means an aging work force, in all developed economies. Unless companies anticipate the change, they will face enormous problems – ones that are entirely foreseeable and preventable. The transformation of workplace demographics may force wrenching changes in government labor regulations and pension policies, but more than that. Workplace environments; management styles; hiring, training, and promotion practices; outsourcing and the use of part-time and contingent workers–nearly every aspect of the people side of running a business will be affected by the aging workforce. That’s the message of “It’s Time to Retire Retirement” in this issue of HBR. The surprising fact is that most training, leadership-development, and other HR policies are steeply skewed to benefit the young. Fifty-somethings are more likely to be offered an early-retirement package than a stretch assignment. Companies that continue along that 10 road will, as the article argues, be driving themselves right over a demographic cliff. The article is the result of collaboration between demographer Ken Dychtwald and consultants Tamara Erickson and Bob Morison. Dychtwald’s studies of baby boomers have already won him recognition from American Demographics as one of the 25 people who have made the most important contributions to the field in the last quartercentury. Erickson is an executive officer and a member of the board of directors at the Concours Group, a management-consulting, research, and education firm. And Morison is an executive vice president and the director of research at the Concours Group. The consultancy, in partnership with Dychtwald, led a research consortium of executives from 30 major public and private organizations in a comprehensive, yearlong study of the business implications of population change. “It’s Time to Retire Retirement” is the first fruit of that study. We’re pleased to bring it to you. Back when boomers were young, some of them said, “Never trust anybody over 30.” They’ve changed that song as they’ve aged, of course, but Saj-nicole Joni’s article,“The Geography of Trust,” suggests that senior executives may need to rediscover a little healthy paranoia about whom they trust. Trust comes from different wellsprings. One is personal integrity: We trust someone’s ethics. Or we trust someone’s expertise – something we do with surgeons and automobile mechanics and others. But there’s also what Joni provocatively calls “structural trust.” Structural trust changes depending on where you stand in relation to someone else. The comrade-in-arms who shared every secret with you back when you were new hires may be unable to offer you the same kind of total trust now that you’re both running divisions and competing for capital, for example. The wise manager – one who has grown wise with age, perhaps–knows that it is as important to read the map of structural trust as it is to understand integrity and expertise. ROBERT MEGANCK D Thomas A. Stewart harvard business review MITSloan editor Thomas A. Stewart deputy editor Karen Dillon executive editor Sarah Cliffe art director Judi Tomlinson Innovation is dependent on effective execution as well as creative ideas. MIT Sloan Executive Education provides the tools and frameworks to transform today’s good ideas into tomorrow’s successful products and services. With our world-renowned faculty and legacy of leading-edge research, we offer programs that turn high-potential managers into innovative leaders. innovation @work Upcoming programs include: Building, Leading, and Sustaining the Innovative Organization April 26-27 Strategies for the Americas May 2-8 senior editors Leigh Buchanan David Champion Diane L. Coutu Bronwyn Fryer Ben Gerson Paul Hemp Julia Kirby Gardiner Morse Ellen Peebles Anand P. Raman senior production manager Dana Lissy associate art director Karen Player associate production manager Christine Wilder associate editor Eileen Roche senior designers Aimee Bida Jill Manca consulting editor Louise O’Brien production coordinator Josette AkreshGonzales manuscript design/production editors coordinator Christina Bortz Heather Barrett Lisa Burrell Roberta A. Fusaro communications manager Margaret K. Hanshaw Cathy Olofson Andrew O’Connell Andrea Ovans editorial coordinators editor for Kassandra Duane business development Andrew Gray John T. Landry contributing staff executive editor and director Amy L. Halliday of derivative Amy N. Monaghan products Suki Sporer Jane Heifetz editor-at-large, harvard business school publishing Walter Kiechel a note to readers Making Business Sense of IT May 24-28 (in partnership with IMD) Product Design, Development, and Management May 24-28 Leading Change in Complex Organizations June 6-11 Business Dynamics June 14-18 For more information on these and other programs, including custom courses, contact us at: http://mitsloan.mit.edu/hbr sloanexeced@mit.edu 617-253-7166 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 3 March 2004 Printed in the U.S.A. Control. Industry leaders achieve their position because they build a rock-solid foundation on information and analysis. Control over core operations gives you the space to innovate and to envision where your company can go next. Discover how some of the world’s top companies gain control of their information. Read the latest pre-publication excerpt of the forthcoming book, The Value Factor (Bloomberg Press), by Mark Hurd, President and CEO, and Lars Nyberg, Chairman of NCR Corporation, available online at: Teradata.com/thevaluefactor You’ve never seen your business like this before. Teradata and NCR are registered trademarks of NCR Corporation. © 2004 NCR Corporation. Life Sciences & Biotechnology A Special Advertising Section Coming in May 2004 Biotechnology and life sciences continue to generate profound discoveries in fields as diverse as genetics and agriculture. HBR will explore advances in research and new product breakthroughs in our third annual advertising section devoted to this evolving industry. Space Closes March 23, 2004 For advertising information, call Maria Beacom at: 212-872-9280 Save Your Back Issues of Harvard Business Review Save time and effort searching for back issues and avoid lost or damaged copies. 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WE DEVELOP LEADERS WHO DEVELOP PEOPLE WHO DEVELOP BUSINESS ADVANCED MANAGEMENT PROGRAMME March, July and October 2004 INTERNATIONAL EXECUTIVE PROGRAMME April, July and October 2004 YOUNG MANAGERS PROGRAMME For further information: May, June and September 2004 Europe Campus: Allison Wheeler T: +33 (0)1 60 72 45 35 E: gmp2@insead.edu THE LEADERSHIP TRANSITION May and September 2004 LEADING YOUR SELF April and July 2004 COACHING FOR LEADERSHIP July 2004 OPEN-ENROLMENT PROGRAMMES Asia Campus: Tan Ai Lin T: +65 6799 5377 E: execed.asia@insead.edu www.insead.edu/gmp2 COMPANY-SPECIFIC PROGRAMMES TOP MANAGEMENT • SENIOR MANAGEMENT • GENERAL MANAGEMENT FAMILY BUSINESS • STRATEGY • LEADERSHIP • ACTION LEARNING ENTREPRENEURSHIP • FINANCE & BANKING • MARKETING • ORGANISATION OPERATIONS MANAGEMENT • NEGOTIATION & DECISION SCIENCES F o r e t h o u g h t idea Don’t Just Do Something, Stand There! Sony’s $1,500 pet robot is virtually useless – which explains why it’s such a big hit. by Youngme Moon Sony managers had a problem. Racing to beat competitors to market, the electronics giant had spent tens of millions of dollars developing its first household robot. But building a personal robot that could do anything useful proved daunting, and Sony’s prototypes were buggy and unpredictable. How could the company establish a foothold in this nascent market without losing its shirt – or worse, becoming a laughingstock? AIBO’s lack of obedience was an The answer, it turned out, was not to obsess about peridiosyncratic display of “attitude.” fecting the technology. Early on, company managers recognized that consumers would immediately categorize, or “frame,” any product that reminded them of a Hollywood movie robot as, well, a robot. If it looked like C-3PO, consumers would expect it to act like C-3PO. And they would be sorely disappointed if it didn’t measure up. So Sony made a conscious decision to manipulate the framing of its product and turn the robot’s shortcomings into attributes. Rather than develop a household helper that would fall disastrously short of expectations, Sony realized it could create an entertaining and lovable pet that no one would expect to be useful. “We had lots of arguments about whether AIBO should do something or not,” one Sony manager told me. “But in the end, we all agreed: AIBO loves you, you love AIBO, and that’s it.” Accordingly, the first-generation AIBO didn’t do much, and what little functionality it had was erratic. While the doglike AIBO could negotiate QRIO obstacles and respond to some commands, for example, it didn’t always do what it was told. 16 But Sony cleverly marketed the creature as an entertainment robot with a personality of its own. According to the company, AIBO’s lack of obedience was an idiosyncratic display of “attitude.” The reality was that AIBO’s voice recognition was unreliable, so sometimes the product simply didn’t work. Framing AIBO as a pet enabled Sony to get the biggest bang out of minimal functionality. The company was able to successfully introduce robotic technology into people’s homes and position itself as the category leader for the future. In the process, Sony created public excitement about household robots and generated internal momentum to drive the product’s development. Because customers were forgiving of AIBO’s quirks, the company had tremendous leeway to tinker with its technology. Categorizing the robot as a pet also helped Sony attract lead consumers who were more demographically and psychographically diverse – ranging from the elderly to very young children – than typical technology early adopters. And, by putting its imperfect technology out into the AIBO harvard business review The strategy boils down to knowing the difference between what the product is and what consumers expect it to be. marketplace, Sony had the opportunity to gather invaluable consumer feedback to help guide continued development. Take Baby Steps Sony has sold more than 130,000 AIBOs since the product launched in 1999. Last September, Sony released its third-generation AIBO, and the company is now prototyping a little humanoid that can walk and talk, recognize voices and faces, and stream video from its camera to your PC. The QRIO (pronounced “curio”) looks and acts more like a Hollywood robot than AIBO ever did. But once again, Sony is carefully managing the new robot’s framing to ensure that when QRIO is released, consumers won’t expect much utility. Highly mobile and just two feet tall, QRIO suggests, if anything, a playful child. And, like its canine predecessor, QRIO does little that’s really useful. As the promotional text on Sony’s Web site explains, “QRIO’s dreams are limitless. But one is clear: to make your life fun and happy.” Contrast Sony’s robot development strategy with Honda’s. Both companies share the same long-term vision: to develop practical household robots. But Honda has nothing marketable to show for the 15 years and $100 million it has spent perfecting its prototype, ASIMO, an android that’s clearly designed – and framed – to imply usefulness. At twice QRIO’s size, the anthropomorphic ASIMO conspicuously evokes the Hollywood ideal, and Honda touts its “unprecedented humanlike abilities.” But ASIMO march 2004 is not for sale. The robot does little more than walk, and even the simplest household tasks are beyond its capabilities. Nonetheless, Honda is aggressively positioning itself as a player. The company has run television spots featuring ASIMO, and its print ads in magazines promise that “one ASIMO day, ASIMO could be quite useful in some very important tasks, like assisting the elderly and even helping with household chores.” No wonder Honda has no immediate plans to market ASIMO. By publicly committing itself to delivering a truly useful robot, the company has created consumer expectations that – for now, at least – will be hard to meet. Reframe the Frame AIBO’s success shows the pivotal role of framing in marketing discontinuous innovations for consumers. If managers want mainstream customers to embrace a new technology, they need to establish the most effective frame early in the development process and commit to it. The strategy boils down to knowing the difference between what the product is and what consumers expect it to be. If customers think your robot is a pet, all the better for them – and for you – while you perfect the technology. Youngme Moon is an associate professor of marketing at Harvard Business School in Boston. Reprint F0403A 17 F o r e t h o u g h t h u m a n ca p i ta l How’s Your Return on People? Companies that invest in employee development can outperform the market. Just ask their shareholders. by Laurie Bassi and Daniel McMurrer The People Payoff Portfolio1 2003 total return Value one year later of $50,000 invested on January 1, 2003 Portfolio one, created in January 2003 35.7% $67,850 Portfolio two, created in December 2001 31.8% $65,900 Portfolio three, created in January 2003 31.1% $65,550 S&P 500 market index 26.4% $63,200 1.These three portfolios are managed by Knowledge Asset Management (KAM), the investment firm founded by the authors. Returns are net of all fees, expenses, and dividends. and 40 companies that invested at roughly twice the industry norm in employee development in each of the previous years (1996 through 1999). We followed the performance of these portfolios through 2001. Their returns were robust and in line with a growing body of empirical research showing that organizations that make extraordinary investments in people often enjoy extraordinary performance on a variety of indicators, including shareholder return. In December 2001, we decided to put our money where our research was and created a live portfolio of companies that spend aggressively on employee development. In its first 25 months since inception, that portfolio has outperformed the S&P 500 index by 4.6 percentage points (2.2% versus a decline of 2.4% for the index). In January 2003, we expanded our investment strategy by launching two additional live equity portfolios made up of similar development-oriented companies. The results speak for themselves. While past performance is never a guarantee of future results, and while it is always possible to lose money, each of these three portfolios outperformed the S&P 500 by 17% to 35% in 2003. (See the exhibit “The People Payoff.”) How are you investing in your most important asset? Laurie Bassi (lbassi@knowledgeam.com) is the chairwoman and Daniel McMurrer (dmcmurrer@ knowledgeam.com) is the chief research officer at Knowledge Asset Management, a money management firm in Bethesda, Maryland. Reprint F0403B 18 harvard business review JAMES YANG Managers are always claiming, “People are our most important asset.” But deep down, they can’t shake the feeling that employees are costs. Big costs. And they treat them that way. Quarterly earnings off? Cut the perks, rein in training, and downsize. This strategy may increase earnings in the short term, but it’s myopic. Recent studies suggest that layoffs actually destroy shareholder value. And our research shows that treating employees like the assets they are – by investing in their development – boosts returns over the long term. For years now, our research has measured the effect of spending on employee education and training – a “cost” that is buried in general and administrative expenses – on the stock prices of 575 publicly traded firms. We created four hypothetical portfolios (one each for years 1997 through 2000) consisting of between 20
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