Best practice does not equal best strategy

Best practice doesn’t always equal best strategy. Best-practice benchmarking, rightly viewed as one of the most important tools for improving operational efficiency, can be a double-edged sword. Managers must guard against transforming what is a purely process-related technique into the overriding goal of strategic decision making. When industry competitors begin to herd around a single strategy, declining margins are bound to follow

Benchmarking is an important way to improve operational efficiency, but it is not a tool for strategic decision making. When competitors all try to play exactly the same game, declining margins are bound to follow.

Steve Ballmer Speaks Passionately about Microsoft, Leadership ... and Passion

Microsoft CEO Steve Ballmer's job: Convince customers that Microsoft's latest products are ground-breaking enough to purchase, transform a company with $44 billion in sales into an agile innovator, compete against new business models that challenge Microsoft's traditional approach to software development and recruit enough talent to keep the software giant relevant 25 years from now.

Ballmer joined Microsoft in 1980, five years after its inception. He has witnessed the company grow from 30 employees to almost 80,000. In 1998, he was named president of Microsoft, responsible for day-to-day operations, and two years later was named CEO. With a management style that he characterizes as "more bubbly" than most, Ballmer says leadership "requires a heavy degree of personalization" and the ability to adapt to new conditions.

The day before Microsoft's Vista launch for business customers in New York City, Ballmer spoke at Wharton as part of the school's Leadership Lecture series. During his talk, Ballmer emphasized that Microsoft's style is to focus on the long term: His troops target a market and work until their products are competitive -- an ethos that has been apparent in nearly every Microsoft product from Windows to Xbox and, most recently, Zune.

"We're going to bet on our long term. We don't do things for the short term. And if we don't at first succeed, we keep trying," he says. "If we don't get what the customers really want, we keep going. It took us three attempts to get Windows right and if we had given up after attempt one or attempt two, Microsoft wouldn't look anything like" it does today. "Leaders have to set the tone that says, 'We'll be patient.'"

Leaders Must Continuously Adapt

Ballmer's patience will be crucial as Microsoft targets new growth areas. The company has two primary cash cows -- its Windows and Office franchises -- and has been spending heavily to expand into new markets. Microsoft's Zune is designed to compete with Apple's hugely successful iPod. Despite a third-place market share in search (behind Google and Yahoo), Microsoft is trying to close the gap. In addition, the company is facing the rise of entirely new ways of developing and distributing software that, according to Ballmer, present a challenge greater than that posed by any individual company.

To make a dent in these new markets, Microsoft has to instill the agility typically associated with startups into a massive company with $32 billion in cash and equivalents. Ballmer's challenge is to adapt to the different markets that Microsoft is targeting. "I believe that good leaders will ... adapt themselves to whatever the situation is that they face," says Ballmer, adding that there is no single blueprint for leadership. "Leadership requires a heavy degree of personalization. A lot of lessons are valuable, but what's probably more valuable is hearing people talk about their experiences and then developing your own model," he says. The one characteristic, however, that he believes is "universally applicable to anybody who wants to be a leader" is passion. "You've got to love what you are doing."

Ballmer readily admits that when he joined Microsoft he was not a computer expert, but he developed a passion about Bill Gates' vision to put a computer on every desk and in every home. The company "spoke to this notion [that] most people [want] to have some kind of grander purpose about what they are doing," Ballmer says. "And, yes, it's about a career and, yes, it's about taking care of family, and, yes, it's about winning.... But, generally, people want to know that there is some bigger, more important thing out there [worth] really striving for. Leaders must set the tone about what the real purpose of any organization is. If you really want to inspire people and inspire their passions, you have to appeal to them in some way that is a little less generic than, 'Hey, it's good for the company. The company can earn a lot of money.'"

Developing passion is particularly critical in the markets where innovation is essential. "Because our business is software and software doesn't wear out, we have to be about innovation," says Ballmer. "If our new release isn't any good, people will not upgrade to it." He disputes the notion that Microsoft doesn't innovate, adding that the company's overall culture is about innovation. "No matter how you will judge ... [what] ... we have done or will do in the future, the culture, the leadership tone has got to be about innovation."

According to Ballmer, Microsoft has maintained a position of leadership throughout a number of transformations in its business. The company helped to create the PC industry, transitioned from text-based interfaces to the era of graphical computing and evolved again when the Internet transformed information technology. "Unless you are really committed to building a culture of continuous change and innovation and transformation, you are not in good shape," says Ballmer, who makes a distinction between personal adaptability and adaptability in response to evolving competitive threats. Indeed, Ballmer sees his job as assuring that Microsoft adapts to these new ways of doing business.

Competing Against New Business Models

"You know, everybody likes to have someone, a competitor, who is more interesting," stated Ballmer. "We have many competitors. We have had very good competitors for years. We competed with IBM when nobody gave us a chance of succeeding -- and we did [succeed] with Windows. We competed with guys like Lotus and WordPerfect and Novell, who started out ahead of us."

Today Ballmer sees two major competitors for Microsoft -- the open source software movement and advertising-supported software. According to Ballmer, the threat comes not from specific companies, but from the business models represented by these two trends. "Right now, the emblem of the first one is Linux and the emblem of the second one is Google. But it's not the companies, it's the phenomena" that present the greatest challenge to Microsoft.

The question surrounding open source software like Linux is whether this approach to software development can surpass that of commercial companies. "Will open source do a better job than a proprietary software company -- any software company?" asks Ballmer. "It's an interesting question -- not just for us, but for anybody who is interested in business. The question is, can paid, commercial people do a better job than unpaid volunteers? The answer, I think, will be yes, but we're going to have to push ourselves."

The other threat facing Microsoft is what Ballmer characterizes as "ad funding" --software, such as that provided by Google, which is delivered for free over the web and monetized through advertising. Ballmer's take on the rise of Google is that "getting search right was actually not the hardest part of the issue. They got ad funding -- they really figured that out. And now the rest of us are going to have to learn that game." Advertising is a new model for software and the question is, "Will we be as good at ad-funded software as we were at paid software?"

Squaring off against Google and figuring out an advertising-funded model for Microsoft software excites Ballmer more than other competitive challenges because it requires the software giant to be "extra agile, extra clever. I get extra fired up about that possibility. And yet, I'm confident in how we'll do in that game. Certainly I'm confident in the long run."

Why Innovation and Agility Matter

Microsoft's confidence largely comes from a history of entering markets where it wasn't top dog and yet eventually becoming a strong competitor. For example, Ballmer says that Microsoft is up to the challenge of being a late comer to a market like digital music players. "When you are not the first guy in the market, you have two choices at the beginning of the day: Get in or don't get in. You just have to decide. Are you a company that is afraid to get into something where there is a clear market leader? We put our hands up and said, 'No, we're not going to be afraid of that.'"

To Ballmer, these new markets are marathons. "It's going to take ... patience and long-term innovation to win. It's what it took us with Windows and, frankly, what it has taken most companies in our business." Google, for example, "didn't invent search. They weren't the first guy to the party." Ballmer points out that Google spent "six, seven, eight years before it established a position [in search] and beat AltaVista and Yahoo. It took Apple a while to come in on top of MP3 and music Players. SAP was at it for almost 20 years before they really got to critical mass with the SAP R/3 product." For Ballmer, the issue is simple: "If you're not the first with an innovation, do you shy away or not?"

And search is an area that Ballmer believes is ripe for innovation. Realizing that the company is playing catch-up to Google, Ballmer says Microsoft had to get in the game, but he also acknowledges that advancing search will be a long-term project. "We're getting the basics right. We think that we have some clever ideas coming, but you know we're going to be in there battling for years and years and years."

Meanwhile, Microsoft is betting that there is opportunity for additional players to improve search. "Fifty percent of all searches still don't ever result in an answer that answers the person's question. And of the other 50%, most people will tell you that it took them longer than they thought it should have. That's got to be a world where innovation matters."

Innovating is one thing. Being agile enough to turn on a dime and take advantage of innovation is quite another. Ballmer acknowledges the challenge. "It's not easy to change cultures.... We have almost 80,000 people working for us these days.... [What we] are working hardest on now is agility. What does it mean to be agile in the marketplace? Agility means that you are able to turn things around, that you can invent new things and yet you can still do things that require scale, discipline and execution."

For a company the size of Microsoft, Ballmer says he's trying to cultivate pockets of agile groups, some of which are "incredibly fast, but shallow," and others that are slower, but "incredibly deep." "How you knit [together] and enable people to get the best of all the cultural aspects in the organization is a challenge right now." He insists that Microsoft can become more agile. While there is one overall Microsoft culture, beneath that is a wide range of sub-cultures which operate at different paces.

For instance, the Windows group, which is responsible for creating an operating system that needs to satisfy multiple requirements, will move slower than the Zune unit, which is targeting a specific niche. "What it means to be agile in the Windows product is quite different than what it will mean to be agile in delivering Zune. Windows shouldn't update itself every three months.... Windows needs to be more things to more people than any other product I can name on the planet ... so Windows has to try to be more encompassing." Zune, on the other hand, is in a very different position, according to Ballmer. "Zune is nowhere in the market. So hit, run, work, find your niche -- go, go, go, go! This is a whole different agility profile than what you need in Windows."

The key "isn't trying to put everybody on the same treadmill. The key is to strike the theme, set the tone, set the priorities among all of the leaders and then let them interpret what makes sense relative to what we are trying to get done in a given context," says Ballmer.

Breaking with the Past to Compete in the Future

Sustaining this level of agility often involves making difficult choices. With the launch of Zune, for example, Microsoft introduced a product that was incompatible with the "PlaysForSure" digital rights management (DRM) scheme the company had been previously encouraging all its partners to use. Following the model that made Microsoft's Windows so successful, Microsoft licensed PlaysForSure to multiple hardware vendors of digital music players. "We thought that was a brilliant strategy -- [develop] an open ecosystem, get a lot of people [to support it]." What happened? As Ballmer puts it, "In this particular case, the whole was not bigger than the sum of the parts." And, as a result, "Apple -- with one model that was simple and consistent -- wound up taking 75%-80% of the market."

Microsoft believed it needed to move quickly to change its strategy. "So we said, 'Okay, what do we have to do here?'.... We had to make the market, not just let our partners make the market.... We needed to get an absolutely consistent...user experience [and] retailer experience.... We said, 'Look, we've got to take a different approach, build a new ecosystem and, by the way, we better do something that Apple hasn't done.'"

Microsoft saw an opportunity in music sharing. "We believe in community; community means sharing.... How do I share my music with you? I want to be able to do that legally. So we said, 'We'll go out and negotiate for the rights.' If I share a song with you, you can listen to it three times, or for three days, whichever comes first, then you can mark it and buy. That's one of the features of Zune. But, as soon as you say that, it is inconsistent with PlaysForSure. The DRM information doesn't know anything about that."

The change in strategy was, in Ballmer's words, a "very hard call." But his conclusion was: "We could be consistent with what is out there, which hasn't succeeded. Or, we can try a new approach, which we think has ... merit and can succeed."

As for the impact on Microsoft's partners as a result of this change of strategy, Ballmer states, "Some of our partners will say 'This wasn't partner-friendly.' But having our partners only have 20% of a market share between them is also not very partner-friendly. One of the key things ... that I have learned about business partners is that business partners are your partners because they make money with you, they succeed with you. And if you don't succeed, eventually you don't have any partners."

Attracting, Retaining Talent

Ballmer believes that the key to all of these goals is talent. Can Microsoft effectively recruit and retain the brainpower to expand its traditional markets while also tackling the challenges of the new business models introduced by the growth of the web? The task is even more crucial as rivals like Yahoo and Google are increasingly competing for talent.

Throughout Microsoft's evolution during his tenure, Ballmer says the "number-one thing that has consumed my time is attracting great people, retaining great people and enabling people." In the end, Ballmer says he's recruiting for Microsoft's next generation, trying to find people willing to continually reinvent the company. "If I were to do surveys with Microsoft right now [asking], 'How many of our folks were around before Windows was a success?' [The answer would be] it's a low percentage. As a leader, then, my job has got to be to connect the dots for people who have had all different kinds of experiences."

Ballmer recalls a question once posed to him by an intern: Where will Microsoft be 25 years from now? After some thought, Ballmer says, the only thing he could predict is that "we're going to have great people.... And if we have great people and we have a leadership position today, then everything will take care of itself," says Ballmer. "We'll be driving the leading edge of technology. We'll be making good money. We'll be earning good returns for shareholders and all of that kind of stuff. But at the end of the day, the only thing that could be the magnetic north compass for the place over the next 25 years has got to be this notion of prioritization of people."

Secrets of Leadership Success

Several years ago, while visiting a regional branch of Lee Hecht Harrison, a global career management services company, then-president Stephen Harrison was stopped short by "Ray," his chief operating officer. "You didn't greet the receptionist," said Ray, who proceeded to show Harrison how to do what he called the "two minute schmooze." Introducing himself, Ray inquired about the receptionist's commute and impressions of the company.

Ray explained to Harrison: "A receptionist is a corporate concierge. They will talk to more important people in a day -- suppliers, customers, even CEOs -- than you will talk to all year."

Enron-level scandals are not averted by talking to the receptionist alone, but Harrison, contended that small acts like this are part of what makes for an ethical corporate culture. And culture, not "heavy handed legislation" like the 2002 Sarbanes-Oxley Act, is a key safeguard against moral lapses, he said in his talk.

Harrison, who is now chairman of Lee Hecht Harrison, pointed to the failure of Sarbanes-Oxley to stop incidences of corporate fraud and misconduct. He quoted a 2005 PricewaterhouseCoopers survey that reported a 22% increase in global fraud over the last two years. When the Federal Sentencing Commission discovered this gap between intention and results, said Harrison, it held a year of hearings and then added one line to the Federal Sentencing Guidelines stating that public companies must "promote an organizational culture that encourages ethical conduct."

Shortly after this addition was made, Harrison was appointed Worldwide Chief Ethics and Compliance Officer of Lee Hecht Harrison's parent company, Adecco, a position he held for two years and one that is mandated for publicly traded companies complying with Sarbanes-Oxley. He, along with other newly appointed ethics and compliance officers, wanted to know: What does "ethical culture" mean to the Federal Reserve Board? Harrison spoke with Federal Reserve Board officials and attended conferences where board members addressed the issue.

"All of us had pens in hand, waiting for the answer. They couldn't give it to us," Harrison recalled. "So I decided I would dig into this myself." What he concluded mirrors the words of former SEC Commissioner Cynthia Glassman, who said that while the government can mandate ethical compliance, "we cannot legislate ethical behavior." For Harrison, even the word "ethics" itself seems too abstract; he replaces it with what he sees as a more intuitive, common-sense word: decency.

"Decency is not just about being nice," noted Harrison, author of The Manager's Book of Decencies. Rather, it is about creating a "bubble wrap" of good deeds that will protect a company in hard times. "Our willingness to be decent at work cannot depend on whether business is up or whether we're in a bad mood or whether it's raining. Decencies don't amount to anything unless we take the trouble to make them come alive through concrete acts in all kinds of weather."

For those at the top, this can mean such actions as being the first to volunteer for ethics training; honoring those with unglamorous jobs, like office cleaning; and listening to people at all levels of the organization. He pointed to the example of Herb Baum, former CEO of Dial, who used to host "Hot Dogs with Herb" on the factory floor, where he invited employees to talk with him about anything on their minds.

Being accessible is as important as being humble, said Harrison. "Remember Ed Koch?" The former mayor of New York, in his second year in office, drove from borough to borough, asking people, "How am I doing?" "He went from being well-liked to well-loved." Harrison also recalled meeting up one night with a long-lost college roommate, Ruben Mark, chairman and CEO of Colgate Palmolive. Over a Japanese dinner, Harrison asked him how he explained his success. "He leaned across the table and said, 'That's easy. I make absolutely sure nothing creative or important is ever identified as my idea,'" said Harrison. "Now that's humility."

He also counseled executives to avoid the trap of "executive pomposity." He first heard that term in a 1967 speech from the CEO of Technico, who spoke specifically about executive "telephone pomposity." Said Harrison: "I have answered my own phone since then."

Being generous with praise and recognition will earn leaders what Harrison calls "psychic income." He gave the example of the chairman and CEO of Campbell Soup who "at the end of every day gathers his people to hear about neat stuff done that day and then handwrites thank-you notes to the people who did it. If you go around Campbell Soup, all over the world, you will find those notes framed."

A key test of a leader's sensitivity comes at layoff time. While Western companies, and particularly American companies, have come to accept the reality of the need for layoffs, "what they should not come to terms with is a downsizing episode that is anything but sensitive, well thought out and has preserving personal dignity as the highest priority," Harrison said.

Immediately after layoffs take place, for example, a leader should be "very visible and accessible," ready to answer questions, reduce anxieties and even assuage the guilt of those who survive the layoffs. "It takes courage to put your chest out, shoulders back, and be there to deal with this. It's a decency, and people will appreciate it."

At the end of the day, said Harrison, the words of poet Maya Angelou ring true: "People will forget what you said, they will even forget what you did, but they will never forget what you made them feel."

Leading with Your Voice

As public speaking coach Richard Greene knows, however, a few unique individuals are able to combine words and feelings in stirring, almost miraculous ways. "I would rather hear Martin Luther King read the Philadelphia White Pages out loud than hear almost anyone in corporate America deliver the 'I have a dream' speech," said Greene during his presentation.

While King had natural gifts that only a chosen few possess, Greene argued that most people have never been trained in public speaking, in part because the subject is not usually taught in schools. "It's a mechanical process and every single employee, with a little bit of intention, focus and time spent, can learn a new skill set. They haven't had a chance to see how good they can be," said Greene.

The first task of a speaker is to realize his or her purpose in speaking, whether it involves addressing several prospective customers across a boardroom table or a convention of thousands. "Public speaking is nothing more than having a conversation about something you're passionate about with two or more people, while you just happen to be standing up, or not," said Greene, who has advised CEOs of Fortune 500 companies and coached presidents, prime ministers, and, in 1996, Diana, Princess of Wales.

One of the biggest pitfalls for speakers in a corporate communication setting is perceiving a speech or presentation as a performance. "It's easy to get nervous and think, 'I want them to know how smart I am and how much I know,'" said Greene. "But if it's just about downloading data, then stay home, hit the send button and save everyone's time and expense."

The best communicators have understood that public speaking is not a performance; it's about making a connection with others, said Greene. "What did Franklin Roosevelt call his weekly radio addresses? Not 'fireside speeches' but 'fireside chats.' He understood that this new technology -- radio -- could be a way to connect with people."

Greene, who began his career as a lawyer, became intrigued by public speaking after watching motivational speaker Tony Robbins. "His ability to work a crowd is unparalleled and I learned a lot from him. I also decided it would be much more fun to do what he was doing, rather than what I was doing, which was being his lawyer."

During the 2000 presidential election, Greene advised Al Gore's campaign to let the then-Democratic nominee speak about environmental issues, but his advice was brushed off by the vice president's campaign on the basis that "no one cares about the environment." "What was missing from Gore in 2000 was a sense of human passion and authenticity. It doesn't matter what you think of global warming: What matters is you see that he believes in something passionately," he said.

Authenticity can help convince an audience that you are bringing something unique to the table, said Greene. "When you're trying to market an idea or product or service, you have to answer two questions the customer has, which are: 'What makes you unique, as compared to your competitors? And how can your uniqueness benefit me?'"

Greene offered some practical tips, including the observation that "the difference between a good speaker and a great speaker is the pause." He recited a piece of the famous King speech: "He said, 'I have a dream' -- pause, pause, pause -- 'that one day' -- pause, pause, pause -- 'this nation will rise up….' He didn't just run it all together, one word after another."

Other simple tools of the trade include making eye contact with audience members even in a large room, establishing a casual relationship by walking in front of a podium rather than standing behind it, and varying voice tone and rhythm. "This is all low-hanging fruit," said Greene, meaning that with a little training, most speakers can improve in these areas.

Of course some public speaking skills are the result of natural gifts, Greene acknowledged, and voice resonance is one of those gifts. Former CBS News anchorman Walter Cronkite won the nation's trust in part because of his deep, full voice, said Greene; on the flip side, Democratic presidential nominee Hubert Humphrey lost the 1968 election in part because his voice was high-pitched and even grating.

As for the current presidential race, Greene predicted that Mitt Romney would win the Republican nomination and Barack Obama the Democratic because both are strong communicators. "There is a continuum of great speakers. Where you are on this continuum is pretty much where you are in terms of overall effectiveness."

He attributes Obama's rapid political rise to the skill of his keynote address at the 2004 Democratic National Convention. "It didn't sound like a normal political speech. He spoke from a place of pure nakedness, as if he were saying, 'I'm not even giving a speech; let's just connect.'"

While disparaging an older generation of public speaking advice that recommended viewing audience members in their underwear, Greene offered a different kind of advice that can be summed up in four words: "It's not about you." Referring again to Martin Luther King, Greene said, "He had this ability to reach inside his heart and soul and just bring out what was there. What he cared about at every moment was just getting his message across. He wasn't worrying about how he looked."

Colgate-Palmolive's Reuben Mark: On Leadership and 'Moving the Bell Curve'

After an unusually long 23-year tenure as chief executive, Reuben Mark, who is still chairman of Colgate-Palmolive, sees corporate leadership like a baseball game that is won, not by spectacular homeruns, but by singles and doubles.

In a recent Wharton leadership lecture titled, "The Essence of Colgate's Leadership Training," Mark said effective leadership at the $12.2 billion consumer products company pays off in incremental and consistent gains. "The essence of leadership is the idea of continuous improvement. No matter what, you can always coach people to do a little better, and if everyone does that, the whole organization moves up."

Colgate-Palmolive, headquartered in New York City, is the world's leader in oral care products with its flagship Colgate toothpaste, but it also sells soaps (including dish soap), pet food and household cleaners such as Ajax. The company's stable of consumer brands has delivered steady growth throughout the past two decades. Since the end of 1983, total return for the Standard & Poor's 500 Index was 1555% while Colgate-Palmolive's peer group of companies returned 2932%. Total return for Colgate-Palmolive during the same period was 4204%. Its after-tax return on capital from 2002 to 2007 was 33% compared to 18.5% at peer companies.

Mark said business leaders should look at their company's performance like a bell curve. The left side of the curve represents very bad results, and the right side, excellence. The bulk of a company's activities will fall in the thickest part of the bell curve in the middle. Management's job is to gradually implement and nurture improvements that will move the entire curve toward the right, Mark suggested: "It's not romantic and not revolutionary or headline-getting, but over time, that's what generates success."

On a First-name Basis

For example, Colgate management worked for several years to get all 35,000 Colgate-Palmolive employees to wear identification badges with their first names in large, highly visible type. The nametags, he said, make it easier for top executives visiting plants and offices around the world to connect more quickly with employees by using first names. "All these efforts at cultural change help to get people to believe and move the curve. The job of the major leaders in the organization centers around culture."

Colgate-Palmolive was founded in New York in 1806 as a candle and soap company. One of its early innovations was packaging dental cream -- at that time sold in jars -- into squeezable tubes. Today, the company operates in 223 countries and is the leading toothpaste brand in most of the world. (In the U.S., it faces heavy competition from Crest.) Mark, 68, joined the company in 1963 and went on to serve as its vice president for Far East operations, president, and then chief executive in 1984. This summer, in keeping with Colgate-Palmolive's succession plan, Ian Cook, Colgate's chief operating officer, took over as chief executive. Mark will continue as chairman through 2008.

He stressed that focus is an important element of leadership at Colgate-Palmolive. The company has limited the number of product lines in its portfolio to focus only on those in which the company can maintain a strong position. For example, the company never followed competitors into pharmaceuticals. "In our case, we decided 25 years ago we couldn't compete with some organizations, like Procter & Gamble, on all fronts. We had to select a limited number of product areas where we could compete."

Indeed, he said, Colgate-Palmolive would have liked to add the Listerine brand to its oral care division in 2006, when Pfizer announced it was selling the mouthwash along with its consumer healthcare division. However, the deal would have included products that did not fit into Colgate-Palmolive's core groups, including Nicorette, the stop-smoking patch, and over-the-counter drugs like Sudafed, Neosporin, Zantac and Benadryl. Colgate-Palmolive walked away from the acquisition and Johnson & Johnson went on to buy the Pfizer brands for $16.6 billion. Mark said that while it was difficult not to buy a strong brand like Listerine, it was more important to remain focused on the company's guiding strategy. "When somebody says this is the deal of a lifetime and you can't pass it up, you almost have to run in the other direction," he added.

Financial discipline is another simple strategy that has led to constant improvement at Colgate-Palmolive, according to Mark. Company managers at Colgate-Palmolive constantly look to reduce overhead and plow savings back into marketing and new product development. As a result, the company's margins have grown from 37.9% in 1984 to 56.4% in 2006, he said.

Mark then went on to describe personal characteristics that are important in successful leaders. "In leadership, some traits come naturally [while others] must be learned," he noted. He emphasized integrity first. "That goes without saying. However, in recent years -- especially in business -- taking integrity for granted has been a mistake. A lot of people got into a lot of trouble because the people at the top of the organization did not demonstrate integrity."

He pointed to former Tyco chief executive Dennis Kozlowski, who agreed to pay restitution for tax evasion after he was caught in a scheme to avoid paying taxes on artwork purchased in Manhattan. Empty cartons supposedly holding the art were shipped to a Tyco facility in New Hampshire for tax purposes, but the paintings were actually sent to Kozlowski's New York apartment.

Mark asked his audience to think about the impact on a worker in the New Hampshire plant, earning $22 an hour, seeing the crates coming to his plant. "He knows that the boss is cheating on taxes. How can you really expect that warehouseman to be honest in his job when the example he's getting is just the opposite? With everything you do as a leader, you've got to think not only, 'Is it the right thing for me to do?' but, 'Is it right for the organization?'"

Coping with Ambiguity

Common sense is another critical trait of good leaders. "That's what business pays big bucks for. That's what makes a success -- seeing the situation and simplifying it so everyone can understand and come up with a common-sense solution that will move the business forward." Strong leaders are able to cope with ambiguity, he added. "If everything were black and white, everyone could do it, but most things in business at any level are gray. The ability to parse out what is on one side and what is on another -- and present those sides well and come to a conclusion -- is important."

Clarity in communications is also vital, said Mark. "You can't expect people to do what you want them to do and to get better each day unless there is clarity." He is often amazed to find himself sitting in a meeting, listening carefully as misunderstandings develop. To prevent this, the top 500 people at Colgate-Palmolive gather twice a year to hear presentations about initiatives within the company. They then must return to their divisions and facilities to make sure the information they received from the very top cascades throughout the rest of the company.

Mark then discussed the use of power by corporate leaders. "The more power you have, the less you need to use it." If top management has fostered the right culture, everyone is aligned and voluntarily moving toward the same goals. In that kind of company, bosses don't need to wield their power. He also emphasized the "human touch." First, he said, leaders must create a caring environment. "Love is a better motivator than fear, I believe, and our company believes." Finally, he added, strong leaders value the contributions of everyone in the organization, manage with respect and often use humor as a powerful tool to get around problems and disarm people who may be inclined to hamper progress.

He was then asked which of the personal traits of good leaders come naturally and which need to be developed. Many of the "human touch" characteristics, he said, can be learned, if necessary -- "It comes down to manifesting an interest in people" -- while the ability to handle ambiguity is something that must be learned with experience. Integrity, however, cannot be learned. Even if a leader has integrity, that is not enough. "It's manifesting integrity to set the example. Even when something comes intuitively, you still have to work to develop it, to move your own personal curve in the right direction."

He told of visiting a new bank headquarters in the Midwest on a rainy day. The building was constructed in such a way that employees and visitors were soaked by the time they entered the bank. Mark was certain the chief executive had used another entrance and thus avoided arriving in the office dripping wet. It was a sign, he suspected, that management did not care much for its employees and investors. Indeed, a short time later, the chief executive was fired and the stock plummeted. "You see it time after time," said Mark. "It's all about how you treat your 'family.'"

Finally, Mark stressed that despite the importance of focus in business, it is also crucial to maintain balance. "You will be a far better professional in all respects if your life is balanced." When asked about his unusually long time as a chief executive, he said his case was not typical. Younger executives need to find a way to the top at companies, he said, and added that he was surprised to learn that he likes retirement. "I was probably in the job too long."

'The Art of Woo': Selling Your Ideas to the Entire Organization, One Person at a Time

Former Chrysler chairman Lee Iacocca once noted, "You can have brilliant ideas; but if you can't get them across, your ideas won't get you anywhere."

As an example of effective persuasion, the story of rock star Bono's visit to then-Senator Jesse Helms' Capitol Hill office to enlist his help in the global war against AIDS.

Bono had all the facts and figures at his fingertips, and launched into a detailed appeal based on this data. He was, in essence, speaking to Helms the same way he had recently spoken to executives and technical experts at the many foundations and corporations he had approached about this issue. But within a few minutes, Bono sensed that he was losing Helms' attention, and he instinctively changed his pitch. Knowing that Helms was a deeply religious man (and drawing on his own born-again Christian values), Bono began speaking of Jesus Christ's concern for the sick and poor. He argued that AIDS should be considered the 21^st century equivalent of leprosy, an affliction cited in many Bible stories of the New Testament. Helms immediately sat up and began listening, and before the meeting was over had promised to be the Senate champion for Bono's cause.

Examples such as this one illustrate what you mean by "woo": It's the ability to "win others over" to your ideas without coercion, using relationship-based, emotionally intelligent persuasion. The rock star Bono is superb at the art of woo because he understands what it takes to be a super-salesman, in the best sense of that term. Here you have a rock star with tinted glasses and an elderly, conservative Southern senator. But when Bono had the good sense to switch from public policy talk about debt relief -- what we call in our book the 'rationality' channel -- to religious talk about poverty and disease -- what we call the 'vision' channel -- he touched Helms' heart. He sold his idea and, in the process, created trust."

Using persuasion rather than force -- is one of the most important skills that everyone from CEOs and entrepreneurs to team leaders and mid-level managers need to learn if they want to be effective in their organizations.

The Art of Woo presents a simple, four-step approach to the idea-selling process.

Firstly Persuaders need to polish their ideas and survey the social networks that will lead them to decision makers. Example : How an unknown mail pilot named Charles Lindbergh turned his dream of being the first person to fly nonstop across the Atlantic into a reality. His idea was radical: He would make the crossing in a single-engine plane flying without a co-pilot or even a life raft. The idea was followed by his campaign to overcome people's disbelief that such a venture could ever work and to win over supporters in his hometown of St. Louis. Lindbergh started with contacts at the local airport who could see why his plan made sense and eventually worked his way up to the most influential businessmen in the city, using each person along the way to leverage an interview with the next.

The second stage of the Woo process is confronting "the five barriers" -- the five most common obstacles that can sink ideas before they get started. These include unreceptive beliefs, conflicting interests, negative relationships, a lack of credibility and failing to adjust one's communication mode to suit a particular audience or situation. Great persuaders throughout history have shared with Bono an instinct for overcoming this last barrier. For example, when Napoleon was a young officer at the siege of Toulon, he set up an artillery battery in such a dangerous location that his superiors thought he would never get troops to man it. They would have been right had Napoleon relied on the conventional "authority channel" and issued threats and orders to get his way. Instead, he demonstrated his social intelligence by switching to the visionary channel and creating a large placard that was placed next to the cannons. It read: "The Battery of the Men without Fear." The position was manned night and day.

Similarly, when Nelson Mandela was incarcerated on the notorious Robben Island in South Africa, he managed to obtain blankets and other necessities for his fellow prisoners by foregoing the expected high-minded appeals to politics and human rights. He worked instead on the relationship persuasion channel. By learning the guards' Afrikaans language and reading their literature, Mandela earned their respect and won them over to his idea of fair treatment -- even as he continued to face hostility from the officials who ran the prison.

The third stage is to pitch your idea in a compelling way. At Google, employees selling ideas to upper management are given a challenge: to distill their business concepts into short, punchy presentations that get right to the essence of what they are proposing. This discipline forces them to figure out exactly what problem their idea addresses, how their idea will solve it and why their idea is better than both the status quo and available alternatives. The authors offer a template for pitching ideas in this format and give examples of distinct ways one can personalize an idea to make it memorable and distinctive.

The final stage of Woo is to secure both individual and organizational commitments. "is to think that their job is finished once they succeed in getting someone to say 'yes' to their proposal. That's only the beginning. Research shows that in most organizations, a minimum of eight people will need to sign off on even simple ideas. The number goes up from there. So after you move the individual, you also have to move the organization."

For example the story of Charles F. Kettering, a brilliant inventor and engineer from the 1930s whom many consider an equal of Thomas Edison. Kettering invented such things as the automatic transmission and safety plate glass, but one of his best ideas -- the air-cooled automobile engine -- sat on the shelf for decades until the Volkswagen Beetle incorporated it. Kettering convinced Alfred Sloan, GM's top executive, that producing the air-cooled engine was a good idea, and the company's executive committee gave the go-ahead to make a limited number of cars with the prototype. But instead of following the idea through, Kettering went back to his lab to concentrate on the technical aspects of the project. The committee handed the production assignment to the Chevrolet division, whose top managers had never been brought into the persuasion process. They let the idea languish and it was eventually abandoned. "Kettering made a fundamental mistake: He didn't follow up and keep the pressure on," Shell notes. "He didn't do the political coalition-building needed to implement his idea."

Andy Grove's 'Constructive Confrontation'

Individual personality plays a key role in how you influence others, For example,The "Driver" style (a highly assertive type who gives only limited attention to the social environment) by examining how Intel CEO Andy Grove managed the persuasion process at Intel during his years as that company's leader. Labeled the "screamer," Grove could be intimidating to people who didn't know him well. But he was also willing to listen if people stood up to him and matched his passion. To facilitate communication, Grove instituted what he called a culture of "constructive confrontation" that freed everyone to be as blunt and assertive as he was. The result was a high-stress environment, but one in which everyone could speak their minds.

The Art of Woo goes on to describe four other distinctive styles with examples drawn from business history. Banker J. P. Morgan is given as the model for the Commander (a Grove-like person who has a quieter demeanor), John D. Rockefeller exemplifies the Chess Player (a quieter person who attends strategically to the social environment), Andrew Carnegie's life provides the example for the Promoter style (a gregarious type who uses high levels of social intelligence), and Sam Walton is the model for the style that strikes the balance among all the others -- the Advocate.

Three Typical Mistakes

The top three mistakes are that people make in selling ideas, Shell notes that the number one-error is "egocentric bias," or "focusing on yourself instead of your audience. People assume that the person they are trying to sell on their idea is just like them, that he or she has the same primary goals and frame of reference, and that what they are talking about is important to the other side. But other people may not care at all about what is important to you.... It's a killer assumption."

A second mistake is the belief that there are no systematic ways to persuade people to accept an idea. "A lot of people just wing it, thinking they can count on their own experience and instinctive powers of persuasion to carry the day," says Shell. "But in fact, you do need a strategy. That is what this book is about."

The third most common error is to forget about organizational politics, as Charles Kettering did at General Motors. "Whenever a new idea might affect resources, power, control or turf," Shell says, "politics will be part of the problem at the implementation stage. You need to prepare an idea-selling campaign, not just a presentation."

The authors suggest that people working in any group -- from the largest Fortune 500 company to an entrepreneurial startup -- can benefit from improving their skills at the art of persuasion. As Shell notes: "Influencing others in an organization to accept and act on your ideas is a challenge that never goes away."

What is the business of business?

By building social issues into strategy, big companies can recast the debate about their role in society.

The great, long-running debate about business's role in society is currently caught between two contrasting, and tired, ideological positions. On one side of the current debate are those who argue that, to borrow Milton Friedman's phrase, "the business of business is business." This belief, most established in Anglo-Saxon economies, implies that social issues are peripheral to the challenges of corporate management. The sole legitimate purpose of business is to create shareholder value. On the other side are the proponents of corporate social responsibility, a rapidly growing, rather fuzzy movement encompassing companies that claim that they already practice the principles of CSR and skeptical advocacy groups arguing that they must go further in mitigating their social impact. As other regions of the world—parts of continental Europe, for example—move toward the Anglo-Saxon shareholder value model, the debate between these points of view has increasingly taken on global significance.

Both perspectives obscure, in different ways, the significance of social issues to business success. They also unhelpfully caricature the contribution of business to social welfare. It is time for CEOs of big companies to recast this debate and recapture the intellectual and moral high ground from their critics.

Large companies must build social issues into strategy in a way that reflects their actual business importance. Such companies need to articulate their social contribution and to define their ultimate purpose in a way that is more subtle than "the business of business is business" and less defensive than most current CSR approaches. It can help to view the relationship between big business and society as an implicit social contract—Rousseau adapted to the corporate world, you might say. This contract has obligations, opportunities, and advantages for both sides.

To explain the basis for such an approach, it may help first to pinpoint the limitations of the two current ideological poles. Start with "the business of business is business." The issue here is not primarily legal: in many countries, such as Germany, companies have a legal obligation to stakeholders, and even in the United States the legal primacy of shareholders is open to very broad interpretation.

The problem with the "business of business is business" mind-set is rather that it can obscure two important realities. The first is that social issues are not so much tangential to the business of business as fundamental to it. From a defensive point of view, companies that ignore public sentiment make themselves vulnerable to attack. Social pressures can also serve as early indicators of factors essential to corporate profitability: for example, the regulations and public-policy environment in which companies must operate, the appetite of consumers for certain goods above others, and the motivation of employees—and their willingness to be hired in the first place.

Companies that treat social issues as either irritating distractions or simply unjustified vehicles for attacks on business are turning a blind eye to impending forces that have the potential to alter the strategic future in fundamental ways. Although the effects of social pressures on these forces may not be immediate, that is not a reason for companies to delay preparing for or tackling them. Even from a strict shareholder perspective, most stock market value—typically, more than 80 percent in US and Western European public markets—depends on expectations of corporate cash flows beyond the next three years.

Examples abound of the long-term business impact of social issues. That impact is growing fast. In the pharmaceutical sector, the past decade's storm of social pressures—stemming from issues such as public perceptions of excessive prices charged for HIV/AIDS drugs in developing countries—are now translating into a general (and sometimes seemingly indiscriminate) toughening of the regulatory environment. In the food and restaurant sector, meanwhile, the long-escalating debate about obesity is now resulting in calls for further controls on the marketing of unhealthy foods. In the case of big financial institutions, concerns about conflicts of interest and the mis-selling of products have recently led to changes in core business practices and industry structure. For some big retailers, public and planning resistance to new stores is constraining growth opportunities. And all this is to say nothing of the way social and political pressures have reshaped and redefined the tobacco and the oil and mining industries, among others, over the decades.

In all such cases, billions of dollars of shareholder value have been put at stake as a result of social issues that ultimately feed into the fundamental drivers of corporate performance. In many instances, a "business of business is business" outlook has blinded companies to outcomes, or to shifts in the implicit social contract, that often could have been anticipated.

Just as important, these outcomes have not just posed risks to companies but also generated value creation opportunities: in the case of the pharmaceutical sector, for example, the growing market for generic drugs; in the case of fast-food restaurants, providing healthier meals; and in the case of the energy industry, meeting fast-growing demand (as well as regulatory pressure) for cleaner fuels such as natural gas. Social pressures often indicate the existence of unmet social needs or consumer preferences. Businesses can gain advantage by spotting and supplying these before their competitors do.

Paradoxically, therefore, the language of shareholder value may in this respect hinder companies from maximizing their shareholder value. Practiced as an unthinking mantra, "the business of business is business" can lead managers to focus excessively on improving the short-term performance of their businesses, thus neglecting important longer-term opportunities and issues, including societal pressures, the trust of customers, and investments in innovation and other growth prospects.

The second point that the "business of business is business" outlook obscures for many companies—the need to address questions about their ethics and legitimacy—is related to the first. For reasons of integrity and enlightened self-interest, big companies need to tackle such issues, with both words and actions. It is neither sufficient nor wise to say that it is for governments to set laws and for companies simply to operate within them. Nor is it enough simply to point out that many criticisms of businesses are unmerited or that those throwing the mud ought also to examine their own practices and social responsibility. Irrespective of whether the criticisms are valid, their cumulative effect can shape the strategic context for companies. It is imperative that businesses seek to lead rather than merely react to these debates.

Moreover, in certain parts of the world—particularly some poor developing countries—the rule of law and basic public services are notable by their absence. This reality can render the "business of business is business" mind-set positively unhelpful as a guide for corporate action. If companies operating in such an environment focus too narrowly on ill-defined local legislation or shy away from broad debates about their alleged behavior, they are likely to face mounting criticism over their activities as well as a greater risk of becoming embroiled in local political tensions.

Is CSR the answer? If only it were. The point is not to criticize the many laudable CSR initiatives undertaken by individual companies or to dispute the obvious need for businesses (as for any other social entity) to act responsibly. It is rather to examine the broad prescriptions proposed by groups and activists involved with CSR. These prescriptions commonly include stakeholder dialogue, social and environmental reports, and corporate policies on ethical issues. This approach is too limited, too defensive, and too disconnected from corporate strategy.

The defensive posture of CSR springs from its origins. Its popularity as a set of corporate tactics was driven, in large part, by a series of anticorporate campaigns in the late 1990s. These campaigns were in turn given impetus by the antiglobalization protests mounted around the same time. Since then, companies have been drawn to CSR by nice-sounding if vague notions such as the "triple bottom line": the idea that companies can simultaneously serve social and environmental goals as well as earn profits. Companies have seen CSR as a way to avoid nongovernmental-organization (NGO) and reputational flak and to mitigate the rougher edges and consequences of capitalism.

This defensiveness starts the argument on the wrong foot—certainly as far as business leaders should be concerned. Big business provides huge and critical contributions to modern society. These are insufficiently articulated, acknowledged, or understood. Among them are productivity gains, innovation and research, employment, large-scale investments, human-capital development, and organization. All of them are, and will be, essential for future national and global economic welfare. Big business also supplies investment vehicles that are likely to be central to the provision of pensions in the aging countries of the Organisation for Economic Co-operation and Development (OECD). In developing countries, meanwhile, the entry of multinational companies through foreign direct investment has often contributed critical capital, technology, skills, and other poverty-reducing economic spillovers. It is no coincidence that developing countries place such emphasis on attracting big business and the investment it can bring to their economies.

CSR is limited as an agenda for corporate action because it fails to capture the potential importance of social issues for corporate strategy. Admittedly, companies undertaking a stakeholder dialogue with NGOs will be more aware, in advance, of potential issues. But tracking NGO opinion is only part of the process of understanding the range of social pressures that can ultimately affect core business drivers such as regulations and consumption patterns.

An obvious next step for companies, having understood the possible evolution of these broad social pressures, is to map long-term options and responses. This process clearly needs to be rooted in the development of strategy. Yet typical CSR initiatives—a new ethical policy here, for example, or a glossy sustainability report there—are often tangential to it. It is perfectly possible for a company to follow many prescriptions of CSR and still be caught short by seismic shifts in the socially driven business environment. One of the compounding problems is the fact that many companies have chosen to root their CSR functions too narrowly, within their public- or corporate-affairs departments. Although such departments play an important tactical role, they are often geared toward rebutting criticism and tend to operate at a distance from strategic decision making within the company.

A contract has two sides, and business must acknowledge that in return for the ability to function, it is subject to rules and constraints

In the limitations of both CSR and of the "business of business is business" thinking lie the outlines of a new approach—as relevant for Chinese, German, and Indian companies as for US and British ones. Three main strands stand out. The first is a helpfully simple prescription: businesses should introduce explicit processes to make sure that social issues and emerging social forces are discussed at the highest levels as part of overall strategic planning. This point means that executives must educate and engage their boards of directors. It also means that they need to develop broad metrics or summaries that usefully describe the relevant issues, in much the same way that most companies analyze customer trends today. The risk that stakeholders—including governments, consumer groups, lawyers, and the media—will mobilize around particular issues can be roughly estimated by studying the known agendas and interests of these parties. For example, the likelihood that the obesity debate would rebound on food companies was partly predictable from the growing expenditures of governments on obesity-related health problems, the inevitable media focus on the issue, plus the interest of some lawyers in finding fresh corporate targets for litigation. By the time businesses seriously engaged with the question, they were in a defensive posture, merely struggling to catch up with the public debate. In the future, companies will need to be much better at understanding and anticipating such issues.

Both the second and third strands of the new approach reflect the idea that there is an implicit contract between big business and society or indeed between whole economic sectors and society—the contract that is the subject of this article. Detractors have often successfully portrayed the contract as a one-way bargain that benefits business at society's expense. The reality is much more complex. The activities undertaken by business have clearly brought social benefits as well as costs. Similarly, however, there are two sides to a contract, and business must acknowledge that in return for the ability to function, it is subject to rules and constraints. At times, the contract can come under obvious strain. The recent backlash against big business in the United States can be seen as society seeking to shift the terms of the contract as a result of popular perceptions that business has abused its power. Similarly, in Germany at present, business is struggling to defend itself against charges that its contract with society is fundamentally unbalanced.

The second strand requires companies not just to understand their individual contracts but also to manage those contracts actively. To do so, companies can choose from a range of potential tactics, such as more transparent reporting, shifts in R&D or asset reorganization to capture expected future opportunities or to shed perceived liabilities, changes in approaches to regulation, and, at an industry level, the development and deployment of voluntary standards of behavior.

Some companies and sectors are already experimenting with such approaches. Nonetheless, there is scope for much more activity, provided it is aligned with corporate strategic goals. Reshaping conduct on an industry-wide and increasingly global basis may be particularly important, given that the perceived misdeeds of one company can rebound on its sector as a whole.

An important point to remember is that companies, depending on their circumstances, will have quite different tactical responses, so off-the-shelf or simply nice-sounding solutions may not always be appropriate. Transparency offers a good example. It is easy, but wrong, to say that there can never be enough of it. What might be good for a pharmaceutical company trying to restore the consumers' trust could be damaging for a hedge fund manager. A voluntary code of practice for a retailer naturally would be very different from that of a copper-mining company.

This observation leads me to the third strand of the new approach for business leaders: they need to shape the debate on social issues much more consciously by establishing ever higher (but appropriate) standards of integrity and transparency within their own companies and by becoming much more actively involved in external debates (such as those in the media) on issues that shape the social context of business.

A starting point may be for CEOs to articulate publicly the purpose of business in terms less dry than shareholder value, although that should continue to be seen as the critical measure of business success. However, it may be more accurate, more motivating—and indeed more beneficial to shareholder value over the long term—to describe the ultimate purpose of business as the efficient provision of goods and services that society wants.

This is a hugely valuable, even noble, purpose. It is the basis of the contract between business and society and the basis of most people's real interactions with business. CEOs could point out that profits are not an end in themselves but a signal from society that a company is succeeding in its mission of providing something people want—and doing so in a way that uses resources efficiently relative to other possible uses. From this perspective, the creation of shareholder value or profits is the measure, and the reward, of success in delivering to society the goods and services we desire, which is the more fundamental business objective. The measures and rewards reflect the predominant values of the relevant society.

CEOs could point out that profits are not an end in themselves but a signal from society that a company is providing things people want

By moving away from a rigid focus on the term shareholder value, big business can also make clear to broad audiences that it understands the trade-offs inherent in its social contract. The debate between business and society is essentially one about how to manage (and reach agreement on) those trade-offs. What might this point mean specifically? There is no shortage of big social issues today that directly affect many big businesses and require new debate. These issues include ensuring that aid organizations and trade regimes successfully promote the development of Africa and other poor regions, whose economic liftoff would present a major potential boon to global markets as well as to international security; promoting a more sophisticated and sensitive approach, by both companies and governments, to balancing the societal risks and rewards from new technologies; spearheading dialogue on the health care and pension challenges in many developed countries; and supporting efforts to resolve regional conflicts.

Obviously, the relevant issue must be matched to the specific business. Some companies and business organizations have taken strong public stances on these and similar issues. But in general, high-level, concerted corporate activism is more notable by its absence. Business leaders shouldn't fear taking a more forward role advocating the idea of a contract between business and society. Public receptiveness to active business leadership on issues such as these may be a lot greater than some might be inclined to think. Despite the poor image and bad press of big business in recent times, polls suggest that people retain a belief in its ability to provide a positive contribution to society.

More than two centuries ago, Rousseau's social contract helped to seed the idea among political leaders that they must serve the public good, lest their own legitimacy be threatened. The CEOs of today's big corporations should take the opportunity to restate and reinforce their own social contracts in order to help secure, for the long term, the invested billions of their shareholders.

Seven ways China might surprise us in 2009

The country could yet again change the way the world sees it. Here’s a shortlist of realistic possibilities.

How will China surprise us next? Shocks, tipping points, and revelations have become basic staples of the world’s daily news diet. But with so many eyes now on this emerging Asian giant, what happens there continues to have an exceptional ability to draw attention and to shift perceptions drastically and suddenly.

Will the surprise be planned, like the magnificent Beijing Olympics Games, whose nearly flawless execution set a counterpoint to China’s image as an economic laggard buoyed mainly by cheap labor? Will it repel, like the tainted-milk scandal? Or will it send a message, as Lenovo’s takeover of IBM’s personal-computer business did in serving notice that Chinese companies were ready to enter the global fray?

Here’s a list of some realistic possibilities for the next year. Will all of them come to pass? I doubt it. But any one of them could, and each might make us see China and its future in a new light. What do you think?

China announces that by 2020, half of the cars in the country will be electric. It invests tens of billions of dollars in R&D toward achieving that goal.

Such a move could make China the leader in the automotive technology of the future, with other countries struggling to keep pace. Shanghai Automotive Industry Corporation (SAIC) or newcomer BYD Auto could become the Ford Motor of the 21st century, propelled by a new technology—much as Ford capitalized on the internal-combustion engine at the start of the 20th century.

The Chinese government buys a 50-year lease on an entire geographic region of Mexico, enabling Chinese companies to build factories there to supply the North American market more easily.

Chinese companies would then become the undisputed leaders in outsourced production. No longer constrained by geography, they could bring their expertise in low-cost manufacturing to Mexico (or Poland or Turkey), greatly expanding their reach and overcoming obstacles—such as maintaining supply chains across the Pacific—that still hinder their growth.

A major office block collapses in Chaoyang, Beijing’s central business district.

Although officials would scramble to rewrite construction regulations, a disaster in the capital or another large city would change the relationship between the country’s growing middle class and the government and might threaten its ability to keep social unrest in check. True, construction standards came under fire after the May 2008 Sichuan earthquake felled many school buildings. But the reaction to that tragedy would pale beside the response to a similar one in a rich urban area with immediate media access.

A leading Chinese company tries to buy an iconic US technology firm (or two).

A major deal could be worth 10 or 100 times Lenovo’s $1.35 billion purchase of IBM’s PC division. If the US government blocked the sale, the acquisition’s failure could herald an era of renewed corporate nationalism in China, just as its companies were becoming more global. You could expect an aggressive increase in domestic R&D spending as the country focused on homegrown technology, as well as a chillier climate for multinationals with research operations in China.

A successful deal, by contrast, could create a truly global company, unlike anything seen before, with a multinational culture superseding any sense of national origins.

A restructuring of China’s telecommunications industry turns into a complete consolidation.

Regulatory failure and competitive imbalances have already reduced competition down to three major players, from four, and telecom companies are now being encouraged to share infrastructure. If stock prices continue their freefall and these imbalances remain, the inability of the second- and third-ranked players to chart a path to success could bring a full reconsolidation of the domestic industry.

The English Premier League football association buys its Chinese counterpart, the Chinese Super League.

What better way to signal a coming of age for China’s urban middle class? The takeover would be a major bet that this growing socioeconomic group is ready to spend heavily on sports and entertainment—a bet that could open the floodgates for investment in other consumer sectors. Wallets are already opening up: witness the Olympics and the US National Basketball Association’s exploration of franchise and stadium deals in China. Such a purchase would also show that the country is willing to bring outside expertise and professionalism into a challenged domestic industry.

Warming cross-strait relationships lead to a merger between the mainland’s Industrial and Commercial Bank of China and Taiwan’s Chinatrust Commercial Bank.

The reaction in Taiwan would probably be ambivalent—just another large business deal. But in China, a cross-strait merger of powerhouses like these, in banking or some other sector, would be applauded as an affirmation of its One China worldview.

Just-in-time strategy for a turbulent world

Uncertainty and rising levels of risk make it impossible for companies to determine the future. But a portfolio-of-initiatives approach to strategy can help ensure that companies take full advantage of their best opportunities without taking unnecessary risks.

The classic approach to corporate strategy starts with a presumption: that with sufficient analytical rigor and an adequate assessment of the probabilities, strategists can pave a predictable path to the future from the matter of the past. In this world, they make reasonable assumptions about the evolution of product markets, capital markets, technology, and government regulation and, in effect, "assume away" most risk. Chief executive officers articulate strategy every few years, often in the context of a change in top management.

Such traditional strategy formulation often pays lip service to the perspectives of the capital markets, to changing industry structures, and to the forces at work in the environment. But in reality, a "visionary" corporate strategy is often an internally driven reflection of what the company wants the world to look like.

But suppose we no longer believe that the future is foreseeable. What if defining and achieving an enduring competitive advantage is really just a conceit that must be abandoned? What if the outstanding fact of business, as John Maynard Keynes once described it, is the "extreme precariousness of the basis of knowledge"? What if it is no longer possible to block out the "noise" of the world's messy reality in order to rationalize a plan to achieve predetermined outcomes?

In fact, this is the confusing, complex, and uncertain environment that corporate leaders now face. Globalization and technology are sweeping away the market and industry structures that have historically defined the nature of competition. Although the pace of change continues to accelerate, the fundamental transformations under way in the global economy have only just started.1 The variables that can profoundly influence success and failure are too numerous to count. That makes it impossible to predict, with any confidence, which markets a company will be serving or how its industry will be structured—even a few years hence.

The result is an economic environment that is rich in opportunity but also marked by a substantial increase in awareness of risk and aversion to it— a phenomenon reflected in the rise of risk premiums throughout the world even while the risk-free cost of capital remains low.

A new approach

Strategy today has to align itself to the fluid nature of this external environment. It must be flexible enough to change constantly and to adapt to outside and internal conditions even as the aspiration to deliver favorable outcomes for shareholders remains constant.

An analogy may help. Consider the management problem of moving supplies and ships across the Pacific Ocean during World War II. The starting point for the strategist was to recognize that controlling the environment—the weather in the Pacific—was beyond anyone's power but that risks could be minimized and schedules roughly set through the study of weather patterns and the use of navigational aids. But the real challenge was to consider factors beyond natural forces—factors such as enemy submarines, other enemy ships, and air attacks, analogous to corporate competitors with unknown capabilities and plans.

The strategist's answer was to deploy whole convoys with a mix of aircraft carriers, battleships, destroyers, escort ships, troop ships, and supply ships. Convoys improved the ability of each ship to cross the ocean and, crucially, helped to ensure, through "portfolio effects," that sufficient supplies made it across the ocean even when some ships didn't. The strategist couldn't know where battles might occur or which ships would be lost to enemy action. Yet the probability of success for individual vessels and the mission as a whole could be increased.

A CEO can think about corporate strategy as a 'portfolio of initiatives' intended to achieve favorable outcomes for the entire enterprise

Likewise, a CEO can think about corporate strategy not as a "portfolio of businesses" but as a "portfolio of initiatives" aimed at achieving favorable outcomes for the entire enterprise. Usually, these initiatives will be organized around themes—"convoys" if you please—focused on achieving particular aspirations, such as increasing the global reach of the enterprise, entering a new but related industry, or achieving the industry's lowest marginal cost of production. Portfolio effects increase the likelihood that some of these aspirations will be achieved even if many others fail.

Like a more traditional strategy, such an effort is best led by the corporate center and an activist CEO, making use of his or her command over talent and resources. Beyond that, however, most executives will find this approach more deductive, adaptive, and fluid than any they have used before.

Familiarity breeds opportunity

An approach that enables a corporation to mobilize convoys of initiatives now offers extraordinary payoffs. In the post-September 11 business environment, risk premiums have risen for all manner of investments. Consider the rise of risk premiums in the bond markets: in early 2002, for example, US Treasury bonds commanded nothing less than an 8 to 9 percent premium over B-rated corporate debt, compared with a spread of only 4 percent just ten years ago.

Risk premiums rise not only because the absolute level of risk increases but also because lenders require higher rates of return when they are unsure about how companies will perform—that is, when they lack deep famili-arity with the specific risks individual companies face. An investor who can acquire distinctive knowledge about particular B-rated credits and discern where the risk premiums are "too high" can create a bond portfolio with superior returns relative to the risks taken. Strategy thus becomes increasingly about gaining competitive advantage through deep familiarity (in other words, distinctive knowledge), which can transform the rise in risk premiums into increased rewards.

Consider another analogy. Of two runners, one is faster than the other and can be expected to win on a level track no matter how many times the race is run. But what if the race were held at night on a path strewn with rocks and fallen trees? Suppose that the slower runner practiced both in daylight and at night, while the faster one didn't bother to see the course in advance. The runner with the superior knowledge—the greater familiarity—would probably win even if the other were intrinsically faster. If the prize money were to rise, the value of familiarity would rise as well.

In today's increasingly global economic environment, confusion about risk is like the obstacles in this analogy. Familiarity makes them less dangerous. As the global economy evolves, and as geographic markets and industry structures aggregate, par-ticipants will enjoy a variety of advantages from familiarity and a variety of disadvantages from unfamiliarity. The strategic idea is constantly to adapt the corporation to this fluid environment and to take risks primarily where it enjoys the former, while shedding the latter.

A company that builds a portfolio of initiatives in areas in which it enjoys advantages of familiarity can prosper even amid uncertainty

Statisticians call this approach a search for "asymmetric" risk. Oddsmakers might call it "loading the dice," and it is the opportunity to capture this effect that makes a portfolio-of-initiatives approach so appealing today. If companies scanning the range of new opportunities choose to compete only where they have significant advantages of familiarity, and if they can build a portfolio of such initiatives, they make it highly probable that they can prosper even amid a high level of complexity and uncertainty.

A portfolio in action

Consider the hypothetical case of a financial company. Bank Multistate, a multiregional institution with $250 billion in assets and $2 billion in profits, was formed from a series of regional bank mergers. Its strengths lie in lending to small and midsize businesses, branch-based retail banking, credit cards, and mortgage banking. It also has special strengths in commercial finance and leasing.

Bank Multistate enjoys a number of familiarity advantages in many of its core businesses and geographic locations. It is particularly familiar with the use of technology to improve the productivity and underwriting results of lending to small businesses. The bank wants to explore whether it could use this skill to become an "outsourcing" intermediary for other banks. To load the dice in this initiative, Bank Multistate might begin by making a small bet ($1 million to $2 million) to assess the opportunity and design a value proposition. Its objective would be, first, to acquire distinctive knowledge by exploring market acceptance of its proposed offering and by "reverse-engineering" possible competing offerings. It would also work to acquire skills such as hiring experienced talent. During this exploratory phase, a full-time team of one senior manager and three or four junior managers and analysts would probably be deployed for four to six months.

Diagnosis and design can take a company only so far, however. Much of the needed familiarity can come only through experimentation, which in this case might include testing the new value proposition. At this point, Bank Multistate might need to make a medium-bet investment of $20 million to $30 million to undertake a pilot with two or three customers.

If the customer pilots proved successful, Bank Multistate might then be willing to make a large bet of $200 million or more so that the company could leapfrog potential competition. In any case, the decision on whether or not to scale up the business would be made "just in time," when further information had been gained from the pilots. By staging the investments, Bank Multistate would be using the passage of time to acquire deep familiarity and the option to expand, while still limiting its downside risk until the value proposition became clearer.

The hallmark of this approach is a willingness to change direction contin-ually as more and more distinctive knowledge is acquired. The approach implies an expectation that major midcourse corrections will be required, not that everything will go according to plan. It calls for a willingness to shut down initiatives if it becomes clear that they are headed nowhere.

Certain companies already use this approach in at least some of their strategic decision-making processes. The pharmaceutical industry has long used such disciplined processes to develop new drugs and medical devices, and so have venture capital firms, with their portfolios of companies. But most businesses are much less disciplined: far too often, large-scale decisions to build new businesses, to acquire or divest others, and even to adapt core businesses to changing conditions are made under extreme time pressure. In turn, these big, spur-of-the-moment decisions often come about because the company squandered its available lead time.

In particular, most companies put too little energy into adapting core businesses to changing markets. Indeed, they often unintentionally harvest their core businesses by pushing for short-term performance while neglecting the investments needed to stay ahead of the game. Often, companies move only when competitors start investing aggressively. When these companies do act, they usually make insufficient small-bet investments in diagnosis and design and skip the medium-bet prototyping and piloting steps entirely because they are trying to play catch-up. As a result, these initiatives are often exposed to entirely avoidable risks in execution, or, even worse, sometimes businesses panic and make bet-the-company investments based upon leaps of faith.

In a portfolio-of-initiatives approach, every major strategic action is subject to a disciplined process. Bank Multistate might, for example, have 10 to 20 such initiatives, at various stages of exploration, in order to build new businesses, to adapt its core businesses, and to acquire or divest businesses. The bank might have pursued some of these initiatives in the ordinary course of events. What makes a portfolio-of-initiatives approach different is the quantity of initiatives explored, the rigor of the analysis behind them, the discipline of the process, the willingness to make midcourse corrections, the staging of investments, the high degree of hands-on involvement by executives, the open discussion of issues, and the care taken before deciding whether to forge ahead.

Rigorous monitoring is crucial. The group for reviewing initiatives could consist of a strategy oversight team of the company's 20 or so top managers, chaired by the CEO, which would review initiatives perhaps monthly. Each initiative might well be reviewed several times before the final large-scale decision is made.

Increasing the visibility and transparency of these processes helps ensure that the best decisions are made and raises the stakes so that managers don't approach the group's work in a halfhearted way. The intent, of course, is to improve performance. In Bank Multistate's case, a favorable outcome for the shareholders might be financing five or six big-bet initiatives annually. In all, these might provide an extra 5 percent a year of growth in earnings and an extra 3 percent increase in the bank's return on equity—without involving big risks.

Three distinct elements are central to a portfolio-of-initiatives approach. First, it entails a disciplined search, based on familiarity, to discover and create initiatives that provide disproportionately high rewards for the risks taken. Second, it involves a dynamic, continuous effort to manage the portfolio of initiatives resulting from this search process and the use of time-management and portfolio theory to overcome unavoidable risks due to complexity and uncertainty. Finally, it calls for a flexible and evolutionary approach that lets "natural selection" rather than vision determine where, how, and when to compete. It may be useful to examine each of these elements in greater detail.

A disciplined search

CEOs might find it difficult to believe that there can be an abundance of "no-regrets" and "low-regrets" opportunities in these uncertain times. Yet the same global forces that create confusion, complexity, and uncertainty also create opportunities for companies to innovate in their core businesses. The world's markets and industry structures are in flux because the global forces at work are lowering the barriers to interaction.2 As interaction costs fall around the world, new economies of specialization, scale, and scope are being created—economies that can provide innovative companies with an abundance of opportunities to earn high rewards for the risks taken. Some companies, for example, are discovering that they can save up to a third of their labor costs in overhead or customer service functions by moving them to, say, Scotland or India.

Most large incumbents have dozens of high-potential opportunities to use their familiarity advantages to adapt their core businesses or to build closely related ones that could capture the new economies of scale, scope, or specialization. Many of these seemingly mundane opportunities will prove upon close examination to have higher returns, relative to the risks taken, than some other activities on which the company may already be investing its focus, talent, and discretionary spending. A daylong brainstorming session can usually generate dozens of ideas about potential opportunities.

The challenge is to convert these raw ideas into real investment opportunities. A company must organize a disciplined search to identify, enhance, and nurture its best ideas—and deploy some of its most talented people to pursue them—if it wants to create real opportunities to earn high returns relative to the risks taken. One of the hallmarks of a portfolio-of-initiatives approach is the overinvestment of scarce resources, such as discretionary spending, talent, and focus, on acquiring advantages of familiarity. No less important, senior management must "just say no" to making big bets in situations in which it lacks familiarity or is exposed to uncertain outcomes, even when competitors are making big strategic moves. As a rule of thumb, a company is familiar with opportunities when it doesn't have to take any large leaps of faith to understand where it expects to make returns from its investments.

Managing a portfolio of initiatives

Corporate-level involvement is essential because hard decisions must be made about allocating scarce resources to nurture the initiatives. Only the company's top-management team can balance the risks, rewards, and timing of each of the initiatives and make decisions about which to start, scale up, or terminate.

The challenge for a chief executive and the top-management team is to create enough initiatives to be reasonably sure that the company will be able to outperform the market's expectations. While it is essential always to have opportunities with large current returns, numerous small-bet initiatives can hold out the promise of large potential future returns once familiarity has been achieved. Much of the challenge of undertaking a portfolio-of-initiatives approach to strategy is the need to keep many balls in the air at the same time.

Executives employing a portfolio-of-initiatives approach should make the passage of time an ally. Checkpoint reviews, milestones, and staged investments enable managers to make maximum progress while minimizing risk. Pilot programs build familiarity before investments are scaled up. Risks arising from complexity and uncertainty fade as time passes, because the range of outcomes is reduced . Competitive advantage comes in the form of the progress a company makes while its competitors, paralyzed by confusion, complexity, and uncertainty, sit on the sidelines. The key is to be ready to act as soon as it becomes possible to estimate, in a reasonable way, the risks and rewards of an investment. The advantage lies not with the first mover but with the first mover that can scale up activities once the way forward has become clear and it is possible to see returns from larger bets.

A flexible and evolutionary approach

A successful portfolio-of-initiatives strategy involves creating enough initiatives offering high returns relative to the risks taken to enable a company to meet its aspirations and outperform the expectations of the capital markets. The process requires the CEO and the management team to keep an open mind about where the company might be headed. Inherent in this approach is the understanding that future decisions and future outcomes are likely to vary enormously from initial hypotheses. The whole process resembles art more than science. Most of the critical decisions involve subjective judgments that, unlike those generated by more deterministic strategies, will be informed by not just the highest-quality staff work but also the knowledge gained as time passes.

There is, of course, no substitute for the talent of a top-management team. But the advantage of the portfolio-of-initiatives approach is that it is far better at getting the most out of a company's top talent than are traditional approaches to strategy.