#Executive Summaries

Corporate leaders have long subscribed to the belief that the sole purpose of business is to make money. That narrow view, deeply embedded in the American capitalist system, molds the actions of most corporations, constraining them to focus on maximizing short-term profi ts and returns to shareholders at the expense of worker safety and health, the environment, and society in general. In this article, HBS pro-fessor Kanter argues that a very diff erent logic informs the prac-tices of most high- performing and sustainable companies: An institutional logic.

These companies believe that they are more than money-making machines; they are a vehicle for advancing societal goals. They deliver more than just fi nancial returns; they also build enduring institutions.

At great companies, insti-tutional logic takes its place alongside economic logic in research, analysis, and managerial decision mak-ing. Six facets of institutional logic—a common purpose, a long-term focus, emotional engagement, partnering with the public, innovation, and self- organization—radically alter leadership and corporate behavior and form the building blocks of a more sustainable competitive advantage.

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Excellence in community engagement, labor relations, environmental protection, cor-porate governance, and supply chain accountability isn’t easy to achieve. But in the long run, top performance in those areas strengthens an organization, as the fi ve companies profi led in this article demonstrate. They prove that doing the right thing isn’t at odds at all with building the bottom line, and in fact it can be integral to a fi rm’s eco-nomic logic.

Dutch chemical maker Royal DSM, for instance, not only specializes in nutritional and environmental products but gives them away to people in need. That unconventional move is helping DSM win the talent war and crack critical markets. Southwest has become America’s largest domestic air-line by committing to employee happiness. China’s Broad Group has won industrial customers worldwide with its energy-effi cient air conditioning and fi ltration systems and is now moving into sustainable building construction. PotashCorp, a Canadian fertilizer company, has raised the bar on transparency in governance—and is reaping the reputational rewards. And Unilever has proved that it is possible to make your supply chain more sustainable, even if you sell 170 billion products across 180 countries a year and run 250 factories.

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He may not appear to be one, but Murthy is quite the contrarian. At a time when few Indians felt they could become entrepreneurs, he founded In-fosys with just $1,000. When no one believed that India could compete in the high tech arena, he dared to develop software services for export. In an era when hardly anyone in India conducted business ethically, he set out to create a values-based corporation.

Over his 30-year tenure, Murthy has largely succeeded. He helped create a $6 billion technology fi rm with over 134,000 employees, pioneered an innovative way of deliver-ing software services globally, and strove to make Infosys the epitome of a “good” company.

That’s a reputation that is hard won and easily lost, especially in India today, where companies are notorious for their lack of transparency. In fact, public outrage against corruption reached a fl ashpoint in August 2011, with millions taking to the streets in protest.

As businesses gird for change in India, Infosys faces its own turning point. In August, Murthy stepped down as chairman, according to plan. In this interview, Murthy explains that building a values-based fi rm is a never-ending process. Leaders must demonstrate that values matter every day, at every turn.

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Spotlight How Great Companies Think Differently 66 by Rosabeth Moss Kanter

What Counts As Good? 68Compiled by HBR’s editors

It’s Hard to Be Good 88by Alison Beard and Richard Hornik

The Good Company

ARTWORK Sarah Morris Mogul [Clips], 2009 Gloss household paint on canvas, 48.03" x 48.03"

“Why Don’t We Try to Be India’s Most Respected Company?” 80 An interview with N.R. Narayana Murthy

The For-Benefit Enterprise 98 by Heerad Sabeti

The companies that perform best over time build a social purpose into their operations that is as important as their economic purpose.

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STRATEGY

How Great Companies Think Diff erentlyRosabeth Moss Kanter | page 66

ORGANIZATION & CULTURE

It’s Hard to Be GoodAlison Beard and Richard Hornik | page 88

LEADERSHIP

“Why Don’t We Try to Be India’s Most-Respected Company?”An interview with Infosys founder N.R. Narayana Murthy by Anand P. Raman | page 80

Executive Summaries SPOTLIGHT ON THE GOOD COMPANY

Adhering to nonfi nancial corporate principles can be diffi cult, especially in tough times. To succeed, develop a rationale that aligns with your other strategic objectives; attract dedicated capital; create an eff ective, supportive organizational structure; and nurture the right talents.

1377 Nov11 ExecSumms.indd 1621377 Nov11 ExecSumms.indd 162 9/28/11 6:25 PM9/28/11 6:25 PM

The Big Idea

They want information—lots of it. The case for telling Wall Street more by Baruch Lev

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FINANCE & ACCOUNTING

How to Win Investors OverBaruch Lev | page 52

Providing earnings guidance—publicly releas-ing managerial forecasts of a company’s profi ts—has become a highly controversial practice, with critics ranging from Warren Buff ett to a McKinsey team to the U.S. Cham-ber of Commerce. Yet more than a thousand U.S. corporations issue such forecasts each year. Are they making a mistake?

On the contrary, argues Lev, an accounting professor at NYU Stern: Investors want more information, and they will reward companies that make it available. Conventional wisdom notwithstanding, Lev maintains that investors care a lot about what drives a company’s long-term growth; however, they often need help understanding what the drivers are. Guidance, non-GAAP pro forma earnings statements, and executive conference calls with investors and analysts after the release of earnings statements are potent tools. Done right, they can bring higher stock prices, lower volatility, and reduced cost of capital, and they may also temper shareholder litiga-tion and its consequences.

Some guidance for guiders is in order: Off er guidance only if your predictions are consistently better than analysts’ consensus forecasts. Don’t stand out as a “guidance refusenik” in a sector where guidance is prevalent. Maintain credibility and don’t duck the truth—manipulating expectations so that reported earnings will comfortably exceed them breeds mistrust. Resist legal advice to be cryptic or bland, and don’t overlook the value of “soft” information; executives’ narra-tive and tone color many investors’ decisions and account for most stock price changes in the wake of fi nancial reports.

These are not easy times to be an execu-tive dealing with fi nancial markets. But run-ning away from disillusioned investors only makes things worse. Far better is to fi gure out what they value and to shape your fi nancial reporting and communications strategies accordingly.

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A growing number of socially motivated entrepreneurs have been creating new kinds of organizations that combine a social mission with a business engine. Unlike typical for-profi ts, these “for-benefi t” enterprises have social or environ-mental outcomes as their ultimate bottom line; and unlike typical nonprofi ts, they derive their income mostly from the sale of goods and services rather than from grants and donations. They defy classifi ca-tion as pure business or nonprofi t; rather, they are a blend of the two.

Many more such enterprises would exist, except that few entrepreneurs have been able to choose for-benefi t as a legally recognized organizational structure. Most countries’ legal and economic systems allow only for-profi t or nonprofi t activity; entrepreneurs must shoehorn their vision into one or the other structure.

All this seems destined to change. For-benefi ts will become more commonplace as entrepre-neurs learn to better navigate existing constraints, and as an eco-system of support—including fi nan-cial markets, accounting standards, and professional services—develops around them. The even bigger news is what will happen then, writes the author. With formalization of the for-benefi t structure, we will see the emergence of a fourth sector of the economy, interacting with but separate from government, non-profi ts, and for-profi t businesses. The rise of that sector is likely to reshape the future of capitalism.

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GOVERNANCE

The For-Benefi t EnterpriseHeerad Sabeti | page 98

November 2011HBR.ORG

We asked over 1,700 CMOs about today’s newly empowered customer. See what they said.

ibm.com/CMOstudy3


Businesses that thrive on social platforms don’t just sell stuff— they also help people connect. by Mikołaj Jan Piskorski

More than a billion people use social plat-forms such as Facebook, eHarmony, Renren, and LinkedIn. What’s the attraction? They

satisfy two basic human needs: to meet new people and to strengthen existing relationships. Fee-based dating websites, which collectively grossed $1 bil-lion in 2010 by connecting strangers, now account for an estimated one in six new marriages. Facebook, which fortifies friendships, boasts a staggering 750 million users and a valuation in excess of $100 billion.

Numbers like those attract traditional companies, which have launched Facebook fan pages and Twit-ter accounts in hopes of finding new customers and engaging existing ones. But few of those companies succeed in generating profits on social platforms, de-spite collecting lots of “friends” and “followers.”

Social Strategies That Work

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The Great Repeatable Business Model

Leveraging a simple formula allows corporations to create new and more-lasting differentiation. by Chris Zook and James Allen

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Differentiation is the essence of strategy, the prime source of competitive advantage. You earn money not just by performing a valuable task but by being different from your competitors in a manner that lets you serve your core customers better and more profitably.

The sharper your differentiation, the greater your advantage. Consider Tetra Pak, a company that in 2010 sold more than 150 billion packages in 170 markets around the world. Tetra Pak’s carton pack-ages extend the shelf life of products and eliminate the need for refrigeration. The shapes they take—squares and pyramids, for example—stack more

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Andrew McAfee is a principal research scientist at MIT’s Center for Digital Business and the coauthor, with Erik Brynjolfsson, of the e-book Race Against the Machine (Harvard Busi-ness Review Press, 2011). Twitter: @amcafee.

What Every CEO Needs to Know AboutThe Cloud

What Every CEO Needs toWhat Every CEO Needs toWhat Every

Know AboutThe Cloud

The true benefits of cloud computing will surprise you. But you’ll need the right people to lead the transformation. by Andrew McAfee

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November 2011 Harvard Business Review 125124 Harvard Business Review November 2011

KFC’s Radical Approach to ChinaTo succeed, the fast-food giant had to throw out its U.S. business model. by David E. Bell and Mary L. Shelman

The Globe

Global companies face a critical question when they enter emerg-ing markets: How far should they

go to localize their offerings? Should they adapt existing products just enough to appeal to consumers in those markets? Or should they rethink the business model from the ground up?

The typical Western approach to foreign expansion is to try to sell core products or services pretty much as they’ve always been sold in Europe or the United States, with headquarters watching closely to make sure the model is exported correctly. This often starts with selling imported goods to the expat community or opening one or two stores for a trial run. Once such

an approach is entrenched, companies are reluctant to rethink the model. U.S. retail-ers and food corporations that have spent years saturating the huge home market tend to cling to what has worked in the past. Domino’s Pizza nearly failed in Aus-tralia because it underestimated the need to adapt its offerings to local tastes; only after it turned the country over to a local master franchisee did Domino’s become the largest pizza chain there.

A master of adaptation is the Swiss food giant Nestlé, which has created an array of products that incorporate differing re-gional flavors—and cater to local tastes—in coffee, chocolate, ice cream, and even wa-ter. For a hundred years Nestlé’s country

At a KFC in Beijing

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Features

Global companies face a crucial question when they enter emerging markets: How far should they go to localize their off erings? Typically they try to sell core products or services pretty much as they’ve been sold in Europe or the United States, with headquarters calling all the shots—and usually with disap-pointing results.

The authors, both of Harvard Business School, examined why KFC China has been able to fi nd fertile ground in a market that is notoriously challenging for Western fast-food chains. KFC’s executives believed that the dominant logic behind the chain’s growth in the U.S.—a limited menu, small stores, and an emphasis on takeout—wouldn’t produce the kind of suc-cess they were looking for in China. KFC China off ers important lessons for global executives seeking guid-ance in determining how much of their existing business model to keep in emerging markets—and how much to throw away.

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INTERNATIONAL BUSINESS

KFC’s Radical Approach to ChinaDavid E. Bell and Mary L. Shelman | page 137

POSTMASTERSend domestic address changes, orders, and inquiries to: Harvard Business Review, Subscription Service, P.O. Box 62270, Tampa, FL 33662. GST Registration No. 1247384345. Periodical postage paid at Boston, Massachusetts, and additional mailing offices.Printed in the U.S.A. Harvard Business Review (ISSN 0017-8012; USPS 0236-520), published monthly with combined issues in January–February and July–August for professional managers, is an education program of Harvard Business School, Harvard University; Nitin Nohria, dean.Published by Harvard Business School Publishing Corporation, 60 Harvard Way, Boston, MA 02163.Copyright © 2011 Harvard Business School Publishing Corporation. All rights reserved. Volume 89, Number 11

THE GLOBE

Cloud computing is a sea change in the way companies use technology; it’s as inevitable and signifi cant as the shift from steam power to electricity on the factory fl oor. Because criticisms of the cloud have gotten a lot of hype, however, many companies are hesitant to explore it. In this article McAfee, a principal research scientist at MIT’s Center for Digital Business, debunks commonly cited concerns about the cloud. When it comes to cost, reliability, and security, he says, the cloud promises to equal or better on-premise computing. Moreover, as the experiences of companies like 3M, the global contractor Bal-four Beatty, and the consulting fi rm CSC show, cloud computing off ers sizable benefi ts, such as improved productivity, easier collaboration, the ability to mine data for insights, and higher capacity without major capital investment.

Here, McAfee walks readers through the three basic categories of cloud computing: infrastructure-as-a-service (the leasing of raw computing capacity), platform-as-a-service (the leasing of computers ready for software development), and software-as-a service (the hosting of applications for users). Arguing that CEOs and senior man-agers need to take the lead on the shift to the cloud, he then outlines how companies can get started.

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MANAGING TECHNOLOGY

What Every CEO Needs to Know About the CloudAndrew McAfee | page 124

The sharper a company’s diff eren-tiation, the greater its competitive advantage. In studying companies that sustained a high level of performance over many years, the authors, both partners at Bain, have found that more than 80% of those companies had a well-defi ned and easily understood diff erentiation at the center of strategy. But dif-ferentiation can wear with age: The growth it generates creates com-plexity, and complex companies tend to forget what they’re good at. Often they respond by trying to reimagine their entire business models quickly and dramatically.

That’s rarely the answer, the authors write. Really successful companies relentlessly build on their fundamental diff erentiation, going from strength to strength. They learn to deliver it to the front line, creating an organization that lives and breathes its strategic advantages day in and day out. They learn to sustain it through constant adaptation to changes in the market. And they learn to resist the siren song of today’s hot market better than their less-focused competitors do. The result is a simple, repeatable business model that a company can apply to new products and markets over and over again to generate sustained growth.

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Although most companies have collected lots of friends and fol-lowers on social platforms such as Facebook, few have succeeded in generating profi ts there. That’s be-cause they merely port their digital strategies into social environments by broadcasting their commercial messages or seeking customer feedback.

To succeed on social platforms, says Harvard Business School’s Piskorski, businesses need to devise social strategies that are consistent with users’ expectations and behav-ior in these venues—namely, people want to connect with other people, not with companies. The author defi nes successful social strate-gies as those that reduce costs or increase customers’ willingness to pay by helping people establish or strengthen relationships through doing free work on a company’s behalf.

Citing successes at Zynga, eBay, American Express, and Yelp, Piskor-ski shows that social strategies can generate profi ts by helping people connect in exchange for tasks that benefi t the company such as customer acquisition, marketing, and content creation. He lays out a systematic way to build a social strategy and shows how a major credit card company he advised used the method to roll out its own strategy.

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GROWTH

The Great Repeatable Business ModelChris Zook and James Allen | page 106

STRATEGY

Social Strategies That WorkMikołaj Jan Piskorski | page 116

EXECUTIVE SUMMARIES

166 Harvard Business Review November 2011

How I Did It

When Peters became president of Offi ce Depot’s North American opera-tions, in 2010, its customer service scores (as graded by a third-party mystery-shopping fi rm) were soar-ing—but sales were falling. To understand why, he went

undercover, quietly visiting 70 stores in more than 15 states. He talked to customers and observed their behavior. What struck him most was how often they walked out of the store empty-handed. It turned out that Offi ce Depot’s customer service scores depended on factors that shoppers didn’t really care about—such as the cleanliness of fl oors and bathrooms. And its employees were off ered incentives to focus on the wrong things. (In fact, the company learned that some of its associates preferred interacting with stock over interacting with people.) Peters’s conversations with customers gave him three insights: The chain needed to off er smaller stores, dramatically improve the in-store experience, and add value with services such as shipping and copying. Offi ce Depot has since rolled out 30 pilot stores, retrained associates, and begun to see the fi rst signs of improvement.

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LEADERSHIP

Offi ce Depot’s President on How “Mystery Shopping” Helped Spark a TurnaroundKevin Peters | page 47

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Office Depot’s President onHow “Mystery Shopping”Helped Spark a Turnaround

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hen I became the leader of Office Depot’s retail stores in

the United States, in 2010, the first thing I tried to do was figure out the meaning of a puzzling set of facts. Our sales had been declining, and although that’s not unusual in a weak economy, they had declined faster than the sales of our com-petitors and of retailers in general. At the same time, the customer service scores our third-party mystery-shopper service was reporting were going through the roof. This didn’t make any sense. How could it be that we were delivering phenomenal service to our customers, yet they weren’t buying anything?

To understand these contradictory data points, I decided to do some mystery shop-ping myself. I didn’t wear a suit. I didn’t wear a blue Office Depot shirt like the ones employees wear in all our U.S. stores. In-stead I wore a faded pair of jeans, a T-shirt, and a baseball cap. I didn’t tell anyone I was coming to visit, and in most cases I didn’t let anyone know afterward that I’d been in the store. What I wanted was to experience Office Depot in the same way our custom-ers do. Over the next several weeks I visited 70 stores in 15 or more states.

At each location I followed the same routine. First I pulled into the parking lot and just watched customers go in and out

by Kevin Peters

The office products retailer was measuring customer service using metrics— such as the cleanliness of bathrooms—that didn’t drive sales. Its new presi-dent is trying to fix that by retraining the staff and transforming the company.

THE IDEA

Kevin Peters is Office Depot’s president for North America.

PHOTOS Peters (center at upper right; on the right below) with Office Depot employees


How I Did It…HBR.ORG

Managing Yourself

What does it take for an av-erage manager to become a highly eff ective leader? There are countless books, models, and formulas for success. But the truth is that leadership transforma-tion is deeply dependent on circumstances. The key

for those who seek it is to absorb the insights that can be drawn from the successful experi-ences of others. During their in-depth study of seven CEOs, Fuda and Badham uncovered seven interdependent metaphors, which they went on to test with more than 10,000 managers on four continents. The authors discuss four of those metaphors—fi re, snow-ball, mask, and movie—here, in the context of individual managers’ experiences.

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Fire, Snowball, Mask, Movie: How Leaders Spark And Sustain Changeby Peter Fuda and Richard Badham

MANAGING YOURSELF

What does it take for an inef-fective manager to become a highly effective leader? Talk

to 50 top CEOs, management consultants, and academics, and you’ll get a different answer from each. There are countless books, models, and formulas for success. But the truth is this: Leadership transfor-mation is deeply dependent on context. Everyone follows his own path, has her own story. The key for people who are seeking transformation is to identify the common threads in the experiences of others who have achieved success and absorb the insights they find there.

That was our ambition five years ago, when we embarked on a doctoral research project. We began with an in-depth study of seven CEOs whose success in trans-forming themselves, their leadership teams, and their organizations was well documented. They had all seen radical improvement in 360-degree feedback on their personal effectiveness, along with significant gains for their units or organizations in financial performance, customer approval, and employee engage-ment. We captured their stories through a series of lengthy interviews, conducted a rigorous linguistic analysis, and discov-ered that several themes were common to all seven in the challenges they faced and the strategies they used.

In ensuing conversations with these chief executives, we discovered that one of the best ways to elicit deep and broad discussion of those key themes—and to describe the CEOs’ mastery of what they had learned—was through metaphor. IL

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CASE STUDY 150Will a sad spouse upend a company’s expatriate program?

SYNTHESIS 158New approaches to managing risk

LIFE’S WORK 168Frank Gehry on the architect’s role as problem-solving project manager

ExperienceManaging Your Professional Growth hbr.org


Fire, Snowball, Mask, Movie: How Leaders Spark and Sustain ChangePeter Fuda and Richard Badham | page 145

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#Executive Summaries

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