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Its time that beliefs and theories about business catch up with the way great companies operate andhow they see their role in the world today. Traditionally, economists and financiers have argued that thesole purpose of business is to make moneythe more the better. That conveniently narrow image,deeply embedded in the American capitalist system, molds the actions of most corporations,constraining them to focus on maximizing short-term profits and delivering returns to shareholders.

Their decisions are expressed in financial terms.

I say convenient because this lopsided logic forces companies to blank out the fact that they commandenormous resources that influence the world for better or worse and that their strategies shape the livesof the employees, partners, and consumers on whom they depend. Above all, the traditional view ofbusiness doesnt capture the way great companies think their way to success. Those firms believe thatbusiness is an intrinsic part of society, and they acknowledge that, like family, government, and religion,it has been one of societys pillars since the dawn of the industrial era. Great companies work to makemoney, of course, but in their choices of how to do so, they think about building enduring institutions.They invest in the future while being aware of the need to build people and society.

In this article, I turn the spotlight on this very different logica social or institutional logicwhich liesbehind the practices of many widely admired, high-performing, and enduring companies. In those firms,society and people are not afterthoughts or inputs to be used and discarded but are core to theirpurpose. My continuing field research on admired and financially successful companies in more than 20countries on four continents is the basis for my thinking about the role of institutional logic in business.

Institutional logic holds that companies are more than instruments for generating money; they are alsovehicles for accomplishing societal purposes and for providing meaningful livelihoods for those whowork in them. According to this school of thought, the value that a company creates should be

measured not just in terms of short-term profits or paychecks but also in terms of how it sustains theconditions that allow it to flourish over time. These corporate leaders deliver more than just financialreturns; they also build enduring institutions.

Rather than viewing organizational processes as ways of extracting more economic value, greatcompanies create frameworks that use societal value and human values as decision-making criteria.They believe that corporations have a purpose and meet stakeholders needs in many ways: byproducing goods and services that improve the lives of users; by providing jobs and enhancing workersquality of life; by developing a strong network of suppliers and business partners; and by ensuringfinancial viability, which provides resources for improvements, innovations, and returns to investors.

In developing an institutional perspective, corporate leaders internalize what economists have usuallyregarded as externalities and define a firm around its purpose and values. They undertake actions thatproduce societal valuewhether or not those actions are tied to the core functions of making andselling goods and services. Whereas the aim of financial logic is to maximize the returns on capital, beit shareholder or owner value, the thrust of institutional logic is to balance public interest with financialreturns.


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Institutional logic should be aligned with economic logic but need not be subordinate to it. For example,all companies require capital to carry out business activities and sustain themselves. However, at greatcompanies profit is not the sole end; rather, it is a way of ensuring that returns will continue. Theinstitutional view of the firm is thus no more idealized than is the profit-maximizing view. Well--established practices, such as R&D and marketing, cannot be tied to profits in the short or long runs,

yet analysts applaud them. If companies are to serve a purpose beyond their business portfolios, CEOsmust expand their investments to include employee empowerment, emotional engagement, values-based leadership, and related societal contributions.

Business history provides numerous examples of industrialists who developed enduring corporationsthat also created social institutions. The Houghton family established Corning Glass and the town ofCorning, New York, for instance. The Tata family established one of Indias leading conglomerates andthe steel city of Jamshedpur, Jharkhand. That style of corporate responsibility for society fell out offashion as economic logic and shareholder capitalism came to dominate assumptions about businessand corporations became detached from particular places. In todays global world, however, companies

must think differently.

Irrationality is a basic part of being human. A classic example is buying something we would neverotherwise have spent money on and will never use simply because it's a great deal. So when itcomes to motivating employees to change, it should be no surprise that leaders who rely on rationalitytypically spend time and energy on the wrong things, send messages that miss the mark, and createfrustrating unintended consequences. Yet most do it anyhow. As part of the research forBeyondPerformance, we've come to understand how leaders can leverage social-science research aboutdecision making to motivate employees more effectively.

Employees don't care as much about the company as you think they do. Leaders, rationallyenough, appeal to the company's circumstances when making a case for change. But social sciencepoints to five sources of meaning for humans at work: the impact of the work on society, the customer,the company, the team, and "me." Most people are motivated by one of these more than others, and inlarge groups there are more or less equal shares of people motivated by each. So rational leaders don'ttap into the primary motivators of up to 80% of their workforce. To do so, they need to communicate inways that powerfully touch on all five sources of meaning. It's not as hard as it sounds. Take a costreduction program at a mortgage company, for example. It is of course about ensuring expenses don'toutpace revenue growth (company), but it can also be about helping put more people in homes(society), improving quality and service by reducing errors and streamlining operations (customer),achieving far more working together than any individual could alone (team), and as delegating moreand creating more attractive jobs (me).

Less can be more when it comes to incentives. Money is the most expensive way to motivateemployees, but it's still many leaders' first choice. Our experience and numerous studies, however,show that big bonuses are less effective than smaller, unexpected gestures, because gifts create arelationship while bonuses are purely transactional. Consider how pleased you are when a friend bringsa bottle of wine to your house for dinner and how different you'd feel if he offered to pay you for themeal. In the office, small gestures create a similar friendly feeling. When Gordon M. Bethune wasleading a turnaround at Continental Airlines, for example, he sent an unexpected $65 check to everyemployee when Continental made it to the top five for on-time flights. John McFarlane of ANZ Banksent a bottle of champagne to every employee one Christmas with a card thanking them for their work


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on the company's change program. In both cases, employees ended up feeling far more connected tothe company than the relatively small financial investment would otherwise have implied.

Listen more, talk less. When people choose for themselves what to do instead of just being told,social-science research shows, they are more committed to the outcome by a factor of almost five toone. So although as a leader you likely feel a responsibility to explain your views, you'll do better by

asking people questions that will help them reach their own conclusions about how to improve. DavidFarr, CEO of Emerson Electric, is noted for asking every employee a short list of questions such as"How do you make a difference?" "What improvement idea are you working on?" and "When did youlast get coaching from your boss?" Together, the answers help employees discover how their role linksto the overall company direction, puts a sharp focus on continuous improvement, and highlights howmuch coaching and development is valued by the organization all crucial in times of change.

Don't forget the good stuff. Focusing on problems tends to create fatigue and resistance, manystudies have shown, whereas looking for opportunities to build on strengths leads to inspiration andmotivation. This doesn't mean ignoring problems. But it does mean that the rational idea of pointing outto employees just how bad things are doesn't work. Instead, focus on how your organization's, orindividuals', strengths can be used to overcome your challenges. Consider one U.S. financial servicescompany that traditionally eschewed creating close relations with regulators. The new normal, however,made having such relationships a requirement for success. How did the CEO motivate other seniorleaders to spend time in Washington? By asking them to bring their already strong capability forcreating deep relationships with customers to this new set of relationships.

The corporate poet David Whyte once wrote, "Work, paradoxically, does not ask enough of us, yetexhausts the narrow part we bring to the door." Simple steps like those above will help you at leastpartly resolve this paradox by reaching employees as human beings.

The Productivity Paradox: How Sony Pictures Gets More Out of People by Demanding Less

by Tony SchwartzSource: Harvard Business Review7 pages. Publication date: Jun 01, 2010. Prod. #: R1006C-PDF-ENG

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Companies are experiencing a crisis in employee engagement. One of the problems is all the pressurecompanies are putting on employees to produce. Workers are trying to get more done in less time-and


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are burning out. But while time is finite, energy is not; people can increase their reserves of personalenergy. The key is to establish rituals-such as shutting down your e-mail for a couple of hours a day soyou can focus on priorities, or taking a daily 3 p.m. walk to get a breather-that renew your physical,emotional, mental, and spiritual energy. These behavioral changes are sustainable, though, only ifleaders at the most senior levels of an organization are willing to set a context for them, both bycreating their own rituals and by setting a tone where people feel safe taking time out of the day on a

regular basis. This is just what the leaders of Sony Pictures Entertainment did. Working with TonySchwartz of the Energy Project, they implemented energy management training that has reachednearly half the company so far. To date, the reaction to the program has been overwhelmingly positive.Eighty-eight percent of participants say it has made them more focused and productive. More than 90%say it has helped them bring more energy to work every day. Eighty-four percent say they feel betterable to manage their jobs' demands and are more engaged at work. Sony's leaders believe that thesechanges have helped boost the company's performance. Despite the recession, Sony Pictures had itsmost profitable year ever in 2008 and one of its highest revenue years in 2009.

The new normal means constant change. Companies must reinvent themselves if they want to survive.This HBR Spotlight section looks at organizational change through two very different lenses-the firstexamining the connection between restructuring and improved performance, the second making thecase for reorganization as a means of keeping a company's structure in tune with the human dynamicsthat drive creativity and innovation. A third article suggests new ways to keep overworked employeesengaged and productive in an economy struggling to recover from global recession.

Nine Things Successful People Do Differently

8:58 AM Friday February 25, 2011

by Heidi Grant Halvorson | Comments ( 296)

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Why have you been so successful in reaching some of your goals, but not others? If you aren't sure,you are far from alone in your confusion. It turns out that even brilliant, highly accomplished people arepretty lousy when it comes to understanding why they succeed or fail. The intuitive answer that youare born predisposed to certain talents and lacking in others is really just one small piece of thepuzzle. In fact, decades of research on achievement suggests that successful people reach their goalsnot simply because of who they are, but more often because ofwhat they do.

1. Get specific. When you set yourself a goal, try to be as specific as possible. "Lose 5 pounds" is abetter goal than "lose some weight," because it gives you a clear idea of what success looks like.Knowing exactly what you want to achieve keeps you motivated until you get there. Also, think aboutthe specific actions that need to be taken to reach your goal. Just promising you'll "eat less" or "sleepmore" is too vague be clear and precise. "I'll be in bed by 10pm on weeknights" leaves no room fordoubt about what you need to do, and whether or not you've actually done it.

2. Seize the moment to act on your goals. Given how busy most of us are, and how many goals weare juggling at once, it's not surprising that we routinely miss opportunities to act on a goal because wesimply fail to notice them. Did you really have no time to work out today? No chance at any point toreturn that phone call? Achieving your goal means grabbing hold of these opportunities before they slipthrough your fingers.

To seize the moment, decide when and where you will take each action you want to take, in advance.Again, be as specific as possible (e.g., "If it's Monday, Wednesday, or Friday, I'll work out for 30minutes before work.") Studies show that this kind of planning will help your brain to detect and seize

the opportunity when it arises, increasing your chances of success by roughly 300%.3. Know exactly how far you have left to go. Achieving any goal also requires honest and regularmonitoring of your progress if not by others, then by you yourself. If you don't know how well you aredoing, you can't adjust your behavior or your strategies accordingly. Check your progress frequently weekly, or even daily, depending on the goal.

4. Be a realistic optimist. When you are setting a goal, by all means engage in lots of positive thinkingabout how likely you are to achieve it. Believing in your ability to succeed is enormously helpful forcreating and sustaining your motivation. But whatever you do, don't underestimate how difficult it will beto reach your goal. Most goals worth achieving require time, planning, effort, and persistence. Studiesshow that thinking things will come to you easily and effortlessly leaves you ill-prepared for the journey

ahead, and significantly increases the odds of failure.5. Focus on getting better, rather than being good. Believing you have the ability to reach yourgoals is important, but so is believing you can getthe ability. Many of us believe that our intelligence,our personality, and our physical aptitudes are fixed that no matter what we do, we won't improve.As a result, we focus on goals that are all about proving ourselves, rather than developing andacquiring new skills.


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Fortunately, decades of research suggest that the belief in fixed ability is completely wrong abilitiesof all kinds are profoundly malleable. Embracing the fact that you can change will allow you to makebetter choices, and reach your fullest potential. People whose goals are about getting better, ratherthan being good, take difficulty in stride, and appreciate the journey as much as the destination.

6. Have grit. Grit is a willingness to commit to long-term goals, and to persist in the face of difficulty.

Studies show that gritty people obtain more education in their lifetime, and earn higher college GPAs.Grit predicts which cadets will stick out their first grueling year at West Point. In fact, grit even predictswhich round contestants will make it to at the Scripps National Spelling Bee.

The good news is, if you aren't particularly gritty now, there is something you can do about it. Peoplewho lack grit more often than not believe that they just don't have the innate abilities successful peoplehave. If that describes your own thinking .... well, there's no way to put this nicely: you are wrong. As Imentioned earlier, effort, planning, persistence, and good strategies are what it really takes to succeed.Embracing this knowledge will not only help you see yourself and your goals more accurately, but alsodo wonders for your grit.

7. Build your willpower muscle. Your self-control "muscle" is just like the other muscles in your body when it doesn't get much exercise, it becomes weaker over time. But when you give it regularworkouts by putting it to good use, it will grow stronger and stronger, and better able to help yousuccessfully reach your goals.

To build willpower, take on a challenge that requires you to do something you'd honestly rather not do.Give up high-fat snacks, do 100 sit-ups a day, stand up straight when you catch yourself slouching, tryto learn a new skill. When you find yourself wanting to give in, give up, or just not bother don't. Startwith just one activity, and make a plan for how you will deal with troubles when they occur ("If I have acraving for a snack, I will eat one piece of fresh or three pieces of dried fruit.") It will be hard in thebeginning, but it will get easier, and that's the whole point. As your strength grows, you can take onmore challenges and step-up your self-control workout.

8. Don't tempt fate. No matter how strong your willpower muscle becomes, it's important to alwaysrespect the fact that it is limited, and if you overtax it you will temporarily run out of steam. Don't try totake on two challenging tasks at once, if you can help it (l ike quitting smoking and dieting at the sametime). And don't put yourself in harm's way many people are overly-confident in their ability to resisttemptation, and as a result they put themselves in situations where temptations abound. Successfulpeople know not to make reaching a goal harder than it already is.

9. Focus on what you willdo, not what you won'tdo. Do you want to successfully lose weight, quitsmoking, or put a lid on your bad temper? Then plan how you will replace bad habits with good ones,rather than focusing only on the bad habits themselves. Research on thought suppression (e.g., "Don'tthink about white bears!") has shown that trying to avoid a thought makes it even more active in your

mind. The same holds true when it comes to behavior by trying not to engage in a bad habit, ourhabits get strengthened rather than broken.If you want change your ways, ask yourself, What will I do instead? For example, if you are trying togain control of your temper and stop flying off the handle, you might make a plan like "If I am starting tofeel angry, then I will take three deep breaths to calm down." By using deep breathing as a replacementfor giving in to your anger, your bad habit will get worn away over time until it disappears completely.

It is my hope that, after reading about the nine things successful people do differently, you have gainedsome insight into all the things you have been doing right all along. Even more important, I hope are


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able to identify the mistakes that have derailed you, and use that knowledge to your advantage fromnow on. Remember, you don't need to become a different person to become a more successful one. It'snever what you are, but what you do.

HeidiGrantHalvorson, Ph.D. is a motivationalpsychologist, and author of the newbookSucceed: HowWe Can Reach Our Goals(Hudson Street Press, 2011). She is also an expert blogger on motivationandleadership for Fast Company and Psychology Today. Her personalblog, The Science of Success,can be found atwww.heidigranthalvorson.com. Followher on Twitter@hghalvorson

Managing Yourself: A Smarter Way to Networkby Rob Cross and Robert Thomas

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Listen to an interview with Rob Cross.

One of the happiest, most successful executives we know is a woman named Deb. She works at a majortechnology company and runs a global business unit that has more than 7,000 employees. When you ask herhow she rose to the top and why she enjoys her job, her answer is simple: people. She points to her boss, theCEO, a mentor who always has her back; Steve, the head of a complementary business, with whom she hasmonthly brainstorming lunches and occasional gripe sessions; and Tom, a protg to whom she has delegatedresponsibility for a large portion of her division. Outside the company, Debs circle includes her counterparts inthree strategic partnerships, who inspire her with new ideas; Sheila, a former colleague, now in a differentindustry, who gives her candid feedback; and her husband, Bob, an executive at a philanthropic organization.

She also has close relationships with her fellow volunteers in a program for at-risk high school students and themembers of her tennis group and book club.

This is Debs social network (the real-world kind, not the virtual kind), and it has helped her career a lot. But notbecause the group is large or full of high-powered contacts. Her network is effective because it both supportsand challenges her. Debs relationships help her gain influence, broaden her expertise, learn new skills, and findpurpose and balance. Deb values and nurtures them. Make friends so that you have friends when you needfriends is her motto.

My current role is really a product of a relationship I formed over a decade ago that came back to me at the right

time, she explains. People may chalk it up to luck, but I think more often than not luck happens throughnetworks where people give first and are authentic in all they do.

Over the past 15 years, weve worked with many executives like Deb, at more than 300 companies. What beganas organizational researchhelping management teams understand and capitalize on the formal and informalsocial networks of their employeeshas since metamorphosed into personal programs, which teach individualexecutives to increase their effectiveness by leveraging their networks.


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The old adage Its not what you know, its who you know is true. But its more nuanced than that. In spite ofwhat most self-help books say, network size doesnt usually matter. In fact, weve found that individuals whosimply know a lot of people are less likely to achieve standout performance, because theyre spread too thin.Political animals with lots of connections to corporate and industry leaders dont win the day, either. Yes, itsimportant to know powerful people, but if they account for too much of your network, your peers and

subordinates often perceive you to be overly self-interested, and you may lose support as a result.

The data weve collected point to a different model for networking. The executives who consistently rank in thetop 20% of their companies in both performance and well-being have diverse but select networks like Debsmade up of high-quality relationships with people who come from several different spheres and from up anddown the corporate hierarchy. These high performers, we have found, tap into six critical kinds of connections,which enhance their careers and lives in a variety of ways.

Through our work advising individual managers, weve also identified a four-step process that will help anyexecutive develop this kind of network. But first, lets take a look at some common networking mistakes.

Getting It Wrong

Many people take a misguided approach to networking. They go astray by building imbalanced networks,pursuing the wrong kind of relationships, or leveraging relationships ineffectively. (See the sidebar Are YouNetworking Impaired?) These people might remain successful for a time, but often they will hit a plateau or seetheir career derailed because their networks couldnt prompt or support a critical transition.

TONY SCHWARTZ

Tony Schwartz is the president and CEO of The Energy Project and the author of Be Excellent at Anything. Become a fan ofThe EnergyProject on Facebook and connect with Tony at Twitter.com/TonySchwartz and Twitter.com/Energy_Project .

The Secret to Dealing With Difficult People: It'sAbout You

7:51 AM Wednesday October 12, 2011 | Comments ( 176)

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Do you have someone at work who consistently triggers you? Doesn't listen? Takes credit for workyou've done? Wastes your time with trivial issues? Acts like a know-it-all? Can only talk about himself?Constantly criticizes?

Our core emotional need is to feel valued and valuable. When we don't, it's deeply unsettling, achallenge to our sense of equilibrium, security, and well-being. At the most primal level, it can feel like athreat to our very survival.

This is especially true when the person you're struggling with is your boss. The problem is that being incharge of other people rarely brings out the best in us.

"Power tends to corrupt, and absolute power corrupts absolutely," Lord Acton said way back in 1887."There is no worse heresy than the office that sanctifies the holder of it."

The easy default when we feel devalued is to the role of victim, and it 's a seductive pull. Blaming othersfor how we're feeling is a form of self-protection. Whatever is going wrong isn't our fault. By off loadingresponsibility, we feel better in the short-term.

The problem with being a victim is that you cede the power to influence your circumstances. The painfultruth when it comes to the people who trigger you is this: You're not going to change them. The onlyperson you have the possibility of changing is yourself.


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Each of us has a default lens through which we see the world. We call it reality, but in fact it's aselective filter. We have the power, to view the world through other lenses. There are three worth tryingon when you find yourself defaulting to negative emotions.

The Lens of Realistic Optimism. Using this lens requires asking yourself two simple questions whenyou feel you're being treated badly or unfairly. The first one is "What are the facts in this situation?" The

second is, "What's the story I'm telling myself about those facts?"

Making this distinction allows you to stand outside your experience, rather than simply reacting to it. Italso opens the possibility that whatever story you're currently telling yourself isn't necessarily the onlyway to look at your situation.

Realistic optimism, a term coined by the psychologist Sandra Schneider, means telling yourself themost hopeful and empowering story about a given circumstance without subverting the facts. It's aboutmoving beyond your default reaction to feeling under attack, and exploring whether there is analternative way of viewing the situation that would ultimately serve you better. Another way ofdiscovering an alternative is to ask yourself "How would I act here at my best?"

The Reverse Lens. This lens requires viewing the world through the lens of the person who triggeredyou. It doesn't mean sacrificing your own point of view but rather widening your perspective.

It's nearly certain that the person you perceive as difficult views the situation differently than you do.With the reverse lens, you ask yourself, "What is this person feeling, and in what ways does that makesense?" Or put more starkly: "Where's my responsibility in all this?"

Counterintuitively, one of the most powerful ways to reclaim your value, when it feels threatened, is tofind a way to appreciate the perspective of the person you feel devalued by. It's called empathy.

Just as you do, others tend to behave better when they feel seen and valued especially since

insecurity is what usually prompts them to act badly in the first place.The Long Lens. Sometimes your worst fears about another person turn out to be true. He is someonewho bullies you unreasonably and seeing it from his perspective doesn't help. She does invariably takecredit for your work.

When your current circumstances are incontrovertibly bad, the long lens provides a way of lookingbeyond the present to imagine a better future. Begin with this question: "Regardless of how I feel aboutwhat's happening right now, how can I grow and learn from this experience?"

How many times has something that felt terrible to you in the moment turned out to be trivial severalmonths later, or actually led you to an important opportunity or a positive new direction?

My last boss fired me. It felt awful at the time, but it also pushed me way out of my comfort zone, whichis where it turned out I needed to go.

Looking back, the story I tell myself is that for all his deficiencies, I learned a lot from that boss, and it allserves me well today. I can understand, from his point of view, why he found me difficult as anemployee, without feeling devalued. Most important, getting fired prompted me to make a decision founding the company I now run that has brought me more happiness than any other work I've everdone.


12/27

Managing Yourself: A Smarter Way to Networkby Rob Cross and Robert Thomas


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by John Clayton, John Daly, Isa Engleberg, et al.

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EmailSharePrint

Listen to an interview with Rob Cross.

One of the happiest, most successful executives we know is a woman named Deb. She works at a majortechnology company and runs a global business unit that has more than 7,000 employees. When you ask herhow she rose to the top and why she enjoys her job, her answer is simple: people. She points to her boss, theCEO, a mentor who always has her back; Steve, the head of a complementary business, with whom she hasmonthly brainstorming lunches and occasional gripe sessions; and Tom, a protg to whom she has delegatedresponsibility for a large portion of her division. Outside the company, Debs circle includes her counterparts inthree strategic partnerships, who inspire her with new ideas; Sheila, a former colleague, now in a differentindustry, who gives her candid feedback; and her husband, Bob, an executive at a philanthropic organization.She also has close relationships with her fellow volunteers in a program for at-risk high school students and themembers of her tennis group and book club.

This is Debs social network (the real-world kind, not the virtual kind), and it has helped her career a lot. But notbecause the group is large or full of high-powered contacts. Her network is effective because it both supportsand challenges her. Debs relationships help her gain influence, broaden her expertise, learn new skills, and findpurpose and balance. Deb values and nurtures them. Make friends so that you have friends when you needfriends is her motto.

My current role is really a product of a relationship I formed over a decade ago that came back to me at the righttime, she explains. People may chalk it up to luck, but I think more often than not luck happens throughnetworks where people give first and are authentic in all they do.

Over the past 15 years, weve worked with many executives like Deb, at more than 300 companies. What beganas organizational researchhelping management teams understand and capitalize on the formal and informalsocial networks of their employeeshas since metamorphosed into personal programs, which teach individualexecutives to increase their effectiveness by leveraging their networks.

The old adage Its not what you know, its who you know is true. But its more nuanced than that. In spite ofwhat most self-help books say, network size doesnt usually matter. In fact, weve found that individuals whosimply know a lot of people are less likely to achieve standout performance, because theyre spread too thin.Political animals with lots of connections to corporate and industry leaders dont win the day, either. Yes, its

important to know powerful people, but if they account for too much of your network, your peers andsubordinates often perceive you to be overly self-interested, and you may lose support as a result.

The data weve collected point to a different model for networking. The executives who consistently rank in thetop 20% of their companies in both performance and well-being have diverse but select networks like Debsmade up of high-quality relationships with people who come from several different spheres and from up anddown the corporate hierarchy. These high performers, we have found, tap into six critical kinds of connections,which enhance their careers and lives in a variety of ways.


14/27

Through our work advising individual managers, weve also identified a four-step process that will help anyexecutive develop this kind of network. But first, lets take a look at some common networking mistakes.

Getting It Wrong

Many people take a misguided approach to networking. They go astray by building imbalanced networks,pursuing the wrong kind of relationships, or leveraging relationships ineffectively. (See the sidebar Are YouNetworking Impaired?) These people might remain successful for a time, but often they will hit a plateau or seetheir career derailed because their networks couldnt prompt or support a critical transition.

The Five Competitive Forces That Shape Strategyby Michael E. Porter


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Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Hardcover)

by Clayton Christensen

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Editors Note: In 1979, Harvard Business Reviewpublished HowCompetitive Forces Shape Strategy by a

youngeconomist and associate professor, MichaelE. Porter. Itwas his firstHBR article, andit started a

revolution in the strategy field. In subsequent decades, Porter has brought his signature economic rigor to the

study of competitive strategy for corporations, regions, nations, and, more recently, health care and philanthropy.

Porters five forces have shaped a generation of academic research and business practice. With proddingand

assistance from Harvard Business SchoolProfessor Jan Rivkin andlongtime colleague Joan Magretta, Porter

here reaffirms, updates, and extends the classicwork. He also addresses common misunderstandings, provides

practicalguidance for users of the framework, and offers a deeperviewofits implications for strategy today.

In essence, the job of the strategist is to understand and cope with competition. Often, however, managersdefine competition too narrowly, as if it occurred only among todays direct competitors. Yet competition forprofits goes beyond established industry rivals to include four other competitive forces as well: customers,suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces definesan industrys structure and shapes the nature of competitive interaction within an industry.

As different from one another as industries might appear on the surface, the underlying drivers of profitability arethe same. The global auto industry, for instance, appears to have nothing in common with the worldwide marketfor art masterpieces or the heavily regulated health-care delivery industry in Europe. But to understand industrycompetition and profitability in each of those three cases, one must analyze the industrys underlying structure interms of the five forces. (See the exhibit The Five Forces That Shape Industry Competition.)


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If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earnsattractive returns on investment. If the forces are benign, as they are in industries such as software, soft drinks,and toiletries, many companies are profitable. Industry structure drives competition and profitability, not whetheran industry produces a product or service, is emerging or mature, high tech or low tech, regulated orunregulated. While a myriad of factors can affect industry profitability in the short runincluding the weather andthe business cycleindustry structure, manifested in the competitive forces, sets industry profitability in the

medium and long run. (See the exhibit Differences in Industry Profitability.)Differences in Industry Profitability

Understanding the competitive forces, and their underlying causes, reveals the roots of an industrys currentprofitability while providing a framework for anticipating and influencing competition (and profitability) over time. Ahealthy industry structure should be as much a competitive concern to strategists as their companys ownposition. Understanding industry structure is also essential to effective strategic positioning. As we will see,defending against the competitive forces and shaping them in a companys favor are crucial to strategy.

Forces That Shape Competition

The configuration of the five forces differs by industry. In the market for commercial aircraft, fierce rivalry betweendominant producers Airbus and Boeing and the bargaining power of the airlines that place huge orders foraircraft are strong, while the threat of entry, the threat of substitutes, and the power of suppliers are more benign.In the movie theater industry, the proliferation of substitute forms of entertainment and the power of the movieproducers and distributors who supply movies, the critical input, are important.


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The strongest competitive force or forces determine the profitability of an industry and become the mostimportant to strategy formulation. The most salient force, however, is not always obvious.

For example, even though rivalry is often fierce in commodity industries, it may not be the factor limitingprofitability. Low returns in the photographic film industry, for instance, are the result of a superior substitute

productas Kodak and Fuji, the worlds leading producers of photographic film, learned with the advent of digitalphotography. In such a situation, coping with the substitute product becomes the number one strategic priority.

Industry structure grows out of a set of economic and technical characteristics that determine the strength ofeach competitive force. We will examine these drivers in the pages that follow, taking the perspective of anincumbent, or a company already present in the industry. The analysis can be readily extended to understandthe challenges facing a potential entrant.

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Artwork: Vincent Fournier, The Man Machine: ReemB #1, Pal, 2010, Barcelona

The war for talent shows no signs of letting up, even in sectors experiencing modest growth. According to aglobal study we conducted, only 15% of companies in North America and Asia believe that they have enoughqualified successors for key positions. The picture is slightly better in Europe, but even so, fewer than 30% ofEuropean companies feel confident about the quality and amount of talent in their pipelines. Moreover, in theregions where many companies are focusing their growth strategiesemerging marketsthe supply ofexperienced managers is the most limited, and the shortage is expected to continue for another two decades.

One popular battle strategy is to institute programs aimed at high potentialsthe people that companiesbelieve may become their future leaders. The appeal is clear for both sides: Promising managers are attracted tocompanies known for strong development opportunities, and a well-managed talent pipeline dramaticallyincreases the odds that a company will appoint great leaders at the top.

But these programs arent simple to execute. The selection criteria are often confusing. Employees arefrequently mystified by whos included and whos excluded. Company leaders have to weigh the upside of puttingtop performers into developmental opportunities against the downside of temporarily distracting them from anenterprises immediate needs. Firms risk demoralizing solid contributors who are notanointed as high

potentialsthe vast majority of managers, the people who keep the trains running on time. Sometimes thechosen few dont stick around or dont live up to expectations. And too often, the programs fail to maintainmomentum, leaving companies unsure they have paid off and fueling worker cynicism.

There are exceptions, of course. Companies such as GE, Unilever, PepsiCo, and Shell have long been knownfor their careful attention to talent management. But those companies are not the norm.


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As far as we know, no one has yet studied the process of managing high potentials from end to end. In order tofill this void, in 2007 we launched a joint research project with the executive search firm Egon ZehnderInternational, conducting a large-scale cross-sectional and longitudinal analysis of how companies assess andmanage their rising stars. We also interviewed executives from 70 companies that have programs for highpotentialsfirms of all sizes, located around the world.

From this research, we identified a set of cutting-edge practices. Some are from unexpected placessuch as anArgentine manufacturer of steel tubes thats become an international leader despite regional and industryturbulence, and a Turkish bank that has gone global. Some are broadsuch as the direct involvement of apharmaceutical-device makers senior management team in the development of that companys 600 mostpromising leaders. Though high-potential programs abound, the field is so new and so dynamic that thesepractices havent yet been time-tested. Still, they can provide valuable ideas and inspiration to companieslooking to strengthen their talent pipelines.

One important finding of our research was that the effective management of the next generation of leaders

always encompasses three sets of activities. The first involves the establishment of clear strategic priorities,which shape the way companies groom high-potential leaders. The second involves the careful selection of high-potential candidatesand communicating who they are to others in the organization. This can be touchy. Andthe third comprises the management of talent itselfhow high potentials are developed, rewarded, and retained.

There is no cookie-cutter method for creating a successful program. Just as you cant lift any other peoplemanagement process directly from another company, you cant assume that a high-potential program that workssomewhere else will work for you. Your strategy and your culture influence the nature of the program that will bemost effective. If your strategy is to aggressively expand through acquisitions in emerging markets, for instance,youll need a different type of program than you would if you were pursuing low-cost leadership through

operational and productivity improvements.

Well outline the strategic, selection, and managerial aspects of effective high-potential programsbelow. But first, lets start with a definition.

What Is Potential?

We were a little surprised to discover how many companies launch high-potential programs without firstclearly establishing what they mean by potential. We use the following simple definition: Potential

indicates whether someone will be able to succeed in a bigger role in the future. It is a persons abilityto growand to handle responsibilities ofgreater scale and scope. By greater scale we mean a job inthe same area but with, say, a larger budget or staff; by greater scope we mean a job involvingactivities of substantially more breadth and complexity.

Consider a sales vice president who consistently meets her budget forecasts. Could you reasonablyexpect her to take responsibility for marketing as well? Might she be able to lead a multidivisional


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initiativerepositioning the business from a product-centric to a customer-centric organization? Shedoesnt have to be ready to take it on tomorrow to be high potential. However, if youre going to investsignificantly in her development, you want to be reasonably confident that the investment will pay off.

Before classifying her as an up-and-coming leader, then, youd look for signs of her capacity to learn

quickly on the job, genuine interest in broadening her scope (is she inclined to show up at meetingswhere she might learn something that doesnt directly relate to her job?), and willingness to take onextra work on short notice. She might be very bright and a highly valued contributor but still not qualifyas a high potential.

A basic model for assessing executive potential, developed by Egon Zehnder International, is depictedin the exhibit The Essentials of Executive Potential. It contains five elements, shown in the exhibit as asection of five concentric rings. These range from very difficult to change (motives) to highly teachable(skills).

The Essentials of Executive Potential

At the inner core are the individuals motives. These predict consistent patterns of behavior over time.They tend to be stable, are usually not conscious, and are highly related to what people enjoy and getenergized or engaged by. Does the person get satisfaction from seeing others succeed? Does shedemonstrate a passion for the organizations mission over personal reward? Foundational research atHarvard long ago showed the relevance of the Three Social Motivesachievement, affiliation, andinfluence. One form of the last motive, the desire forsocializedinfluence (having a positive impact onothers for the good of the larger organization), is a predictor of senior executive potential. To a certainextent, it may be something youre born withor at least a product of early social interactions.However, positive work experiences and wise mentorship can help people develop better motives.

One level out youll find a series of abilities we call leadership assets, which predict how far and howfast an executive will grow. There are four important assets: A high potential derives insight; she canmake sense of a vast range of information and discover and apply new ideas that transform pastpractices or set new directions. She also effectively engages others through emotions and logic,communicating a persuasive vision and connecting individuals. She demonstrates resolve and keepson driving toward goals despite challenges. Finally, and perhaps most important, a high potential seeksunderstanding; she constantly looks for new experiences, ideas, and knowledge; asks for feedback;and adjusts her behavior accordingly.

At the next level is a sense of self, or identity. Identity is how you see yourself on the stage. For highpotentials, this means envisioning yourself as a senior executivenot just for the prestige but becauseyou want to fulfill a passion for developing a team or make things happen. Individual contributors maybe motivated by others success, for instance, but may have no wish to play an enterprise-wide role.

How to Hang On to Your High Potentialsby Claudio Fernndez-Aroz, Boris Groysberg, and Nitin Nohria


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The characteristics found in the three innermost ringswhich are so hard to change or learnare essential tohigh potential. The things in the outer two rings of the modelskills and knowledgecan be acquired. Skills

what an executive is actually able to do and applycan effectively be taught or learned on the job. And in orderto perform an individual job well, every manager needs some specialized knowledge (say, about a market, abusiness, or certain practices), which should be tested and eventually supplied before any critical promotion.

Align Development to Strategy

Many companies programs for high potentials simply replicate those in place at other firms, as if talent could bedeveloped with an off-the-shelf model, without taking into account an organizations goals. Potential is situational,and programs that manage it should be aligned with a companys strategy. (I f your value proposition toemployees is that youll develop them for successful careers wherever they go, thats a legitimate aim, but its notsomething that will necessarily strengthen your talent pipeline.) There is no universal great manager, as we

found when conducting an analysis of a large group of GE graduates who went on to become CEOs at othercompanies. Some added tremendous value to their new organizations, but others proved disastrous. Doubtlessall of them went through a rigorous development process at GE, but they could excel in a new company only if itwas a strong strategic, organizational, and industry fit.

If, for instance, a companys strategy is to grow in emerging markets, it might focus on a more global talent poolas well as people who have demonstrated flexibility operating in unfamiliar settings. In contrast, a company thatis committed to being the low-cost leader might target people who are highly disciplined and results-oriented.

Best-practice organizations start with this strategic focus but periodically reexamine their strategic priorities and

refresh their pool of candidates. Such flexibility is key; from what weve seen, companies that set rigid goalsabout the type or number of high potentials, instead of taking a dynamic approach, become complacent anddont get much out of these programs.

One more note on tying talent management to strategyits not a matter to be left to HR. If the seniormanagement team is not involved, the process may be doomed. It can be tough to get the senior-mostexecutives viscerally engaged in talent development, but if they arent personally invested from the start, thewhole program could easily head down the wrong path.

Select with Care

Though it can be tricky, choosing candidates for these programs is an extremely important part of the process:The consequences of a faulty assessment can be costly. Not only is it wastefulin terms of training anddeveloping people unlikely to become leadersbut i t undermines employee morale and the credibility of thewhole program. Furthermore, poor assessments also mean that people who have strong potential are excluded.Disheartening a prospective star for the wrong reasons can be extremely expensive.


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Identifying promising candidates. Selection usually begins either with nomination by the employees immediatesupervisor or through the annual appraisal process. At several companies we studied, including a Caribbeanfinancial services firm, an Italian utility, and a Cypriot bank, managers are expected to pinpoint high-potentialemployees. At some companies, managers are expected to put forward candidates from their own departmentsbut can nominate individuals from other departments as well.

Other companies, like one Danish bank we studied as well as a European airline and a Scandinavian onlineservice provider, allow employees to nominate themselves. However, we found that the practice is not prevalent,because it carries risks. Across the board, people overestimate their potential. Their self-assessments might beuseful but need to be taken in context.

Using annual appraisals to make the first cut brings more objectivity to the process. At a gas pipelinecompany we studied, two years worth of outstanding reports qualify an individual as high potential. Atan insurance company, the annual appraisal process specifically calls for categorizing individuals aslateral, potential, or high potential: lateralsignifies that someone is ready to move into positions only at

the same level;potential, readiness for promotion in two years; and high potential, the ability to maketwo major moves upward in the next five years. But annual appraisals alone are not enoughresearchhas shown that most high performers are not, in fact, high potentials. Thats why we recommendsupplementing appraisals with a subjective view of candidateslike supervisors recommendations andother inputs.

After youve identified your first cut of candidates, the next step is to develop valid and reliableassessments of their potential. Many companies routinely use personality tests to do this. The practiceis somewhat more commonplace in North America and somewhat less popular in Asia and Africa. Wedont recommend it; though some research in the early 1990s provided evidence that personality can

predict job performance, it has become clear that personality tests have low validity. Furthermore, iftheyre self-reported, you cant prevent people from gaming them. The best tools for assessing potentialare references and behavioral interviews. At some companies, psychometric tests are used only tocustomize development plans for candidates who have already been selected by other means.

Increasingly, major organizations also complement their own internal appraisals with periodic input fromqualified external partners. External assessments decrease the element of bias and offer a broad set ofbenchmarksallowing companies to compare their talent against strong outside candidates.

Just as important as the choice of methods is the person conducting the assessment. Most people

arent nearly as good as they think at sizing others up. Indeed, most managers are dismal at predictingemployees future accomplishments. The good news is that its not about intuition: Accurateassessment can be learned. And the right person using the right model can learn to assess potential(predicting whether a person will not be promoted, will be promoted once, or will be promoted twice ormore over the next four to five years) with 85% accuracy.

Communicating wisely. Many organizations try to hide high-potential classifications, as if that werepossible. A study conducted by Anthony J. Fresina and Associates in 1987, featuring 225 corporations


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in 10 industries, found that 78% of companies did not inform high potentials of their designation, but90% of the time employees knew anyway. Yet even in that study, informing high potentials of theirstatus was clearly associated with enhanced retention and improved productivity.

Nonetheless, this is a delicate topic. If youre completely open about who is on the list, you have to

prepare for the disappointment of those not anointed and even the frustration of high potentials whoseexpectations are not met. We believe strongly in transparencylet people know if theyre highpotential; acknowledge it when they are not. To some extent, the instinct to keep the list private isunderstandable, because the process is new at many f irms and because companies have so muchtrouble evaluating even past performance. Still, weve found that the main reason companies dontcommunicate openly is that their process is overly subjective or unfair and therefore indefensible.

To make sure they provided the right type of feedback, the companies we studied would typically informmanagers in private discussions that they had or hadnt been designated as high potentials. Somecompanies also communicated status indirectly, by suggesting enrollment in special programs or

appointing the managers to special developmental roles and assignments. However, transparency winsover secrecy.

Develop and Reward Thoughtfully

The development of high potentials needs to go beyond formal education programs and include self-directed learning and other types of training. On-the-job development is also key. Changing underlyingmotives and traits is hard, but a combination of targeted mentoring, coaching, education, and jobexperiences can achieve considerable impact. The best companies in our study look for experiencesthat will both challenge and motivate people, and strongly encourage senior leaders involvement in keyactivities like mentoring.

How to Hang On to Your High Potentialsby Claudio Fernndez-Aroz, Boris Groysberg, and Nitin Nohria


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Programs for high potentials typically employ a handful of time-tested methods. One Eastern European financialservices company we looked at offers a classic example of a formal, well-thought-out program. At this firm, inaddition to performing their regular jobs and stretch assignments, selected young middle managers attend a 15-month training program designed and taught by business-school faculty and featuring case studies and other

business-school content. They receive coaching at the same time. When the program ends, they get a three- tosix-month foreign assignment, chosen for its opportunities for personal development, to do a job closely relatedto their job at home.

Its useful to involve company leaders as teachersin both formal programs and informal conversationsand asnetworking resources. High potentials need visibility with senior executives, as well as role models of leadership.At a major pharmaceutical company we studied, the CEO and other members of the senior team meet one-on-


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one with people on the leadership development track. Theyll ask them about their experience being a memberof the talent pool, explains the companys executive vice president of HR and corporate affairs. Do they feeltheyre getting appropriate development? Are they getting good coaching from their leader? How can we helpthem? Do they understand the benefits of being a member of the global talent pool? When the CEO spends timedoing this, it shows you how important he thinks it is.

Job rotations. Its well established that on-the-job experiences are by far the biggest lever you can pull indeveloping the skills that will take high potentials to larger, more senior, and more complex positions. As longago as 1988, a study on managing high potentials conducted by C. Brooklyn Derr, Candace Jones, and EdmundL. Toomey showed that 84% of firms used job rotations as the primary strategy to develop high potentials.

Rotations that develop managers include bigger scale, bigger scope, line-to-staff or staff-to-line switches, cross-moves (handling a very different set of activities across divisions, functions, or industries), start-ups, turnarounds,change management initiatives, and international assignments. Changes in level, organizational unit, location,industry, and circumstances all help managers grow. Ideally, job assignments will involve novelty and the need to

adapt. The greater the change in scope and responsibility, the greater the learning. There is, however, a fine linebetween a challenging assignment and an overwhelming one.

Because job rotations are costly, they should be chosen with care. Here again, it helps to go back to the strategicgoals of the organization. What is it that this high potential would need the most to further contribute to ourstrategic objectives? If its, say, broader international experience, consider a geographical shift with an eventualincrease in job scale. But make sure you dont overload peopleif youre expecting somebody to lead asignificant overseas expansion, dont add too many new challenges in other dimensions.

Rewards and incentives. Some companies seem to believe that the high-potential classification is a significant

reward in itself. But the best companies think beyond the benefits of participation in specific developmentprograms and make considered choices about their high potentials compensation, as well as how its paid out.

Financial incentives should not be excessivecompensation is only one part of any reward strategyand theymust be properly aligned with the objective of building lasting strengths for the company. And external incentiveslike money work only in conjunction with internal motivators like the need for achievement and recognition. Whilecompanies need to pay people well to attract and retain high potentials in the first place, they should be carefulnot to overdo it, because that is the surest way to demotivate employees who are not classified as highpotentials, who may feel unfairly paid.

If peopleare your most important asset, as companies like to say, then high potentials are vital to your future.We are hesitant to definitively label the processes we describe here best practices, because they are evolvingand we dont yet have long-term evidence of their merit. But we give credit to the companies experimenting withnew approaches, because they are on the vanguard as we move into what may prove to be the most intensebattle yet in the global war for talent.


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