6.3.2 Providing Inspiration and Direction

Strategy Execution: 1.1.
1 Course Introduction
Thursday, May 20, 2021
10:35 PM

Learning Objectives
By the end of this lesson, you will be able to:
 Explain why making tough choices is essential to successful strategy execution.
 Describe some of the tough choices managers need to make to execute strategy
successfully.
 Identify which tough choices are routinely made at businesses with which you’re
familiar.
Lesson Time Estimate: 65 minutes. Most participants spend between 45 and 95 minutes on this
lesson.

Gap between Strategy formulations and Strategy execution can we fix using management tools and
frame work

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1.1.2 Making Tough Choices
10:59 PM

1.1.2 Making Tough Choices

Why Strategy Execution Fails
In your response to the prompt, you may have identified some of the following factors that play
a role in derailing strategy execution:
o Too many initiatives or unclear priorities
o Poor communication between senior leaders and employees
o Ineffective distribution of resources
A lack of organizational focus underlies many of these problems. Research has identified that
those businesses that do execute strategy successfully do so by constantly making difficult
choices/tradeoffs and setting clear priorities that allow them to focus on and measure the most
critical elements for the business’s continued success.
We have designed this course to provide you with frameworks and tools that will allow you to
make those difficult choices and measure their effectiveness.
During the course, you will have the opportunity to learn from business leaders throughout the
world. Here are a few of those leaders on the tough choices they have had to make to execute
strategy successfully. These choices introduce themes that we will develop throughout the
course.

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Define what your organizational goal are and what are not organization goal are
Example : Adidas define the goal as best sport stuff and not a sport fashion

Video
11:02 PM

1.Meeting Our Protagonists

First, we will hear from Adidas CEO Kasper Rorsted on how the sporting goods company
decides which business opportunities they should and should not pursue—one of the
prerequisites for effective strategy execution.
Note: In the video, Kasper mentions that he has been CEO of Adidas for 3 years. He became
CEO in 2016, and the video was filmed in 2019.
AM:

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2. Next, we will turn to Meghna Modi, Managing Director at the mobile phone
retailer Go Mobile, which serves the Delhi National Capital Region in India.
Here, Meghna explains why deliberate choices about store location—dictated
by the business’s “cluster strategy”—are so essential to Go Mobile’s growth.
Rather than opening a new store wherever an ideal opportunity for one
presents itself, Meghna’s team takes a more strategic approach, opening
clusters of new stores in walking distance to already-profitable stores. This
approach allows Go Mobile to scale customer and store management
knowledge more effectively than a store-by-store growth strategy would, as
Meghna explains.
AM:
Cluster Strategy to Dominate the market in specific area



3. Finally, we will hear from Bruce Welty, founder and CEO of Quiet Logistics, a
fulfillment company that serves online retailers. Here, Bruce discusses the
importance of careful customer selection for the company.


4. 2011, ATH received regulatory approval to market its product. To finance the
venture, Dr. Charles Casper and John Frost struck a deal with a venture capital
firm—Alumni Capital Partners—which invested $11.3 million in ATH to support
the product launch.

609d8e6f29c5fc0b825a1db4/0148167f-4145-42e4-9b8b-2916c29b02ea/1071/908/#/>

5.

Course Capstone Preparation
11:44 PM

Course Capstone Preparation

This was the first of many times we will ask you to analyze course material through the lens of a
business you know well. These activities are designed to culminate in a capstone project at the end of
the course.
In the capstone, you will evaluate a business’s strategy execution approach using a framework we
will introduce soon. Then, you will write a 300- to 500-word proposal outlining solutions to what
you identify as the business’s most pressing executional challenge. Finally, you will send your
proposal to a colleague or peer and meet with them to discuss their feedback.
To get the most out of the capstone project, we strongly encourage you to select a business now
and to analyze that same business in activities throughout the course.
Here are a few pointers to help you choose a business:
 Ideally, this will be a place where you currently work or have recently worked. Or, it
might be an organization for which you currently consult or have recently consulted.
Most important is that you can recall in detail the organization’s strategy and their
approach to executing it.
 Some past participants have used their capstone work to advocate for/introduce real
changes to their organizations. If you think you might wish to do the same, we
encourage you to select your current place of employment.
 If you select a place of employment, this will ideally be a place where you have or have
had management responsibilities, or at least knowledge of and/or influence over matters
including the following:
o Job design
o Resource allocation
o Employee motivation and performance management
o Core value definition
o Profit planning
o Goal setting and measurement
o Incentive design
o Risk assessment and mitigation
o Research and development
 Because the capstone includes a peer review component, we encourage you to select an
organization where you are in touch with people who are familiar with it (perhaps a
current or former employee). However, you can also find a peer from this course to
review your proposal. We will provide more instruction on this task in the coming
weeks, but we encourage you to begin thinking now about potential reviewers. You
will eventually schedule a meeting to discuss the proposal with your reviewer during
the final week of the course.

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Managing the Tension Between Growth, Profit, and
Control
Friday, May 21, 2021
6:46 PM
Managing the Tension Between Growth, Profit, and

Control
It is not easy for organizations—especially large and complex organizations—to make the tough
choices we explored in the opening lesson. These choices demand that managers successfully
navigate a variety of tensions.
A major tension exists between the competing demands of growing a business, turning a profit, and
instilling an appropriate level of control over procedures and processes without inhibiting innovation.
Underlying these demands is a fundamental tension between the need for a business to be innovative
and nimble, on the one hand, while providing the necessary level of control over business activities,
on the other.
Let’s start by examining how this particular tension arises by exploring the case of ATH
Technologies, an entrepreneurial startup in the medical technology industry that is acquired by a
major pharmaceutical company. As we analyze the various strategy execution choices the startup and
its new parent company made, we will uncover the major levers managers can use to manage these
tensions and guide strategy execution. These four levers will serve as a guiding framework for our
work throughout the course.
Please note that we have disguised the company name for reasons of confidentiality. It will be
important to keep in mind, though, that the business and the challenges it faced are very real.
Note: This online case is based on a case developed by Professor Robert Simons (HBS Case No.
117-012). The original version of the case was developed by Professor Robert Simons and Professor
Antonio Dávila.

Learning Objectives
By the end of the next two lessons, you will be able to:
o Describe the tension that exists between the demands of growth, profit, and
control when executing strategy.
o Analyze and explain the critical role that control systems play in helping
organizations manage this tension.
o Identify the four distinct levers managers use to implement their strategies.
Lesson Time Estimate: 80 minutes. Most participants spend between 55 and 95 minutes on
this lesson.

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1.2.2 Acquisition by Scepter Pharmaceuticals
7:28 PM

1.2.2 Acquisition by Scepter

Pharmaceuticals
Striking a Deal with Scepter
In early 2014, Scepter purchased ATH with (1) an initial cash payment of $120 million to
existing shareholders (the venture capital investors and equity holding managers) plus (2) a
pro-rated “earn-out” contract that would pay an additional $230 million to executives who
stayed with the business if specific goals were hit. An earn-out is a contractual provision that
guarantees additional compensation for the sellers of a business if specific goals are hit.
Note: You can access a glossary of key terms on the sidebar at left at any time during the
course.
Meanwhile, the venture capital firms that had initially funded ATH now exited the scene with a
handsome profit.

Table A: Structure of Earn-Out Payments

Sales Goals Bonus Earnings Goals Bonus
2016 results $82 million $20 million $11 million $20 million

In addition to the sales- and earnings-related bonuses, Scepter agreed to pay ATH executives
an additional $35 million if the Food and Drug Administration (FDA) approved their new
products currently under development and an additional $45 million if an independent study
determined that ATH’s product was superior to other existing technologies in the market.
Under these terms, the 10 equity-holding managers who chose to stay could receive between $2
million and $10 million in additional payouts. (Recall that these early employees were
originally granted equity in lieu of fully competitive salaries.)

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7:38 PM

As described in the video, the Organizational Process Model illustrates the process by which all
businesses create value.

ATH Financial Performance, 2010–2014
7:53 PM

ATH Financial Performance, 2010–2014

To place the earn-out structure in its full context, let’s examine ATH’s financial performance up until
the time of the acquisition. As you study the numbers in Table B, consider the following questions:
 What was the company’s revenue growth trajectory during this time frame? Going
forward, what will the revenue growth rate need to be in order to hit the earn-out
goals?
 What happened to costs—especially sales/marketing and R&D—as their sales grew?
What do these costs represent as a percent of sales? How has that changed over time?
 Is net income going in the right direction? What needs to change to get back into the
black? What sort of growth rate is expected in order to hit the earn-out goals?
 How does cash flow look? Where do you think the company was spending its cash?

Table B: Financial Performance, 2010–2013 (USD)

2010 2011 2012 2013
Net sales 9,477 354,357 1,683,852 5,377,135
Gross margin -275,042 -687,870 -1,147,871 337,394
Marketing and sales 37,658 385,937 1,594,771 2,964,603
Research and development 1,008,723 1,716,427 2,826,919 4,283,553
Net income (loss) -1,560,573 -3,999,741 -7,057,232 -8,828,983
Cash and short-term investments 1,300,131 7,643,286 10,559,767 2,341,329
Other current assets 166,580 838,730 1,569,850 2,280,068
Net fixed assets 613,411 1,698,383 2,149,032 2,522,679
Total assets 2,425,108 10,557,350 14,838,167 7,754,700
Long-term debt - - - -
Common stock 4,744,580 16,080,724 26,492,782 26,492,781
Retained earnings -2,569,987 -6,569,728 -13,626,958 -22,455,942
Headcount 17 41 65 95

Key Takeaways
As you may have observed, ATH’s financial performance was mixed during this time frame. Sales
have increased but are still relatively modest. Gross margin is anemic at 5.6%. Big investments in
sales/marketing and R&D have led to very large losses (a loss of almost $9 million on sales of $5
million).
If you are interested in reading a more detailed financial analysis of ATH’s financial performance
during these critical early years, we have provided one here.


Growth Trajectory:
8:38 PM

Growth Trajectory: ATH’s situation seems precarious. Sales revenue growth quadrupled from 2011
to 2012, but it only doubled between 2012 and 2013—so it seems that during that time period,
ATH’s growth was slowing. Moving forward, in order to hit the earn-out goals, ATH needs to
reverse this trend and more than double its growth rate.
Costs: Gross margin is too low to be sustainable. (Gross margin is the profit left over after the cost of
acquiring or manufacturing the products that a company sells during a period. It is used to cover
discretionary expenditures and generate net income.) The returns of sales and marketing costs
improved: In 2010, ATH essentially spent $4 in sales/marketing to earn $1 in revenue. By 2011 and
through 2012, this ratio was approximately $1 to $1, and by 2013, ATH earned almost $42 in
revenue for every $1 spent on sales and marketing. This is a major improvement, especially if the
business can sustain that trajectory.
Additionally, the trajectory for R&D expenses was strong. In 2010, expenses were roughly 100 times
revenue, but by 2013, they were down to about 80% of revenue. It is possible that this improvement
helped drive improvement in COGS as well.
Net Income: Net income was moving in the wrong direction, but there were signs that the curve was
flattening and that ATH could turn things around—for example, the business finally produced a
positive gross margin in 2013, and as we have noted, marketing and sales expenses have decreased as
a percent of revenue. In other words, it cost ATH less money to manufacture their technology and
less money to convince customers to purchase it. If ATH can continue to increase the number of
products sold, earnings should improve.
However, this is no guarantee. ATH has dug itself into a deep hole and will need to constantly
improve unit economics to climb out. If the business can sustain this momentum and hit its $82
million revenue goal, it should hit all earnings goals.
Cash Flow: Cash flow was inconsistent during this time, primarily because most of the cash was
coming from investors. ATH appeared to be spending much of its cash on R&D and headcount at
this time.


Pros
1. ATH earned almost $42 in revenue for every $1 spent on sales and marketing. This is a
major improvement, especially if the business can sustain that trajectory.

2.

Cons
ATH’s growth was slowing. Moving forward, in order to hit the earn-out goals, ATH needs to
reverse this trend and more than double its growth rate.

1.

Turning Around the Bottom Line
9:02 PM

Turning Around the Bottom Line

In addition to the unexpected financial losses ATH incurred, the competitiveness study Scepter
commissioned as part of the earn-out revealed a European competitor that could threaten ATH’s
position. As a result, this portion of the earn-out ($45 million) was not paid.
In order to meet the requirements for the earn-out payments related to sales growth and profit, ATH
needed to find a way to turn the bottom line around moving into 2016.
As we begin thinking about how to improve the bottom line, let’s examine how ATH fared
financially in the years following Scepter’s acquisition.
Please review Table C and consider the following questions:
 Which growth trajectories have remained similar and which have changed?
 How does the company appear to be funding its operations?

Table C: Financial Performance, 2010–2015 (USD)

(All numbers are in thousands, except headcount)
2010 2011 2012 2013 2014 2015
Net sales 9 354 1,684 5,377 12,641 23,349
Gross margin (275) (688) (1,148) 338 (774) 3,288
Marketing and sales 38 386 1,595 2,965 5,404 12,666
Research and development 1,009 1,716 2,827 4,284 8,299 13,342
Net income (loss) (1,561) (4,000) (7,057) (8,829) (18,114) (30,525)
Cash and short-term investments 1,300 7,643 10,560 2,341 (545) (546)
Other current assets 167 839 1,570 2,280 9,123 11,291
Net fixed assets 613 1,698 2,149 2,523 7,576 13,030
Total assets 2,425 10,557 14,839 7,755 16,509 25,236
Long-term debt - - - - 24,046 61,758
Common stock 4,745 16,081 26,493 26,493 26,493 26,493
Retained earnings (2,570) (6,570) (13,627) (22,456) (40,570) (71,096)
Headcount 17 41 65 95 221 252

As you may have observed, the growth trajectory for net sales remains similar to 2014, although the
speed of growth decreased slightly. This means that ATH will need to increase growth dramatically
—multiplying their previous year’s sales by a factor of 4—to hit the 2016 revenue goal (and achieve
the first earn-out payment).
Profitability is terrible, with a loss of more than $30 million. This is because gross margin is still far
too low, at only 13% of revenue. Gross margin is equal to sales minus the cost of production. This is
the amount of profit left over to cover period expenses and profit.

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otice also that marketing and sales, as well as R&D costs, have continued to grow at roughly the
same rate as they were in 2014. ATH needs to slow the rate of growth for both of these cost
categories to hit its next year’s earnings goal.
Additionally, ATH no longer relies on investors to fund operations—the business has begun
borrowing money from its parent to fund operations (money that it will eventually need to repay).


Critical,Performance,Variables

Other common examples of diagnostic control systems include balanced scorecards, expense center
budgets, project monitoring systems, brand revenue systems, market share monitoring systems,
human resource systems, and cost-accounting systems.
Now, imagine that you are Dr. Casper. For your upcoming town hall meeting with your employees,
you need to draft an action plan communicating your priorities for the next year. Drawing on your
analysis of the earn-out structure and a careful evaluation of the company’s financial performance,
which of these demands would you prioritize to help the business improve the bottom line for 2016
(the first year of revenue and profit earn-out goals)?
Select only one option.
Growth (revenue, market share, recruiting, increasing number of new customers and sizes of
customer purchases)
Profit and Long-Term Sustainability (gross margin, staff training and development, new product
R&D)
Control (process standardization and efficiencies, cost management, product quality monitoring)


Push to Profitability: 2016
9:47 PM

1.3.1 Push to Profitability: 2016

Reconsidering Growth at All Costs for ATH
Lesson Time Estimate: 80 minutes. Most participants spend
between 55 and 105 minutes on this lesson.
By 2016, Dr. Casper and the team at ATH were facing a large and unexpected loss. They had
discovered that focusing on growth alone would not bring them the early successes they
desired. To hit Scepter’s earn-out goals, they would need to achieve profitable growth.
Focusing on profitability so early in a startup’s trajectory runs contrary to today’s management
thinking, especially in Silicon Valley. However, many companies, both there and elsewhere,
are being forced to reverse their views.
Investors who once heavily subsidized tech startups are now mandating that these young
enterprises aim for financial sustainability much sooner. These investors once believed that if
they could help businesses that were building promising goods and services grow rapidly,
profits would follow—the early losses would eventually pay for themselves. Instead, many
such businesses have found themselves bleeding money, with no profitability in sight. For
instance, ride-hailing companies such as Uber and Lyft had less than stellar IPOs (initial public
offerings) because of poor profitability. Now, inside many startups, austerity is beginning to
replace extravagance. Cash is something to be managed with care rather than spent with
abandon.

One of ATH’s largest expenses—which may impede its ability to hit its profit target and
related bonus—is R&D. As noted in a previous video, under American accounting rules, R&D
must be expensed as it is incurred. If you were Dr. Casper, would you scale back R&D to hit
the 2016 profit target?
Yes or no?
Yes
No
Please explain your choice. If you would not cut back on R&D, what alternative expense
categories would you target?
Response:
Results
o 69.89999999999999 percent selected Yes
o 30.100000000000005 percent selected No
o 69.89999999999999 percent selected Yes
o 30.100000000000005 percent selected No
-3-2-1123-1169.9%Yes30.1%No
93 of 350 participants have responded. You may return at any time for the latest results.
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Reining in Spending
ATH chose to cut back on R&D spending in 2016, as illustrated in the table shown here. Even
though sales and marketing costs continued to grow, a dramatic increase in sales coupled with
those R&D cuts improved net income considerably. ATH is finally funding operations with its
own proceeds, and the business has begun to pay down some of the debt to its parent.

Table D: Financial Performance, 2010–2016 (USD)

(All numbers in thousands, except headcount.)
2010 2011 2012 2013 2014 2015 2016
Net sales 9 354 1,684 5,377 12,641 23,349 95,831
Gross margin (275) (688) (1,148) 338 (774) 3,288 57,896
Marketing and sales 38 386 1,595 2,965 5,404 12,666 21,308
Research and 1,009 1,716 2,827 4,284 8,299 13,342 10,474
development
Net income (loss) (1,561) (4,000) (7,057) (8,829) (18,114) (30,525) 13,813
Cash and short-term 1,300 7,643 10,560 2,341 (545) (546) (1,778)
investments
Other current assets 167 839 1,570 2,280 9,123 11,291 26,107
Net fixed assets 613 1,698 2,149 2,523 7,576 13,030 10,568
Total assets 2,425 10,557 14,839 7,755 16,509 25,236 35,048
Long-term debt - - - - 24,046 61,758 52,744
Common stock 4,745 16,081 26,493 26,493 26,493 26,493 26,493
Retained earnings (2,570) (6,570) (13,627) (22,456) (40,570) (71,096) (57,283)
Headcount 17 41 65 95 221 252 356

Here is Dr. Casper on ATH’s decision to cut back on R&D and the other steps he took to
achieve profitability—and the surprising fallout from those choices.

There is one thing fundamental wrong in this Organizational. After acquisition, Vision or Goals
for this organization shifted from building reliable and advance medical device to how to hit
the earning goals so that the investors can get richer and throw some peanuts to employees. I
100% blame leadership on their current position and lack of processes.

1.3.2 Refocus on Process: 2017–2018
10:51 PM

1.3.2 Refocus on Process: 2017–2018

Installing Controls at ATH
Dr. Casper and the management team at ATH took three major steps to turn things around in
the wake of the FDA investigation:
1. They developed a vision and beliefs system.
2. They introduced new performance measures that encouraged employees to focus
on product innovation, quality, and customer satisfaction.
3. They modified their incentive program to link bonuses to these new, non-
financial measures.
These non-financial measures reflected the underlying processes that John Frost believed drove
performance at ATH. The four measures he introduced focused on the customer experience:
o Product Defects: number of units that do not meet customers' quality
requirements divided by the total number of patients treated
o Customer Contact Errors: number of order entry, shipping, and telephone
responsiveness errors divided by the total number of orders taken
o Backorders: total number of orders received for backordered product divided by
the total number of orders taken
o New Product Delays: the number of months beyond the intended date that new
product/enhancement release goals are not achieved
Please take a few minutes to examine the belief statement ATH executives wrote (Figure A)
and the bonus scheme they developed (Figure B).

Figure A
VISION AND BELIEFS OF ATH TECHNOLOGIES

VISION
Our ultimate accountability is to our patients, who live better lives because we continually set
the standard for diagnostic excellence with our electronic imaging products.

BELIEFS
Customer Orientation
My job is to understand and satisfy my customer's needs.
Quality
The care of each patient depends on the quality of the products and services I deliver.
Performance
My work is important to the health of each patient. I strive to continually improve what I do
and I am recognized for how well I do it.
People
I am empowered, I communicate, and I share responsibility for my career development.
Investment in the Future
I am accountable to ensure appropriate resources are applied to meet customer needs.
Balance
I have support to balance my personal and professional life.
Alignment
Our success depends on my commitment to teamwork and to creating and maintaining
alignment.

Figure B
Access preceding image details
Two pie charts. The first pie chart shows the three components of the 2017 bonus program at
ATH Technologies. In 2017, these components were weighted as follows:
Component Weighting in 2017 Bonus Program
Income before taxes 16%
Department performance 6%
Income before taxes as a percent of sales 8%
In 2018, ATH redesigned its bonus program to reflect the new non-financial measures
introduced. Managers eliminated the income before taxes as a percent of sales component from
the bonus program and replaced it with customer-focused quality measures. In the 2018 bonus
program, the three components were weighted as follows:
Component Weighting in 2018 Bonus Program
Income before taxes 14%
Department performance 6%
Customer-focused quality measures 10%

1.3.3 New Management: 2019–2020
11:27 PM

1.3.3 New Management: 2019–2020

Departure of the ATH Founders
Thanks to their new emphasis on processes and control, the management team at ATH was able
to turn performance around and achieve their earn-out goals. What would that achievement
mean for Dr. Casper and John Frost and for the future of the business? Let’s learn what
unfolded next.

01:58
01:58

Considering Janet Isabella’s Changes

Let’s examine how the changes Janet made impacted ATH’s financial performance in 2019 and
2020. As you review these numbers, consider what ATH could have done to protect itself from
declining sales.

Table G: Financial Performance, 2013–2020 (USD)
(All numbers in thousands, except headcount)
2013 2014 2015 2016 2017 2018 2019 2020
Net sales 5,377 12,641 23,349 95,831 140,080 196,492 195,354 117,105
Gross margin 338 (774) 3,288 57,896 88,600 122,795 115,536 68,055
Marketing 2,965 5,404 12,666 21,308 33,188 37,491 35,208 33,485
and sales
Research and 4,284 8,299 13,342 10,474 19,052 20,580 23,544 16,718
development
Net income (8,829) (18,114) (30,525) 13,813 32,162 44,611 12,061 (2,406)
(loss)
Cash and 2,341 (545) (546) (1,778) 5,156 12,526 141,276 593
short-term
investments
Other current 2,280 9,123 11,291 26,107 39,829 51,987 48,308 23,200
assets
Net fixed 2,523 7,576 13,030 10,568 16,351 14,110 11,606 2,471
assets
Goodwill and n/a n/a n/a n/a n/a n/a 186,321 171,748
trademarks
Total assets 7,755 16,509 25,236 35,048 61,576 79,630 391,989 200,249
Long-term - 24,046 61,758 52,744 41,266 - 128,700 (10,819)
debt
Common 26,493 26,493 26,493 26,493 26,493 30,752 228,141 242,041
stock
Retained (22,456) (40,570) (71,096) (57,283) (25,213) 11,418 1,307 (29,299)
earnings
Headcount 95 221 252 356 619 636 670 289

Net sales dropped significantly during these years. Gross margin remained the same as a
percent of sales. ATH cut costs in both marketing/sales and R&D to try to save money;
however, net income was still negative.
You may also have noticed that ATH was no longer funding itself primarily from sales
proceeds. The business issued a lot of new stock while assuming considerable debt.
The reason for the dramatic drop in revenue in 2019 and 2020 was the actions of the competitor
in Europe that had challenged ATH’s market position at the time of the acquisition (remember
the lost earn-out payment for technical superiority?). While ATH managers had been focusing
on executing their existing strategy and pushing their products out the door as quickly as
possible, the competitor in Europe had been investing in new products that customers found
superior.
What is one action ATH might have taken to keep sales strong while still maintaining a strong
focus on customers and processes?
Your Reflection:

Saturday, May 22, 2021
12:44 AM

1.4.1 Balancing Short-Term Results

Against Long-Term Capabilities and
Growth Opportunities
Understanding Other Organizational Tensions
The tension between growth, profit, and control that you explored with ATH Technologies is
an example of perhaps the most central tension facing businesses as they implement strategy.
However, there are several other tensions that are important to consider. These include tensions
between achieving short-term results and investing in future growth and capabilities, pursuing
opportunities and maximizing attention, and overcoming the organizational barriers that hold
people back from their potential.
In this lesson, we will introduce and examine these tensions and preview the role that the levers
of control play in managing them.

Learning Objectives
 Describe three additional tensions businesses face when they implement
strategy:
 Balancing short-term results against long-term growth and
capabilities.
 Balancing limited attention with ever-expanding
opportunities.
 Balancing positive human motives with organizational blocks
that hold people back from their potential.
 Illustrate and analyze how these tensions affect your day-to-day work.
 Explain the role that the levers of control play in managing these tensions.
Lesson Time Estimate: 80 minutes. Most participants spend between 60 and 85 minutes
on this lesson.

Let’s begin with another tension that figured heavily in the challenges facing ATH—the
delicate balance between delivering results in the short term while positioning the business for
long-term success.

WHAT SHORT-TERM RESULTS—FINANCIAL AND OTHERWISE—DID ATH TECHNOLOGIES
NEED TO FULFILL TO MEET THE EARN-OUT GOALS OUTLINED BY SCEPTER?
WHAT SPECIFIC LONG-TERM CAPABILITIES WERE COMPROMISED AS ATH ATTEMPTED TO
HIT THOSE SHORT-TERM GOALS?

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01:51
01:51

Navigating the Tension Between Short-Term

Results and Long-Term Capabilities at BD
Now that we have studied ATH, let’s hear from the executive of another firm who deals with
this tension on a day-to-day basis. Here is Tom Polen, CEO of the medical technology
organization Becton, Dickinson & Company (known as BD). He will describe how his
company navigates the tension between short-term results and long-term innovation by setting
specific non-financial goals designed to position BD for long-term growth—financial and
otherwise. BD refers to these goals as their Key Driver Goals, or KDGs.

04:01
04:01

Tom Polen notes that very few of BD’s KDGs will have an impact on revenue in the short
term. Think of an instance where it would be in a business’s best interest to shift more—if not
all—of its focus toward delivering strong financial results in the upcoming year, even if they
must do so at the partial expense of investing in certain long-term capabilities. Please explain in
a few sentences.

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This past year has provided a prime example of an instance where companies might need to
shift more of its focus towards delivering strong financial results in the upcoming year with
the global pandemic. Many companies were affected by the COVID-19 pandemic and some
were even struggling to make rent and pay their employees. These companies were forced to
put all of their efforts into driving profits, rather than investing in long-term capabilities.
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Analysis: Adjusting Focus Based on Strategy
BD can maintain such a heavy focus on long-term capabilities because of the value investors in
this industry place on revenue growth—rather than, for example, gross margin. BD can drive
revenue growth by prioritizing innovation and R&D to attract new customers and build market
share.
Of course, this relationship—between revenue growth and stock market appreciation—will not
be true for every company. It assumes that gross margins and profitability are positive and meet
or exceed industry averages. If margins are unacceptably low, managers will be forced to focus
on restoring profitability before pushing for growth. (In fact, attempting to grow market share
in a business that is fundamentally unprofitable is a serious strategic error, since more revenue
will lead to greater losses.)
Here is Tom on the central role of revenue growth in healthcare—and on the steps BD takes to
maintain healthy margins even as it invests heavily in long-term development goals.

01:56
01:56

Identify one way in which the tension between short-term goals and long-term capabilities has
been evident at your business. Please remember that your response will be shared.

Video Transcript : A Ratio for Maximizing Your Scarce

Time and Attention
1:06 AM
 PROFESSOR SIMONS: In addition
to navigating competing demands
 between short- and
long-term success,
 business managers
must also figure out
 how to allocate their attention
across all the opportunities
 that continually
arise around them.
 Of course, if there were no
limitations on our time--
 if we had all the
time in the world--
 there is nothing
that we couldn't do
 or a problem that
we couldn't solve.
 But the constraint, of
course, is that there's
 only so many hours in the day.
 And we're being asked to do so
many things simultaneously--
 introduce new products,
branch into new areas,
 manage alliances,
hire new people.
 We are constantly
being pulled in so many
 different directions.
 Because of this tension, I
want to introduce the concept
 of return on management.
 This will be a fundamental
pillar of our course.
 Most of us are familiar
with financial ratios,
 like return on sales or
return on capital employed.
 I want to argue that
for a manager trying
 to make a difference in
his or her organization,
 the critical variable--
 the critical ratio-- is how you
maximize your own scarce time
 and attention in a way that
provides maximum payback
 for your organization.
 Here is Tom Polen
again on how he
 handles this tension between
too many opportunities and too
 little management time
and attention at BD.
 TOM POLEN: When you're
in any large company,
 there's a million
things you can do,
 and there's a million things
that people want to do,
 but there's only a few
things that you really
 have to do that at the end
of the day you look back on
 and you say, if we
don't get these done,
 we're not going to be on
track to achieving our goal,
 or something bad
could happen, which
 is going to prevent us
from achieving that goal.
 And so we sit down
as a leadership team
 and that's the
discussion that we have.
 And we try to get rid of all
of the nice to-do's and things
 that we could do and focus the
organization on the few things
 that we have to do.
 And that's a critical process.
 I can't speak more highly
around the importance
 of spending the time to have
that discussion as a leadership
 team and then having
those discussions
 within each of the
management teams
 below around what are the
things that you have to do,
 and what are the things
that you're not going to do?
 There's actually a
great Harvard IdeaCast
 I heard recently,
which was on initiative
 overload in organizations.
 And they were talking about--
 she was talking about how
to move up in organizations,
 people have to start
their own initiatives.
 And managers at all
level, they get in a job,
 and they say, OK, I need
to do well in this job,
 and therefore they
can't just continue
 to do what the last
person did, and so they
 need to start something
new, a new initiative.
 And you start stacking up that
culture in an organization
 around everyone doing
their own initiative,
 not necessarily focused on
what the organization has to do
 but what they think they need
to do for their department,
 and you end up with hundreds and
hundreds of initiatives going
 on, which can
detract from actually
 achieving the few things
that you've got to do.

609d8e6f29c5fc0b825a1db4/e9d0032d-5275-4dec-a4ae-5974f10c1b88/1071/908/#/syllabus>

Video Transcript : Techniques for Maximizing Return on
Management
1:23 AM

 PROFESSOR SIMONS: The
systems and frameworks
 we will introduce
in this course will
 help you maximize your
return on management.
 You can imagine this
concept as a ratio--
 the amount of productive
energy released
 divided by the amount of
management time invested.
 Like any productivity ratio,
what we're trying to do
 is maximize the numerator while
minimizing the denominator.
 You can achieve
this in two ways,
 first by determining how to best
leverage your scarce attention
 on the most important
initiatives,
 and second by identifying where
you should not spend your time.
 Remember what we said in lesson
one about effective strategy
 execution being a
series of tough choices.
 This is true here as well.
 The choices that you make
about where to direct your time
 and attention are some of
the most important choices
 you will make.
 Now, let's learn
about one way in which
 Tom Polen and his
executive team improve
 BD's return on management
through their use
 of a diagnostic control system--
 in this case, the Key Driver
Goals introduced earlier.
 These goals serve as a framework
that helps top management
 decide which new business
opportunities to pay attention
 to.
 They then motivate employees
to focus their attention
 on these specific opportunities
by aligning their incentives
 and reward programs to
these Key Driver Goals.
 TOM POLEN: It's a natural
habit of any organization
 to proliferate initiatives.
 And it's something that we
struggle with constantly.
 We actually have a
lot of discussion
 within our leadership
team right now
 of prioritizing the few
things for the organization
 and communicating out these are
the few big initiatives that we
 need to make happen.
 And we do that in
our Key Driver Goals.
 But there's some
other parts that
 are beyond our Key
Driver Goals as well,
 things related to IT, etc.
 And so communicating those to
the organization is important.
 Then what you celebrate in
your organization is important.
 I once heard a saying,
"Get not what you measure
 but what you celebrate."
 And I like that one even more
so than what you measure.
 I think they're both important.
 But celebration's
a lot more fun.
 And actually, it's more
powerful at the end of the day.
 And so we've connected, for
example, our CEO awards,
 which is a big deal at BD
to be a CEO award winner,
 every year we give that to
about a dozen associates
 across the organization.
 And we're aligning that around
our goals to grow the company,
 simplify the company, and
empower the organization, which
 are the key strategies,
which are eight Key Driver
 Goals aligned to achieve.
 And we're really focused on
celebrating and recognizing
 those associates
and those teams who
 are contributing to
that specific vision
 and to those
specific objectives.
 If there's some things that
are happening on the side that
 aren't aligned with those
goals, that's not necessarily
 what we're putting
out programs to award,
 and recognize, and celebrate
within the organization.
 And so even our system
for incentives--
 we've started to change our
long-term incentive program,
 how we give out stock comp.
 So we're focused on driving
revenue growth, as an example.
 We're proposing to
our board of directors
 right now to include revenue
growth in our long-term stock
 incentive plan.
 It's not been there for
the last couple decades.
 It's something that
we're adding in.
 How we think about our
annual bonus plan--
 we're integrating
that into how it
 gets aligned to specifically
achieving those few goals that
 are critical for us to achieve.
 Aligning all of your different
systems and incentives
 is something that is
also extremely important
 to focus on.
 How are your processes, your
incentive systems and rewards,
 your organizational model--
 how are they all focusing for
you to achieve those goals?


Video Transcript : How Other Business Leaders
Maximize Their Scarce Time and Attention
1:36 AM

How Other Business Leaders Maximize

Their Scarce Time and Attention
Let’s find out how some other business leaders have maximized their own return on
management. We will spend time with each of these leaders throughout the course. First
up is Denise Montgomery, who oversees a team of consultants selling Mary Kay
Cosmetics. She will explain why she encourages her consultants to prioritize booking
new appointments ahead of all other activities—and how that same principle informs her
own time management decisions.
Notice how Denise maximizes her return on management in a manner that aligns with
the nature of the business where she works—one that has built a reputation on high-
quality beauty products that customers come to love and to which they remain loyal.






 DENISE MONTGOMERY: I'm
Denise Wilson Montgomery,
 and I'm a Senior Sales Director
with Mary Kay Cosmetics.
 I always say the single
most important thing
 in this business is booking.
 Booking new
customers, booking new
 faces, making
those appointments.
 Because that's
where it all begins
 for us with that
complimentary facial--
 when they try the
product for free,
 and they fall in love with
whatever they fall in love
 with, that's where it begins.
 So when we put those
appointments on the books,
 that's the key.
 So we share with the consultants
and we train and educate
 around what's priority--
 what is most important.
 So we know first,
second, and third
 what to do in addition
to all else that we do,
 we know what's critical.
 In terms of spending my time,
I run my personal business
 because I have my personal
goals that I'm going to achieve.
 And so I take care
of my business first.
 And then I help others with
their business and their goals.
 I really prioritize
my business, my goals,
 because at the end
of the day, I have
 to take care of not
just my household,
 but I want to achieve my
goals by the end of the month,
 by the end of the quarter, etc.
 And usually, when I'm holding
shows, I'm meeting people,
 I'm getting referrals,
I'm selling the product,
 and, of course, I'm
meeting more team members.
 So I'm always
feeding the pipeline.
 And then, of course,
taking care of the rest
 of my unit assisting
in whatever way.
 Sometimes one of the
best things that I
 can do for them is have
them come and watch me work.

How Other Business Leaders Maximize

Their Scarce Time and Attention


Video Transcript : calendar management plays in helps in
productivity
1:39 AM
Next, Adidas CEO Kasper Rorsted will share with us the role that meticulous calendar management
plays in helping to determine where—literally—his time and attention will be most productively
spent overseeing the business.

am I spending
 my time on the areas
that are strategically
 relevant for the company?
 There are three elements
that are strategic to us
 from a growth standpoint--
 China, U.S., and online.
 And then I look upon
it and say, am I
 actually allocating the
vast majority of my time
 to China, U.S., and online?
 And then I do inventory, or
what I call calendar management,
 and go back and say, am I
spending the vast majority
 of the time on this?
 And then, of course, I have
a number of other management
 disciplines.
 But I force myself back
to North America, China,
 and online all the
time because that's
 where I can have
the highest value
 contribution for our company.


Video Transcript1.4.3 Unlocking Human Potential:
Motivation versus Blockers
1:46 AM
1.4.3 Unlocking Human Potential:

Motivation versus Blockers
Identifying Our Personal Theories of
Motivation
Management is often described as the act of getting things done through others.
This means that you will not be able to achieve a high return on
management unless you enable employees to deliver their best work. This is often
easier said than done, because a number of organizational blocks often get in the
way of people’s natural motivations to perform their best.
Recall an instance where a coworker or direct report failed to perform to the best of
his or her ability. In a sentence or two, explain how this individual fell short of
expectations.
What explanation would you provide for his or her behavior?
(Your reflection will not be shared with your peers.)

609d8e6f29c5fc0b825a1db4/8db8ba56-046d-487f-815e-c79d72695458/1071/908/#/syllabus>

 PROFESSOR SIMONS: When
we set goals for people
 and evaluate
subordinates, we all
 have some theory of motivation
in the back of our minds.
 But this is not something
we openly discuss.
 People are not
explicit about what
 they believe
motivates individuals
 in their organization
to work hard and excel.
 What is your theory
of motivation?
 In the academic
literature, there
 are competing views
on this topic.
 At one extreme, you can
look at the economists'
 view of motivation.
 In their models, people are
driven solely by incentives.
 Economists believe that people
dislike work and will avoid it
 as much as possible through
what they call shirking.
 Moreover, they believe that
people will bias, distort,
 and hide information to
maximize their personal utility.
 My own experience suggests
a theory of motivation that
 is quite different than this.
 Over the years, I've worked
with a lot of great companies,
 and I've discovered that
managers in these companies
 devote an enormous amount
of energy and effort
 to attract, retain, and
motivate really good people.
 So as we work through
this course together,
 I want to assume
the best of people.
 I want to assume that
in your organization,
 you've tried to attract
and hire good people--
 people who want
to contribute, who
 want to do the right thing,
who are achievement oriented,
 and who like to innovate.
 The problem, unfortunately,
is that organizations often
 create blocks that
hold people back
 from achieving their potential.
 So part of our
job in this course
 will be to learn how to
eliminate these blockages so
 that the people who work
in your organization
 can achieve their
full potential


Video Transcript : Organizational Blocks at ATH
Technologies
1:53 AM
Organizational Blocks at ATH Technologies

In the case of ATH Technologies, we see how pressures to hit short-term targets from
Scepter’s earn-out caused good people to disregard their innate desire to do the right
thing and stifled their desire to innovate.
Here, one ATH employee describes his experience.


 ATH EMPLOYEE: When
I joined R&D at ATH,
 I was so excited to have
the chance to work directly
 on a groundbreaking technology.
 I'm an engineer by training,
and for most of my career,
 I had been working on
incremental improvements
 to various types of
medical devices--
 small tweaks to popular
x-ray systems, for example.
 Getting to work
on a product that
 would move the
needle on imaging was
 such an intriguing
challenge for me.
 NARRATOR: These challenges
motivated ATH employees
 and management-- at
least in the early days--
 gave them the time
and the resources
 they needed to experiment and
build exciting new products.
 The directive was
clear: Employees
 should do whatever they
needed to do to make
 the best possible product.
 ATH EMPLOYEE: I think my
co-workers would tell you
 that I'm a stickler
for detail and that I
 care a great deal
about patient safety.
 When I was a kid, there was
a tragic death in my family
 from a botched stress test,
so it's personal for me.
 If anything, co-workers tend to
describe me as overly cautious.
 We're sending
electrical impulses
 through the human body.
 It's not something
you play with lightly.
 NARRATOR: But once
ATH was acquired
 by Scepter, employees in R&D
and elsewhere felt a shift.
 ATH EMPLOYEE:
Before, sales targets
 were not something we thought
about in our R&D department.
 That was for the sales team.
 But once the founders
had those earn-out goals,
 we got the message
loud and clear
 that those revenue
and profit numbers
 were everyone's concern.
 And that would have been OK,
but they were so aggressive.
 If we failed to achieve them,
we were all accountable.
 As a result, our R&D budget
was cut dramatically.
 There would be no more
spending on new products,
 at least in the short term.
 Everyone had to focus on
getting the existing product out
 to customers so that we
could book the revenue.
 So much for getting to innovate
and move the needle as I
 hoped to when I joined.
 So we said, OK, what
can we do to help?
 We worked hard on
the final features
 of our existing product,
but looked the other way
 when boxes were pushed out
the door a little early.
 We knew that we could have spent
more time on quality checks,
 but we told ourselves
that what we were doing
 wouldn't cause any harm.
 We convinced ourselves that
the products were good enough
 and that we could
make any needed
 adjustments next quarter.
 But the truth was that we cut
corners when we shouldn't have.
 I'm not trying to make
excuses, but in hindsight, I
 wish that management had given
us clear guidelines about where
 we should not cut back
costs because there
 are a lot of gray areas when
it comes to this type of work.
 On top of it all, we felt
that top managers didn't
 want to hear any bad news.
 Was Hawaii fun?
 Sure.
 But I would have given
that trip up in a heartbeat
 if it meant we
could have avoided
 all the trouble with the FDA.


Video Transcript : summary of common employee
motivations and the organizational blocks that hinder
them
2:01 AM

Here is a summary of common employee motivations and the organizational blocks that
hinder them.
Motive Corresponding Organizational Block
People want to contribute. They Businesses make it difficult for employees to
have an innate desire to make a understand how they can make a difference.
difference in the world, and the Management fails to communicate the business’s
organization can be a vehicle for strategy and direction to employees. They are
fulfilling that need. unsure of the larger purpose and mission of the
business and don’t recognize how their role fits in
to that purpose.
People generally choose to do Employees face pressure to hit performance goals,
right. They recognize the causing them to bend the rules or hide information.
difference between right and Lucrative bonuses and access to company assets
wrong. can tempt employees to cross lines and betray their
sense of right and wrong. Internal controls and
safeguards are not in place to guard against
temptation, and boundaries around unethical
behavior are unclear.
People strive to achieve. Many Employees lack the resources necessary to
work to capture extrinsic rewards complete their tasks. Or, they face so many
such as money, promotions, and competing demands that they are unable to focus on
praise. People also possess an any single objective with enough intensity to
innate drive to feel a sense of achieve the desired outcomes. Their productive
satisfaction from personal energy becomes scattered and diffused, hindering
achievement. efforts to achieve strategic goals.
People like to innovate. The urge Employees fail to innovate because they lack the
to experiment is a powerful necessary resources or because they are afraid to
human instinct that has allowed us risk challenging the status quo. They worry that if
to continually improve our they voice opinions that seem novel or radical,
standard of living. superiors and colleagues will not support them.


 PROFESSOR SIMONS:
Were the people
 who cut corners
at ATH bad people?
 No, of course not.
 They were just like you or me.
 They had aggressive
goals and incentives,
 and they were under enormous
performance pressure
 to make the numbers.
 And not surprisingly,
this created temptation
 to cut corners to move product
out the door as quickly
 as possible.
 Employees will not generally
act on temptation, however,
 unless they can
rationalize their behavior.
 And there's any number
of ways that all of us
 might rationalize bad behavior.
 It might be my boss
would support me
 if she knew what I was doing.
 I'll fix it next period.
 Everyone does it.
 No one's going to get hurt.
 In the ATH case, employees
likely rationalized
 that no one would be hurt
by cutting corners a bit,
 and what they were doing was
for the good of the company.
 Recognizing the danger of
rationalizing bad behavior,
 we must be very clear
in our own organizations
 that we have safeguards
to limit temptation
 to cut corners in a way that
could damage our franchise.
 What else do large organizations
do that hold people
 back from their potential?
 To the extent that people
want to contribute,
 it's often surprising how
many people in organizations
 are unsure of how their
particular job advances
 the mission and strategy
of the organization.
 They're just not sure of the
contribution they're making
 in moving the business forward.
 In terms of wanting to
achieve, the problem here
 is that we often ask
people to do so many things
 simultaneously, it's
very difficult for them
 to focus on the small
number of critical tasks
 that really make a difference.
 In addition, people
are often not
 given the resources they
need to get the job done.
 When we talk about the desire
to innovate and be creative,
 this strikes right at
the heart of culture.
 What kind of an organization
are we working in?
 Is this an organization
where people are encouraged
 to speak their minds and
come forward with new ideas,
 or is this an organization
where no one dares
 say his or her
opinion until they've
 heard what the boss says?
 In the latter case,
it's very hard
 to have productive bottom
up information sharing,
 because people
are always afraid.
 No one wants to
stick their neck out.
 So when we add all
this up, we often
 find that we take great people--
 who want to contribute, do
right, achieve, and innovate--
 and then organizations create
blockages that hold people back
 from achieving their potential.
 So our job over the coming
modules of the course
 is to find ways of
eliminating these blockages
 and unleashing the potential
of all the great people
 in your organization.


Video Transcript : Eliminating Organizational Blocks at
Marriott
2:06 AM
Eliminating Organizational Blocks at

Marriott
Managers of the best organizations work to eliminate the blocks we have introduced and
unleash their employees’ full potential. During the course, we will explore how each of
the levers of control supports this process.
To close, let’s spend a few minutes with David Rodriguez, Global Chief HR Officer at
Marriott, and learn more about the premium that this hotel company places on nurturing
these human motives—specifically, people’s desire to contribute. Rodriguez was named
HR Executive of the Year in 2019 for—among other achievements—his successful
leadership while merging the distinctly different culture of the Starwood Hotel chain into
the people-centric culture at Marriott.


 [MUSIC PLAYING] DAVID RODRIGUEZ:
Hi, I'm David Rodriguez.
 I'm Global Chief HR Officer
for Marriott International.
 I started here back in 1998
and soon this president
 position back in 2006, and
it is the job of my dreams.
 It's a beautiful job.
 I'm an industrial
psychologist by training.
 And as part of that training, I
have a fair amount of training
 in quantitative analysis.
 I love to see the numbers,
and we do quite a few studies
 to understand the connection
between human resource
 practices and the
performance of the business.
 But as a psychologist, I also
have this insatiable need
 to get my own feel for things.
 And so I have a practice
that the general managers
 of our hotels,
most of them, know,
 which is it's hard
to schedule me.
 So when I come on
property, they'll
 usually structure some
activities for me.
 But they know that
I'm also going
 to want unstructured time.
 And what I do in that
unstructured time
 is do what a psychologist might.
 I just walk around
and ask people,
 "What's it like to work here?"
 And I'm looking
for three things.
 I'm looking for
signs that people
 feel this is an
environment where
 I have opportunity to
grow and to better my life
 and the life for my family.
 I look for signs that it's
more of a family atmosphere,
 that people feel that the
relationships that they're
 surrounded with are
constructive and supportive.
 And thirdly and
very importantly,
 I look for signs
that people feel
 that being connected
with Marriott
 is a way to be connected
with something bigger
 than themselves, to be
connected to purpose,
 to feel that it's helping
them leave behind footprints
 that are meaningful.
 Together, this notion of
promoting sense of opportunity,
 promoting community,
and promoting purpose
 is really our recipe for
promoting human well-being.
 And my experience is that when
our associates feel that way--
 in the hotels, by the
way, they do the best job
 of creating that environment--
those hotels tend
 to outperform others, and I
see it actually in our customer
 measures.
 In fact, in one study, what I
found was, in hotels, the more
 that our associates feel
that they work as a team,
 that they have strong,
caring relationships,
 very interestingly, in
customer surveys, our very best
 customers say, at
those hotels, they
 tend to feel better appreciated,
more part of the Marriott
 community, if you will.
 So again, promoting this
human well-being and purpose
 being a key indispensable
part of that,
 frankly, is part of the
secret sauce here at Marriott.

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Video Transcript :1.5.1 A Shared Vocabulary for
Strategy: The Four Ps
2:12 AM
1.5.1 A Shared Vocabulary for
Strategy: The Four Ps
Describing and Communicating Business
Strategy

609d8e6f29c5fc0b825a1db4/568ed48b-2f77-4cfd-9227-40110a7038dd/1071/908/#/syllabus>

Learning Objectives
 Differentiate between business strategy and corporate strategy.
 Explain why analyzing business strategy across four dimensions better
prepares an organization to execute its strategy.
 Understand the types of questions to ask and information to seek to identify
an organization’s business strategy for two of these dimensions: strategy as
position and strategy as perspective.


 PROFESSOR SIMONS: Before we
delve into strategy execution,
 it's important that we take
a step back to make sure
 that we're all on the same
page about what the word
 strategy means.
 Think back to ATH Technologies
and our first lesson.
 You've now spent some time
studying this business,
 but do you feel confident that
you can describe their strategy
 clearly?
 If no, that's understandable.
 ATH managers never took
the time to actually define
 their strategy.
 There was no talk of
customer value propositions
 or differentiation.
 Their actions were all
driven by the earn-out--
 by the output-based
financial measures.
 There was no emphasis
on the strategy itself.
 And I hope that you realize
that without a clear strategy,
 ATH could not build the control
systems they needed to execute
 that strategy effectively.
 It's not uncommon for a business
to lack a clear strategy.
 One of the major
reasons for this
 is that the word strategy is
used in very different ways
 without people realizing it.
 The result is that people
talk past each other,
 and then they wonder
why they didn't
 do a better job communicating
direction and achieving
 results.
 To solve this problem, the first
distinction we need to make
 is between corporate strategy
and business strategy.
 Corporate strategy is deciding
where, as a corporation,
 you want to allocate
your assets.
 What businesses do
you want to be in?
 This would be the problem
that a company like GE
 faces when it decides
it doesn't want
 to be in aircraft engines or
light bulbs or medical devices.
 Which of these markets
do we want to play in?
 That is a corporate
strategy decision.
 The second notion of strategy
is business strategy.
 This is asking within
our chosen markets,
 how do we compete to win?
 What is our value proposition?
 How do we differentiate
our products and services
 from those of our competitors?
 In this course,
our focus will be
 on the latter of these two
concepts: business strategy.
 Once you've decided what
markets you want to compete in,
 our task is to figure
out how to execute
 in a way that will allow you
to compete effectively and win
 in those markets.
 In this lesson, we will
introduce a framework
 that will provide
us with a shared
 vocabulary for analyzing and
controlling business strategy.
 I learned this
framework, what we
 will call the four
Ps of strategy,
 from my friend and mentor
Professor Henry Mintzberg.
 Each P-- strategy as
perspective, as position,
 as plans, as
patterns of action--
 serves as a driver for
one of the control systems
 we've introduced in
the previous lesson.


video Transcript : Strategy as Position
2:24 AM

1.5.2 Strategy as Position

Identifying a Value Proposition and
Differentiators
Perhaps your definition focused on describing the competitive position your
business has taken within the marketplace. This is the first of the four Ps: strategy
as position.
Position in a competitive market is always an important consideration, and it’s
often the first thing that comes to mind when we hear the word “strategy.”
However, in order to implement strategy effectively, businesses should also
analyze their strategies from three additional angles, aligned to the control systems
introduced in Lesson 1. In this lesson, we will uncover each of the four Ps by
analyzing the strategy of C3.ai, a business-to-business (B-to-B) software company
based in California that helps its customers design and deploy artificial intelligence
applications.
To get us started, let’s learn about the company’s value proposition from CEO Tom
Siebel. A value proposition is the mix of product and service attributes that a
business offers to customers in terms of price, product features, quality,
availability, image, buying experience, and after-sales warranty and service.
Differentiation is what sets a firm’s value proposition apart from competitors' and
answers the question, “Why will customers choose to buy from us as opposed to
our competitors?” Together, a business’s value proposition and its sources of
differentiation shape its strategy as position.
As Tom shares here, an important dimension of C3.ai’s value proposition is its
unique ability to develop artificial intelligence applications at a level of
sophistication that lies beyond the internal capabilities of its customers. These
applications address critical challenges for large enterprises in both the public and
private sectors. For example, Enel, a multinational energy company based in Italy,
is able to predict instances of fraud (such as electricity theft) and outages across
millions of its smart meters using C3.ai technology.
Note: This online case is based on a case developed by Professor Robert Simons
and Researcher George Gonzalez of the California Research Center (HBS Case
No. 119-004).

609d8e6f29c5fc0b825a1db4/f30859db-6023-4b3d-a45e-1615b595f85a/1071/908/#/syllabus>

 TOM SIEBEL: My
name is Tom Siebel,
 and I'm the Chief
Executive Officer of C3.ai.
 C3.ai is a software
company, and we
 have built a software suite
that enables our customers that
 are typically today large
multinational organizations,
 to design, develop,
provision, and operate
 large industrial, commercial,
and government scale AI
 applications.
 Applications of AI in the
commercial and industrial
 sector would include,
common applications--
 AI-based predictive maintenance,
stochastic optimization
 of the supply chain,
fraud detection,
 production optimization.
 And so these
applications are applied
 in industries like mining,
utilities, oil and gas,
 aerospace, manufacturing at
organizations like Royal Dutch
 Shell, Enel, ENGIE, 3M,
Department of the Air Force,
 Department of the
Army, what have you.
 The alternative to
using the C3.ai suite
 is to do it yourself.
 Now this has been very common in
the history in the information
 technology industry.
 In this period of the
last, say, 50 years,
 we've seen the transition
from mainframe computing,
 to minicomputing, to
personal computing;
 on the software side
from bespoke Fortran
 and COBOL programming, to
relational database systems,
 to enterprise
application software,
 to CRM, and then
to cloud computing.
 And when we introduced
these products to market,
 the competition really wasn't
Oracle, or Sperry, or RTI.
 The competition
was the IT manager,
 who was going to build his or
her own relational database
 system.
 And many companies attempted to
do this, and nobody succeeded.
 So we're seeing a
similar trend as it
 relates to industrial
and commercial AI.
 Nevertheless, the knee-jerk
reaction of the CIO
 is very frequently to take
his or her 30,000 programmers
 in Bangalore, or
wherever they may be,
 sometimes it's 3,000
people distributed
 across four continents, and
apply this to these people
 to attempt to build this
application themselves out
 of various open-source
components,
 and then other services that
might be provided by Google,
 or Microsoft, or AWS.
 These are extraordinarily
complex and expensive problems.
 I think GE spent a decade
and almost $7 billion
 on this GE digital project
before it collapsed.
 IBM might have, I think, $50
billion invested in this Watson
 project, and not much
has come of that.
 And so to our knowledge, no
one has ever succeeded at this.
 So the competition that
we have is companies that
 want to build it themselves.
 And virtually every
one of our customers--
 Royal Dutch Shell, Enel,
ENGIE, Caterpillar, 3M,
 the Department of the Army,
the United States Air Force,
 ConEd--
 everybody has attempted to build
this application themselves.
 They've failed at
it, and then they've
 come to us to
purchase the solution.

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Video transcript : Customer Selection at C3.ai
2:46 AM

Customer Selection at C3.ai

As we will learn throughout the lesson, much of C3.ai’s ability to solve unprecedented technological
challenges stems from several critical choices regarding strategy. For example, C3.ai ruthlessly
screens for only the best and brightest employees and allocates resources in a manner that supports
their ability to work out these solutions effectively.
Here is Chief Technology Officer Ed Abbo on another dimension of the business’s value proposition:
their extremely careful selection of customers.

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6023-4b3d-a45e-1615b595f85a/1071/908/#/syllabus>

In the burgeoning field of artificial intelligence, C3.ai is able to distinguish itself by partnering
closely with customers to understand their challenges and build tailored solutions that address them.
At this stage, C3.ai is essentially behaving as a consultant, and their customers are behaving as
clients. The services provided, however, run in both directions. For instance, C3.ai helps a client
solve an issue, but in the process, the customer provides C3.ai with the raw materials—the problem
at hand, the datasets themselves—that will allow C3.ai to develop a deep level of expertise around
crafting solutions in this space.
Once the solution has been battle-tested and refined for that customer, then—and only then—C3.ai
can scale the solution to similar customers within an industry. This is yet another reason that C3.ai’s
choice of its first customer within each industry is so crucial. If they can’t work with that initial
customer effectively to build strong solutions that can be easily and quickly implemented, they could
be closed off from doing business with an entire industry segment.

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Identifying Mission, Values, and Purpose
3:56 AM

Identifying Mission, Values, and Purpose

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9d98-405c-bc8f-81ca853427d8/1071/908/#/syllabus>

Translating Strategy into Measurable Goals

9:49 PM

Learning Objectives
 Understand the types of questions to ask and information to seek to identify
an organization’s business strategy within two remaining
dimensions: strategy as plans and strategy as patterns of action.
 Analyze an organization’s business strategy across each of the four
dimensions.
 Evaluate how effectively an organization has defined its strategy within
each of the four dimensions.

609d8e6f29c5fc0b825a1db4/3e296e19-785b-4e9b-be59-9f053d84806a/1071/908/#/>

 PROFESSOR SIMONS: So far, we've
studied how businesses define
 core values that provide
a guiding perspective
 for formulating strategy.
 And we've examined how, using
that perspective as a North
 Star, they choose to
position the business
 to compete and create value.
 The question that arises now
is what the company will do
 to realize its chosen position.
 This brings us back to
the third P of strategy:
 strategy as plans.
 Here, we will be looking
at the formal systems that
 set strategic goals,
determine action plans,
 and implement measures
to track progress.
 When we consider
strategy as plans,
 we focus on key initiatives
that are intended
 to drive the strategy forward.
 Embedded in those plans are
decisions about the allocation
 of resources, setting
key milestones,
 assigning accountability
for results,
 and building diagnostic
control systems
 to communicate
and track progress
 according to those plans.
 Let's now turn
back to Tom Siebel
 to learn how C3.ai
translates its strategy
 into measurable goals for
monitoring and follow up.


Strategic Planning and Measurement at C3.ai
10:04 PM

Strategic Planning and Measurement at C3.ai

As you may have noted, many startups refrain from formulating their strategies in terms
of plans, sometimes out of concern that imposing too much structure will inhibit the
flexibility necessary to get ahead during those critical first years. ATH Technologies is
an excellent example—but as you will recall, they also paid a steep price for this choice.
As we will learn from Tom Siebel, C3.ai took a much different approach to defining its
strategy in terms of plans—and consequently building robust diagnostic control systems
—from the get-go.


 TOM SIEBEL: We have a
fundamental management core
 value that if it's
important, you measure it.
 And as I believe Peter Drucker
said, "If you don't measure it,
 you can't improve it."
 And so everything that's
important to the business,
 we have a KPI and we measure it.
 For example, what could be
more important than customer
 satisfaction?
 And here we do anonymous
customer satisfaction surveys
 every quarter to see how we're
measuring up in our customer
 expectations, product
quality, documentation,
 ease of doing business,
support quality.
 To what extent is the customer
receiving the expected value
 from the products,
and in what ways
 can we improve our
business practices
 in engaging with customers?
 And so we measure it.
 We monitor it.
 We improve it.
 As it relates to, let's say, key
performance indicators related
 to financials, we have a
very rich financial planning
 and analysis model,
where every Sunday I
 receive a very detailed report
that shows the key performance
 indicators for the quarter and
for the year in terms of how
 we're tracking against
bookings, how we're tracking
 against revenue, how we're
tracking against expenses, how
 we're tracking against
headcount as it
 relates to our objectives.
 And where are the variances,
both positive and negative,
 so that in the
Monday staff meeting
 we can address them and
put together a plan?
 As it relates to
employee productivity,
 I, for example, receive a
report from virtually every--
 the entire executive
team receives
 a report on the status of every
customer engagement every week.
 And we review in
Monday staff meeting
 virtually every
customer engagement
 based upon any number
of metrics in terms
 of what's going on
here with the schedule,
 where are we ahead of
schedule, where are we
 behind of schedule, where
are the critical success
 factors, where are the problems
that might be emerging.
 We try to identify
problems well in advance.
 If there's a problem
on an account,
 we will know about it well
before the customer will.
 So we can take action to
fix it before the customer--
 so it doesn't happen.
 So we review the status of
every customer, every week.
 And as a result, and where
we see something slipping,
 we'll put whatever
actions we need
 to put into place to
mitigate the problem
 and make it go away.
 For many years,
I've had a practice
 where we have a very flat
management organization.
 We will always have a very
flat management organization.
 And people feel
free to communicate
 with whoever they need
to communicate with
 to get the job done.
 It's not necessary that
they talk to their manager,
 and their manager
talk to their manager.
 It's very fluid.
 All the doors are open,
and we communicate
 in a very open, candid,
and honest fashion.
 Along these lines,
I receive a memo
 from every one of
my direct reports,
 a number of other key
people in the company,
 every salesperson in the
company every Sunday night.
 And that report
will include what
 did I accomplish
last week, what am
 I going to accomplish
in the following week,
 and what do I need from the
company to get the job done.
 Now, it's not so important
that I read these reports.
 What's important is that
people write the reports.
 They think about
what did I get done
 and exactly what am I going
to do in the following week.
 We want people to
think about what
 are the action items
that are important,
 and what am I going
to do this week.
 And so I think the process of
people writing those memoranda
 are much more important than
the process of me reading them.
 That being said, in a
couple hours on Sunday
 night, I'm in a
pretty good position
 to understand exactly
what's going on in Asia,
 in Europe, in North America, and
in Washington DC as it relates
 to all aspects of the business.
 As it relates to the
products organization,
 we have a highly, highly
productive product
 organization.
 And we use these products
like Jira and GitHub
 to manage productivity and
track very carefully who
 is getting the job done, who's
keeping up with the task,
 and who we need to provide
some assistance to,
 to help them do a
little bit better.
 So I think we have a very
robust set of metrics.
 Every quarter we get together
as an extended management team.
 This would be my direct reports
and their direct reports.
 And we'll spend three or four
days setting the objectives
 for the next quarter,
the next four quarters,
 and the next four years.
 We will come to
an agreement on--
 we will assess the business
opportunity that is out there,
 as we see it at that time.
 We'll look at the
business pipeline.
 We'll modify our operating
plan as necessary,
 as it relates to business
volume, revenue, and headcount.
 And then each organization--
legal, finance, marketing,
 product marketing,
engineering, sales, forward
 deployed engineering--
will review
 what are their objectives
for the quarter.
 Every other person in
the management team
 will participate
in that discussion,
 say, well, I need this.
 I need this from legal.
 Or I need this from
customer support.
 Or we need this from products.
 Or we this activity from sales.
 And based upon that,
each manager will revise
 their objectives,
will as a group
 come to a consensus
on what the plan is.
 Out of that will fall the
operating plan for the quarter,
 our revised operating plan for
the year, and then each manager
 will write down a
written set of MBOs,
 or management by objectives,
and this is a very old school,
 Andy Grove, high-output
management style,
 management by objectives.
 We will aggregate those
objectives and that budget
 and communicate them to the
board at the board of directors
 meeting in the following
week so that the board knows
 what's going on in the company.
 And then each manager will then
cascade those objectives down
 to each person in
their organization.
 So each person in
the organization
 will assume some component
of those objectives.
 And so that if everybody
in the organization
 fulfills their objectives,
the manager's objectives
 are fulfilled.
 And if each manager fulfills
his or her objectives,
 my objectives have
fulfilled, and my objectives
 are the company's objectives.
 So it's very old school.
 There is no misunderstanding.
 Everybody knows exactly
where they fit in.
 Everybody knows exactly
what is expected of them.
 And everybody is
assured that they
 have the resources
and the wherewithal
 necessary to get their job done.

609d8e6f29c5fc0b825a1db4/3e296e19-785b-4e9b-be59-9f053d84806a/1071/908/#/syllabus>

According to the video, C3.ai tracks variables including:
 revenue
 expenses
 booking
 customer engagement
 customer satisfaction
 employee productivity
 resource allocation

609d8e6f29c5fc0b825a1db4/3e296e19-785b-4e9b-be59-9f053d84806a/1071/908/#/syllabus>

Putting Profitability First at C3.ai
10:13 PM

Putting Profitability First at C3.ai

Another key variable for C3.ai is profitability. This focus (as opposed to a focus only on fast growth)
again makes C3.ai unique compared to other companies in Silicon Valley. Here is Tom Siebel on
why C3.ai takes this unorthodox approach. During the video, Tom references the last decade; please
note that this video was filmed in October 2019.

From <https://safe.menlosecurity.com/https://courses.myhbx.org/student/concept/609d8e6f29c5fc0b825a1db4/3e296e19-
785b-4e9b-be59-9f053d84806a/1071/908/#/syllabus>

Here are two variables C3.ai might choose to monitor, given their strategy:
 Number of customer referrals. C3.ai is working to build a name for itself among
major enterprises. Measuring how likely customers are to recommend C3.ai’s services
would allow them to gauge how effectively they are building up their customers as
brand emissaries.
 Employee satisfaction. As we learned, hiring and retaining top talent is critical to
C3.ai’s success. Closely monitoring this variable would allow them to intervene
quickly if satisfaction among employees ever began to drop.

From <https://safe.menlosecurity.com/https://courses.myhbx.org/student/concept/609d8e6f29c5fc0b825a1db4/3e296e19-
785b-4e9b-be59-9f053d84806a/1071/908/#/syllabus>

1.6.2 Strategy as Patterns of Action
10:25 PM

Detecting Change in the Competitive

Landscape

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 PROFESSOR SIMONS: Once you've
defined your strategy as plans,
 you should be ready to execute.
 However, not all planned
strategies will be realized.
 As they say in the
military, "No battle plan
 ever survives the first
encounter with the enemy."
 Think back to ATH and what can
happen when a company focuses
 solely on executing its plans.
 Even after successfully
establishing diagnostic control
 systems, belief systems,
and boundary systems,
 the company still found itself
blindsided by the emergence
 of new superior technologies.
 Businesses need to be
open to the possibility
 that their strategy must evolve
with changing conditions.
 As a result, they
must have the ability
 to detect changes in the
competitive environment
 and adapt quickly if necessary.
 They do this by establishing
our fourth and final P--
 strategy as patterns of
action to drive learning.
 C3 got to where it is today by
being vigilant about changes
 in the competitive
landscape, and then
 acting quickly and proactively
to adjust its strategy.
 Here is Tom Siebel on what
that journey looked like.


 HOUMAN BEHZADI: My
name is Houman Behzadi,
 and I'm the senior
VP and chief product
 officer of C3.ai,
responsible for, really,
 products overall-- so product
management, engineering,
 data science, and the
operation of the product
 at our customers.
 As the company scales
with lots of customers,
 I think the
interactions, of course,
 you have to find different
ways of interacting.
 I do think it's really
important through customer
 advisory boards,
quarterly customer
 reviews, internal
reviews that you still
 stay as close as you
can to what's happening
 within the customer scenarios.
 That said, I think
as you scale, it's
 difficult to do
that at the level
 that you may want to do
that with every customer.
 So in terms of our
systems, if you
 think about we have a
performance management
 system for the individuals,
for the organization,
 for the teams themselves.
 We had to evolve ourselves as
we started to scale the customer
 base to think through things
like customer satisfaction
 surveys--
 market surveys.
 And if you think about
customer satisfaction surveys
 and adoption metrics as well--
so we had to actually start
 to introduce some
customer metrics--
 CSAT scores, adoption
criteria, and where
 are we in terms of adoption.
 And what we ended up
doing is we started
 providing these
surveys, starting
 to measure some of these
measures themselves
 around adoption and
actually link them back
 into the performance
management for the individual
 and for the team itself.
 So it starts to provide
you a more cohesive view
 of what's happening
across the customer base
 and at a customer.
 Are they satisfied?
 Where are they not satisfied?
 Where can we improve ourselves?
 Are we seeing adoption?
 Are we seeing people
realizing the value
 from these AI-based
applications?
 How many people are using
the system on a daily basis?
 How many predictions
are we making,
 and what's the accuracy,
precision, and recall of those?
 So, yeah, in cases
where we noticed--
 where we thought certain things
are great in a customer--
 we noticed from a CSAT score
that they had recommendations
 for us in areas we
actually didn't--
 we weren't aware of,
and that's an easy thing
 to then look at, create a plan
around, and put objectives
 around addressing that over
the next 4 to 12 weeks.
 Adoption, I think you can start
to identify issues in terms of,
 well, why aren't we seeing
the adoption that we need
 or why aren't we seeing the
results that we need in terms
 of the machine
learning and the AI,
 and it's then you focus on
putting a plan around how do we
 make that happen?
 So I think, as
we've scaled, we've
 started to put some more of
those CSAT scores and adoption
 metrics in place,
and we've actually
 linked them back to
individuals and teams
 as a measure as we move forward.

02:35
02:35

10:44 PM

 advancing the technology
 footprint and
ongoing innovation,
 I think edge computing is
going to be very important.
 If we look at this
IoT constellation,
 that being this
Internet of Things
 constellation that's
being deployed,
 so far we have deployed
in the value chains,
 in all value chains-- travel,
transportation, aerospace, oil
 and gas utilities-- say, 30
billion sensors out there.
 In five years, it will
be 50 billion sensors.
 And people think about these
IoT devices as, commonly--
 and I used to think about them--
 as sensors that allow
us to remotely sense
 the state of things in real
time or near real time,
 for the classic case being
the smart meter in the utility
 sector, where instead of sending
a truck out once every 30
 or 60 days, with a smart
meter, we can remotely
 sense its state every
minute or every 15 minutes.
 And we know how many
kilowatt-hours of electricity
 this meter has consumed.
 Similarly with Fitbits,
or heart monitors,
 or sensors on turbines,
and auxiliary power units
 and equipment where
we can measure torque,
 rotational velocity, pressure,
temperature, whatever
 it may be in real time.
 This is true.
 And we can take these signals
and we can aggregate these data
 and build machine
learning models
 that are highly
beneficial in production
 optimization and AI-based
predictive maintenance
 and what have you.
 But if you think about what
these sensors really are,
 they have
computational capacity,
 they have storage
capacity, and they
 have communication capacity.
 They may only cost a few cents,
but they have this capacity.
 They are computers, and where
these computers are being fully
 connected together
into a network.
 So we have order of
50 billion computers
 that are being
connected together.
 Now, some of you will
remember a scientist
 by the name of Bob Metcalfe
at Xerox PARC who invented
 this thing called ethernet.
 And with ethernet,
we had the ability
 to tie these computers
together into networks.
 And Bob found that the
power of the network
 was much greater than
the sum of its parts.
 And that power came to be
described by something called
 Metcalfe's Law, where it
says the power of the network
 is basically a function of the
square of the number of nodes
 in the network.
 So I think we can think
about this AI constellation
 as it is in fact a
network of computers.
 And it's 50 billion
computers soon.
 Fifty billion squared,
if I'm not mistaken,
 is 10 to the 21st.
 Ten to the 21st would be
equivalent, roughly equivalent,
 to the number of
stars in our universe.
 So I look at this as
a computing platform.
 And so this is a computing
platform the power of which
 was unimaginable as
recently as a decade ago.
 And so I think we need
to look at IoT and AI
 as two sides of the same coin.
 And IoT is basically a
computing platform upon which--
 that we use to
execute, to solve,
 predictive analytics
computational problems.
 In the next generation
of AI, I think
 it's about taking
advantage of this computing
 and doing the
computing on the edge.
 Rather than bringing home to
some central base in the cloud
 to compute and pushing
the answer out,
 we'll be doing the computing
at 50 billion locations
 on the edge.
 So I think edge
computing is going
 to be an increasingly important
vector in this AI domain.


Wednesday, July 7, 2021
11:45 PM

Main diagram for 4 p
11:00 PM

Now, recall that each of the four Ps is controlled by one of the levers of control, as
illustrated here.
Note that this visual also presents the strategic variables (core values, risks to be
avoided, critical performance variables, and strategic uncertainties) that managers use to
design levers of control that reflect the four Ps as they have defined them for their
business strategy. These variables are not relevant to the activity that follows; however,
we will address each of them in depth throughout the course. For now, please take note of
which lever controls which of the Four Ps.

 PROFESSOR SIMONS: Now that
we've introduced the four Ps,
 let's take a moment
to recap them.
 First, we have strategy
as perspective: who we are
 and what we stand for.
 This view of
strategy is embedded
 in the stories we
tell each other
 about our founders, our past
successes, and our failures.
 For example, think of a high-end
auto manufacturer like Ferrari.
 It's very unlikely
that, given who
 they are-- their history
of past successes--
 that they're likely to go into
mass market budget automobiles.
 Or consider McDonald's.
 Given their history in
the fast food industry,
 it's very unlikely
that they're going
 to enter the high-end French
cuisine restaurant market.
 It's not who they are.
 As these examples illustrate,
strategy as perspective
 determines the
opportunities that managers
 are willing to pursue.
 The second P is
strategy as position.
 This is a classic
view of strategy
 that we teach in our
Harvard MBA classrooms.
 How do you formulate a
value proposition that's
 attractive to your customers?
 How do you differentiate
your products and services
 from those of competitors?
 This view of strategy is
anchored in data and analysis.
 Many strategy consulting
firms specialize in this work
 and help clients find
profitable niches
 within specific
industries that will
 allow them to compete and
build sustainable competitive
 advantage.
 The third P of strategy
is strategy as plans.
 If you ask someone
what their strategy is,
 they turn to a planning
document that details, over one
 or more years, their planned
initiatives, acquisitions,
 product extensions, and
innovation projects.
 Resources are allocated
to these initiatives,
 accountability is assigned
to specific individuals,
 and measures are put in
place to track progress.
 In this view, the formal
plans represent the strategy.
 The last P is strategy
as patterns of action.
 This comes back to the idea
of organizational learning
 and emergent strategy.
 How do we monitor
what's happening
 in the external environment?
 How do we bubble
up information that
 may impact the validity
of our current strategy?
 How are we learning
together as an organization
 and adapting to change?
 The mechanisms that we put in
place to foster this learning
 will determine our success
or failure on this dimension.
 We saw ATH Technologies
successfully implement three
 of these four P's.
 They articulated
 through a form of
belief systems.
 Their strategy as
position was reflected
 in the investments they made to
bring their new medical device
 products to market.
 They eventually figured out
how to get control of strategy
 as plans as they developed
diagnostic control
 systems to motivate and monitor
everyone in the organization
 to focus on achieving
key targets.
 But the one P they failed on was
strategy as patterns of action.
 They failed to develop
an organization that
 could learn and adapt as
circumstances changed.
 In other words, they were good
at executing today's strategy,
 but they failed to build the
patterns of action and learning
 that could position the
business for tomorrow.
 This shortcoming is
not unique to ATH.
 Many good companies
think they're doing fine
 if they're performing well on
two or three of the four P's
 of strategy.
 Only the very best
companies, the ones
 that prosper decade after decade
in highly competitive markets,
 are firing on all
four cylinders.
 But managing all
four P's of strategy
 is difficult and demanding.
 Managers must constantly change
hats, shifting between roles
 as they go through their day.
 This is what makes your job
so hard and so important.
 As you implement
strategy as position,
 you're acting as a commander,
providing direction
 to your team, allocating
assets, moving the pieces
 on the chessboard.
 To implement strategy
as plans, you
 assume the role
of a boss who must
 provide goals and incentives
and evaluate the performance
 of your subordinates.
 For strategy as perspective, you
must take on a different role--
 that of a coach who
motivates and inspires
 team members to deliver
their very best performance.
 And finally, to implement
strategy as patterns of action,
 you need to be a facilitator
and sponsor who empowers people,
 enables them to innovate and
be supported in their work.
 Throughout the course,
we will come back
 to each of these five
roles and explore
 how you can navigate the demands
of your job more effectively.

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Image illustrating which of the levers controls which of the Four Ps. Clockwise from top,
image shows four boxes with beliefs systems controlling strategy as perspective,
boundary systems controlling strategy as position, diagnostic control systems controlling
strategy as plans, and interactive control systems controlling strategy as patterns of
action.

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Module 1 Summary
11:43 PM

Module 2 : Strategy Execution: 2.1.1 Module 2
Introduction
8:36 PM
Learning Objectives
 Explain why a business’s strategy should determine the allocation of
resources to specific jobs.
 Define span of control and identify it for a given job.
 Evaluate whether span of control for a job is appropriate for a business’s
strategy.

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 PROFESSOR SIMONS: Welcome
to the second module
 of Strategy Execution.
 In this module,
you will learn how
 to empower your employees to
execute strategy effectively.
 Think back to the
four management roles
 we introduced at the
end of our last module--
 commander, boss, coach, and
facilitator and sponsor.
 If you remember, I used the
metaphor of changing hats
 as you go through your day.
 In this module, we will focus on
how to think about these roles
 when designing specific jobs
for your team or business unit.
 Job design is a critical
part of strategy execution.
 If individuals don't have the
resources they need and are not
 accountable in the
right way, they
 will not be able to
work to their potential.
 And when the jobs
in your business
 are not aligned
to your strategy,
 both employees and
performance will suffer.
 In our first lessons, we
will travel to New Delhi
 to meet Meghna Modi.
 You will learn
about the challenges
 that Meghna faced
as she attempted
 to scale her
business, Go Mobile,
 to meet the growing demand
for mobile phones in India.
 To understand the root
cause for these problems,
 we will teach you how to use a
Job Design Optimization Tool,
 or JDOT for short, to
improve the design of any job
 and align it to your strategy
so that every employee is set up
 for success.

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Strategy Execution: 2.1.2 Allocating Resources to
Implement Strategy
8:41 PM

 do not know how
their jobs connect
 to their business's strategy.
 Managers have not
spent enough time
 articulating and
communicating their strategy
 and what it means for every
single person in the business.
 Recall that strategy
as position describes
 how a business creates value
and differentiates itself
 from competitors.
 The most successful
businesses identify
 which functions and groups
are most critical to providing
 their unique value proposition.
 Then they allocate the
bulk of the resources
 to those jobs and units,
the ones that create value
 in the eyes of customers.
 By doing this, they
ensure that every employee
 is maximizing the
business's ability
 to give customers more of what
they want than competitors.
 Let's review five
different strategies
 that describe the
competitive positions chosen
 by most companies.
 First is the low cost strategy.
 This type of business
differentiates itself
 by giving customers the lowest
priced products or services.
 Walmart would be a good
example of a firm following
 this strategy.
 Second is what we call the
local value creation strategy.
 Firms in this group
differentiate themselves
 by providing products or
services that are tailored
 to regional preferences.
 Nestle would fall
in this category.
 It tailors its food products
for different countries
 around the world to respond to
differing customer preferences
 for sweets and spices.
 The third strategy is the
global standard of excellence.
 These firms provide world-class
branding or world-class
 technologies to customers
around the globe.
 Businesses such as L'Oreal
in luxury cosmetics
 and GE in aircraft engines
would fall in this category.
 The fourth strategy is a
dedicated service relationship.
 These companies
compete by organizing
 into teams that
serve the specialized
 needs of their large
and important customers.
 Honeywell and IBM would
be good examples here.
 And finally, there is the
expert knowledge strategy.
 Customers of these businesses
are looking for breakthrough
 ideas and technologies.
 As a result, the bulk of the
resources in these companies
 is allocated to research
and development.
 Google and Merck are two
examples in this group.
 Once your business
strategy is decided,
 managers need to organize
internal resources
 to maximize the
business's ability
 to deliver its
differentiated value, what
 is often called the value
proposition, to customers.
 For example, customers go
to Walmart for low prices.
 To deliver those
low prices, Walmart
 allocates the bulk of
its internal resources
 to employees working in
centralized operating core
 units, such as merchandising
and distribution.
 These units are best equipped
to create economies of scale
 and maximize efficiency
across the entire system,
 all with a view to keeping
prices as low as possible
 for customers.
 At a business like
Nestle, however, employees
 need to understand and
respond to differing customer
 preferences by country.
 As a result, employees
working in the country-based,
 market-facing units
will get more resources
 than those in the
operating core.
 Of course, this duplication
of functions across countries
 leads to a loss in efficiency.
 Therefore, for this
strategy to be viable,
 customers must be willing to
pay higher prices in return
 for the local
customization they enjoy.
 As these examples
illustrate, you
 should be allocating
your resources
 to jobs and units in a way
that reflects your strategy.
 If you look at two
seemingly similar companies,
 individuals in each company
may have exactly the same job
 title, say, a marketing manager
or a supply chain manager.
 But they may have
very different levels
 of resources at their
disposal depending
 on the strategy chosen
by the business.
 And, of course, if you don't
allocate resources correctly,
 giving more to some
jobs and less to others,
 you run the risk that
your strategy execution
 will be flawed from the start.
 You will not be able to
deliver the unique value
 proposition that you have
promised your customers.
 Competitors who
get this right, who
 make the right choices in
internal resource allocation,
 will overtake you
as they deliver more
 of what your customers value.

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Business Strategy at Go Mobile

Now, let’s discover how Meghna Modi and her team organized Go Mobile’s resources to
execute their strategy as position. You met Meghna Modi in Module 1. She is the
managing director of Go Mobile, a mobile phone retailer based in New Delhi, India.
When Meghna co-founded Go Mobile with business partner Glenn Wong, she was eager
to take advantage of the booming mobile phone market in India. At the time, small
“mom and pop” shops dominated this market. These small, entrepreneurial operations
excelled at providing personalized service, but they lacked the bargaining power,
inventory management abilities, and economies of scale that a larger player might offer.
And while these mom and pop shops were skilled at providing service with a
knowledgeable and personal touch, some were also known for being untrustworthy. In
Go Mobile, Meghna saw a prime opportunity to build a business that brought this same
high-quality—and trustworthy—service to customers while also giving them the choices
and flexibility made possible by economies of scale.
Here is Meghna with more on Go Mobile’s competitive landscape.
Note: This online case is based on a case developed by Tatiana Sandino (HBS Case No.
114-034).

609d8e6f29c5fc0b825a1db4/ff7c9fe4-87af-4fbb-b8d7-74247a3c2b1d/1071/908/#/syllabus>

 MEGHNA MODI: The
market is very big.
 And it's dominated by
a lot of competitors,
 because the margin is very low.
 It runs under like
8% cross margin--
 10% cross margin.
 So there's huge incentives
on the mom and pop to cheat.
 They will not maybe
cheat on the phone.
 But they could open
the box, duplicate it
 with charger accessory,
take the original one,
 put a cheap Chinese
charger and accessory,
 and try to get more
margin out of that box.
 So one is trust.
 The second is it's a very
capital intense industry.
 So most of the
mom and pop stores
 do not have enough stock.
 And they only keep
what they can sell.
 So they do not have
range for customers.
 So customers are not able
to choose the handset.
 In India, unlike the West--
 in the West, there
are contracts.
 So you really don't--
 The phone is subsidized.
 You really don't buy
the phone upfront.
 But you pay it through
the contract, what you
 have with your AT&T or Verizon.
 But in India, because
there is no postpay--
 99% of the market is
a prepaid business--
 these handsets are
not subsidized.
 So it is a very significant
part of their disposable income.
 Like a iPhone, if you
buy it in the U.S.,
 you'll buy it on a contract.
 In India, you will pay $2,000
upfront to buy the handset.
 So it becomes a very big
constraint for the shopkeeper
 to keep good inventory.
 So how we differentiate
is we keep high levels
 of stock-- a good stock.
 Second is trustworthy.
 Third is give EMI
options, like give--
 make it very easy for the
customer to own the handset.
 So we have types
with all the banks,
 nonbank financial institutions,
which provide low cost EMI,
 like equal monthly installments.
 So you can come into a store,
look at the iPhone 11, which
 costs, let's say, $2,000,
pay only $100 in the store,
 and rest of the balance you
can pay in easy installments.
 Now, that's something a mom
and pop cannot mimic that well,
 because he's waiting for
that 90% of the money to come
 in maybe 7 to 10 days.
 And he does not have the
working capital width.
 So he would rather sell
in cash versus finance.
 And today, over 60% of
the sales are sold on EMI.
 So it's very important
to understand that that's
 our key differentiator.
 So the customer could be
from an 18-year-old boy
 to a 70-year-old guy
across the lifespan.
 Handsets is a very
critical part of his life.
 Unlike the West, the
turnaround of a handset
 is less than a year.
 So every six months
to eight months,
 a customer comes into
the store looking for,
 what's the next phone?
 Maybe he would have
damaged his phone,
 or have broken the phone,
or have lost the phone,
 or-- and it's unnecessary.
 He's wasting his money, because
he'll got a good buyback value.
 So he knows that if he
holds onto the stock,
 to his own handset for too
long, he'll destroy value.
 So he'll come in after three
months, six months, or a year
 and say, can I sell
my old handset back,
 and can I get a new handset?
 So we have a lot of
repeat customers.
 The customers are average
middle class customers,
 necessarily not
having credit cards.
 So I would say not
very high end customers
 would like to just go online
and buy on credit card.
 They want to come.
 They want to choose
their phones.
 They may not be that
technology savvy.


 MEGHNA MODI: The strategy
continues, we give you more.
 So we give customers more
choice in terms of product.
 We give customers
more choice in terms
 of how to buy the product,
not necessarily in cash.
 Customers need phones,
but every customer
 is not able to buy the
phone that he would like.
 So making it possible, making
it easy for the customer to buy
 the most expensive phone.
 If he wants to buy the
most expensive phone,
 he can go ahead and buy
it and buy it at his pace,
 like given his
financial condition.
 Give more to employees through
the incentive structure
 to our store teams.
 The incentives are
very entrepreneurial.


Analysis: Allocating Resources to Address Customer
Needs at Go Mobile
According to Meghna, Go Mobile customers care most about affordability (option 1)—
although Go Mobile addresses this need by offering flexible payment options and
attractive bundles rather than lowering the initial purchase price. Additionally, customers
clearly value trustworthy relationships with mobile phone retailers (option 4). Choice is
also important when it comes to products—customers want variety (option 2). For this
reason, offering flexible payment options is a wise choice. As Meghna notes, it means
that customers with limited means can still afford to purchase an expensive phone.
Given these customer preferences, how should Go Mobile organize its internal resources
and design key jobs to ensure that the company can deliver on its value proposition? This
is a tricky question: The fact that customers value low price—which requires highly
efficient operations—as well as responsiveness to their individual needs (such as
payment and product options and high levels of customer service) creates an interesting
conundrum for the executive team at Go Mobile.
Let’s learn how Go Mobile attempted to design key jobs in light of this challenge. We
will now introduce a tool that will allow you to analyze job design, identify problem
areas, and propose solutions for jobs in any organization: the Job Design Optimization
Tool (JDOT). JDOT allows you to test the design of a job to ensure that it’s playing the
proper role in executing any business’s strategy.


In the next lessons,
 we will show you how
to analyze and improve
 the design of any job using the
Job Design Optimization Tool,
 or JDOT for short.
 With this tool, which
will be available to you
 online for free when
you finish the course,
 you can ensure that
all your employees
 are empowered to execute
business strategy successfully.
 To use JDOT, there are four
questions you need to ask.
 Each question
corresponds to a span
 that can be adjusted like
a slider on a sound mixer
 to alter the job's design.
 Each of these spans
corresponds to one
 of the four P's of strategy.
 In thinking about
these questions,
 imagine that you are
interviewing for a job
 and trying to decide whether
or not to accept the position.
 Here are the four
questions that I think
 you would want answers to.
 First, what resources
will you give
 me to accomplish what
I'm supposed to do?
 Who will report to me, and
how big will my budget be?
 As we've discussed earlier,
the answer to this question
 will depend on the strategy of
the business and the job's role
 in executing that strategy.
 For some strategies,
a marketing manager
 will get a lot of resources.
 For other strategies, that same
job would get fewer resources.
 We will use this question
to adjust span of control.
 Second, what
measures will be used
 to evaluate my performance?
 Again, your answer should
reflect your business strategy.
 For any given job,
how does your strategy
 tilt the balance between
innovation on the one hand
 and control on the other?
 For jobs that
require innovation,
 we will select wide measures.
 For jobs that focus
on compliance,
 we will choose to
narrow the measures.
 As you will see, this
will be reflected
 in what we will call
span of accountability.
 The third question
you will want to ask
 is, who do I have to
influence to achieve my goals?
 Some jobs are
self-contained-- you
 can sit at your desk all day
and quietly do your work.
 And other jobs require that
you spend the bulk of your time
 meeting and influencing
others who you will need
 to rely on to get the job done.
 This aspect of the job
will be captured by how
 we adjust span of influence.
 Finally, you will want to
know, how much support can I
 expect when I reach
out to others for help?
 This question is especially
important in roles
 where a lot is demanded
from you and you
 have to spend a lot of your
time interacting with others.
 The answer to this
question will be
 reflected in how we
adjust our fourth slider--
 span of support.


Strategy of position - Span of control - people
budget

Walmart will have operational manager will have more span of control
PWC (Local value standard) - Auditing consulting based on regional -
 he span of control slider
for a specific job anywhere
 between one and 10, indicating
very narrow at one end

 PROFESSOR SIMONS: We are
now ready to walk you
 through the four different
spans of job design.
 Let's begin with
span of control.
 Span of control
answers the question--
 what resources do I have at my
disposal to get the job done?
 Span of control typically
refers to the number of people
 who report to an individual.
 If you ask someone, what
is your span of control,
 they will respond
with a number--
 8, 10, or 12.
 We will take a
different approach.
 For our purposes,
span of control
 encompasses the entire
range of resources
 for which an individual
is given decision rights
 and held accountable
for performance.
 This includes not only people,
the traditional definition,
 but also budgets, balance
sheet assets, facilities,
 and infrastructure.
 As you already know,
span of control
 is a function of an individual's
position in the hierarchy
 of the business.
 A senior executive
will have a wide span
 of control with
hundreds or thousands
 of employees reporting to
him or her and decision
 rights over inventory,
spending levels,
 and other critical activities.
 A more junior employee
will have a narrower span
 of control with maybe a team
of a few people and decision
 rights over a very
limited project.
 But this is not the
end of the story.
 It's important to remember
that span of control
 is also a function of
business strategy--
 in this case,
strategy as position.
 To adjust this span, you must
put on your hat as a commander.
 Imagine you are directing
a military operation.
 You need to decide
which jobs are
 most important in delivering
value to your customers
 and allocate the maximum
possible resources
 to those jobs.
 Recall our earlier example.
 A business organized
to sell products
 at the lowest possible
prices, like Walmart,
 will give managers
in the operating core
 a great deal of resources.
 In other words, they have a
very wide span of control.
 These are the jobs that
can maximize efficiencies
 and create economies of scale
to keep product prices low.
 In contrast, managers
of market-facing units,
 the store managers,
for example, will
 have relatively few resources
and a narrow span of control.
 But of course, this will change
with different strategies.
 Take a business organized to
sell highly customized products
 and services, like PWC, the
audit and consulting firm.
 This is a firm pursuing what we
call the local value creation
 strategy.
 Because audit
standards and tax rules
 differ country by country,
managers in this business
 push more resources out to
the market-facing units.
 Those employees then
have the resources
 they need to understand
customers' unique needs
 by country and
tailor their products
 and services accordingly.
 As illustrated
here, you can adjust
 the span of control slider
for a specific job anywhere
 between one and 10, indicating
very narrow at one end
 or very wide at the other.

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The Team Leader Role at Go Mobile

To enhance our understanding of the span of control, let’s step inside a Go Mobile retail
store. In this video, Meghna Modi will describe the composition of a typical store team
and introduce the store’s most critical position: the store manager, known internally as
the team leader. Team leaders (or TLs for short) oversee operations of individual Go
Mobile store locations, including cashiers and promoters, and interact directly with
customers.


 MEGHNA MODI: So a
typical store would
 have about 10 to 20 people.
 And so we will have one
store manager called a team
 leader and one cashier
and possibly a TL
 trainee if someone is
getting trained under him.
 That's it.
 The rest of the promoters
are coming from the brand.
 So we'll have about five
to six handset promoters--
 iPhone, Samsung, Oppo,
Vivo, the Chinese brands,
 some of the Indian brands,
and the international brands.
 And then you have the
finance company promoters.
 So from HDFC Bank,
we'll have somebody.
 We'll have somebody
from Citibank,
 nonbank financial institutions.
 So between 10 to 20 promoters,
depending upon the size
 and potential of the store.
 So team leader is
typically an 18-year-old
 toward 30-year-old guy.
 He could be anywhere
in that age group--
 not necessarily a
college graduate.
 So maybe 10% today of our team
leaders are college graduates--
 90% of them are school dropouts.
 Could be for many reasons--
financial, family situations.
 And one of the
things we did, given
 that we knew that the numerical
literacy or the calculation
 may not be up to the
mark, is at Go Mobile,
 we're the only chain that
developed promotional materials
 or leaflets or posters that
actually calculate everything
 for them.
 So write down, like
suppose if you ask me,
 if you want to buy
an iPhone 10R 64
 GB, how much would it cost
you, I would tell them
 2,420 rupees in 24 months.
 So I've nailed it down for them.
 I do the math at
night so that the boys
 get that script and easy.
 And that's wonderful
because that's something
 that they know that that's the
answer, then they work back.
 We put it as part
of our training.
 But that's the background.
 Very street smart, hungry,
driven, very entrepreneurial.
 They are, again, not
typically from the Delhi City.
 They have come from
small towns and villages
 and searching for a job and
searching for a good career.
 And they start as a
promoter or as a cashier.
 They start and they learn
the tricks of the trade
 as they do the job.
 So very young but
very street smart.
 Very street smart.


 [STREET SOUNDS] RANJIT
SINGH: Basically, I
 am the team leader
and the store manager.
 I'm usually the first
to arrive at the store.
 My staff primarily consists
of all-around promoters.
 We start off the day with
a small meeting, where
 I brief the day's
targets, specifically
 the daily run rate required
to achieve these targets.
 As a part of stock
management, we
 check the stock
requirement and forward
 the relevant information
to fulfill the same.
 Customer service is given
the highest priority.
 In our "on-decision" structure,
the customer informs us
 of their requirments and we
ensure to make everything
 available to them.
 This includes quality service,
finance schemes and even
 guiding the customer
to find the best fit.
 Basically, our company provides
a good financial scheme,
 a good product and a good
complimentary scheme.
 MEGHNA MODI: So
the store managers
 don't have any authority
or control over products.
 They don't have
control over pricing.
 They don't have control over the
way we message the promotion,
 but they have huge
discretion or decision
 over building
customer relations,
 so that is completely
decentralized.
 So they control very
little resources.
 They control-- they
don't control the stock
 and for obvious reasons.
 If they controlled
the stock, all of them
 controlled the
stock, you know, we
 would have so much
stock in the store.
 They don't control the price.
 If they did control
the price, we
 would not be in the
business, because we would
 be selling everything for free!
 So, it would be
the cheapest price
 and we would go bust,
because given the margin
 is only 10 percent.
 So they don't control the price.
 They don't control the stock.
 They don't control
the major promotions,
 because they are led by
the brands such as Samsung
 and iPhone, so we
cannot dilute that.
 We have to enhance
that promotion.
 We have to work within
the brand lines.
 So the entire collateral,
the marketing materials
 that the head
office produces, is
 how to make it easy for
the TL and the customer
 to understand that you can
buy the most expensive phone
 in the lowest EMI.
 What's the easiest
way to get your hands
 on the most expensive product
without losing your shirt.
 That's the marketing material.
 How to make it easy.
 How to make all the
offers very easy
 so that the customer
understands it quickly,
 and the team leader is able
to explain it very easily
 to the customer, of
how to buy the phone
 and how to buy the best phone
that suits his need in the most
 efficient manner.
 But what do they control is
the customer relationship.
 That is what they
own, they control,
 they are accountable for.
 We have metrics around
customer satisfaction.
 True North, repeat
customers, so that's
 what they really control.
 They control they
way the store looks.
 They control relationships,
the discipline in the store.


JDOT: Setting Span of Control for Team Leaders

Span of control defines the range of resources for which an individual is given decision
rights and held accountable for performance.
Span of control is determined by the allocation of resources, such as:
 Headcount
 Budget Allocation
Balance Sheet Assets

Decision Rights: Products and Services

Decision Rights: Intangible Resources

Based on Meghna’s description of span of control in the video, drag the slider to indicate
how wide a span of control team leaders have at Go Mobile (with 1 representing a
narrow span and 10 representing a wide span).


Analysis: Setting Span of Control for Team Leaders

Meghna Modi gave team leaders a narrow span of control—reserving decisions on
product price, product mix, stock levels, and promotional material design for
headquarters—because Go Mobile needs to deliver on its promise to make mobile
phones affordable to Delhi residents.
In order to compete effectively with small mom and pop stores, who have limited
bargaining power with suppliers, Go Mobile needs to centralize inventory and pricing
decisions to drive economies of scale and ensure the lowest possible cost. In addition,
Meghna wants the central office to negotiate unique service offerings, such as equal
monthly installment (EMI) plans that are more easily executed by large businesses. The
stakes here are simply too high to give team leaders decision-making authority over
price, product mix, inventory, etc. These aspects of Go Mobile’s value proposition need
to be tightly controlled, and team leaders must comply with decisions made at
headquarters. Think back to our earlier reference to Walmart. The setup here is similar.
However, Go Mobile’s strategy is in some ways more complex than Walmart’s.
Remember that sales will suffer if Go Mobile fails to deliver the same personal touch and
to cultivate the deep knowledge that mom and pop stores offer their customers. As
Meghna notes, Go Mobile sells a commoditized product in a market with low margins.
This means they can’t simply lower their prices to differentiate their offering. Instead,
they must motivate team leaders to maximize engagement with the customer and offer
creative bundles that will encourage customers to buy from Go Mobile.
We tackle this problem next.


9:48 PM

JDOT: Setting Span of Control for Team Leaders
Span of control defines the range of resources for which an individual is given decision rights and
held accountable for performance.
Span of control is determined by the allocation of resources, such as:
 Headcount
 Budget Allocation
 Balance Sheet Assets
 Decision Rights: Products and Services
 Decision Rights: Intangible Resources
Based on Meghna’s description of span of control in the video, drag the slider to indicate how wide a
span of control team leaders have at Go Mobile (with 1 representing a narrow span and 10
representing a wide span).

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5822-4de5-b53b-90d9b6690db1/1071/908/#/syllabus>

2.2.1 Span of Accountability
10:26 PM

Identifying Trade-offs in Performance

Measures

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a7b7cf84-f931-4dfe-917a-8a338393aa5a/1071/90
Learning Objectives
 Explain why and how a business’s strategy should inform the range of trade-
offs in performance measures for jobs.
 Define span of accountability and identify it for a given job.
 Evaluate whether span of accountability for a job is appropriate for a
business’s strategy.
 Define the entrepreneurial gap and explain why it can be valuable for certain
types of jobs.
on this lesson.
Span of accountability represents the range of trade-offs embedded in performance
measures used to evaluate a manager's achievement.
The table we worked through in the video lists some common financial and non-financial
performance measures presented in the video in relation to the range of trade-offs inherent
in each measure.

Access the elaborated transcript
PROFESSOR SIMONS: Let's now turn to our second question of job design. What
measures will I be held accountable for? We can answer this question by adjusting span of
accountability.
Recall that span of control focuses on implementing strategy as position-- one of the four
Ps. Span of accountability focuses on a different P-- implementing strategy as plans. As
you will learn in the next module, performance measures are one of the critical
mechanisms for implementing strategy as plans.
For this span, you will put aside your hat as a commander and put on your hat as a boss.
Span of accountability is determined by the range of trade-offs that affect the performance
measures used to evaluate a manager's achievements. We can think of this range in both
financial and non-financial terms.
SPAN OF ACCOUNTABILITY FUNNEL DESCRIPTION
Funnel titled Span of Accountability at the top and Range of Trade-Offs in Performance
Measures at the bottom. Non-financial measures are listed on the left and financial
measures are listed on the right. From the bottom of the funnel up, non-financial measures
include the following:
 inputs
 process
 outputs
 product reliability
 customer satisfaction
 market share
 brand equity
 competitive position
From the bottom of the funnel up, financial measures include the following:
 operating expenses
 manufacturing costs
 sales revenue
 profit & loss
 P&L + current assets
 return on capital employed
 residual income
 market value
The bottom of the funnel is labelled Narrow Measures with arrows pointing to both sides
of the funnel and the top is labelled Wide Measures, again with arrows pointing to both
sides of the funnel.
END SPAN OF ACCOUNTABILITY FUNNEL DESCRIPTION
The funnel here shows financial measures on the right and non-financial measures on the
left. If we start on the right side of the funnel, the financial measures widen as we move
up. At the bottom, someone who runs a cost center may be accountable for minimizing
costs for a particular function. They are accountable for relatively few trade-offs.
But as we move up, we might find a sales manager who is accountable for revenue growth.
To maximize revenue, he or she needs to make more trade-offs, this time between sales
volume and product prices. Moving further up, we could consider a business unit head
who is accountable for profit on a P&L statement. This individual has to make trade-offs
among revenues, margins, and discretionary expenses.
Going one step higher, the trade-offs widen for a manager accountable for balance sheet
assets and return on capital employed. At the very top of the funnel, a CEO might be
accountable for the market value of the entire firm.
On the left side of this funnel, we have non-financial measures. At the bottom, someone
might be accountable for narrow measures that focus on the usage of inputs, such as
energy, materials, and labor. Higher up the funnel, a manager might be accountable for
outputs, such as production volume and quality. This would require more trade-offs.
Still higher, if someone is accountable for customer satisfaction, this widens the span of
accountability even further. This measure depends not only on product quality and
features, but also on the sales experience and after-sales service. At the top of the
organization, a CEO is responsible for the competitive market position of the entire firm.
He or she is accountable for every possible trade-off, and as a result, has a very wide span
of accountability.
But as we discussed earlier, span of accountability is also rooted in the nature of the job
and its role in strategy execution. For jobs where you want lots of creativity and
innovation, you want people to make lots of trade-offs. This means you need to hold them
accountable for wider measures.
The opposite is also true. If you want no innovation, you hold people accountable for
narrow measures that do not allow any trade-offs.
Think of a nuclear power plant where safety is critical. Although the plant manager has a
wide span of control, running the entire plant, he or she is accountable for very narrow
measures that limit degrees of freedom. They are required to do everything according to
prespecified standards. No trade-offs or innovation are allowed, because the cost of an
error is too great.

a7b7cf84-f931-4dfe-917a-8a338393aa5a/1071/908/#/syllabus>

 MEGHNA MODI: They are
responsible for everything
 that goes on in the
store, and yet they
 rely on the central office
to provide the stock,
 the price, the promotions.
 But that's life.
 That's life.
 I mean, I need to do 200
stores with not much resources.
 So that's mimicking life,
and that's mimicking
 the competition mom and pop.
 Just think about who
do they compete with.
 The mom and pop
store on the street
 doesn't control the stock.
 Let's say Samsung is out
of stock on certain models.
 You cannot do anything.
 You just cannot do anything.
 So what you need to
do is really hone down
 what does really
the customer want,
 and what is the right
product for him.
 He may come in, saying that
he needs a particular model,
 but that's not necessarily true.
 So you really need to guide
him, provide the right guidance
 to him to buy the right product.
 It's really building customer
service around those things.
 So you don't control the stock.
 The price is dictated by
the market, by the brands.
 And we don't want
to discount that,
 because there's no end to it.
 Really, the onus lies
on the store manager
 or the TL is to be different.
 And you cannot
commoditize this business.
 This business is already
enough of a commodity.
 Everybody's selling
the same Samsung.
 Everybody's selling
the same iPhone.
 So what is it that is different?
 It's not that you
have the same--
 that you sell at the
lowest price or you
 sell at the same price.
 What you do is you
design a new offer
 that you relate
to your customers,
 so really understanding deeply
what the customer wants.
 So right now, one of
our promotions going on
 is in 3 rupees, in just 3
rupees, you get three iPhones.
 So we don't talk about price.
 There's no need to.
 But you really need
to figure out what's
 the best deal for the customer.

609d8e6f29c5fc0b825a1db4/749f0ccf-8d35-453e-b714-a37b676fbcab/1071/908/#/syllabus>

Moving from the “Hard Spans” to the “Soft

Spans” of Job Design
Span of control and span of accountability represent two of the questions that we asked at
the beginning of this module: 1) What resources will you give me to accomplish what I’m
supposed to do? 2) What measures will be used to evaluate my performance? These
questions focus on the traditional dimensions of job design that are recorded in job
descriptions, organization charts, and performance measurement systems. These represent
the “hard” spans: the hard resources provided to an employee in a particular job and the
hard demands for performance expected from that employee. But as we observed at the
beginning of the lesson, there are two other questions we must ask of any job to
understand whether it works effectively.
In the next lesson, we will explore the final two spans of job design—both of which play
an important role in positioning employees with entrepreneurial gaps to succeed. These
two spans—span of influence and span of support—are what we might call the “soft”
spans. As we will see, while they may be “softer,” they are no less important in designing
a high-performance job.


Go Mobile: Span of Accountability for Team

Leaders
Here is Go Mobile Director of Human Resources Nishant Mahajan on the level of
responsibility team leaders hold, followed by Meghna Modi on the specific measures they
take to accomplish their goals.

a7b7cf84-f931-4dfe-917a-8a338393aa5a/1071/908/#/syllabus>

 NISHANT MAHAJAN: My
name is Nishant Mahajan.
 I take care of the
HR in MG Mobiles.
 And I take care
of the employees.
 And I ensure the
best productivity
 from each individual.
 Team leaders basically,
they are actually
 leading the entire team,
which is there in the store.
 We have these cashiers,
we have these promoters
 from different brands-- be it
Samsung, Oppo, Vivo, Apple.
 The entire lot is actually
led by the team leaders
 at the store level.
 They're actually running
these business units
 for the organization.
 They have to ensure
that they maintain
 their P&L at their store level.
 They maintain the
expenses and ensure
 that they do not lose even
a single customer every day.
 They are also
responsible to maintain
 the discipline and the
hygiene at the store level.
 So what we emphasize
and try and actually
 train these people on
to increase and maintain
 their knowledge with respect
to the finance in the market,
 with respect to the
products and the process
 which company follows.
 MEGHNA MODI: The team leader's
responsible to achieve
 the store targets.
 And the store
targets essentially
 are sales targets, profit
targets, and now some finance
 targets.
 One is unsold inventory that
there is a certain percentage
 above which they cannot have.
 So if the stock is 100, they
cannot have more than 10 pieces
 which are aging
stock above 25 days.
 And also, they cannot have
financial delinquency.
 They're responsible
for everything
 that goes on in the
store, and yet, they
 rely on the central office
to provide the stock,
 the price, the promotions.

01:44
01:44

2.2.2 The Entrepreneurial Gap
10:46 PM

Using Job Design to Foster Creativity


 PROFESSOR SIMONS: The span of
accountability for team leaders
 at Go Mobile is very wide.
 They effectively
run their stores
 as independent business units.
 They have full responsibility
for store sales and profits.
 Team leaders need to make
significant trade-offs
 to achieve their sales
and profit targets.
 For example, they need to
be creative in designing
 offers, bundles, and buyback
schemes for customers.
 Meanwhile, we note that the
span of control for this job
 is very narrow.
 Team leaders control no
significant resources
 and all major decisions
are made at headquarters.
 Meghna adjusted the sliders
this way on purpose.
 She created what we call
the entrepreneurial gap--
 a situation where an employee
is accountable for performance
 measures that are wider
than the resources
 under his or her control.
 The idea of an
entrepreneurial gap
 goes against the grain of
historical management thinking.
 For years, we taught
that authority
 should equal responsibility.
 Give someone resources,
and then hold
 them accountable for the
performance of those resources.
 In other words, we taught for
years that span of control
 should line up with
span of accountability.
 This created what people
called line of sight
 in their performance measures.
 But if you ask people today
what resources they control
 and what measures
they're accountable for,
 almost everyone will
tell you that their span
 of accountability is
significantly wider
 than their span of control.
 ENTREPRENEURIAL GAP POLL & REFLECTION
 Although it may not
seem fair, there
 is method to this madness.
 Unlocking this puzzle
requires that you
 understand the definition
of an entrepreneur.
 An entrepreneur is someone
who pursues opportunities
 without regard to the
resources they control.
 An entrepreneur has a great
idea but no manufacturing,
 no distribution, no
marketing resources.
 He or she must be creative
and innovative in finding
 the resources they
need to succeed.
 All businesses can use
the same principle.
 You can force someone to be
entrepreneurial by holding them
 accountable for wide measures
and at the same time not
 giving them all the resources
they need to get the job done.
 In other words, you set
span of accountability
 wider than span of control.
 This will force
them to be creative,
 reaching out to others,
coming up with new ideas
 to meet the goals
they're accountable for.
 You can also flip this
relationship around.
 In jobs where you want a
compliance focus, where
 you want someone not to
innovate, but to instead
 follow standard
operating procedures,
 you can set span
of accountability
 to be narrower than
span of control.
 Think back to our nuclear
power plant example.
 Employees with full authority
over plant operations
 are accountable for measures
that allow no trade-offs.
 Their span of accountability
is much narrower
 than their span of control.
 How entrepreneurial do
you want your employees
 to be as they implement
your strategy?
 I hope that you now
appreciate that the answer
 to this question will be
different for different jobs
 and different strategies.
 But for every job, it's
important to understand
 that how you set span of
accountability relative
 to span of control will directly
affect each individual's
 behavior.

2.3.1 Span of Influence
11:39 PM

From <https://safe.menlosecurity.com/https://courses.myhbx.org/student/concept/609d8e6f29c5fc0b825a1db4/5d4aaa75-
a014-4a3a-82b2-50040ee639cd/1071/908/#/syllabus>
2.3.1 Span of Influence

Encouraging Cross-Unit Engagement

Learning Objectives
 Explain why a business’s strategy should determine the amount of influence
required to do a job effectively.
 Explain why a business’s strategy should determine the amount of support the
person in that job needs to receive.
 Define span of influence and span of support and evaluate whether they are
appropriate for a business’s strategy.
 Analyze if the four job design spans balance the demand and supply of resources
for any job.
Lesson Time Estimate: 35 minutes. Most participants spend between 25 and 45 minutes on
this lesson.


PROFESSOR SIMONS: In our first lessons on job design, we examined two complementary
spans-- span of control and span of accountability.
BEGIN JDOT DESCRIPTION
Interactive JDOT tool titled Configured Job Title. Two sliders appear one directly above the
other: Span of Control and Span of Accountability. Both sliders range from 1 to 10 in
increments of 1. Span of Control lists Few Resources at 1 and Many Resources at 10. The
slider is set at 5. Span of Accountability lists Measures allow few trade-offs at 1 and Measures
allow many trade-offs at 10. The slider is also set at 5.
END JDOT DESCRIPTION
But recall from the beginning of this module that we had four questions to ask. To design a
high performing job, we must ask two additional questions and adjust two more spans. The first
of these questions relates to span of influence. To adjust this slider, we need to ask, who does
an individual need to influence to achieve the goals for which he or she is accountable?
Like the other spans, you can design different levels of influence into any job. As you adjust
this span, you will be specifying how much you want the employee in that job to engage with
others. This will determine how that individual will spend their time during the day. By
adjusting this span, you are again focusing on one of the four P's of strategy. This time, it's
strategy as patterns of action.
BEGIN DIAGRAM DESCRIPTION
Business Strategy is surrounded by four items:
 Strategy as Perspective
 Strategy as Position
 Strategy as Plans
 Strategy as Patterns of Action
Strategy as Patterns of Action is highlighted.
END OF DIAGRAM DESCRIPTION
For this span, you have to put on your hat as a facilitator and sponsor. As you widen span of
influence, you will be encouraging people to reach out to others, gather information, influence
their thinking, and share best practices.
Some jobs are designed with a very narrow span of influence. Employees with a narrow span
of influence can sit by themselves all day doing their work and not have to engage others.
Consider a software engineer responsible for writing a simple piece of code. He or she can
accomplish this project successfully without having to spend much time engaging with others.
They don't need to be distracted from their work.
At the other extreme are employees who must spend most of their days in meetings and
discussions in attempts to bring people along with their agenda. They know they can't succeed
unless they can influence others to help them. These employees are in jobs with wide spans of
influence. This would likely be the case for a sales manager who oversees a team of field sales
representatives. That individual needs to engage with the engineering team to make sure that
they're responding to customer suggestions and requests. He or she also needs to engage with a
customer service team to learn how the field reps can answer customers' questions. And there
will be meetings with the finance team to ensure the proposed new customer deals get
financing approval.
The wider the span of influence, the more creative and resourceful an employee will need to be
about how he or she will achieve their goals. There are a number of mechanisms you can use to
widen span of influence. One is deliberately creating an entrepreneurial gap, as we discussed
earlier. When individuals do not control the resources they need to get the job done, they will
be forced to reach out and influence others to obtain the support and resources they require.
Other techniques that force employees to influence others include setting stretch goals, creating
cross-unit teams and task forces, using cost allocations and transfer prices to force people to
pay attention to costs originating in other units, and using dual-reporting or matrix
accountability.
BEGIN LIST OF INFLUENCE TECHNIQUES
1. Entrepreneurial gap
2. Stretch goals
3. Cross-unit teams and task forces
4. Cost allocations and transfer prices
5. Dual-reporting
6. Matrix accountability
END LIST OF INFLUENCE TECHNIQUES


 distracted from their work.

 At the other extreme
are employees
 who must spend
most of their days
 in meetings and discussions in
attempts to bring people along
 with their agenda.
 They know they can't
succeed unless they can
 influence others to help them.
 These employees are in jobs
with wide spans of influence.
 This would likely be the
case for a sales manager
 who oversees a team of
field sales representatives.
 That individual needs to engage
with the engineering team
 to make sure that they're
responding to customer
 suggestions and requests.
 He or she also needs to engage
with a customer service team
 to learn how the field reps can
answer customers' questions.
 And there will be meetings
with the finance team
 to ensure the
proposed new customer
 deals get financing approval.
 The wider the span of
influence, the more creative
 and resourceful an
employee will need to be
 about how he or she will
achieve their goals.
 There are a number
of mechanisms you can
 use to widen span of influence.
 One is deliberately creating
an entrepreneurial gap,
 as we discussed earlier.
 When individuals do not
control the resources
 they need to get
the job done, they
 will be forced to
reach out and influence
 others to obtain the support
and resources they require.
 Other techniques that force
employees to influence others
 include setting stretch goals,
creating cross-unit teams
 and task forces, using cost
allocations and transfer prices
 to force people to pay
attention to costs originating
 in other units, and using
dual-reporting or matrix
 accountability.


2.3.2 Span of Support
11:56 PM
2.3.2 Span of Support

609d8e6f29c5fc0b825a1db4/b38e5b11-ebdb-4b41-b323-c408755d7f25/1071/908/#/syllabus>

PROFESSOR SIMONS: A wide span of influence forces employees to try to influence
others, shaping patterns of action.
Interactive JDOT tool with three sliders appearing one directly above the other: Span of
Control, Span of Accountability, and Span of Influence. All three sliders range from 1 to
10 in increments of 1. Span of Control lists Few Resources at 1 and Many Resources at
10. The slider is set at 2. Span of Accountability lists Measures allow few trade-offs at 1
and Measures allow many trade-offs at 10. The slider is set at 6. The horizontal distance
between the 2 and the 6 is labeled the Entrepreneurial Gap. Span of Influence lists
Interactions within unit at 1 and Interactions across units at 10. Slider is set at 8.
This leads to our final question, how much support can an individual expect when they
reach out to others for help in achieving their goals? We address this with a fourth and
final span-- span of support.
In some organizations, employees may find that others are not very willing to help them.
When they ask for support, the response is flat out-- that's not my job. But in other
organizations, people are eager and willing to help when asked. Span of support is the
most challenging span to adjust. It's relatively easy to adjust span of control by
increasing or decreasing headcount or budgeted resources. Similarly, you can easily
adjust the span of accountability by narrowing or widening performance measures. For
span of influence, managers can use design techniques such as stretch goals and ranking,
which we will discuss shortly.
Span of support is different. It reflects a business's culture. This points to another P of
strategy-- strategy as perspective. For this one, you have to put on your hat as a coach,
inspiring people to work together as a team, dedicated to helping others succeed. Unlike
the others, this span is not based on formal design mechanism. It requires leadership.
Organizations with wide spans of support typically have four attributes. First, they have a
strong sense of mission and shared purpose. Think of the U.S. Marine Corps or any elite
military unit. In the Marines, your primary responsibility and duty is to help the person
beside you, even if it means giving up your life. As a result, Marines put enormous
emphasis on building pride in their organization's mission through a sense of shared
purpose.
The second attribute is strong identity with the group. These organizations hire very
selectively and everyone knows it. As a result, employees feel that they're part of an elite
group. They're special. This makes them much more willing to help others in the group
when asked. We see this at organizations like Google and Southwest Airlines. There's a
strong sense of camaraderie. People are willing to step up and help when asked.
The third attribute is trust. When you help someone, you're making yourself vulnerable.
You have to have confidence that your actions will not come back to hurt you. Finally,
there has to be a sense of fairness and equity in rewards. If someone asked you to help
them and they received all the rewards and recognition and you got nothing, you're going
to be less eager to step up the next time they ask.
BEGIN LIST REVIEWING FOUR ATTRIBUTES OF ORGANIZATIONS WITH
WIDE SPANS OF SUPPORT
 Strong sense of mission and shared purpose
 Strong identity with the group
 Trust
 Fairness and equity in rewards
END LIST REVIEWING FOUR ATTRIBUTES OF ORGANIZATIONS WITH WIDE
SPANS OF SUPPORT
Of course, not all jobs require a wide span of support. Consider a bond trader sitting at a
trading desk who's motivated by self-interest and personal rewards as they search for
profitable trades. There are no expectations that other traders will help them maximize
their trading profits. But this is the exception. Most organizations today are trying to
build long-term relationships with customers and manage complex value chains. For jobs
in these organizations, a wide span of support is essential. Leaders must work hard to
ensure that all four attributes-- pride and purpose, group identity, trust, and fairness and
equity-- are in place to build the necessary commitment to help others.


To get a view from another business leader you’ve met, let’s turn to David Rodriguez to
learn how Marriott cultivates a wide span of support across roles at his company.


 DAVID RODRIGUEZ:
One of the tensions
 that we try to
manage very carefully
 is we do believe, I
certainly believe,
 that it's important
that people understand
 what they're held accountable
for and expectations.
 I think that's
vitally important.
 In fact, not to
clarify expectations,
 not only is it dysfunctional, it
just seems like an inhuman way
 to run a company--
 inhumane way to run a company.
 That said, we also
try at the same time
 to cultivate an
environment where--
 I know many, many
environments, they think up
 internally you have customers.
 Everybody has customers.
 I personally don't
believe in that.
 And every time I hear it
here at Marriott I say,
 we're all partners.
 And so you may have
a certain level--
 area of responsibility.
 But I want you to be
concerned to what's
 the left of you,
what's to the right
 and what's to the
left of you, as well.
 To some extent, that may blur
a little bit of the clarity.
 But I think that that
is more realistic
 given the complexity of the
environments that we're in
 and the change that occurs.
 I don't think it's realistic
to think that everyone's
 going to have this
very discreet,
 black-and-white responsibility.
 I think they should
have a good notion
 of their principal
responsibilities,
 but in a community sense,
have some sense of ownership
 over other related
activities and how others
 are progressing in their work.
 One of the things that we
do applaud and recognize
 here is the extent to which
people go out of their way
 to help someone else, even
though there isn't necessarily
 a direct tie to
personal outcomes.
 But we have actually awards
that get at that sort of notion.
 In leadership development,
one of our principal
 focuses on leadership
development
 now is, in fact, to evoke--
 to have our leaders
think more about their,
 I'll use the word
"network effect"--
 not just whether they're
having good local results,
 but to what extent are they
contributing, for instance,
 to the overall, say,
organizational agility
 of the company?
 You may have developed good
teamwork within your own team.
 But as a manager,
we expect you also
 to do whatever you can to
promote inter-group teamwork as
 well.
 And so this notion of
having a network effect
 on the company, part of
my major areas of focus
 is, the more
managers that I have
 who are thinking about
the network effect
 they have on the
company overall,
 I think the more successful
we're going to be.


Span of Support at Go Mobile

Span of support defines the range of support an individual can anticipate and expect from
people in other organizational units.
Span of support is determined by organization-wide variables such as:
 Shared purpose
 Group identification
 Trust
 Group-based rewards
 Equity ownership
Given how the previous three spans have been set, if you were Meghna, how wide
a span of support would you set for team leaders, with 10 being widest?


2.4.1 Performing the X-Test
12:11 AM

 PROFESSOR SIMONS: Now that we
have introduced the four spans,
 it's time to pull
it all together
 and test whether a job
is properly designed.
 To do this, we need to go back
to the concept of equilibrium
 that we learned in our
Economics 101 class.
 As you will remember for
any business or the economy
 as a whole, the supply
and demand of resources
 must be in balance.
 We can apply this same
concept to any job.
 For a job to work well,
the supply of resources
 must equal the
demand for resources.
 The JDOT will allow
you to test this
 by performing what
we call the x-test.
 Let's try this out for the
team leader job at Go Mobile.
 If you remember, team leaders
have a narrow span of control.
 They control very little.
 Decision rights over pricing,
product mix, and inventory
 are handled at headquarters to
maximize economies of scale.
 At the same time,
team leaders have
 a wide span of accountability.
 They are accountable for
revenues and store profit.
 These measures are
wider than the resources
 they control, creating
an entrepreneurial gap.
 But this makes sense, because
Meghna Modi wants her team
 leaders to be as scrappy and
entrepreneurial as the mom
 and pop competitors
down the street.
 But span of control and
span of accountability
 represent only half
of the equation.
 They are what we might
call the hard resources
 and the hard demands of the job.
 We must also look at the
soft side of the equation.
 This includes span of
influence and span of support.
 For team leaders, let's
set span of influence
 somewhere in the middle.
 Most of their work is
inside their stores.
 But they have to reach out
occasionally to other stores
 and to people at
headquarters for help.
 And how much help can
they expect to receive?
 From the early days
of the business,
 Meghna Modi personally
provided the support
 that the team leaders needed.
 She worked day and
night to support them.
 We can therefore set span
of support far to the right.
 Now that we've set
all four spans,
 we can perform the
x-test to find out
 if this job is likely to work.
 This comes back to
the need to ensure
 that the supply of
resources equals the demand.
 Consider total
resources available.
 To do so, we draw a line
connecting the hard resources
 and the soft resources.
 The hard resources come from
your command and control
 authority, as indicated
by span of control.
 With wide span of
control, you can literally
 order people to do things.
 The soft resources come
from people's willingness
 to help you, captured
by span of support.
 Second, we look at the
demands of the job.
 So we next draw a line
connecting the hard demands
 and the soft demands.
 The hard demands come from span
of accountability, the measures
 that you're accountable for.
 The soft demands
come from your need
 to influence others
to get your job done.
 If those two lines
cross to form an X,
 this tells you that
the supply of resources
 equals the demand for resources.
 The job will work.
 If the lines don't cross,
however, supply and demand
 are out of balance.
 The job will not work.
 The spans need to be adjusted
to bring them into equilibrium.
 As you can see for
the team leader job,
 the lines cross to form
an X. This job works.
 But as you can also see, this
is because of the wide span
 of support Meghna provides
to the team leaders.
 The problem she
now faces, however,
 is that she wants to
scale the business
 from 34 stores to 200 stores.
 With so many new
stores, she does not
 have enough time to support
all the team leaders.
 As a result, span of
support for team leaders
 will shift to the left as the
number of stores increases.
 As that happens,
the x-test reveals
 that the demands on that job,
from span of accountability
 and span of influence, are
now greater than the resources
 available from span of
control and span of support.
 To succeed with her
expansion plans,
 Meghna needs to find another
way to provide team leaders
 with the support they need.

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Scaling Support at Go Mobile: The District

Manager Role
To widen span of support in her absence, Meghna hired district managers to supervise
the team leaders and provide them with the necessary coaching and guidance.
Here is Meghna describing the new district manager job and the type of individuals she
was looking for to fill these roles.


 MEGHNA MODI: In the
early days of Go Mobile,
 I was spending 20 hours a day
supporting the store managers,
 from morning to night.
 So we opened the
stores at 9:00 AM.
 And I knew the boys
were coming to stores
 from between 8:00 to 9:00.
 And then we would shut down.
 There were long hours.
 A typical store opens at
9:30 and closes at 9:30.
 And then we closed the shutter.
 But then there's
another half an hour
 to wrap up the store, to do
the checklist, audits, etc.
 So it was a full day.
 And I spent all my time in
supporting the stores, day
 and night.
 So it was critical to hire
the right middle management,
 the right district
manager, at that time
 for providing the supervision
and support to the store
 managers.
 The type of person
that we looked
 for was a mature guy,
because the team leaders were
 in their late teens,
early 20s, somewhat
 like wild horses, very
driven, very hungry,
 but could be out of control.
 So we looked for
a mature person,
 so definitely not in
their 20s, early 20s.
 He was in his 30s,
hoping that he'd
 be mature and provide the
leadership that the store
 manager would require.
 So I looked for educated
managers having experience
 in running teams, at least
minimum eight to 10 people,
 having been in sales
jobs or sales functions,
 and overseeing
distributed business.
 They had the capability
to look at data,
 analyze data, and remotely
also supervise stores,
 because we had so many stores.
 And it was not possible
for a district manager
 to visit a store every day.
 So that's what I
was looking for.
 And we hired some people from
those similar backgrounds
 who were traditional
sales managers,
 having three to four years of
experience in India in telecom.
 The district managers
did get a lot of support
 from me in terms of
pricing decisions,
 in terms of stock decisions.
 In terms of people decisions,
they had a lot of power
 in deciding which store
managers to put in which stores.
 If some store manager
or the team leader
 was not performing
in a store, they
 had the right to shift
him to another store.
 They could recruit
a store manager.
 They could fire a store--
so they had plenty of rights
 and a huge amount of
power and lots of support.
 There had power because
they were the middle level
 layer between me and
the store manager.
 So they had power to
decide on the price.
 If in the market, they felt that
it is really price-sensitive,
 let's run a promotion
for one week.
 Let's see what happens.
 So I gave them that authority.
 It was decentralized.


 MEGHNA MODI: The
district managers
 were not able to
support the team
 leaders in the way we conceived
it and failed to support them.
 Not because they did not
want to support them.
 It's just that they were
not able to understand
 what needs to be done.
 Because the market
is so competitive,
 it is such a commodity business.
 So if a customer
walks in, says I'm
 getting this iPhone
10% cheaper than you,
 what do you do at that time.
 That's the question.
 What level of
support, what do you
 answer, what do you tell the TL
that he does not know already?
 And first is that.
 Second is if it's at
9 o'clock at night,
 does the district manager care
enough to pick up the phone
 while he's having dinner and
the store manager or the team
 leader needs to take, because
he did not have decision rights,
 he did not have
authority over pricing?
 So he had to reach
out to somebody
 to take a price discount.
 Now either I don't
pick up the phone
 or the district manager
says, I don't know,
 you try to convince
him that he's
 buying from a
reputable brand, he's
 buying from a better store, and
therefore, he should pay more.
 The point is, it is a
price sensitive market.
 There's so much
pricing pressure.
 Stock may not be 100%.
 So what are you looking for?
 You're looking for somebody
to show you a way out.
 What could be the
possible way out?
 These are the alternatives.
 If there's no product, say these
are the substitute products.
 For that, you need to have
knowledge about the products.
 So somehow, the district
manager struggled
 in understanding the products.
 They could not
understand the difference
 between Samsung A10S, A20S,
A30S, but that's bible.
 Like for me, that's
the first page.
 You have to know, you have to
know how many cameras there
 are in the phone,
you need to know what
 are the lenses in the phone.
 You need to know the phone to
be able to substitute the phone.
 So that's one thing.
 So if you don't
know the product,
 how do you help
the customer, how
 do you help the team leader to
satisfy the customer when they
 don't have stock, which is one
of the biggest resources they
 need and they don't control?
 The second thing is, pricing
is very tough in this market.
 At that time, there were
so many mom and pop shops
 and they need to sell, even
if they sell at a loss.
 So if I don't have
a strategy of how
 to help the store manager
or the team leader
 to sell high, to sell at
a high price in a very
 competitive pricing market, then
what use of that conversation?
 So if a team leader calls me,
for example, at 9 o'clock,
 and says this model is
selling for 20% cheaper
 than the price that is dictated
by the brand or the company,
 what am I supposed to do?
 Now how do you respond
to that question?
 You ask like, for
typically, the district
 manager would in that time,
would ask for a price discount.
 So that's exactly what
we don't want to do.
 Because you don't know
the customer enough.
 Whereas, the typical question
should be, who is the customer,
 how is he wanting
to buy the phone.
 Is he buying it on finance?
 If it's something
he cannot afford,
 can we show him some
other alternative?
 So that communication
breakdown happened
 when the district
manager did not
 have enough knowledge about what
it takes to win in the market.
 So despite effort,
I truly believe
 some of the district
managers did try, but failed
 to deliver because
understanding the market,
 because it's so competitive and
you're so close to customers.
 If you're not
close to customers,
 you're not market facing, it
may be very difficult for you
 to appreciate the challenges
that the team leader faces.

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 PROFESSOR SIMONS: Why didn't
the district manager role
 work for Go Mobile?
 We can use the job
design optimization tool
 to identify the reasons.
 Let's start with
span of control.
 District managers were
given decision rights
 over product mix,
store staffing,
 and many other variables.
 In other words, their span
of control was very wide.
 But surprisingly,
district managers
 had very little accountability.
 They were not responsible for
store revenues or store profit.
 They were only expected to
ensure that stores opened
 and closed on time and
kept up general standards
 of cleanliness.
 Span of accountability
was narrow.
 For span of influence,
we could put this
 somewhere in the middle.
 Most of their job
was self-contained,
 although sometimes they reached
out to other district managers
 and to Meghna for help.
 And finally, we
know that Meghna was
 very responsive to
their requests for help.
 In other words,
district managers
 had a wide span of support.
 When we perform the x-test
for the district manager role,
 the lines do not cross.
 The district managers have
more resources than they need.
 Or put another way, not enough
was being asked of them.
 Either way, resources
were being wasted
 and this job was not
successfully supporting
 strategy execution.
 For the team leaders, of course,
the most important implication
 was that the district
managers were not giving them
 the support they needed
as Meghna's time became
 more and more limited.
 There were several
reasons for this problem.
 First, district managers had
higher levels of education
 and came from different
social backgrounds.
 As a result, there was little
goodwill or social bonding
 between them.
 Second, the team
leaders received bonuses
 for store revenue and profits.
 District managers did not.
 So quite often, team
leaders earned more
 than their district managers.
 This created resentment
and got in the way
 of the willingness of
the district managers
 to help and support them.
 Finally, district managers
had never worked in a store.
 They didn't know how
to sell or understand
 the problems that team
leaders faced every day.
 As a result, shared purpose
and trust was very low.
 All this added up to a situation
where the team leaders were not
 getting the support they needed
from their district managers.
 And this problem grew as Meghna
added more and more stores.
 She was simply
stretched too thin.

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 MEGHNA MODI: I'm number
one in Samsung in TL.
 As a TL, my store does number
one in Samsung or iPhone.
 So I know the brand.
 Now I would like to
manage the brand,
 so not just sell the brand,
but manage the brand.
 So would you like to be
the buyer of the brand?
 With lots of
training, with lots of
 support that he wins
in that new role.
 So while being a team
leader, he gets a new laptop
 with WiFi and internet.
 And so he can raise the purchase
order while being in the store,
 and have all the tools--
 the tech tools that
are built around
 that that gives him guidance
on how to raise a PO.
 So there's constant
pipeline, constant training,
 as well as constant
opportunities,
 I hope, for everybody
to grow in Go Mobile.

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2.4.3 Job Design Changes at Go

Mobile
Rethinking the Design of the District
Manager Job
Now that you are familiar with the JDOT and the theory underlying it, please
propose at least one change you would make to the design of the district
manager job at Go Mobile so these managers are better positioned to support team
leaders.
DESCRIBE THE CHANGE HERE.
WHY DO YOU THINK THIS CHANGE WILL HELP?
HOW WILL THE CHANGE YOU SUGGEST BETTER BALANCE THE SUPPLY AND
DEMAND OF RESOURCES IN THE ROLE?

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 MEGHNA MODI: So when
the relationship
 between the district manager
and the team leader failed--
 the district manager failed
to supervise or provide
 the right levels of support
to the team leaders--
 we tried an incentive plan.
 Because initially, they
were not on incentives,
 as they had dual roles, if
someone was an HR manager.
 So we said, if the district
manager is responsible for five
 stores, let's link the
incentives of those five stores
 to the district manager.
 We did that.
 We tried it for three months.
 It did not work, just because
incentives is not everything.
 Incentives do work.
 Incentives are very powerful.
 Incentives are very
entrepreneurial.
 But you need to know
what to do to be
 able to catch the incentive.
 They work in certain
conditions, and they don't
 work in certain conditions.
 In fact, it can create problems
if it's not well monitored.
 Just to get that incentive, I
can also do some malpractice,
 or I can manipulate data.
 So that was one
that did not work.
 The second was the matching.
 We tried a way
that possibly there
 was more understanding and trust
between the district manager
 and the team leaders
by a matching system.
 So the district manager
could choose the stores
 he would be supervising,
or the team leaders
 could nominate the
district manager they
 would be working with.
 But once again, it did not work.
 Because there were
all sorts of games.
 I want to pick my favorites.
 I want to win, so
why should I invest
 in building a weak store?
 I have five hours or
10 hours of workday.
 Should I spend on
the big stores?
 Should I spend on
the small stores?
 So that did not work
in terms of fairness,
 consistency, equal levels of
support to the team leaders.
 And the third was
the feedback system,
 which we tried, a upward
feedback system from team
 leader to the district manager.
 And you can only give feedback
if the environment is not
 threatening.
 And you truly want feedback.
 You want to improve.
 And we felt that the
team leaders were not
 very comfortable in doing that.

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Analysis: Widening Span of Support for Team Leaders

Through Internal Advancement
Let’s pause to reflect on Meghna’s closing statement: She wants everyone to grow at Go
Mobile. To that end, you might have observed a critical change to Go Mobile’s strategy
in these last two clips: Team leaders themselves were now being promoted into
managerial roles.
Previously, Go Mobile hired individuals from outside the company or from headquarters
to staff the district manager positions: they required these managers to possess advanced
degrees as well as prior management experience.
As part of her attempt to increase span of support for team leaders, Meghna made the
critical decision to create more advancement opportunities for team leaders within the
business. With enhanced training, team leaders could now aspire to become team leader
coaches, team leader controllers, or brand managers. This not only motivated high
performance, but also helped address some of the deficiencies in the design of the
original district manager role.
As the business scaled from 34 stores to 200 stores, the newly promoted managers
supporting the team leaders needed to know the customer and the market intimately.
These managers needed to be on the ground—literally—as much as possible. And no one
had more on-the-ground experience than those who had worked in the team leader role
themselves.
Moreover, Meghna believed that promoting from within would increase all four
attributes that widen span of support: shared purpose, group identity, trust, and fairness
and equity in rewards.

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Employee Growth at Go Mobile

To close our study of Go Mobile, let’s turn to Purshotan Paney to learn about the impact
that this culture of learning and support has had on his career and on his life. Starting as a
cashier in one of Go Mobile’s stores, Purshotan has worked his way up through the ranks
of individual store management to oversee one of Go Mobile’s store clusters.


 PURSHOTAN PANEY: I
came to Delhi in 2012.
 I was studying at
NIIT at that time.
 I started the job in 2014,
month of July, in MG Mobile,
 as a cashier.
 And it was important
to me that I
 work at a good company
in a good role.
 I come from a middle-class
Bihari family,
 and these roots
instilled in me the drive
 to work hard and strive
to be a good man.
 I came to MG mobile in 2014
and worked as a cashier
 for a year and a half.
 I was then transferred
to Bunglow Road
 but was in the same role.
 During my short
stint here, ma'am
 acknowledged that I was
capable of much more!
 Seeing my potential,
ma'am gave me a chance
 to work in a larger setting.
 I was transferred to
different locations
 like Lakshmi Nagar,
Kalkaji and others.
 But I still couldn't see
myself holding higher positions
 in the company!
 All I had envisioned for myself
was to work in a good role
 and work with honesty,
like I always have.
 But with the complete support
from ma'am and the company,
 I've been able to learn
and implement much more!
 Now it's been five
months since I've been
 promoted to Cluster Manager.
 This company has fostered such
a collaborative and supportive
 environment that we feel it's
our own house, our own family!
 Just as a parent never
leaves anyone behind,
 this company has done a lot
to take everyone forward
 with them.


Q2 2021 Capital Markets Custom
9:35 AM

[MFCRM-3756] CM: Investor Trends Tab: By Product, By Coupon Rate, and By Bond Type Category -
Modern Delivery Jira (fhlmc.com)

1. C360 ID potential
2. Automation integration CME and uses Tabule report
3. Investor trend tab - Card by product (
4. Customer 360

Module 2 Summary
5:48 PM

Module 2 Summary
Aligning Job Design to Strategy
Congratulations. You have now finished the second module in Strategy Execution. Let's review
what we have learned about empowering employees to execute strategy.
In our first lessons, we discovered that cascading strategy into job design is both important and
challenging. For any job to succeed, the supply of resources available to an individual must
equal the demands placed on that individual. Managers can analyze and improve this balance
by adjusting span of control, span of accountability, span of influence, and span of support.
But what happens when you find that a job is not balanced? This was the challenge facing
Meghna Modi at Go Mobile. She needed her store managers, or team leaders, to behave
entrepreneurially and cultivate deep customer relationships to compete effectively with the
small mom and pop businesses nearby. To do so, she held team leaders accountable for wide
measures like store revenue and profit.
At the same time, she wanted to capitalize on the benefits of scale that come with being a
multi-store retail chain. This meant that many critical decisions around product price and
inventory levels must be made at headquarters rather than left to store managers. For team
leaders, this mismatch created a gap between their narrow span of control and the wide
measures for which they were accountable. This gap is called the entrepreneurial gap, and it’s
very common in many of today’s fast-moving, customer-centered businesses.
Span of influence at Go Mobile was mid-range. Team leaders had to sometimes reach out to
Meghna Modi and their district managers for help, but much of their work was self-contained
in their individual stores.
How can a business help employees succeed in such circumstances? They can ensure that they
provide a wide span of support. We saw Meghna struggle with this problem as she redesigned
the district manager job to ensure that the district managers would give the team leaders the
support they needed as she scaled the business.
As we have seen, accounting for the “soft” demands and resources of a job—reflected in the
spans of influence and support—is every bit as critical as thinking through the more traditional
“hard” resources defined through the spans of control and accountability. In Module 3, we will
explore how you can best design these two “soft” spans.
We ended this module by having you analyze a job in your own business using JDOT and
develop recommendations for improvement. We encourage you to share what you have learned
about JDOT with others in your organization and to think about how you can implement the
job improvements you identified.

From <https://safe.menlosecurity.com/https://courses.myhbx.org/student/concept/609d8e6f29c5fc0b825a1db4/3ec071a0-
16d3-4824-9ef3-3165c047da44/1071/908/#/>

Module 3:
Thursday, June 3, 2021
10:39 PM

Motivating and Inspiring Employees

Welcome to Module 3 of Strategy Execution. Last week, we introduced you to the Job
Design Optimization Tool, or JDOT. You learned the importance of balancing the supply
and demand of resources in a job by adjusting four spans aligned to the four Ps of
strategy. You also learned how to adjust span of control—to provide the right amount of
resources to key jobs—and span of accountability to create an entrepreneurial gap.
This week, we will go into more detail on how to adjust the remaining two spans—span
of influence and span of support. First, you will learn how to widen span of influence and
spur your employees to innovate. Then, you will learn how to widen span of support—
people’s willingness to help others—by developing and communicating core values. By
the end of this module, you will have the tools you need to empower your employees and
give them the motivation and inspiration they need to execute your strategy.

609d8e6f29c5fc0b825a1db4/5f386dd7-940b-44f1-89a8-03021b1f87b2/1071/908/#/>
In our last lessons,
 we saw how critical
it was for Go Mobile
 to motivate its team leaders
to act like entrepreneurs.
 If they didn't, they
would lose their customers
 to the entrepreneurial mom and
pop stores down the street.
 This isn't something that
affects only Go Mobile.
 It affects every
company operating
 in a competitive environment.
 To win, every employee must
be at the top of their game.
 We all get comfortable
following familiar routines
 and working at an
easy pace, and then we
 wonder why the business is
falling behind competitors.
 Part of the problem is
that many employees are
 insulated from the marketplace.
 They never meet customers.
 They don't have a sense
of competitive pressures.
 Our goal then is to bring
this competitive pressure,
 the pressure that
entrepreneurs feel every day
 inside the organization.
 Businesses do this by
pushing employees out
 of their comfort zones,
asking them to think and act
 like winning competitors.
 The best businesses
motivate their employees
 to be creative,
entrepreneurial, and willing
 to work with others to
find customer solutions.
 They generate creative tension
to shape patterns of action,
 one of the four Ps of strategy.
 In this lesson,
we will introduce
 a set of techniques
you can use to increase
 the level of creative
tension in your business.
 Before we continue, I should
emphasize the importance
 of the adjective creative.
 As we dial up the
level of pressure,
 we're trying to generate a
healthy, creative tension
 to spur innovation.
 We are not trying to
introduce anxiety and fear.
 What we will present
next is a menu
 of options from
which you can choose.
 Just like when you
go into a restaurant
 and look down the
menu, some things
 you will like and choose.
 Others you will not.
 In the same way,
you should not feel
 that you have to like or use
any or all of the techniques
 that we will discuss.
 But at a minimum, you
need to be aware of them.
 Many of your competitors will
be using these techniques,
 and you may certainly
choose not to.
 But if you decide not to
adopt these techniques,
 you need to be sure that you
have an alternative approach.
 Otherwise, your competition
will outrun you.

609d8e6f29c5fc0b825a1db4/5f386dd7-940b-44f1-89a8-03021b1f87b2/1071/908/#/syllabus>
Learning Objectives
 Explain why it is important for businesses operating in competitive markets
to spur innovation.
 Define stretch goals and explain how they differ from typical goals.
 Describe techniques for creating an environment conducive to achieving
stretch goals.

609d8e6f29c5fc0b825a1db4/5f386dd7-940b-44f1-89a8-03021b1f87b2/1071/908/#/syllabus>

3.1.2 Changes Afoot at Henkel
11:05 PM

Shaking Up Complacency at “The Happy
Underperformer”
In Module 1, we met Kasper Rorsted. Before becoming CEO of Adidas, he helped
to push an underperforming global business, Henkel, into the top echelon of its
industry by generating high levels of creative tension in a business where
complacency was the norm.
Kasper Rorsted got his start in a sales job at a U.S. technology business, rising
through the ranks to become the leader of an international business unit with over
40,000 employees. In 2005, he joined Henkel, the German consumer goods and
adhesives company, as executive vice president of human resources, purchasing,
information technology, and infrastructure services. In 2008, Kasper replaced the
business’s retiring CEO.
Upon becoming CEO, Kasper announced a set of extremely ambitious financial
targets for the business. Henkel at this time was reporting comfortable growth and
profits: €14 billion in sales, with an increase of 8% over the previous year, and an
earnings before interest and taxes (EBIT) margin of 10.3%. However, Kasper felt
that the business had a complacent attitude and could do much better. He was not
alone in this perception: One senior official referred to Henkel as “the happy
underperformer.”
To spur performance in his first year as CEO, Kasper set a four-year target of a 14%
EBIT margin for 2012—a significant stretch from the reported 10.3% EBIT in 2008.
Additional targets included growing organic sales from 3% to 5% and growth in
adjusted earnings per preferred share above 10%. (“Organic growth” refers to
growth in a company’s sales from existing businesses rather than businesses that are
acquired.)
These financial “stretch goals” were the first in a series of changes Kasper planned
to implement to create a “winning culture” at Henkel. But do you think Henkel
employees and the wider financial community reacted to these changes?
Let’s find out.

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 the global economy
was in turmoil.
 He had set these
financial targets in 2007
 before the economy took
a turn for the worse.
 Rorsted, however,
took a firm stance
 that Henkel should not
revise those targets.
 As Rorsted will explain,
this was a departure
 from the usual way
of doing business
 at Henkel, one in which
poor performance was always
 attributed to external factors.
 KASPER RORSTED: We had
a tradition in the past
 that if we had a bad
year, it was oil crisis,
 it was recession,
it was competition,
 it was flooding in Thailand.
 But when the year was good, it
was because we were fantastic.
 So we changed it
around and said,
 I don't care what the excuse is.
 It's your number.
 So when it's good,
you're the hero.
 If it's not good, you're
the not-so-much hero.
 But we took it
out of the system.
 And we had, for ages, done
adjustments in our comp plans.
 And we said in 2008, we're not
going to change the business
 plan from 8 to 12.
 I don't care about recession.
 We just kept it, and
that's the way it is.
 And when we communicated
that number in London
 to the financial
community in 2008,
 there was 36 people there.
 And 35 didn't believe it--
 35 did not believe us.
 So sitting in a room like this
communicating and 35 was just
 saying, it's a waste.
 We don't understand
what you're saying.
 We don't believe you're
going to make it.
 In 2009, most of the
finance community
 came and said, why not
dropping the number?
 We have the biggest financial
crisis since the Second World
 War.
 And internally, it was
pretty much the same.
 So the buy-in to the number
internally and externally
 was fairly limited.


Was Kasper’s decision to hold Henkel to its original 14% EBIT margin target the right
one? Or would an undertaking like this one prove too much for the business to handle
under the circumstances?
To begin our evaluation, let’s examine how Henkel operated during this timeframe.
Henkel was founded in Germany in 1876 and became a leading producer of laundry
detergent and adhesives. Over the decades, the business expanded both its product
portfolio and geographic footprint. The company went public in 1985. The business,
nevertheless, maintained its strong German, family-owned roots. The Henkel family
continued to be heavily involved in the shareholder committee, and most of the leadership
team was German, including its past CEOs. Kasper, a Denmark native, was the first CEO
to be born outside Germany or Austria.
Henkel was organized into three major businesses, all of which operated in highly
competitive markets:
 Adhesives (48% of sales)
 Laundry and home care (30% of sales)
 Cosmetics/toiletries (22% of sales)
Henkel’s business was a leader in adhesives (as a point of interest, Henkel invented the
world’s first glue stick), but faced stiff competition from global competitors like 3M. In
contrast, the business was a relatively small player in home products (e.g., cleaners and
detergents) and cosmetics, where it competed against global brands from much larger
competitors such as Procter & Gamble (P&G), Unilever, and L’Oréal.
This chart outlines Henkel’s performance relative to competitors in the years leading up to
and overlapping Kasper’s tenure:

KEY
FINANCIALS
OF HENKEL
AND
SELECTED
COMPETITOR
S
2000 2001 2002 2003 2004 2005 2006 2007
Total Revenue
(in millions of
euros)
P&G 41,733 46,312 40,749 37,764 42,215 46,845 53,650 55,387
Unilever 47,582 51,514 48,270 42,693 38,566 38,401 39,642 40,187
3M 17,778 18,027 15,573 14,465 14,780 17,869 17,372 16,751
L'Oreal 12,671 13,740 14,288 14,029 13,641 14,533 15,790 17,063
Henkel 12,779 9,410 9,656 9,463 10,592 11,974 12,740 13,074
Sales Growth
(%)
P&G 4.8 -1.8 2.5 7.8 18.5 10.4 20.2 12.1
Unilever 16.1 8.3 -6.3 -11.6 -9.7 -0.4 3.2 1.4
3M 6.2 -4.0 1.7 11.6 9.8 5.8 8.3 6.7
L'Oreal 17.9 8.4 4.0 -1.8 -2.8 6.5 8.7 8.1
Henkel 12.5 2.2 2.6 -2.3 12.3 13.0 6.4 2.6
EBIT Margin
(%)
P&G 14.9 12.1 16.6 18.1 19.1 18.5 19.4 20.2
Unilever 11.1 11.2 11.8 13.1 14.9 13.2 13.6 14.5
3M 17.2 13.6 18.7 20.9 22.9 22.9 20.2 21.8
L'Oreal 12.0 11.5 12.1 12.6 15.0 15.9 16.1 16.5
Henkel 7.4 6.4 6.9 7.5 9.4 9.7 10.2 10.3
Source: Compiled from Capital IQ and company documents, citing Bloomberg.


 NARRATOR: As Rorsted
took the helm at Henkel,
 all three of their
businesses began
 to feel the impact of the
global financial crisis.
 Consumers were
switching to lower
 cost cosmetic and
personal care products,
 and focusing more on
basic must-have items.
 They made fewer discretionary
pleasure purchases.
 This would present a
challenge for Henkel.
 As you may have observed,
it is quite difficult
 to improve EBIT margin
in these businesses,
 even with good
market conditions.
 These are highly
commoditized products,
 and consumers tend to
be price sensitive.
 Additionally, the cost
of the raw materials
 used to produce these
products went up.
 Henkel raised prices to
offset these increases, which
 together with the poor
economy, slowed down
 volume growth across
all business units
 in the second half of 2008.
 Beyond the walls of
Henkel's headquarters,
 market conditions were grim.
 But inside Henkel,
little had changed.
 Employees continued to
enjoy the long tenures that
 were a hallmark of the company.
 Performance feedback was
overwhelmingly positive.
 And they were generally shielded
from competitive pressures.
 It was into this
context that Rorsted
 announced his turnaround
plan for the business.
 This turnaround
plan was not limited
 to setting intense
financial targets.
 Rorsted also divested several
businesses, terminated
 employees, closed
facilities, invested
 in growing brands and
business, consolidated shared
 services to several
global sites,
 created a forced ranking
system for remaining employees,
 and overhauled
Henkel's core values.
 Here is Kasper on the
turnaround plan he introduced.
 KASPER RORSTED: When I
took over as CEO in 2008,
 the first thing I did was,
within the first 30 days,
 I closed our corporate
R&D overnight.
 So people understood that
this is probably serious.
 We closed, in 2008,
our manufacturing
 plants, the old company.
 Before the war, the
Second World War, we had,
 the company had a manufacturing
plant in Eastern Germany.
 In 1990 or '89 when
the unification came,
 that plant was brought back.
 Because it was very
emotional parting.
 We needed to close that also.
 So basically, we sent
a couple of signals.
 There are no sacred cows.
 And I deliberately
choked the corporate R&D
 at the center of our
company, because it
 was, as you probably
know, most companies have
 all kinds of rules,
but there's always
 exceptions for headquarters.
 Everything is always more
strategic at headquarters.
 So if you want to
change something,
 you go to the root
of the company.
 So closing there means
you're sending a signal.
 This is not, we're not
sacred or anything else.
 Closing a plant that
poorly performed,
 but that was acquired
for emotional reasons
 sends the very same signal.


Are the changes Kasper Rorsted has discussed so far—divesting plants, eliminating
departments, and reducing headcount—enough to prepare Henkel to hit the EBIT margin
goal?
Select the option that best applies.
Yes
No


 PROFESSOR SIMONS: By managing
the profit wheel effectively,
 a business can ensure that
its strategy is viable.
 By managing the cash
wheel effectively,
 a business can check to
ensure it has enough cash
 to execute that strategy.
 But again, this is not
the end of the story.
 The best companies will
go one step further,
 because those managers
know that businesses
 that produce the most profit
will have more resources
 to invest in new opportunities.
 They can pay higher
dividends to their investors.
 And they will enjoy
a higher stock
 price and a lower cost of debt.
 This is why businesses need
to not only produce a profit,
 but to maximize the
amount of those profits
 given the resources
they are utilizing.
 This analysis brings us to
our third and final wheel,
 the return on
equity or ROE wheel.
 Again, you can see the link
back to the profit wheel.
 We take our previous
profit projection
 as our starting point and now
examine that profit in relation
 to the size of the asset
base used to generate it.
 Imagine you produce $1,000 in
profit using $10,000 in assets.
 This is a very different
outcome than producing
 the same $1,000 profit
using $1 million in assets.
 In the first
scenario, assets are
 being used much
more effectively,
 thereby maximizing the
returns on capital employed
 and the returns on
equity for shareholders.
 Businesses should always be
working to maximize equity
 for shareholders,
since this will ensure
 the willingness of
shareholders to continue
 to invest in the businesses.
 Businesses can maximize
ROE in a number
 of ways, all based on increasing
your asset utilization.
 If you operate in a crowded
and competitive market,
 like Boston Retail does, you
can compensate for low margins
 by speeding up asset turnover.
 Boston Retail could do this by
holding less stock in inventory
 and selling the current
stock as quickly as possible
 to increase its
inventory turnover.
 To make this happen,
their management team
 would need to optimize
their supply chain
 to ensure the
business was receiving
 just-in-time inventory
replenishment.
 They should also pay
very close attention
 to changes in clothing
trends to ensure
 that they end up with fewer
end-of-season markdowns.
 As you can see, the
wheel comes full circle
 as higher levels of
asset utilization
 generate higher profits.
 To measure how effectively
they are maximizing ROE,
 Boston Retail managers
could set goals
 for supply chain optimization
and inventory turnover.
 In general, managers use the ROE
wheel to set performance goals
 for the following variables:
balance sheet assets, return
 on capital, asset utilization.

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ROCE: Measuring Asset Utilization at Scale

As a small business, Boston Retail does not need to worry about maximizing its return on
equity (ROE) across multiple profit centers. But what about larger companies that
comprise many business units? These companies can analyze their total asset base to
determine the amount of capital that each individual business employs. They can then
calculate how effectively managers are employing that capital by looking at the amount of
profit that business unit produced. This ratio calculation is known as return on capital
employed (ROCE) or return on invested capital (ROIC).
The formula is:
The first term in the formula (net income/sales) reveals a business unit’s profitability. The
second term (sales/capital employed) reveals the effectiveness of its asset utilization.
By allocating the company’s total asset base to individual operating units, the
ROCE/ROIC calculation allows managers to identify the contributions of individual
business units to the firm’s overall ROE.
To help us better understand ROCE, let’s return to Tom Polen at BD. As we recently
learned, BD invests much of its capital in plant facilities and equipment. But how does
this capital-intensive company measure the quality of the returns it sees on those
investments?
As part of its push to simplify operations, BD is urging leaders to do whatever they can to
free up capital that is not generating significant financial returns. Here, Tom outlines BD’s
new initiative to look more closely at return on invested capital or ROIC. Notice that BD
formally monitors the efficacy of this new approach by using a measure that is tied to
incentives for managers.
 TOM POLEN: One of the things
that we're very focused
 on now as we think about the
next phase of BD's journey,
 is we're actually increasing our
focus of our business leaders
 on capital and being
more responsible for it.
 And the surrogate
that we're using there
 is we're doubling down on ROIC,
or return on invested capital,
 as a metric that we're
not only increasing
 its weight in our long-term
incentive plans for leaders,
 but that we're holding
businesses accountable to.
 And this isn't something
that we've done
 over the last several years.
 But because our BD
2025 strategy is
 focused on growing,
simplifying, and empowering
 the organization, we see
ROIC as a very good surrogate
 for simplifying.
 And so having fewer
assets, less inventory, all
 of the different elements
of ROIC, fewer products,
 less complexity ends up
creating higher value
 through that at the same time.
 The less complex of an
organization you have,
 I believe ultimately it creates
the right mindset and behavior
 that improves your ROIC.
 And so we've spent
the last few months
 actually calculating ROIC
for each of the businesses.
 We're right in the process
now of communicating that
 to each of the business
presidents, who
 don't know their ROIC of
their business unit today.
 I actually will be sharing that
with each of our presidents
 in the next 30 days.
 And then they'll be setting
goals, three-year goals
 for improving their ROIC
with annual targets that
 will be done later this year.
 And then we'll make that
part, a much stronger part,
 of the metrics and systems
that we use at the company.
 And we're not just
doing it because we
 think ROIC is a good thing.
 It is a good thing.
 But we're utilizing
ROIC as a surrogate
 to help drive our
strategy forward.
 And that's really a focus on
our simplification strategy.
 I recently just had a
discussion last week
 where one of our business
presidents that-- they're not
 located here in New Jersey,
they're in another state.
 And they have a
beautiful campus,
 and we also own some
property across the street.
 And the property
across the street
 is worth tens of
millions of dollars.
 It's a beautiful property
in an expensive area.
 And so our team at
corporate went and said,
 do you have any plans
to use that space?
 And they said, no, but we
should just hold onto it,
 because who knows?
 And in that case,
that manager, there's
 no incentive for them to not
keep that piece of property.
 As soon as you start
measuring them on ROIC,
 they will immediately
want to get rid
 of that piece of property.
 Because it's not
adding any value.
 In fact, by holding
that property,
 we could be
preventing the company
 from investing in that next
acquisition of a new technology
 company, because that uses cash.
 We could be returning that to
shareholders in a specific way.
 We could be automating
a new manufacturing
 process that's going
to improve the quality,
 using the cash to do that.
 And so that focus of
really helping people
 be aware of ROIC, what
that means for them;
 we're actually going to have a
whole-day session where we're
 training our leaders
on what does ROIC
 mean to you as a
business-unit leader,
 and really understanding
the different levers
 that they can pull, building
those multiyear plans
 to improve their
ROIC, understanding
 what's dragging them down.
 And we're excited about that.
 And again, I'm
convinced that's going
 to help drive the simplification
focus that we want
 through the company,
but not from company
 corporate down, but
from the businesses
 up, by empowering
them in that way.
 Inventory is free.
 Capital equipment is free.
 So if you're a
president, there's
 no negative for having as
much inventory on the shelf,
 because it actually helps
you hit your revenue goal.
 It's easy to say for customers,
we've got a ton of the products
 sitting around.
 If I can get more capital free
to automate my manufacturing
 processes, why
wouldn't I do that?
 And so inserting
ROIC in that metric,
 it helps get the company
interests with the business
 interests together but do
so in an empowering way,
 so the business presidents can
really own it and drive it.

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3.1.3 Designing Stretch Goals
11:57 PM

Dialing Up Performance Pressure at
Henkel

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 to prove his skeptical
audience wrong
 and show that Henkel
could hit its EBIT goal,
 he would need to make some
major changes to performance
 measurement at Henkel.
 Historically, the business
set easy performance goals
 and targets.
 Between 2004 and
2008, 95% of employees
 hit their targets, even
as the business itself
 failed to hit its goals.
 Rorsted believed this was
happening because the targets
 themselves were too easy.
 KASPER RORSTED: You can
only have a winning culture
 if you win.
 And basically what we had is,
we had a very comfortable,
 very complacent
culture, and everybody
 was fulfilling their targets.
 But their targets were wrong.
 It was like saying, we're
losing every week as a company,
 and all the employees
felt they were winning.
 And you looked upon-- you saw
the companies you have up here
 is actually the top quartile.
 So we wanted to measure
ourself against the best ones.
 And people didn't
believe we could make it.
 We said, "We've got to do this--
 you push it through, and
if you don't, if you're not
 capable of doing it, we'll
help you, we'll develop you,
 or we'll let you go."


Henkel’s days of easy goals and targets would soon be behind them as Kasper Rorsted
ratcheted up creative tension. The stretch goals that Kasper announced aligned with his
vision of creating a winning culture. But what exactly do we mean when we talk about
“stretch goals”? Stretch goals demand that individuals reach beyond their current
capabilities and performance levels. The power of stretch goals, however, lies in the
unstated assumption that people must also work differently—not simply harder—in order
to achieve a difficult goal.
It’s important to understand the relationship between goal difficulty and motivation.
Behavioral research suggests that individual creativity and initiative are highest when
employees are placed under some amount of pressure to perform, which is why stretch
goals are so valuable. When employees aren’t challenged, motivation will diminish and
performance will drop. On the other hand, there is also a point when a goal becomes too
challenging. When employees perceive a goal as unachievable, they will begin to lose
motivation and may give up. As a manager, therefore, you should seek to find the “sweet
spot” of goal difficulty—the point where performance is maximized through a level of
challenge that is motivating but not perceived as impossible.

Y-axis represents motivation to achieve goals. X-axis represents goal difficulty by using
the example of a profit improvement goal presented using targets ranging from 2% to
20%. As size of the target increases, the line graph illustrates motivation increasing until
goal difficulty hits approximately 16%. This peak on the line graph is labeled the “Sweet
Spot” of goal difficulty. After this peak, the line graph drops to illustrate motivation
declining.


o meet stretch performance goals—and in the process, help the business hit its financial
targets—employees need to change how they work. Doing so required a huge mindset
shift for a business like Henkel.
How could Kasper Rorsted prepare a team of employees accustomed to easy targets for
such a significant change? To answer that question, let’s move our attention from the
market environment to Henkel’s internal operations, where employees tended to be very
set in their ways.
To put his plan into action, Kasper made a set of changes to the job design for a typical
manager, as shown here:
A typical management job in the “old” Henkel is shown in the left JDOT diagram.
Everything worked, but there was not much tension in the system—leading to the
complacency Kasper inherited. He quickly made two changes. First, he centralized
shared service, which effectively reduced resources and narrowed the span of control for
operating managers. Second, he widened span of accountability by changing
performance measures. Employees were now held accountable for fewer but wider
measures: in particular, customer-focused measures were now included in everyone’s
scorecard. These changes—narrowing span of control and widening span of
accountability—created an entrepreneurial gap. As a result, management jobs
throughout the business became more dynamic.
Next, he widened span of influence by using a common technique for generating creative
tension: a forced ranking system. This new system held employees accountable for
results, rather than for effort, and ranked their performance relative to their peers. We
will study this ranking system later in the lesson.
To perform well under this new job design, employees were forced to innovate and
collaborate with each other in unforeseen ways. As a result, teams began sharing best
practices and learning from each other.
As you learned in the last module, an entrepreneurial gap coupled with a wide span of
influence will only work if employees have the necessary level of support. Kasper
increased span of support in several ways. For instance, he created a new bonus structure
linked to overall business performance, group performance, and team performance,
which motivated employees to collaborate and help each other succeed. In addition—and
most importantly—he developed a new set of core values focused on putting customers
first and took great pains to ensure that these values were communicated effectively, as
we will see later in the module.
Marriott: Using Stretch Goals as Learning

Opportunities
Stretch goals can be used in a variety of organizations: they are not restricted to highly
competitive cultures such as the one Kasper wanted to create at Henkel. Here is David
Rodriguez, global head of human resources at Marriott, discussing how his (very
different) business approaches stretch goals.


One of the elements
 to not falling behind and not
having negative surprises,
 meaning the environment's
changed dramatically
 and, all of a sudden,
you find, wow, how did I
 lose market share that quickly?
 One of the ways that we prevent
that is to make managers,
 in particular,
accountable, not just
 for executing today's
business, but also,
 we communicate and
advocate, you need
 to be looking around corners
and asking the question, not
 just what other
opportunity's out there
 but what are potential
threats to the business?
 And an element of that is
having stretch goals out there
 and pushing people to not
accept today's level of success
 as a final destination but as
a starting point for what might
 be possible in the future.
 And I think as part of that,
I think what we've learned
 is it's good to set aggressive
goals and to challenge people.
 But you need to get
out of their way.
 You need to let them innovate,
try different things.
 One of the great things
I've learned here
 at Marriott, having been someone
who has fallen prey to this,
 I've made mistakes here.
 I've tried things.
 And they have not succeeded.
 I have never felt my
job was in jeopardy.
 What we ask is that people
learn from those mistakes.
 But it's really
important, to us,
 that people feel it is
safe to try new things.
 And all we ask is we
expect that there's going
 to be things that don't work.
 And all we ask is make sure
that you extract the learnings
 and apply it to
the next situation.
 But that's one of
the ways that we
 try to stay on the
leading edge of things.
 And setting aggressive goals,
realistic but aggressive goals,
 has to be part of
the dynamic in order
 to push the
organization forward.


nalysis: Creating a Safe Environment to Learn from

Mistakes
David notes the importance of cultivating a safe learning environment when assigning
stretch goals to employees. We can see this as an important condition for increasing span
of influence: Encouraging employees to take creative risks and work outside their
comfort zone inevitably increases the likelihood of making mistakes. To be willing to
take such risks, employees need to know that if they do make an honest mistake, they
will be encouraged to learn and improve.

Reminder: If you have not returned to the Team Discussion thread recently, please
revisit it now to review your peers' latest responses and share your latest thinking on the
discussion topic.


TRANSCRIPT
Autoscroll
ON
For us at Marriott,
 success is all about the degree
to which our associates are
 literally inspired to create
great experiences for others.
 And I'll give you
an example of that--
 a story, true story.
 It was just, maybe,
10 years ago now.
 But I was traveling
outside the country.
 I arrive at the airport.
 And I'm immediately told by my
Marriott counterparts there,
 there's a housekeeper
that desperately
 needs to talk to you.
 Now, I'm thinking-- that's
the first thing they talk
 to me when that plane lands.
 You're wondering, what
am I about to hear?
 Something's gone wrong.
 I have to have
this conversation.
 Of course, I said, of course,
I'll meet with the housekeeper.
 And so I get to the hotel.
 And they bring me to this room.
 And the housekeeper's in tears
before she starts to speak.
 And the difference,
though, the tears
 are actually tears of gratitude.
 What she wanted to express
to the company through me
 was gratitude.
 It turns out, in the course
of that conversation,
 she came from domestic
violence, poverty--
 in fact, generations of poverty.
 And she was a single mom
with a couple of children.
 And so she said that she was
just grateful because when
 she crossed the
threshold of that hotel,
 she found a new
family, a community.
 She found the
opportunity to break
 that trajectory for her family.
 In fact, those two
kids, I know today,
 have very successful
careers of their own--
 have started very successful
careers of their own.
 And I'll never forget.
 She said to me, because
I feel like family here,
 I make sure that every
single customer that I meet
 feels like family too.
 Is she motivated?
 Of course she is.
 I like to think about
it as inspiration.
 She is inspired
by the environment
 that she's in to create
great experiences
 and to create that sense of
well-being for her customers.
 Who is the primary
customer at Marriott?
 Our history would strongly
suggest it's our associates.
 Our business model,
in fact, starts there.
 It's reflected by the favorite
catch phrase of our founders--
 take care of the
employees, they'll
 take care of the customers.
 And the customers come
back again and again.
 So you can make a strong
case that for Marriott, it's
 about our employees
and making sure,
 again, that we are laser focused
on promoting their well-being.
 Because our belief is that
they, then, will be laser
 focused on customers.
 And in our case, also,
owners and franchisees which,
 in essence, are
a different class
 of customers for Marriott.
 But we start there.

3.2.1 Other Techniques for Generating Creative Tension
Friday, June 4, 2021
12:26 AM

Ranking Employees
Kasper Rorsted not only changed expectations for employee performance at Henkel
by setting stretch goals; he also changed the basis on which employee performance
would be measured. For the first time, Kasper would evaluate employees based on
the results they produced rather than on their effort.
Additionally, in 2009, he introduced a forced ranking system for all managers. He
believed that ranking managers against each other would motivate them to perform
at the levels necessary for Henkel to hit these ambitious goals.
Under the new ranking system, managers were rated along two dimensions on a 4 x
4 grid: (1) past performance (horizontal axis) and (2) potential for advancement
(vertical axis). Here is the schema they used:
Frame of
Orientation
Distribution
Potential Clarity Above 1 M1 S1 T1
Next Level 2 M2 S2 T2
Enrichment 3 M3 S3 T3
Engagement
Right Level 4 L4 M4 S4 T4
5% 25% 60% 10%
Clearly Moderate Strong Top

BeLow
Performance
Using this grid, managers would assign a “T1” to a high performer with significant
potential to move up in the business and an “M4” rating to someone who was doing
his or her job adequately, but had no prospects for promotion.
Managers assigned these rankings collaboratively at development roundtable
meetings (DRTs), which typically involved a group head and his or her management
team along with a human resources moderator.
The system mandated that, both within each department and business-wide, 5% of
employees must receive a “Low” rating, 25% a “Moderate” rating, 60% a “Strong”
rating, and 10% a “Top” rating. So, even if a manager believed that fewer than 5% of
individuals on her team deserved an “L” rating, she would still be required to revisit
those employees given “M” ratings and move the lowest performers among them
into the “L” category to meet the system’s requirements.
Evaluations flowed bottom-up, from country level to region to global business units,
with the Henkel corporate office actively tracking the percentages of employees in
each category to ensure compliance with the system.
Once the roundtable discussions concluded, managers met with their employees to
discuss their ratings and create individual development plans.

Learning Objectives
 Explain the benefits and risks of ranking employees to create
performance pressure.
 Describe a number of techniques for encouraging cross-unit
innovation.
 Identify the most valuable techniques for generating creative
tension in a given business context.

609d8e6f29c5fc0b825a1db4/95b2ab9c-a46a-4241-b1b2-72dea5cbf891/1071/908/#/syllabus>

 NARRATOR: Here is Kasper
Rorsted on initial reactions
 to the forced ranking system
and the larger development
 roundtable, DRT
process, at Henkel.
 KASPER RORSTED: I remember
when we implemented DRT
 four years ago in a
democratic organization,
 everybody was saying, this is
a great system, but just not
 my culture.
 I heard that in 75
countries across the world.
 Everybody said, fantastic.
 Or they would say--
stop and say--
 I really think it's good,
but I have a great team,
 it's really Tom's
team that's poor.
 And we said, I'm very happy to
hear that, but I don't care.
 So we've been very
clear on certain things
 and said, where we're
interested in understanding,
 where we're willing to
negotiate and where we're not.
 We're not willing to
negotiate our mission values.
 We're not willing to
negotiate on the DRT.
 NARRATOR: While some
employees at Henkel
 struggled to adapt
to the increased
 transparency and responsibility
brought about by the system,
 many were energized to perform
at their highest levels
 and improve their
ratings over time.
 Feedback also took on a more
prominent role at the business.
 Previously, managers tended to
avoid difficult conversations
 with employees.
 Everyone generally believed
they were doing good work.
 So when people were let go,
they were typically shocked.
 Now, difficult conversations
were unavoidable.
 And all employees received
an honest assessment
 of how they measured up.
 Here is Kasper Rorsted on
how he and the leadership
 team at Henkel used
the ranking system
 to identify high-potential
employees and to mentor them,
 by meeting with them
during their travels.
 KASPER RORSTED:
Every single time
 we travel, and the
management team travels
 160 to 170 days a year,
every single time we
 meet our high potentials.
 And our high potentials are,
if I can take your case study,
 you go and look upon the grid.
 S1, T1, T2.
 So when I went to Brazil, I
called the general manager
 and said I'd like to have a
breakfast meeting with this
 one, T1 and T2.
 Very easy.
 And then we track it every year.
 And then when we have
regretted losses,
 it has to be one of those.
 If it's not one of those,
then they are not regretted.
 An M that leaves the company
might be quote, unquote, sad.
 But it's not a regretted loss.
 That's why we put
this person into M.
 And then we link the pay
scheme to the DRT now.
 So depending on
where you are, then
 if you are more to the
right-hand side you get more,
 if you're more to the
left-hand side, you get less.
 So what we did was, we upped
the overall variable pay,
 but we redistributed the pay
going back to simplicity.
 And the thinking
is, that the best
 employee you have in your
company is the cheapest.
 Price performance is the lowest.
 So the best employee you have
is actually the cheapest.
 And the worst is your
most expensive one,
 because you pay a
lot for very little.
 So we said is, we're going
to over reward the good ones
 and quote, unquote, under
reward those who don't perform.
 And then we went in on
exactly the S1, T1, and T2
 and said, for our best people,
we'll send them to Harvard.
 Everybody can go to Harvard.
 You just need to be good.
 Very easy.
 And we made it
completely transparent.
 In the beginning, we thought,
should we be transparent,
 that if Swansie goes
to Harvard or not,
 we said, no, we don't care.
 If she is good, which we think
she is, that's why she's T1,
 then she goes to Harvard.
 Then we owe it to her
to tell her she's good.
 Very easy.
 But we didn't give out plaques.
 Harvard class of 2011.
 Everybody knows Paul
is in Harvard now.
 So we've been very,
very transparent
 on this, which has
not always been easy,
 but it's been very important
to drive performance
 into the organization.
 As I said, performance is
driven by living our values.
 If you don't live our
values, we'll kick you out.
 It's not a threat.
 This is who we want to be.
 If we say we put the customers
at the center of what
 we do and people don't
want to see customers,
 or the same with how we
engage with our people,
 how we develop them, how we give
them feedback, so for instance,
 one of the things we
did this year in 2012,
 our feedback was that
we're not quick enough
 to define the targets for
people in the fiscal year.
 I'm certain some
of you have that.
 When do you actually
give the personal target?
 And then we said,
any manager that
 is not giving the targets
out on the deadline,
 will get an M, period.
 Instead of saying,
Cheryl, please do it,
 I really want you to do this.
 We just said, the
deadline is this.
 If you don't do it, your
rank is M this year.
 Changed overnight.
 So what we are doing is,
we are using the grid.
 You know, very,
very, the DRT grid,
 very specifically on how
we look at people, how
 does the pipeline look,
who do we promote.
 NARRATOR: As Kasper
Rorsted just observed,
 the ranking system also
helped his team implement
 other cultural changes
and initiatives
 central to his turnaround plan.
 Additionally, as Rorsted
will explain now,
 the ranking system creates
a clear track record
 of employee success
and promotion
 that Rorsted and his
team can refer back to.
 KASPER RORSTED:
So for instance, I
 know we had in the
last three years,
 we've had 100 people in Harvard.
 About 50 of those
have been promoted.
 Another 30 has been
international relocation.
 So we know exactly how it works.
 And the pool, by the way, quote,
unquote-- the T1, S1, and T2--
 is not static.
 It's every year
people get evaluated.
 You can be a T1 one year,
and if you don't make it,
 if you're in M4 next
year, then you're
 a part of the executive
resource pool.
 So that has brought the
company tremendously forward.

05:21
05:21

Benefits
Drawbacks/Risks
The ranking system forces honest performance conversations between managers and direct
reports that were previously avoided.
Some average performers may perform worse due to stress from increased pressure; they
may also lose their emotional connection to the business.
Because ratings are assigned collaboratively, employees are motivated to form strong
relationships with managers beyond their line managers (which increases span of
influence).
There is no way to account fairly for managers who are new to their roles and still learning
the ropes.
The attention of top management is now focused on high performers who become visible
to everyone across the company. This creates more opportunity to retain high-potential
employees, driving the business forward and ensuring a strong pipeline of future leaders.
It is difficult to account for high-performing employees who may temporarily perform less
proficiently due to personal circumstances.
Average performers may be motivated to work harder to improve their ratings.
There may be some risk that employees will seek easier assignments so that they can
receive higher ratings.
Low performers, who may negatively impact employee productivity and morale, are now
more likely to leave the business.
There is the possibility that personal loyalties will impact the way employees are portrayed
and rated in evaluation meetings.
Development roundtables can become a forum for sharing best practices as managers
present their employees’ success stories.
Knowing that the number of spots in each ranking category is fixed, employees within a
unit may begin competing with each other in counterproductive and unhealthy ways.

Employees may be tempted to cut corners or engage in other risky behaviors to hit their
goals and receive a high rating.

In small units, or “after fat is trimmed,” there may not be people to fill the low performer
category.

609d8e6f29c5fc0b825a1db4/95b2ab9c-a46a-4241-b1b2-72dea5cbf891/1071/908/#/>

Alternatives to Ranking Systems

Perhaps you argued against using the forced ranking system at Henkel, citing concerns
about the impact such a system would have on employee morale and performance or
noting other drawbacks that arise when differing levels of performance among employees
are emphasized.
Businesses interested in enjoying the increased creativity and innovation promoted by
ranking do have other options: Some businesses opt to rank functional units or teams
instead, stirring up friendly rivalries between groups of employees. You might, for
example, simply post each team’s performance scores after each quarter or review season,
as Nike does. Eager to see their publicly displayed scores trend upward, teams will put
their heads together to devise ways to improve performance.
At Marriott, David Rodriguez and his colleagues made an explicit decision not to use such
a forced ranking system for employees. Here, he explains that decision.


 DAVID RODRIGUEZ: In other
areas, for instance,
 there are some
companies that might
 go to a forced
ranking of employees.
 That'll never
happen on my watch.
 I don't think it's
something we would do,
 because I don't think
in the final analysis,
 making those sorts of arbitrary
judgments about people,
 you may get some
short-term benefit
 or believe you got some
short-term benefit.
 I can almost guarantee
you that you're
 paying a dear price in
terms of employee trust,
 and commitment, and the
things that, I think,
 drive sustainable success.
 So very often, I find that some
of these methods and techniques
 that get a lot of
attention out there
 are shortsighted in
how they're applied.
 We put more emphasis
at Marriott on pushing
 very hard for business units
to learn from each other, less
 emphasis on how they stack
up on different measures.
 Partly because, to
be honest, I mean,
 their environments
could be so different
 in geographic
areas of the world.
 You know, some of
those comparisons
 can be less than meaningful.
 So less focus on
creating arbitrary
 sort of competitiveness
that may not
 yield a specific useful
outcome and may, in fact, lead
 to some dysfunctional behavior.
 But we put a lot of pressure and
make sure that we stay humble.
 You need to stay humble here.
 And if the guy or gal next
door is doing a better job
 or found a better
way to do things,
 we expect you to be humble, and
to explore it, and understand
 it, and to the extent that it
fits your business situation,
 it's highly expected
that you would do that.
 I will tell you
that to the extent
 you don't do that, that
would be taken very
 seriously at Marriott actually.
 I think one of the attributes
of the company that I've
 come to love is there is
a good sense of humility.
 I think it goes back to
the origins of the company.
 And I think one of the
useful aspects of that
 in a modern sense
is this notion how
 it applies to things, like,
yeah, it's unacceptable for you
 to look at another
business unit and try
 to explain away their success.
 We want to understand
that success
 and find what are the
things that might be
 applicable to your situation.


For additional commentary on the benefits of ranking systems and techniques for addressing
the risks, let’s turn to Susanna Gallani, an assistant professor at Harvard Business School. We
will spend more time with Susanna in the next module, when we study performance
measurement and incentive design.


For additional commentary on the benefits of ranking systems and techniques for addressing
the risks, let’s turn to Susanna Gallani, an assistant professor at Harvard Business School. We
will spend more time with Susanna in the next module, when we study performance
measurement and incentive design.


 SUSANNA GALLANI: My
name is Susanna Gallani.
 I am an assistant professor
at Harvard Business School
 in the Accounting
and Management unit,
 and I teach together
with Professor Simons
 in the Executing
Strategy course, which
 is a course in which
we study and explore
 systems and structures
to implement strategy
 in the most effective ways.
 As everything in
incentive design,
 there is good and bad of
every tool that we can use.
 Ranking systems, which are
quite common in practice,
 have really good features
that managers can
 use to stimulate performance.
 One that is really important
is that they level the playing
 field.
 So as we know in the complexity
of organizational performance,
 there's many unexpected
events or external shocks that
 might impact positively
or negatively
 the performance of
the organization.
 And these shocks,
because they're external,
 they have nothing to do with
the decisions of the workers
 within the organization,
but they do eventually
 impact their performance.
 What the ranking system does--
 it takes that shock away.
 So everybody's compared at the
same level, and that's good.
 Because it really highlights
the individual contribution
 of different workers and
points out who did better
 and who did worse.
 So that's a great way to measure
performance in a more balanced
 way, if you will, taking
these external shocks away.
 The other thing that's
good about a ranking system
 is that for those people
that are motivated
 by personal success,
achievements, winning,
 in a word, these are very
powerful tools of motivation.
 Because, of course,
if you can win--
 be better than the other
people that work for you--
 that is a source of utility
for you that you as a manager
 can tap into and
drive performance,
 especially if there is a reward
at the end of being first,
 associated with being first.
 So these are all good things.
 The risks associated
with ranking systems
 is that they may have some
demotivating factors associated
 with them as well.
 Research shows that when
we have ranking systems,
 there is a demotivating
factor for those people
 that end up ranking
always at the bottom.
 Now, remember that the
employment relationship
 is an ongoing interaction.
 So it's not that
we are ranked once,
 and then we are
no longer ranked.
 Or we're done playing the game.
 We get ranked once, and
then again, and then again,
 and then again.
 Now, we all know there are the
superstars that will always
 end up ranking first.
 The risk associated with being
the superstar that always ranks
 first is that, at some point,
you might become complacent,
 and instead of pushing
performance further,
 you know you're
going to win, and you
 start to reel your effort back.
 The more dangerous part--
 because, if you're
a high performer,
 you're still
performing very well--
 but the more dangerous
part is at the bottom
 of the curve, where
you have people
 that consistently rank in the
bottom section of the ranking.
 And what the reality of
the situation might be
 is that they're simply
not as good as the others,
 but they're still good enough.
 So the problem is that we
can create this message
 that you're inadequate, and
that can be very demotivating.


3.2.2 Spurring Innovation Across Units (Cross-Unit
Teams and Matrix Organizations)
12:26 AM
3.2.2 Spurring Innovation Across

Units (Cross-Unit Teams and Matrix
Organizations)

609d8e6f29c5fc0b825a1db4/018b6af2-1590-47e4-93b5-0cd42c027f60/1071/908/#/syllabus>

TRANSCRIPT
Autoscroll
ON
 PROFESSOR SIMONS: We have
now studied two techniques
 to motivate employees
to think and act
 like winning competitors--
 setting stretch goals
and ranking individuals.
 There are additional
techniques that you
 can use to generate creative
tension, especially when you
 want to encourage
innovation across units.
 We have already introduced one
of these techniques-- creating
 an entrepreneurial gap.
 By setting span
of accountability
 wider than span of
control, you can
 force individuals to reach
out to people in other units.
 They will try to
influence others
 to get the resources they
need, and in doing so,
 will share problems, solutions,
and generate new ideas.
 There are other
ways that you can
 generate information sharing
and innovation across units.
 As you know, organizations
are good at moving
 information vertically, up
and down the formal hierarchy.
 They're not so good at moving
information horizontally.
 As a result, you've
likely heard terms,
 like silos and stovepipes, to
describe formal organizations.
of mechanisms you
 can employ that will force
people from different units
 to interact and work
together more closely.
 One is the cross-unit
team or task force.
 You give a group a challenge,
such as improving speed
 to market, integrating
a new acquisition,
 or rolling out a new
quality initiative.
 People from different
units and functions
 who don't normally
interact together
 will sit around a table,
brainstorming, sharing ideas,
 and working up a proposal.
 Those ideas are presented
for implementation,
 but equally important,
members of the task
 force learn from each other and
take ideas and new perspectives
 back to their individual units.
 Another mechanism you can use is
to create solid and dotted line
 reporting relationships.
 With this arrangement, an
individual has two bosses.
 The solid line boss
has direct authority
 for resource allocation,
goal setting, and evaluation.
 The dotted line boss
provides guidance and input
 to evaluations.
 An example here could be a
finance manager in a business
 unit who reports solid line
to the business unit head
 and dotted line to
the company's CFO.
 At the extreme, you can
design matrix organizations,
 where people have two
bosses with equal authority,
 say, a regional boss and
a business unit boss.
 In matrix organizations,
everything
 must be managed
on two dimensions.
 Employees and their bosses
working in different units
 and functions are forced to
negotiate resource allocations,
 coordinate goals and
measures, and agree
 on performance evaluations.
 Of course, this generates
a lot of tension--
 hopefully, creative tension--
as information, challenges,
 and best practices are
shared across the two units.

PROFESSOR SIMONS: We have now studied two techniques to motivate employees to
think and act like winning competitors-- setting stretch goals and ranking individuals.
There are additional techniques that you can use to generate creative tension, especially
when you want to encourage innovation across units. We have already introduced one of
these techniques-- creating an entrepreneurial gap.
By setting span of accountability wider than span of control, you can force individuals to
reach out to people in other units.
Interactive JDOT tool titled Configured Job Title. Two sliders appear one directly above
the other: Span of Control and Span of Accountability. Both sliders range from 1 to 10 in
increments of 1. Span of Control lists Few Resources at 1 and Many Resources at 10.
The slider moves from 5 to 3. Span of Accountability lists Measures allow few trade-offs
at 1 and Measures allow many trade-offs at 10. The slider moves from 5 to 6 to 8,
increasing the horizontal distance of the Entrepreneurial Gap.
They will try to influence others to get the resources they need, and in doing so, will
share problems, solutions, and generate new ideas. There are other ways that you can
generate information sharing and innovation across units.
As you know, organizations are good at moving information vertically, up and down the
formal hierarchy. They're not so good at moving information horizontally. As a result,
you've likely heard terms, like silos and stovepipes, to describe formal organizations.
There are a number of mechanisms you can employ that will force people from different
units to interact and work together more closely. One is the cross-unit team or task force.
You give a group a challenge, such as improving speed to market, integrating a new
acquisition, or rolling out a new quality initiative.
People from different units and functions who don't normally interact together will sit
around a table, brainstorming, sharing ideas, and working up a proposal. Those ideas are
presented for implementation, but equally important, members of the task force learn
from each other and take ideas and new perspectives back to their individual units.
Another mechanism you can use is to create solid and dotted line reporting relationships.
With this arrangement, an individual has two bosses. The solid line boss has direct
authority for resource allocation, goal setting, and evaluation. The dotted line boss
provides guidance and input to evaluations.
An example here could be a finance manager in a business unit who reports solid line to
the business unit head and dotted line to the company's CFO. At the extreme, you can
design matrix organizations, where people have two bosses with equal authority, say, a
regional boss and a business unit boss. In matrix organizations, everything must be
managed on two dimensions.
Employees and their bosses working in different units and functions are forced to
negotiate resource allocations, coordinate goals and measures, and agree on performance
evaluations. Of course, this generates a lot of tension-- hopefully, creative tension-- as
information, challenges, and best practices are shared across the two units.


Talent Network Teams at Marriott

We will now examine how you can use cross-unit teams to break down these siloes to
promote innovation and the sharing of best practices. To get us started, here is David
Rodriguez again on one practice Marriott uses to bridge the divides that inevitably
emerge in large global businesses.


 DAVID RODRIGUEZ: As you become
larger and more complex,
 one of the things that
you have to deal with
 is you have larger and
larger subgroupings
 in the organization that
almost become self-sustaining.
 They almost feel, by
themselves, as a business.
 Take if you're
geographically dispersed,
 and you have continent
divisions across the company.
 After a while, particularly
as their profitability
 becomes quite large,
some of those entities
 are larger than most
entire businesses.
 And so one of the things
that you need to combat
 is this notion of we're
separate from everybody else,
 the walls that get built up.
 One of the ways that
we've combated that
 is a program we call
talent network teams.
 And what it is, is any
senior executive at Marriott,
 who's facing a
business challenge,
 can initiate one of these TNTs--
 is what we call them--
talent network teams.
 So they articulate
the business problem.
 And in essence, they're
putting out a call--
 who wants to volunteer
to work on this issue?
 Typically, they last
six to eight weeks.
 And here's the great
thing about this.
 Let's say you've been in
finance your entire career.
 But you've always
had this inner child
 that wanted to be in marketing
and never had the opportunity.
 You could join one of
these TNTs that happens
 to be focused on marketing.
 And a couple of
great things happen.
 One is, obviously, from
a personal development
 standpoint, you're
getting a sense of I
 now have a better idea
of what that's like.
 And if it's early in a career,
very often, what we're finding
 is that that's all people
need to have the courage
 to take that step outside
their comfort zone,
 and in fact, go to a different
part of the business.
 So on an individual basis,
from a development perspective,
 from a networking
perspective, very valuable.
 But interestingly, from an
organizational perspective,
 there's a lot of value in people
in one area of the organization
 mingling and working on
issues with someone they might
 ordinarily in the course
of ordinary business never
 have met, never have learned
about their perspective.
 And we find that's a way to
break down some of these walls,
 literally creating these
forums, where not only are they
 accomplishing something
for the company--
 they're working on
real business issues--
 but they are also, in
essence, bridging the company
 and breaking down these
barriers and having
 different parts of
the organization
 have a better appreciation
for how each of them
 contributes to the overall
purpose of the company.


Matrix organizations
 offer many benefits by promoting
the sharing of information
 across units.
 They effectively
break down the silos
 that so often hold organizations
back from their potential.
 So you might wonder, why
doesn't every company use
 a matrix organization design?
 The problem, of course, is
that you end up in a situation
 where everyone is spending too
much of their time negotiating
 between bosses who have
different goals, agendas,
 and priorities.
 This slows down decision-making
and, at the limit,
 leads to paralysis.
 As a result, managers in
many matrix organizations
 are frustrated as more lean and
agile competitors outpace them.
 Matrix organizations can
work, but they are not
 for the fainthearted.
 They demand clarity, and
conviction, and some very tough
 choices.
 Going back to our
four spans in JDOT--
 for a matrix to work,
each of the four sliders
 must be pulled far to the right.
 The easy one to adjust
is span of influence.
 In a matrix, span of
influence is very wide.
 People must interact with
people in other units
 on a constant and
continuing basis.
 This, of course,
creates the benefits
 that managers of a
matrix hope to capture.
 Next, you have to move the
slider for span of control
 to the right.
 Each of the two
bosses in a matrix
 must have equal authority over
the resources they jointly
 control.
 Span of accountability also
needs to shift to the right.
 This will demand a lot of your
accounting and control systems.
 You must be able to calculate
profit simultaneously
 along both dimensions
of the matrix.
 For example, the
business unit head
 must be accountable for
profit of the business unit,
 and the regional head
must be accountable
 for country-level profit.
 Finally-- and this one is
the killer --span of support
 must be high throughout
the organization.
 Everyone must be willing
to step up to help others.
 If not, the whole
thing will collapse.
 I wrote a case study years
ago on one organization,
 the Swiss engineering firm ABB,
that used a matrix organization
 very successfully.
 Before he announced
the new matrix
 with regional and
product-based bosses,
 the CEO installed new
performance measurement systems
 that could simultaneously
measure profitability
 and return on capital
for both regions
 and product-based
business units.
 The next problem he faced was
how to widen span of support
 throughout the organization.
 He could not allow the matrix
to slow down decision-making,
 and he knew that conflicting
goals and objectives could
 grind the business to a halt.
 So he created a "three
strikes, and you're out" rule.
 He said, if two
people can't decide,
 elevate it to your
boss, and he or she
 will make the decision for you.
 If you can't decide
a second time,
 send it to your boss again.
 But the third time you can't
agree, I will fire both of you,
 and he actually did this.
 People quickly got the message.
 As this example illustrates,
if you want to use a matrix,
 you have to make some
very tough choices.
 It can work, but it requires
moving all four spans
 to the right.
 This is not easy,
but if done well,
 it can generate real
competitive advantage.


3.2.3 Conclusion: Considering the Risks of Generating
Creative Tension
11:41 AM

The techniques we've
 introduced for generating
creative tension
 can bring enormous
benefits, but they can also
 introduce considerable risk.
 When we push employees
to be athletes--
 to stretch themselves
further than
 they've ever stretched before--
 there is always a danger
that someone may cross a line
 to enhance performance.
 We see this with
competitive athletes,
 and it's exactly
what happened at ATH.
 Responding to
performance pressures,
 employees cut
corners on quality.
 So when we turn up
 to drive innovation
and creativity,
 we have to be sure
that we aren't creating
 an environment where people
might choose to cross a line
 and do bad things.
 There are two systems that
we can use to counterbalance
 these pressures.
 First, we need
strong belief systems
 to communicate our core values
and ethical aspirations.
 Second, we must create
clear boundaries
 that specify what kinds of
activities and behaviors
 will not be tolerated
and punish those who
 are caught crossing the line.
 We will explore each of
these systems in the course.
 A final risk from using the
techniques in this lesson
 is that you can overdo it.
 I use the metaphor of
going into a restaurant
 and looking at the menu.
 You will order the items
you like and pass on others.
 That is exactly the approach
that you should be taking here.
 In the restaurant, if you
ordered and ate every item
 on the menu, you probably
wouldn't feel great afterward.
 Similarly, if you adopted all
the techniques we've discussed,
 you could easily end up with
an organization that's bloated,
 bureaucratic, and slow moving.
 There's a great quote from a
French philosopher, Antoine
 de Saint-Exupery,
that says, "You
 know you've achieved
perfection in design
 not when you have
nothing more to add,
 but when you have nothing
more to take away."
 In other words, simplify,
simplify, simplify.
 Choose the techniques that give
you the most bang for the buck,
 but don't use more
than are needed
 to achieve the results
you are seeking.

609d8e6f29c5fc0b825a1db4/bfe84709-3f2c-4da6-a4e7-c017d84e4724/1071/908/#/syllabus>

The techniques we've
 introduced for generating
creative tension
 can bring enormous
benefits, but they can also
 introduce considerable risk.
 When we push employees
to be athletes--
 to stretch themselves
further than
 they've ever stretched before--
 there is always a danger
that someone may cross a line
 to enhance performance.
 We see this with
competitive athletes,
 and it's exactly
what happened at ATH.
 Responding to
performance pressures,
 employees cut
corners on quality.
 So when we turn up
 to drive innovation
and creativity,
 we have to be sure
that we aren't creating
 an environment where people
might choose to cross a line
 and do bad things.
 There are two systems that
we can use to counterbalance
 these pressures.
 First, we need
strong belief systems
 to communicate our core values
and ethical aspirations.
 Second, we must create
clear boundaries
 that specify what kinds of
activities and behaviors
 will not be tolerated
and punish those who
 are caught crossing the line.
 We will explore each of
these systems in the course.
 A final risk from using the
techniques in this lesson
 is that you can overdo it.
 I use the metaphor of
going into a restaurant
 and looking at the menu.
 You will order the items
you like and pass on others.
 That is exactly the approach
that you should be taking here.
 In the restaurant, if you
ordered and ate every item
 on the menu, you probably
wouldn't feel great afterward.
 Similarly, if you adopted all
the techniques we've discussed,
 you could easily end up with
an organization that's bloated,
 bureaucratic, and slow moving.
 There's a great quote from a
French philosopher, Antoine
 de Saint-Exupery,
that says, "You
 know you've achieved
perfection in design
 not when you have
nothing more to add,
 but when you have nothing
more to take away."
 In other words, simplify,
simplify, simplify.
 Choose the techniques that give
you the most bang for the buck,
 but don't use more
than are needed
 to achieve the results
you are seeking.


We’ve spent the last two lessons learning about Kasper Rorsted’s attempts to generate
creative tension at Henkel. How successful was he? As you can see in the graph below,
which shows Henkel’s stock prices relative to those of competitors between 2008 and
2013, his decision to stick with their original EBIT margin goal and spur high
performance through forced ranking and cross-unit engagement paid off. Employees rose
to the occasion to work harder and in innovative ways. Those changes, combined with
the other changes Kasper made at Henkel, transformed the “happy underperformer” into
a top performer.


3.3.1 Introduction: The Role of Core Values
1:05 PM

Putting Strategy as Perspective into Practice

f6335520-6ee0-43d9-bd01-3ba99ee7809d/1071/908/#/syllabus>

 PROFESSOR SIMONS: When we
push employees to perform,
 there's always a risk that to
hit their performance targets,
 they could do something bad.
 Think back to our study
of ATH Technologies
 in the first module.
 How did the founders
respond when
 they discovered that
employees had cut corners
 on product quality?
 One of the things
that ATH managers did
 was to create a beliefs system
to define and communicate
 their core values.
 As you will recall,
beliefs systems
 are one of the four
levers of control
 that businesses can use to
guide strategy execution.
 I suspect that many of you are
skeptical when it comes to core
 values and beliefs systems.
 You may think of them as
little more than window
 dressing, ticking a box
without much real impact
 on the business.
 But I've learned that the
best companies, the ones that
 are most competitive and
lead their industries
 decade after decade,
put enormous emphasis
 on their core
values and beliefs.
 Beliefs systems play
an essential role
 in both inspiring and
guiding employee actions.
 And importantly, following
on our previous lesson,
 they push span of
support to the right
 by encouraging employees
to help each other.
 In this lesson, we will show you
how to define and communicate
 core values effectively.
 It's not enough just to
put nice words on paper.
 Effective core values
possess two attributes.
 First, they inspire people.
 They make every
employee in the company
 proud of where they work.
 Second, effective core
values provide guidance
 on how to make tough decisions.
 When you're faced with
a difficult choice,
 your values should
tell you whose interest
 to put first, second, and third.
 For this lesson, we
will be returning to one
 of the four Ps of strategy.
 This time, it's
strategy as perspective.
 If you live here in
the U.S. and you're
 a hobby photographer or
interested in consumer
 electronics, one business
that you probably know
 is B&H Photo, based
in New York City.
 This company has won a number
of awards, including best online
 consumer electronics retailer,
one of America's top customer
 service companies, one of
America's best employers,
 and the company that provides
the best user experience
 of any e-commerce company.
 In addition to the
customer service awards,
 there are several things that
impress me about this company.
 The first is their commitment
to put principles over profit.
 They state that they believe
in customers, not sales.
 For them, the customer comes
first, second, and third.
 They are also a family-owned
business, driven
 by strong religious beliefs.
 As Hasidic Jews, they
close their retail store
 and their online
website for the Sabbath.
 From sundown on Friday until an
hour after sundown on Saturday,
 customers can visit
their online site,
 put items in their
shopping basket,
 but orders will not be
processed until an hour
 after sundown on
Saturday evening.
 Everything they do is driven by
their core values and beliefs.
 And it shows in their
success in the marketplace.


PROFESSOR SIMONS: When we push employees to perform, there's always a risk that
to hit their performance targets, they could do something bad. Think back to our study of
ATH Technologies in the first module. How did the founders respond when they
discovered that employees had cut corners on product quality?
One of the things that ATH managers did was to create a beliefs system to define and
communicate their core values. As you will recall, beliefs systems are one of the four
levers of control that businesses can use to guide strategy execution.
BEGIN DESCRIPTION BUSINESS STRATEGY CHART
A chart with Business Strategy in the middle square. Four arrows point from each corner
of the square outward. Starting in the left corner, an arrow points first to a circle titled
Core Values then to a square titled Beliefs Systems. Clockwise to the upper right, arrow
points to a circle titled Risks To Be Avoided then points to a square titled Boundary
Systems. Clockwise to the bottom right, an arrow points to a circle titled Critical
Performance Variables then to a square titled Diagnostic Control Systems. Clockwise to
the bottom left, an arrow points to a circle titled Strategic Uncertainties then to a square
titled Interactive Control Systems. The circles are all connected by arrows with dotted
lines.
END DESCRIPTION BUSINESS STRATEGY CHART
I suspect that many of you are skeptical when it comes to core values and beliefs systems.
You may think of them as little more than window dressing, ticking a box without much
real impact on the business. But I've learned that the best companies, the ones that are
most competitive and lead their industries decade after decade put enormous emphasis on
their core values and beliefs.
Beliefs systems play an essential role in both inspiring and guiding employee actions. And
importantly, following on our previous lesson, they push span of support to the right by
encouraging employees to help each other. In this lesson, we will show you how to define
and communicate core values effectively.
It's not enough just to put nice words on paper. Effective core values possess two
attributes. First, they inspire people. They make every employee in the company proud of
where they work.
Second, effective core values provide guidance on how to make tough decisions. When
you're faced with a difficult choice, your values should tell you whose interest to put first,
second, and third.
For this lesson, we will be returning to one of the four Ps of strategy. This time, it's
strategy as perspective. If you live here in the U.S. and you're a hobby photographer or
interested in consumer electronics, one business that you probably know is B&H Photo
based in New York City.
This company has won a number of awards, including best online consumer electronics
retailer, one of America's top customer service companies, one of America's best
employers, and the company that provides the best user experience of any e-commerce
company. In addition to the customer service awards, there are several things that impress
me about this company.
The first is their commitment to put principles over profit. They state that they believe in
customers, not sales. For them, the customer comes first, second, and third. They are also
a family-owned business, driven by strong religious beliefs.
As Hasidic Jews, they close their retail store and their online website for the Sabbath.
From sundown on Friday until an hour after sundown on Saturday, customers can visit
their online site, put items in their shopping basket, but orders will not be processed until
an hour after sundown on Saturday evening.
Everything they do is driven by their core values and beliefs. And it shows in their success
in the marketplace.
Core Values at Adidas

As we noted earlier, core values play an important role in managing the risks that can
arise when increasing creative tension in a business. When Kasper Rorsted became CEO
at Henkel, his first decisions focused on generating more creative tension at the previously
complacent company. He elevated performance pressure by placing greater demands on
employees, held them accountable for wider measures, and forced them to work across
units in new ways. Recall, however, a key lesson from Module 2: for jobs (and
organizations) to succeed, the supply of resources provided to employees must equal the
demands placed on them. If Kasper wanted Henkel to adapt to this new level of pressure,
he would need to give employees the resources they needed to succeed.
Recall also that there are two ways that employees are given resources—span of
control and span of support. Widening span of control would increase the supply of
formal resources—such as budget and headcount—available to Henkel employees, but it
would also narrow their entrepreneurial gap, hindering Kasper’s vision for a more
entrepreneurial and creative organization. To deliver on his vision, then, Kasper decided
instead to widen span of support: he needed to create a culture where employees were
willing to help each other. He did this by building shared customer-focused goals across
the entire business and rewarding those who showed commitment to the new agenda.
Recall that managers can only widen span of support through effective leadership. As we
will learn, core values play a pivotal role in this work: they set expectations about how
employees should treat each other, they help to create a sense of mission, purpose, and
shared group identity, and they clarify whose interests should come first when making
difficult decisions.
In this lesson, we will introduce some best practices for designing effective core values.
Then, you will have the opportunity to apply what you’ve learned by analyzing the
changes Kasper made to core values at Henkel.

Learning Objectives
o Describe how core values help employees execute strategy.
o Explain why a business’s core values should prioritize the interests of
specific constituents over others when tough choices must be made.
o Identify which constituent a business’s core values should prioritize.


 KASPER RORSTED: I've been
a great believer in values
 through my entire CEO
career, so to speak,
 because I believe values,
mission, and strategy
 are the most
important boundaries
 you put into an organization,
because it defines
 a framework upon which and how
you operate and how you behave.
 And that's why we also say
we don't negotiate values.
 We don't negotiate strategy.
 We don't negotiate mission.
 That is actually the
most important guardrails
 you have in an organization to
ensure that the organization
 stays on track.
 And that's why we preach, if
you want to use that term, very
 consistently, globally.
 And there's actually no room
for negotiation on this.
 So the core values in our
mission have changed over time.
 So if I start with a mission--
 that is through sport
we have the power
 to change lives-- we believe
that if we get people
 to engage in sport, they will
overall have a healthier life.
 They'll have a better life.
 We can get kids off
the street and play
 football or basketball, they
will have a better life.
 So we want to be sure
that that always stay
 in the middle of what we do.
 Our three values are built
around creation or creativity,
 because we need
to create the best
 products for our consumers.
 Collaboration, because
we need to make certain
 that in a highly
matrixed organization,
 we are clear on how we
collaborate internally.
 And then confidence.
 Confidence in a modest
understood way, not arrogance,
 but confidence in
believing the mission
 we're out to pursue,
to be the best sports
 company in the world.
 So it's creativity,
it's collaboration,
 and it's confidence.
 In order to ensure that the
values are well understood,
 they're very often
incorporated, if not always,
 in almost all the town
hall meetings or management
 conversations we have.
 We have built the values into
our compensation system, where
 we evaluate our
employees towards how
 they behave, towards the
three C's, as we call them.
 And then, of course,
we look for consistency
 when we drive communication.
 And we have a very
digital-enabled communication
 strategy.
 So whether we do it
on a quarterly basis,
 on a monthly basis,
on a weekly basis,
 we take the key elements of
our strategy and always repeat
 that: starting with our mission,
getting to our strategic
 framework, creating the new, and
then repeating our three C's.


Core values can inspire Core values can give direction by:
employees by:
Making people proud of Providing guidance when faced with decisions that
where they work. require putting the needs of one set of constituents over
another.
Motivating individuals to Guiding organizational search and discovery by helping
search for new ways of businesses identify which opportunities they should
creating value. pursue.
Acting as a compass that points employees in ethical
directions when they may be tempted to go astray in
order to hit their goals.
Conveying information about the level of performance
desired and how individuals are expected to manage
relationships.


3.3.2 Prioritizing Constituents in Your Core Values
2:29 PM

South east (1st Employee , 2nd Customer and 3rd Shareholders)
Johnson & Johnson (1st Customer)
 Fizer put (1st shareholders)
TRANSCRIPT
Autoscroll
ON
 PROFESSOR SIMONS: One of the
key attributes of core values
 is their ability to provide
direction and guidance
 to employees who must make
difficult decisions that
 put the needs of one
constituent over another.
 Once again, we return to our
theme of difficult choices.
 The best companies
use their values
 as the foundation to
communicate to everyone
 in their organization whose
interests should come first
 when people are faced
with tough choices.
 Who should they prioritize?
 Should they put employees first?
 Should they put customers
first, or should they
 put shareholders first?
 Some companies, such
as Southwest Airlines,
 put employees first.
 Their values are clear.
 Employees first, customers
second, and shareholders third.
 This ordering is based on
their theory of value creation.
 They believe that, if the
company treats its employees
 well, the employees will
treat their customers well,
 and this will lead to
increased business and profits.
 And these are more than
just words on paper.
 In a downturn, they will
always protect their employees.
 They will cut
executive salaries,
 close routes, and cut back on
discretionary expenditures.
 But they will never
fire an employee.
 This approach has
worked for Southwest,
 making it an industry leader
for many years in market share
 growth and financial
performance.
 Other companies have a different
theory of value creation.
 Johnson & Johnson, for
example, puts customers first.
 The opening sentence
of their credo,
 which we'll look at
more carefully, states--
 our first responsibility
is to our customers.
 This important declaration
provides every employee
 in the company
with guidance when
 they're faced with
tough decisions that
 affect multiple constituents.
 Other companies put
shareholders first.
 If you look at Pfizer, for
example, decade after decade,
 CEO after CEO, they
put shareholders first.
 This means that
they focus primarily
 on managing their income
statement and their balance
 sheet, trying to get the
best leverage, best returns,
 and making very tough decisions
in favor of their shareholders.
 In reviewing these three
different approaches,
 I want to be very clear
that one choice is not
 better or worse than others--
 just different.
 As you will learn, different
theories of value creation
 dictate which choice you
should make when faced
 with a difficult decision.
 What is important is that you're
consistent with your choice
 and have communicated
it clearly throughout
 your entire organization.

 TOM SIEBEL: My job as CEO
is, I'm very clear on this,
 so they, number one, my job
is to represent the interests
 of the employees first, OK?
 Secondly is, I represent the
interests of the customers.
 And thirdly, I represent the
interests of the shareholders.
 And it's in that order.
 But that being said,
in my experience,
 if you take care
of the employees
 and you take care
of the customers,
 OK, the shareholders get
taken care of just fine.
 So that's the focus,
that's the priority, that's
 how we operate the business.

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 PROFESSOR SIMONS: Prioritizing
employees clearly lines up
 with C3.ai's strategy.
 Their customers
demand the latest,
 cutting-edge AI technology--
 solutions to problems that
have never been solved before.
 To succeed, Tom
Siebel and his team
 must hire the very best
technology experts.
 The challenge, of course, is
that everyone in Silicon Valley
 is fighting for the same talent.
 C3 executives need to ensure
that their company is perceived
 to be a great place to work.
 I mentioned Southwest
Airlines before.
 They also prioritize employees.
 Like C3.ai, they put
enormous emphasis
 on getting the right people.
 Before you can get
hired at Southwest,
 you must meet and be
interviewed by everyone
 you'll be working with.
 People have joked
that it's harder
 to get a job at
Southwest Airlines
 than it is to be admitted to
Harvard, and that may be true.
 Of course, this
careful selection
 builds strong group identity.
 People who are
hired feel special
 and want to help
others around them.
 As a result, Southwest has
the fastest gate turnaround
 in the industry.
 Everyone pitches in,
including pilots,
 to offload bags,
clean the plane,
 and greet new passengers.
 Their core values of
putting employees first,
 customers second, and
shareholders third
 have built a strong
sense of loyalty
 throughout the entire business.
 Other companies will choose to
put customers or shareholders
 first.
 I illustrate this in
my Harvard MBA classes
 by teaching a
matched set of cases
 looking at Merck and Pfizer.
 Both are great companies that
made very different decisions
 based on their
different core values.
 The teaching cases focus on
arthritis pain medications,
 a drug called Vioxx
for Merck and a drug
 called Celebrex for Pfizer.
 These were both
blockbuster drugs
 generating enormous revenue and
profits for the two companies.
 Thirty months into a
carefully controlled study
 of the long-term
effects of Vioxx,
 Merck discovered an unexpected
increase in cardiovascular
 events--
 heart attacks and strokes.
 Nobody died, but there
was clearly a problem.
 Merck's values were clear in
telling executives what to do.
 Their values state--
 Merck puts patients first.
 Using those values as
a guide, executives
 pulled Vioxx from
the worldwide market
 within days of getting
the disappointing news
 about its safety.
 When they announced their
decision at a press conference,
 Merck's market value fell
$25 billion in four hours.
 Ultimately, their commitment
to customers paid off.
 Merck's decision boosted
public confidence,
 and investor returns
eventually rebounded
 to their prior levels.
 Pfizer with a similar drug
made a different decision.
 With an eye on
shareholders, Pfizer did not
 pull Celebrex from the market.
 Instead, the company chose to
inform patients and doctors
 of the newly discovered
risks by adding
 what is called a black
box warning label.
 Then, they aggressively
marketed Celebrex's benefits.
 In doing so, they pulled
over patients from Merck
 and avoided losing
billions of dollars
 in profits, while
still taking steps
 to protect patient safety.
 I want to be very clear here.
 I am not insinuating
that one company
 made a good decision and the
other made a bad decision.
 Many people, in fact, think
that Pfizer made the right call.
 Arthritis can be debilitating,
and Vioxx and Celebrex,
 both in a special class of
drug called Cox 2 inhibitors,
 were considered
miracles in alleviating
 pain that was so bad that some
arthritis sufferers could not
 get out of bed in the morning.
 The point to remember is that
different core values led
 to very different decisions,
and the people in each company
 were confident that they
had made the right choice.

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Putting Core Values into Practice

It is one thing to communicate core values to employees, but it is quite another to ensure
employees actually put them into practice. Here is David Rodriguez on how he helps
foster a culture where Marriott’s core values are reflected in how the company does
business.
At Marriott, two of their core values are “Act with Integrity” and “Serve Our World.” As
David discusses, Marriott has undertaken an initiative to combat human trafficking
(which can often occur in hotels) by training all hotel employees to recognize signs of
illegal activity on its properties and promptly report their suspicions.
To ensure that employees were equipped to follow through on these values, Marriott, in
conjunction with several nonprofits, developed a human trafficking recognition training
program for its employees. As David will discuss, the company made the training
program available to other hotel companies.

609d8e6f29c5fc0b825a1db4/9c5f6759-8215-40a6-b744-80dbc2da7eca/1071/908/#/syllabus>

 KASPER RORSTED: I believe
the consistent repetition
 of strategy and values are
fundamental for a company,
 because first of all, I
believe a lot of leaders
 underestimate how long time
it takes a message to transmit
 through the organization.
 Secondly, we are a rapidly
growing organization.
 That means that
every year we'll have
 thousands of new employees.
 If we don't continue
to bring them on board,
 but believe because we launched
it three or four years ago,
 of course, they don't know.
 So within a three- or
four- year time frame,
 we probably had
10,000 new employees.
 So getting them on board,
make them understand
 what it means, but also
ensuring that we don't
 become complacent and
forget what they are
 and stop speaking about them.
 So I believe it's
fundamental for a company.
 We have built the values
into our compensation system,
 where we evaluate our
employees to watch
 how they behave towards the
 And then of course, we
look for consistency
 strategy, so whether we do
it on a quarterly basis,
on a weekly basis,
 that--
 starting with our mission,


3.3.3 Connecting Value Creation to Core Values
3:32 PM

Choosing which constituent to prioritize through your core values ultimately comes
down to top management’s beliefs about how your business creates value.
 If top managers believe that value derives primarily from customer
satisfaction and/or customer loyalty, your core values should put customers'
interests first.
 If top managers believe that value derives primarily from the unique talents
of employees or the special relationships that key employees cultivate with
customers, your core values should put employees' interests first.
 If top managers believe that value derives primarily from maximizing cash
flow and operating income and effectively managing assets, your values
should put shareholders' interests first.
Let's put this framework to the test by returning to David Rodriguez at Marriott to
consider which constituent is the best one to prioritize.

609d8e6f29c5fc0b825a1db4/78257a9b-1152-44af-945b-ad59c5e23391/1071/908/#/syllabus>
TRANSCRIPT
Autoscroll
ON
For us at Marriott,
 success is all about the degree
to which our associates are
 literally inspired to create
great experiences for others.
 And I'll give you
an example of that--
 a story, true story.
 It was just, maybe,
10 years ago now.
 But I was traveling
outside the country.
 I arrive at the airport.
 And I'm immediately told by my
Marriott counterparts there,
 there's a housekeeper
that desperately
 needs to talk to you.
 Now, I'm thinking-- that's
the first thing they talk
 to me when that plane lands.
 You're wondering, what
am I about to hear?
 Something's gone wrong.
 I have to have
this conversation.
 Of course, I said, of course,
I'll meet with the housekeeper.
 And so I get to the hotel.
 And they bring me to this room.
 And the housekeeper's in tears
before she starts to speak.
 And the difference,
though, the tears
 are actually tears of gratitude.
 What she wanted to express
to the company through me
 was gratitude.
 It turns out, in the course
of that conversation,
 she came from domestic
violence, poverty--
 in fact, generations of poverty.
 And she was a single mom
with a couple of children.
 And so she said that she was
just grateful because when
 she crossed the
threshold of that hotel,
 she found a new
family, a community.
 She found the
opportunity to break
 that trajectory for her family.
 In fact, those two
kids, I know today,
 have very successful
careers of their own--
 have started very successful
careers of their own.
 And I'll never forget.
 She said to me, because
I feel like family here,
 I make sure that every
single customer that I meet
 feels like family too.
 Is she motivated?
 Of course she is.
 I like to think about
it as inspiration.
 She is inspired
by the environment
 that she's in to create
great experiences
 and to create that sense of
well-being for her customers.
 Who is the primary
customer at Marriott?
 Our history would strongly
suggest it's our associates.
 Our business model,
in fact, starts there.
 It's reflected by the favorite
catch phrase of our founders--
 take care of the
employees, they'll
 take care of the customers.
 And the customers come
back again and again.
 So you can make a strong
case that for Marriott, it's
 about our employees
and making sure,
 again, that we are laser focused
on promoting their well-being.
 Because our belief is that
they, then, will be laser
 focused on customers.
 And in our case, also,
owners and franchisees which,
 in essence, are
a different class
 of customers for Marriott.
 But we start there.

Culture of learning and of respectfully questioning each other, to try to understand the
other perspectives. The whole emphasis on empathy is really shining through in situations
where there’s a dire need to innovate and create something individuals need and want.

From <https://news.microsoft.com/innovation-stories/empathy-innovation-accessibility/>

3.4.1 Analyzing and Improving Core Values
10:50 PM

3.4.1 Analyzing and Improving Core

Values
Evaluating Core Values at Henkel
Now that you’ve explored the purposes that core values serve, let’s apply what
we’ve learned to Henkel.

Learning Objectives
 Evaluate the effectiveness of different sets of core values and
propose improvements.
 Explain why core values should be formalized into beliefs
systems as businesses grow and mature.
 Describe strategies for effectively communicating and
practicing core values.

Recall that Kasper's transformation of the company consisted of both “hard”
changes, such as closing 60 plants and centralizing certain operating functions into
shared-services offices, as well as “soft” changes—or cultural overhaul—designed to
build buy-in around the hard changes and to ensure that employees would receive the
support necessary to achieve their goals.
We studied some of the “hard” changes in our last lesson—the inclusion of
customer-focused measures in target-setting and evaluation, the EPS margin stretch
goals that Kasper insisted the business hit despite the financial downturn, and the
introduction of a new employee ranking system. Now, we will turn to the “soft”
changes. Recall that in making these soft changes, Kasper was seeking to
widen span of support at Henkel. He needed to create an environment where
employees were willing and eager to help each other achieve their ambitious
goals, without reducing performance pressure or dialing down creative tension.
Revising Henkel’s core values was a key component of Kasper’s cultural overhaul.
At the time Kasper joined the business, its tagline was “A Brand Like a Friend,” and
its core values consisted of 10 values:
 We are customer driven
 We develop superior brands and technologies
 We aspire to excellence in quality
 We strive for innovation
 We embrace change
 We are successful because of our people
 We are committed to shareholder value
 We are dedicated to sustainability and corporate social responsibility
 We communicate openly and actively
 We preserve the tradition of an open family company

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Revamping Core Values at Henkel

Under Kasper's direction, Henkel released a new vision—“A global leader in brands and
technologies”—and a revised set of core values:
 We put our CUSTOMERS at the center of what we do.
 We value, challenge, and reward our PEOPLE.
 We drive excellent sustainable FINANCIAL performance.
 We are committed to leadership in SUSTAINABILITY.
 We build our future on our FAMILY business foundation.
Let's learn more about the intensive process Kasper undertook to revamp the core values at
Henkel.

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 ARRATOR: Rorsted invested
extensive time and resources
 in the redesign of
core values at Henkel.
 As a first step, he
surveyed over 100 executives
 in the top executive team and
the next management layer.
 These results formed
the basis of workshops,
 with the management
board focused
 on identifying what the new
vision and values should be.
 The business also involved the
Henkel family in this process.
 Here is Kasper
describing the importance
 of defining core values
and the workshops where
 they were defined.
 KASPER RORSTED: So I took
the management team here
 for a week.
 We went in and discussed it.
 I think most companies
don't have a culture.
 I think they have a headcount
and a headquarter culture.
 But when I look
upon most companies,
 when they get a new employee
on board, they tell he or she
 what the job is, what
the email account is,
 how you submit an expense
claim, how you get into SAP,
 and what your
benefits look like.
 Very few companies
actually sit down and say,
 here is what we are about.
 And we wanted to be very, very
transparent to whom we wanted
 to be in the organization.
 So people could have a choice.
 I want to be part of
that team, or I don't
 want to be part of the team.
 So we worked with Bob
and we had 10 values.
 And it came out.
 We had a management
team meeting in 2009
 at the head of the
financial crisis.
 We had $4 million of debt.
 We're about to lose our
credit rating, one notch down.
 And we discussed the 10 values.
 And the people, the
management team,
 the same amount of people,
but not the same people
 will come to Harvard
next summer for a week.
 We asked, how many of
you know the 10 values.
 And all of us, all of us were
incapable of writing the 10
 values correctly on a board.
 All of us.
 So I say as a joke,
you can either
 change the values or
the management team.
 We choose to change the values.
 And we worked with Bob on this.
 And one of the things
that Bob said, he said,
 create simplicity
in what you say.
 And I remember one of the
words that still says this, so
 one of my colleagues or myself,
it doesn't really matter,
 put the word solution in.
 And Bob said, no, no,
solution is complex.
 You know, Peter, you'll
understand solution
 different to me,
and Jose, you'll
 understand different to Peter.
 So we try to be very specific
and very clear on it.
 Customer, people, financial,
sustainability, and family.
 So be very clear on it, so it
becomes very easy to remember.
 Because a lot of
the thinking that's
 driven around
simplicity in strategy,
 in targets, in culture,
so people actually
 understand who we are.
 And then we drove the culture,
I would say, very aggressively,
 into the organization.
 Aggressively in the
positive sense of the word.
 So we had every single employee
had been taken through strategy
 and culture workshop.
 NARRATOR: When it came to
communicating these values
 to the business's
nearly 50,000 employees,
 Henkel launched a campaign using
the business intranet, posters,
 the employee magazine,
and town hall meetings
 in all major countries.
 Henkel, however, also went
beyond standard communications
 campaigns by holding
interactive events, called
 Vision and Values Workshops--
 which helped to
cultivate employee buy-in
 by linking the values to each
employee's day-to-day work
 and requiring employees,
together with their line
 managers, to
develop action plans
 with accountabilities
and due dates
 for realizing these new values
in specific tasks and projects.
 Line managers
facilitated these events.
 A deliberate choice, which
itself signaled the importance
 Henkel would now be
placing on core values.
 Previously, only HR or
corporate communications
 concerned itself with this work.
 Henkel held over
5,000 such workshops
 over a period of six months.
 These workshops
produced a number
 of developments, such as
Meet Your Customer programs,
 new ROI measures to improve
resource allocation,
 an initiative to increase the
visibility of sustainability
 targets, and an
entrepreneurial award
 to recognize
entrepreneurial behavior.
 Here is Kasper on
the approach he
 took to reinforcing
this new set of values
 throughout the company.
 KASPER RORSTED: What we
said is, and I quote now,
 I said, "We don't have Sprite
and Coke in our company.
 We only have Coke, and
these are the five values.
 If you don't like them, get out
of here, we're not interested."
 Because we want people over time
that believes in those values.
 And we think that if you
come and say as a leader,
 I only want three,
but I don't want five,
 frankly, you are the
one who is supposed
 to live these values
in the organization.
 And if you don't
live them, then we
 don't become transparent
and predictable
 in our organization.


Analysis: Improvements to Core Values at Henkel

Henkel’s new core values prove superior to the old set of core values in a few key ways.
First, they clearly prioritize customers above other stakeholders. This choice was
reinforced by Kasper's mandate that Henkel eliminate “internal customer” from its
corporate vocabulary. By contrast, the original set of core values did not provide any
indication as to which set of constituents should come first.
Second, the new set of core values is short and memorable. As Kasper noted, executives
struggled to remember the original 10 values. This risk is significantly minimized with a
value set that is half the length.


You know, I think
 there are three ingredients
to a great company culture.
 First, the leaders have to
espouse and live core values.
 And I find very often
that in many companies,
 there is a lot of discussion,
but about the wrong things.
 For instance, what core
values should we have?
 I personally think that's
the wrong discussion.
 If you think about the
attributes of a great company--
 being innovative,
having integrity--
 should there be any discussion
about whether those attributes
 should be part of your company?
 I think the relevant discussion
might be at any point in time,
 you may decide to
put more emphasis
 on an attribute of the
company, because you
 want to elevate its focus.
 But I think what leaders
need to be focused
 on is espousing the right
attributes for a company,
 the core values, and then very
importantly, living those core
 values.
 And I'll give you a quick
example of what that means.
 Marriott has had
a continued focus
 on combating human trafficking,
and a couple of years
 ago, our CEO Arne Sorenson
said, let's take a step further.
 Let's not just do
this work internally.
 Let's look to-- let's
talk about it externally.
 Let's, in fact, create resources
that other companies can use.
 Now, there would be others
in the external world who
 probably said, why
would you call attention
 to the possibility that
human trafficking can
 happen in a hotel environment?
 Because it can, so Arne's
focus there in living
 our core value of really putting
the welfare of people first is,
 yeah, we should talk about this.
 And we should do everything
we can to have more companies
 and others join
us in this effort,
 despite the fact that
some might have said,
 you really want to call
attention to this issue?
 I feel that's important, because
employees are always looking
 to see, is it just talk?
 Or is it really what we
believe and what we do?
 And when they see leaders
actually put those core
 values to action in
their own personal lives,
 it's very meaningful.
 Secondly, and very importantly,
in the fast-moving environments
 that we're in,
you want a culture
 that's dynamic, that is
refreshing itself, and the best
 way to do that is,
in fact, to put it
 in the hands of your associates.
 So as each new generation of
worker comes on the scene,
 they're going to
translate your core values
 and create a culture
that's meaningful to them,
 that will connect them more
closely to the company.
 Do you want to start
the death of a company?
 Lock yourself in a room as
the senior executive team,
 and determine, here
are the core values,
 and here's how we want
everybody to behave.
 I could pretty much tell
you before the ink is dry,
 that culture will be
obsolete, and it will fail
 to reach the intended audience.
 I think there's a third very
important ingredient to having
 a great company
culture, and I think
 this is the hardest thing
for business leaders to do.
 And that's to have the
courage to release control
 of the company culture
and empower employees
 to express the culture
of the company.
 So leaders should
espouse core values,
 should live those core
values, but really
 should let employees bring
expression of those core values
 to create culture.
 And why is that important?
 Well, one, again, if you're
across many different countries
 and cultures, it allows
a culture to be localized
 and to be relevant and vibrant
in a very personal way.

02:52
03:49

RANSCRIPT
Autoscroll
ON
 PROFESSOR SIMONS: I hope
that we have made the point
 about how important it is that
your core values communicated
 through your belief
systems provide guidance
 about how to make choices when
faced with tough decisions.
 The best belief systems
state whose interests
 should come first
in these situations,
 but they don't stop there.
 They also outline the
business's responsibility
 to other constituents.
 Johnson & Johnson is a company
that does this very well.
 Their credo, which is a
statement of their core values,
 was first written in 1943.
 As you can see, the
first paragraph says,
 "We believe our
first responsibility
 is to the patients, doctors and
nurses to mothers and fathers,
 and all others who use our
products and services."
 There is no doubt here
at Johnson & Johnson--
 customers come first.
 For the last 30 years,
Harvard MBA students
 have studied how J&J used this
credo to respond to the Tylenol
 crisis.
 In the late 1980s, several
people in the Chicago area
 died when someone
put poison in bottles
 of Tylenol, a J&J product.
 The reaction from J&J executives
was swift and unequivocal.
 Their credo told them
exactly what they must do.
 They immediately
recalled Tylenol
 from stores across
the entire country,
 issued warnings urging
Americans not to take the drug,
 and established a hotline
for concerned customers.
 Although they lost
millions of dollars,
 J&J knew that their
responsibility
 was to put customers first.
 What is also interesting
and very important
 about the J&J credo is
that it doesn't simply
 declare who comes first.
 It also recognizes the
company's responsibilities
 to other constituents who are
affected by their actions.
 Each of the next paragraphs
begins with the words,
 "we are responsible,"
and addresses
 their responsibilities as
a company to employees,
 communities, and shareholders.
 The important lesson
from the J&J credo
 is that, even though you may
be clear on who comes first,
 this doesn't let you
off the hook in terms
 of your responsibilities
to other constituents.
 The J&J theory of value
creation is clearly
 summarized in the final
sentence of their credo:
 "When we operate according
to these principles,
 our stockholders should
realize a fair return."
 In fact, if you look at J&J's
stock price over the past 75
 years, it has been one of the
consistently best performing
 companies in the world.
 As we've seen, belief systems
can play a critical role
 in managing strategy
as perspective.
 But inspiring people
and giving them guidance
 about how to make difficult
choices is not enough.
 You also need to
tell your employees
 what they must not do.
 This will be covered in our
lessons on boundary systems
 later in the course.
Now that you have learned more about strategies for spurring and supporting high
performance and discussed the topic with your peers, please revisit your original response
to the discussion prompt, which we have displayed here alongside the prompt itself.
Last week, we learned that Meghna Modi created an entrepreneurial gap in the team
leader (i.e., store manager) role at Go Mobile, encouraging them to behave like the
owners of the scrappy mom and pop shops they competed against. Much like those small
shop owners, team leaders must find creative ways to generate revenue and make their
stores profitable while working with very limited resources.
If you were Meghna, how else would you try to motivate high levels of performance among
team leaders so that every Go Mobile store location meets or exceeds its targets? Which
tactics or approaches would work best in this context, and why? Which ones might not
work as well? Please share your initial ideas with your peers, and then discuss each
other’s responses.


Strategy Module 3 : Summary
11:59 PM

Congratulations.
 You have now finished the
second and third modules
 in Strategy Execution.
 Let's review what we've learned
about empowering employees
 to execute strategy.
 In our first lessons,
we discovered
 that cascading strategy
into job design
 is both important
and challenging.
 For any job to
succeed, the supply
 of resources available
to an individual
 must equal the demands
placed on that individual.
 Managers can analyze
and improve this balance
 by adjusting span of control,
span of accountability,
 span of influence,
and span of support.
 But what happens when you find
that a job is not balanced?
 This was a challenge facing
Meghna Modi at Go Mobile.
 She needed her store
managers or team leaders
 to behave like entrepreneurs
and cultivate deep customer
 relationships to compete
effectively with the small mom
 and pop businesses nearby.
 To do so, she held
her team leaders
 accountable for wide measures,
like store revenue and profit.
 At the same time, she
wanted to capitalize
 on the benefits of scale
that came with being
 a multi-store retail chain.
 This meant that many critical
decisions around product price
 and inventory levels would
be made at headquarters
 rather than left
to store managers.
 For team leaders, this
mismatch created a gap
 between their narrow
span of control
 and the wide measures for
which they were accountable.
 This gap is called the
entrepreneurial gap,
 and it's very common
in many of today's
 fast-moving
customer-centered businesses.
 How can a business
help employees
 succeed in such circumstances?
 They can ensure that they
provide a wide span of support.
 We saw that Meghna Modi
struggled with this problem
 as she redesigned
the district manager
 job to ensure that they
would give the team
 leaders the support
that they needed
 as she scaled the business.
 We then gave you the opportunity
to use the Job Design
 Optimization Tool to analyze
a job in your business.
 We hope that allowed
you to develop
 a better understanding of why
that job works or doesn't work.
 And we also hope
that it allowed you
 to develop an action
plan to improve
 the functioning of that job.
 Businesses can also
generate creative tension
 to spur innovation and
widen the span of influence.
 In addition to the
entrepreneurial gap,
 we introduced mechanisms, such
as stretch goals and ranking
 employees and units.
 To illustrate these
techniques, we
 explored how Kasper
Rorsted implemented them
 when he was CEO of Henkel.
 We also looked at mechanisms to
share innovation across units,
 such as cross-unit teams,
dotted-line reporting,
 and matrix accountability.
 And we cautioned that,
if you overdo it,
 these techniques can
result in bureaucracy
 that slows decision-making.
 Recognizing the significant
performance pressures
 we have now created,
we next examined
 how to create and
communicate belief systems
 to ensure that people would
engage in the right behaviors.
 This was a critical element
in the transformation Kasper
 Rorsted undertook at Henkel.
 Beliefs systems
communicate core values.
 To work well, they must
not only inspire, but also
 provide employees
with guidance when
 they face difficult
decisions that
 require them to put
the interests of one
 constituent above others.
 We examined how
several companies
 choose to prioritize either
customers, employees,
 or shareholders.
 We reminded you
that you must also
 be clear about
your responsibility
 to other constituents who are
affected by your decisions.
 Optimizing job design,
generating creative tension,
 and building belief systems
that communicate core values
 are all essential components
to empowering your employees
 to execute strategy.
 In our next module, we will
turn to the critical question
 of how you can design
measures to track the progress
 and impact of your efforts.

609d8e6f29c5fc0b825a1db4/dbf7b274-dc3b-47a4-9e8f-51d08ea44a18/1071/908/#/syllabus>

Key Takeaways
•
Many businesses fall
behind their competitors
because managers have
unknowingly insulated
their employees from
pressures in the
marketplace.
•
The best businesses
recreate these market
pressures inside their
organizations,
pushing employees out of
their comfort zones and
spurring them to behave
entrepreneurially.
•
There are a number of
techniques managers can
use to generate this kind of
healthy, creative tension in
their businesses. These
decisions shape
patterns of
action
in the business—one of the
four Ps of strategy.
Techniques for
Generating Creative
Tension
Entrepreneurial Gap
Simulate the challenges
entrepreneurs face by
holding
employees accountable for
measures wider than the
resources they control.
Stretch Goals
Set goals that force
employees and the
organization as a
whole to stretch
performance levels and
capabilities by
working not only harder,
but also differently than
before.
Ranking Systems
Create healthy competition
by ranking employee
and/or unit
performance using a forced
distribution.
Cross-Unit Teams
Encourage innovation
across units by forcing
individuals who
don’t usually interact to
solve a problem together
and bring
the new ideas and
perspectives back to their
units.
Solid and Dotted-
Line Reporting
Designate two bosses for
employees—one
responsible for
resource allocation, goal
setting, and evaluation
(solid) and a
second that provides
guidance and evaluation
input (dotted).
Matrix Organizations
Hold all employees
accountable to two bosses
with equal
authority, forcing
employees and their bosses
to negotiate
resources, goals, and
evaluations and share
information,
challenges, and best
practices across the two
units.
© Copyright 2021 President and
Fellows of Harvard College All
Rights Reserved.
1
•
Be mindful to choose the
technique(s) that will
benefit your business most;
using
too many at once can
create a bureaucratic, slow-
moving organization.
•
To counterbalance the
performance pressures
these techniques create,
you
must implement
boundary systems
that clarify out-of-bounds
behaviors (covered
in Modules 5 and 6) as
well as
beliefs systems.
•
Beliefs systems provide
inspiration and direction to
employees by
communicating
core values.
•
Core values are most
effective when they clarify
to employees whose
interests
they should prioritize when
making difficult decisions.
•
When deciding whether to
prioritize customers,
employees, or shareholders
regarding core values,
business should consider
which constituent plays the
most critical role in value
creation.
•
Businesses must also
communicate their
minimum level of
responsibility to all
other constituents as well.
•
Managers must ensure that
core values are not simply
communicated but
practiced by employees in
day-to-day business
activities.
Case Summaries
Henkel: Building a
Winning Culture
When Kasper Rorsted
becomes CEO of Henkel,
an adhesives and consumer
goods
company based in
Germany, he encounters a
highly complacent culture.
Convinced
that the company could
overcome this apathy and
improve its performance,
he
undertakes a major cultural
transformation aimed at
creating a “winning
culture.” In
addition to divesting
underperforming
businesses, closing
facilities, and terminating
employees, Kasper holds
Henkel accountable to a set
of ambitious financial
targets
despite a global economic
recession, and he
introduces a forced ranking
system for
employees. This system
identified high and low
performers and has a major
impact on
bonus compensation. By
introducing these
techniques for generating
creative tension,
Kasper aims to bring the
market pressures Henkel
faces out in the
marketplace inside
the walls of a company
whose employees are
accustomed to working
comfortably and
adhering to the status quo.
As part of this
transformation, Kasper
Rorsted also—critically—
overhauls the
company’s core values.
Upon discovering that
senior executives can’t
recall them,
Kasper shortens the
number of core values
from 10 to 5 to make them
easier to
remember and clarifies that
customer interests should
come first when making
difficult
© Copyright 2021 President and
Fellows of Harvard College All
Rights Reserved.
2
decisions. These core
values provide Henkel
employees with guidance
and direction as
they work to push
Henkel’s performance to
new heights

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f86d609a08b51ca63facd16959e770>

Check email in [email protected]

3.4.2 Communicating Core Values
11:17 PM

Documenting Core Values in Beliefs

Systems
You have been asked to think about the best core values for your business and which set
of constituents should be prioritized. But how will you ensure that those core values are
effectively communicated to all employees? This is a challenge that becomes more
difficult as companies grow larger and more dispersed. In small companies, where
everyone works side-by-side, it’s easy to communicate values informally. However, as
companies grow larger, top managers must formalize their core values in formal beliefs
systems.
We can define a beliefs system as the explicit set of organizational definitions that senior
managers communicate formally and reinforce systematically to provide basic values,
purpose, and direction for the organization. Beliefs systems are communicated through
formal documents such as missions, credos, and statements of purpose.
Creating such documents, however, is only a first step. In addition, top managers must
communicate, reinforce, and exemplify those values if they are to be embraced by
employees throughout the organization.
Let’s turn to Kasper Rorsted to learn about some of the strategies he has used to
communicate core values at Adidas. Recall from earlier in the module that Adidas
operates on three core values: creativity, collaboration, and confidence—referred to here
as “the three C’s.”


 KASPER RORSTED: I believe
the consistent repetition
 of strategy and values are
fundamental for a company,
 because first of all, I
believe a lot of leaders
 underestimate how long time
it takes a message to transmit
 through the organization.
 Secondly, we are a rapidly
growing organization.
 That means that
every year we'll have
 thousands of new employees.
 If we don't continue
to bring them on board,
 but believe because we launched
it three or four years ago,
 of course, they don't know.
 So within a three- or
four- year time frame,
 we probably had
10,000 new employees.
 So getting them on board,
make them understand
 what it means, but also
ensuring that we don't
 become complacent and
forget what they are
 and stop speaking about them.
 So I believe it's
fundamental for a company.
 We have built the values
into our compensation system,
 where we evaluate our
employees to watch
 how they behave towards the
 And then of course, we
look for consistency
 strategy, so whether we do
it on a quarterly basis,
on a weekly basis,
 that--
 starting with our mission,


4.1.1 The Benefits of Diagnostic Control Systems
9:21 PM

 PROFESSOR SIMONS: Welcome to
Module 4 of Strategy Execution.
 In our previous
lesson, we studied
 how businesses execute
 defining core values and
by
building belief systems.
 In this module, we're
going to turn our attention
 to executing strategy as plans.
 We will introduce
diagnostic control systems
 as a means to communicate and
monitor plans so that everyone
 can understand and act on them.
 You will be putting on
your hat as a boss who
 sets goals, evaluates
performance, and rewards
 accomplishments.
 In the lessons that
follow, you will
 learn how to set goals
based on your strategy,
 select the right measures
and targets to evaluate
 performance, and
design incentives
 that motivate employees to
high levels of achievement.
 A diagnostic control system
communicates direction
 and monitors the
implementation of strategy
 similar to the dials and gauges
in the cockpit of an airplane.
 Imagine a pilot sitting
in a cockpit surrounded
 by many gauges.
 At first, this
seems overwhelming.
 But when you ask
a pilot, he or she
 will tell you that they
only actively watch
 a small number of those
gauges-- maybe six or seven.
 The others serve a
diagnostic purpose.
 If there's a problem, a
buzzer sounds, a warning light
 comes on informing
them that they
 need to take corrective action.
 Otherwise, they can
ignore them and fly
 the plane using just a small
number of critical measures.
 In the same way, when diagnostic
control systems are well
 designed, they allow managers
to put their business
 on autopilot.
 No news is good news.
 The strategy is being
executed according to plan.
 If a problem arises,
you will be alerted.
 Coming back to our constraint
of scarce management attention,
 we will illustrate how a
well-designed diagnostic
 control system can
dramatically increase
 your return on management.
 Of course, the
opposite is also true.
 If diagnostic control
systems are poorly
 designed, if your goals do
not reflect your strategy,
 if you've chosen the wrong
measures, if your incentives
 are misaligned, you will
end up spending far too much
 of your time trying to figure
out what the problem is
 and fighting fires.
 The paradox is that in today's
information-rich environment,
 it's very easy to
get carried away.
 We can measure more
and more variables
 at a very low cost, tempting
managers to build systems
 with far too many measures.
 As a result, people don't know
where they should be allocating
 their time and attention.
 As the saying goes, if
everything is important,
 then nothing is.
 The best managers, just
like the best pilots,
 are deliberate in selecting only
a small number of key measures
 to actively monitor.
 In this module, we will give
you the tools and frameworks
 to help you make this
important choice.

d6b3c633-df5a-4959-a49e-aaf14620d8b2/1071/908/#/syllabus>

Learning Objectives
o Define and identify examples of diagnostic control systems.
o Explain how diagnostic control systems help businesses execute strategy.
o Describe the role diagnostic control systems play in helping managers
maximize their return on management.
on this lesson.
Diagnostic control systems are the formal information systems that managers use to
monitor organizational outcomes and correct deviations from preset standards of
performance. Here are some examples of diagnostic control systems:
 Performance scorecards
 Expense center budgets
 Project monitoring systems
 Brand revenue/market share monitoring systems
 Human resource systems
 Standard cost-accounting systems


 TOM POLEN: Performance
measurement systems
 are essential,
especially if you're
 running a large
company-- $18 billion
 company such as ours with 10
different business units, seven
 or eight different regions
around the world, hundreds
 of different teams that
are critical in executing
 your strategy.
 And so, something we've put
in place as we've gained scale
 over the years is we
have eight key goals
 that we set for the
company on an annual basis.
 And then, we cascade those
down through every business,
 through every region.
 We call them our
Key Driver Goals.
 And we end up deploying
those at the beginning
 of our fiscal year.
 We have a monthly
operating committee
 that we run every month.
 And we're reviewing the status
of each of those Key Driver
 Goals.
 We start in the morning
with China on the phone.
 Then we go through every
region for about an hour.
 Then we go through every
business by the end of the day.
 We go through every function
as how they're contributing
 and where we are on track
to those Key Driver Goals.
 And we have really
open discussions
 on how we're doing against
those goals with very
 specific metrics--
 quantitative metrics.
 Where something's not
on track, we really
 are focused on making sure that
we get the issue on the table.
 Even if someone doesn't
have a solution to it,
 what's important
is that the issues
 are getting on the table.
 And we're bringing the best
and brightest of the company
 to help make sure the teams
that are solving those problems
 are getting the right
resources and support
 to be successful in that.
 And as part of that,
one of the things
 that we helped evolve in the
culture over the last year
 is we got rid of yellow
on our scorecards.
 It's something really small.
 But it's made a big difference
in those discussions.
 Right.
 Now we just have red and green.
 And the difference for
that is-- right-- yellow
 is normally when the
traffic accidents happen.
 If it's yellow, people
just look at it.
 And they gloss over it.
 And they just focus on
the reds and the greens.
 And so we said, hey, look, if
it's not on track, it's red.
 There's no such thing as yellow.
 Let's just have a
discussion on it.
 And red means we're not
going to beat you up on it.
 It's not something that
anyone's failed on.
 It means we want to
have a discussion on it,
 and how we're going to
get it back on track.
 And so, these are
just small nuances
 that we've done, as we've
evolved our operating
 system around those metrics to
help not only understand what's
 happening across our
broad organization,
 but how we can support the
teams who are really driving
 those specific deliverables, and
how we can make sure that we're
 having the most frank,
robust, candid discussions
 in a safe environment.

The system that BD
 uses to report on monthly
achievement of their Key Driver
 Goals is a good example of
a diagnostic control system.
 It allows managers to put
key activities on autopilot.
 The system automates much of the
work of monitoring performance,
 alerting managers only to those
items that are color coded red
 and need their attention.
 Imagine that BD is
building a new plant
 to manufacture insulin syringes,
one of their core products.
 Senior managers will want to
monitor periodic production
 goals for the new plant
and quality indicators
 for products coming off
the production line.
 To do so, they might set
benchmarks for production
 based on the performance
at similar plants
 and set minimum acceptable
quality standards
 to ensure the highest
quality products.
 Of course, executives
with a full agenda
 can't spend every day at the
new plant personally monitoring
 production and quality data.
 These managers do,
however, need assurance
 that everything's on track.
 With a diagnostic
control system in place,
 managers are alerted at
monthly operations meetings
 when variances
from expected goals
 create a red status report.
 These situations receive their
full attention and follow up.
 Otherwise they can allocate
their time to other issues,
 knowing that the new plant is
fully meeting expectations.
 You may be familiar with this
approach, which is referred
 to as management by exception.
 Focusing only on
exceptions plays
 a critical role in
allowing managers
 to maximize their

01:32
01:32

WHAT ARE SOME OF THE CONDITIONS THAT NEED TO BE IN PLACE TO IMPLEMENT
MANAGEMENT BY EXCEPTION EFFECTIVELY?
1.Identify key activities that need monitoring
2. Set reality minimum acceptable quality standards for each key goals
3. Setup monitoring/Alert system to indictor
4. we transparent with any open issues

WHAT ARE THE RISKS OF MANAGING BY EXCEPTION?
If minimum acceptable quality standards for each key goals are not accurate we have the risk
falsely assuming things are working fine.
HOW CAN THEY BE MINIMIZED?
Have clear goals, acceptable quality standards and properly monitoring system

4.1.2 Setting Performance Goals

Strategic Goals vs. Operational Goals
Your answers to the previous questions should have included the requirement for
clearly defined, pre-set performance goals. These goals provide a benchmark by
which to identify deviations from expected performance. Without a performance
measurement goal, it is impossible to prepare the diagnostic reports to confirm that
everything is on track or point to missed targets and potential problems.
In addition, it’s critical that the performance measures that you use to track these
goals are both accurate and comprehensive. Otherwise, you risk missing deviations
and variances that you would have identified if you were personally monitoring
business activities. Because management by exception removes managers from day-
to-day operations, it is likewise critical that you clearly communicate performance
goals to the front-line employees executing business activities. We will spend a good
deal of our time in this module studying how to design and communicate these goals,
measure them effectively, and motivate employees to achieve them.
We must also recognize that businesses set many kinds of performance goals. Some
of these goals are strategic; others are more operational. Our focus in this course will
be on those goals that are critical for implementing strategy. But the principles that
we discuss in this module will be relevant for any type of goal and can be applied
wherever you want to build systems to ensure that goals and plans are being
implemented successfully.
To begin our study of performance goals, let’s turn back to BD. We have learned
how the Key Driver Goals, known internally as KDGs, provide the pre-set standards
that alert managers to deviations from desired levels of performance. Now, Tom
Polen will provide us with an overview of the Key Driver Goals themselves and with
BD’s approach to selecting those goals.
As you watch the video, notice the emphasis BD places both on selecting only a
handful of strategic goals to actively monitor and on communicating the Key Driver
Goals to employees.

609d8e6f29c5fc0b825a1db4/77fed76f-f8d0-454f-acf9-408d5ab9cd7b/1071/908/#/syllabus>
 TOM POLEN: We spent a lot
of time stepping back,
 for example over the last
year, looking at where
 we want BD to be in 2025.
 And we did that process in 2019.
 So how do we see the next
six years of the company?
 How are we going to add
value to our customers,
 to shareholders,
to our associates?
 And we wrote a, in this case,
about a 30-page document
 summarizing our strategy,
and incorporating our views
 on the external environment,
our view on the journey that
 the company's been on
over the last 20 years,
 and how we're now going to the
journey that we're going to be
 on in this next phase,
which we defined as this
 five-to-six-year window.
 And so we started with that
longer-term strategic view
 and then we back into
 So if this is where we want
to be six years from now,
 what do we have to do in
2020 to be on this track,
 to be where we
want to be in 2025?
 And we end up identifying these
are the few things that we have
 to do that if we
don't do them, we're
 not going to achieve the
strategy that we outlined
 in our BD 2020-25 vision.
 Our Key Driver Goals start
with financial goals-- revenue,
 gross profit, operating margin.
 We include cash flow
within those goals.
 Of course, subsets of cash
flow, inventory levels,
 accounts payables, etc.,
are all part of those goals.
 Goal number two would start
diving into innovation goals.
 Specifically, how are we adding
innovations into our pipeline
 once we have products
in our pipeline?
 How well are we doing at
moving those through, hitting
 our milestones?
 And then how are we doing
at launching those products?
 That's KDG number
two, as an example.
 We keep going through
the KDGs, and we
 have goals around quality
levels, around customer service
 levels, around associate
retention goals,
 and diversity goals are
all part of our KDGs.
 So it's not just a financial
scorecard by any means.
 Actually seven out of the eight
KDGs are not financial related.
 They're really balanced
elements to make sure
 that we're holistically
managing the business
 from a financial performance,
quality perspective, innovation
 perspective, and human
talent perspective.
 So we seek to align all of our
different incentive systems
 to encourage focus on
 And so everything from-- we
have CEO excellence awards,
 for example.
 We seek to recognize and
celebrate achievements
 that people are making
against our Key Driver Goals.
 And we constantly are
showing the Key Driver Goals
 to the organization.
 We say, if you're wondering
how to allocate your time,
 you should be thinking,
how am I allocating my time
 making these eight goals
be delivered and achieve.
 We talk about-- to
all associates--
 this is what really
is going to drive our

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Strategy Execution: 4.1.2 Setting Performance Goals
10:45 PM

 TOM POLEN: We spent a lot
of time stepping back,
 for example over the last
year, looking at where
 we want BD to be in 2025.
 And we did that process in 2019.
 So how do we see the next
six years of the company?
 How are we going to add
value to our customers,
 to shareholders,
to our associates?
 And we wrote a, in this case,
about a 30-page document
 summarizing our strategy,
and incorporating our views
 on the external environment,
our view on the journey that
 the company's been on
over the last 20 years,
 and how we're now going to the
journey that we're going to be
 on in this next phase,
which we defined as this
 five-to-six-year window.
 And so we started with that
longer-term strategic view
 and then we back into
 So if this is where we want
to be six years from now,
 what do we have to do in
2020 to be on this track,
 to be where we
want to be in 2025?
 And we end up identifying these
are the few things that we have
 to do that if we
don't do them, we're
 not going to achieve the
strategy that we outlined
 in our BD 2020-25 vision.
 Our Key Driver Goals start
with financial goals-- revenue,
 gross profit, operating margin.
 We include cash flow
within those goals.
 Of course, subsets of cash
flow, inventory levels,
 accounts payables, etc.,
are all part of those goals.
 Goal number two would start
diving into innovation goals.
 Specifically, how are we adding
innovations into our pipeline
 once we have products
in our pipeline?
 How well are we doing at
moving those through, hitting
 our milestones?
 And then how are we doing
at launching those products?
 That's KDG number
two, as an example.
 We keep going through
the KDGs, and we
 have goals around quality
levels, around customer service
 levels, around associate
retention goals,
 and diversity goals are
all part of our KDGs.
 So it's not just a financial
 Actually seven out of the eight
talent perspective.
 So we seek to align all of our
different incentive systems
 to encourage focus on
 And so everything from-- we
have CEO excellence awards,
 for example.
 We seek to recognize and
celebrate achievements
 that people are making
against our Key Driver Goals.
 And we constantly are
showing the Key Driver Goals
 to the organization.
 We say, if you're wondering
how to allocate your time,
 you should be thinking,
how am I allocating my time
 making these eight goals
be delivered and achieve.
 We talk about-- to
all associates--
 this is what really
is going to drive our
 achieving our 2020-25 vision.

Performance goals can improve your return on management in a number of ways:
 They provide your employees with valuable information that can be used to
support key decisions. This allows them to make important decisions more
effectively.
 They force a discussion about the adequacy of resources and workflow
coordination among units. This reduces the likelihood of future problems
that would require your time and attention.
 They provide strong motivation for employees to achieve desired outcomes
without constant oversight and direction when linked to incentives.


 Tom Polen introduced us to
the Key Driver Goals at BD.
 A number of those goals, such
as revenue and gross margin,
 measure financial performance.
 How did BD set those goals?
 Businesses set financial goals
by building profit plans--
 one of the primary diagnostic
control systems managers
 use to execute strategy.
 Profit plans, a
subject of this lesson,
 are budgets drawn up for
business units that have
 both revenues and expenses.
 They summarize the anticipated
revenue inflows and expense
 outflows for a specified
accounting period--
 typically, one year-- and are
produced in the familiar form
 of an income statement.
 Profit plans serve several
important purposes.
 First, they provide the critical
link between business strategy
 and economic value creation.
 In effect, managers use profit
plans to price their strategy.
 They can then use these
plans to analyze trade-offs
 between different
courses of action
 and to evaluate how
likely performance is
 to meet the profit expectations
of owners and investors.
 Second, profit plans
establish accountability.
 Individual managers can be
held accountable for achieving
 specific revenue
and expense targets
 and the overall profitability
of the business.
 Third, they provide a benchmark
for variance analysis.
 As the year unfolds,
managers can
 analyze the difference between
profit plan projections
 and actual outcomes.
 This will allow them to explore
reasons for any differences
 and put remedial
action plans in place.
 Finally, profit plans can also
play an important educational
 role, both inside and outside
the organization, teaching
 employees and investors
how the business works
 and what its
critical drivers are.
 To create a profit plan,
there are three questions
 managers should ask.
 Number one, does a
business's strategy
 create adequate levels
of profit to cover costs
 and reinvest in the
business going forward?
 Second, does the business
generate enough cash
 to remain solvent
through the year?
 And finally, does
the business create
 sufficient financial
returns for investors?
 PROFIT PLANNING
 Nearly all businesses ask
the first question-- will
 we make enough profit?
 But better businesses also
ask the second question.
 These businesses forecast
their cash flows carefully
 to ensure that they will
have enough working capital
 to ride out any periods
when cash reserves run low.
 The best businesses go
one step further and focus
 on the utilization of assets.
 They don't simply
ensure that they
 are creating profit and
generating adequate cash flow.
 They also look at how
managers use the assets
 under their control to
maximize value for shareholders
 and attract long-term capital.
 As you will see, asking and
answering all three questions
 is essential for executing
strategy successfully.
 To answer the three questions
that we just reviewed,
 managers analyze three wheels--
 the profit wheel,
the cash wheel,
 and the return on
equity, or ROE, wheel.
 Although we will study each
of these wheels separately,
 they actually interlock
and move in lockstep,
 much like the gears
on a mechanical clock.
 To analyze these
wheels, managers
 need to make assumptions
based on their plans about how
 the future will likely
unfold for their business.
 For example, will customers
respond to new products?
 Will the market
expand or contract?
 How aggressively
will competitors
 try to capture market share?
 Of course, senior managers
must rely on people
 throughout the organization
to help them derive accurate
 planning assumptions.
 This might include, for
example, sales managers who
 are best informed about
customer preferences
 or production managers
who understand
 the trade-offs that must be
made to cut manufacturing costs.
 Once managers have completed
the profit planning process,
 people throughout
the organization
 will be in agreement about
the direction of the business
 and the assumptions that
underpin the forecasts.
 Managers can then
use a profit plan
 to set performance
goals for the business.

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 Describe the role that profit planning plays in translating strategy into action
plans.
 Analyze how the profit cycle unfolds within a business.
 Describe the major tasks that businesses perform to develop profit plans.
 Explain why it is important for businesses to analyze cash flows as part of profit
planning.
 Explain why it is important for businesses to measure return on equity (ROE) as
part of profit planning.

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4.2.2 The Profit Wheel
11:13 PM

Tracing the Profit Cycle

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Sales Forecasting: Identifying External

Variables
As we noted, the first step of the profit wheel—forecasting sales accurately—can be
difficult. This is because the variables that influence sales are often unpredictable and
beyond a business’s control. These external variables include:
External Example from Boston Retail
Variable
Macroeconomic For Boston Retail, a new disease or pest might wipe out large amounts of
factors the global cotton crop, driving up prices for a key component of their
supply chain.
Government For Boston Retail, trade restrictions and tariffs might make it more
regulation expensive to import clothing, or new labor laws could drive up the hourly
wages of store employees or force the retailer to offer costly benefits.
Competitor For Boston Retail, a new e-commerce competitor might emerge that
moves copies the retailer’s designs while offering free delivery to customers in
Boston Retail’s service area.
Customer For Boston Retail, management may be late in recognizing a new fashion
demand trend in time to order fresh stock, hurting sales as customers go elsewhere
to find these new fashions.

Getting sales estimates right is especially critical for Tom Polen’s team at BD because, as
we learned in Module 1, value creation in the health care technology industry happens
first and foremost through revenue growth. Here is Tom on how BD confronts the
challenge of forecasting revenue growth accurately.


 OM POLEN: I'm not aware of
any company who has just a slam
 dunk on their revenue
forecasting, right.
 That doesn't happen.
 We've got a great
team that's quite
 solid at forecasting revenue.
 We have a great history of
hitting our revenue goals.
 We've got a fantastic
team to do that.
 But maybe the advice
that I would give
 is revenue is always
something that's
 going to be less
predictable than what
 you think it's going to be.
 There are always
going to be issues
 that come up through the year.
 And so the importance
of planning up front,
 not being overly
bullish in terms
 of, if all of these things
come to fruition, we're
 going to hit our plan.
 You're failing before you
started your journey, if that's
 the approach you take.
 So we much more are
focused on let's understand
 what's the 90% revenue plan
that you're going to submit.
 I don't want to see, here's
the extra stretch plan.
 We want to have revenue
plans that people can hit.
 And then we want to have
contingency plans that, here's
 what you're assuming
is going to happen
 for you to achieve that goal.
 If those don't happen,
what are the other things
 that you already have
planned that you're
 going to do to help
mitigate those risks
 and still achieve your goals.
 And we spend quite a bit of
time on those mitigation plans
 as well before the year starts.


 TOM POLEN: One of
our businesses that
 has a common issue in
revenue forecasting
 would be our
diagnostics business.
 We're the leader in infectious
disease diagnostics.
 And certain conditions like
flu are very variable by year.
 And so trying to
understand and predict
 how big is the flu season
going to be this year
 is a constant challenge
that those businesses have.
 And that can mean
tens of millions
 of dollars of business
one way or the other.
 And so they start with a
baseline projection of--
 here's a normal flu season.
 And obviously if
it's a larger flu
 season that could allow
them to beat their goal,
 that creates a
challenge for next year
 when they have to
grow over that.
 Or if it's a weaker flu
season, they suddenly
 could not deliver
on their goals.
 And so they're
constantly looking
 at what other new
products are we launching,
 new initiatives
can we be doing--
 given something that's
out of our control,
 if it were to evolve one way
or the other, what levers
 are we going to pull to make
sure that we're still achieving
 our revenue goals for the year.
 That's just one example.


Internal Factor Example from Boston Retail
Mix and pricing Boston Retail overstocked particular sizes and styles of jeans (low-rise
of product versus high-waisted). At the end of the season, they were forced to sell
categories off the unsold inventory at a significant discount.
Marketing Boston Retail spent considerable money purchasing advertising time on
programs TV, without identifying that their primary customers—college students
—don’t watch much live TV. Boston Retail should have paid for digital
ads instead.
New product For a clothing retailer such as Boston Retail, developing new products is
introductions and costly due to design costs, establishing a new supply chain, and training
product deletions sales associates on how to sell the new product. On the other hand,
eliminating a product can lead to unhappy customers who were
accustomed to relying on Boston Retail for a particular item that they no
longer carry.
Changes in Boston Retail learned that one of its top jacket suppliers had switched to
product quality less expensive materials but chose to continue purchasing jackets from
and features them anyway. Customers, discovering that the zippers were faulty,
returned the jackets in high numbers.
Manufacturing In an effort to improve the store experience, Boston Retail drew on
and distribution interior design studies to introduce more casual seating areas and large
capacity decorative pieces, inadvertently reducing shelf space and limiting the
amount of clothing it can distribute in a given store.
Customer service Boston Retail switched to a new online training format for new store
levels associates. They discovered that it is less effective than the more
expensive, hands-on training they used previously, as demonstrated by
an increase in customer service complaints.

Managers must do their best to estimate the effects of these variables and price them into
their profit plans to accurately reflect their business strategy. Managers are also
responsible for monitoring these factors during the year and adjusting profit plan forecasts
as conditions change.


Managing Cash Flow at BD

To confront these cash flow challenges effectively, businesses must think carefully about
where cash is most needed and why. Let’s turn to Tom Polen to learn about the cash
allocation process at BD. As you work through the video, take note of where BD expends
the majority of its cash.

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 TOM POLEN: We go through
an annual process
 to allocate our cash.
 And we generate
about $3.5 billion
 of cash per year, which
is pretty significant.
 And so we're making decisions
on how much of that cash
 we apply towards
capital, which we
 allocate about a billion
dollars a year in capital.
 This is new
manufacturing equipment,
 updating BD facilities.
 That tends to be quite a
large amount of capital
 on a company such as our size.
 But that's because we're
making billions of units a year
 in highly automated
manufacturing lines,
 and that's part of
our business model.
 The other areas that we're
very focused on allocating cash
 towards are M&A, so bringing
in new innovations that
 help fuel our revenue growth
and make an impact for patients.
 And then the other major piece
is how we're thinking about
 returning that cash
to shareholders--
 either in the form of
dividends or share buybacks--
 are decisions that we're making.
 We at BD have a very
long track record,
 over 40-year track record,
of increasing our dividends
 every year.
 That's a trend that
we plan on continuing,
 with no end in sight.
 So that's very important to us.
 We haven't bought back shares
for the last couple of years,
 because we've done two large
transformational M&A deals,
 and we're now very focused
on paying down debt.
 But that debt, we're actually
done paying down debt
 at the end of FY '20,
and we free up cash
 that we'll start
reallocating back
 into value-creating
initiatives at that time.

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4.2.4 The Return on Equity (ROE) Wheel
Saturday, June 12, 2021
7:02 PM

Improving Asset Utilization to Maximize Profits

From <https://safe.menlosecurity.com/https://courses.myhbx.org/student/concept/609d8e6f29c5fc0b825a1db4/f6dea34d-
c3cc-4ad7-a8f2-6438524a1b98/1071/908/#/syllabus>

4.2.5 Putting the Three Wheels Back Together
7:18 PM

The Three Wheels of Profit Planning

For further reading on the profit wheels, please see R. Simons, Strategy Execution
Module 5: Building a Profit Plan, HBS Publishing Product Number 117-105.

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Cash wheel is presented as a continuously connected set of 4 states. Operating cash leads
to inventory, which leads to sales, which leads to accounts receivable, which leads back
to operating cash, resuming the circular process.
Sales from the cash wheel flow into the profit wheel, presented as another continuously
connected set of 4 states. Sales lead to operating expenses, which lead to profits, which
lead to investment in assets, which lead to back to sales, resuming the circular process.
Profits from the profit wheel flow into the ROE wheel, presented as another continuously
connected set of 4 states. Profits lead to stockholders’ equity, which leads to return on
equity, which leads to asset utilization, which leads back to profits, resuming the circular
process.


 PROFESSOR SIMONS: As we've
analyzed each of the three
 wheels, we've taken the
same forward-looking view
 that the management
team at Boston Retail
 would take as they worked
through their profit planning
 process.
 To understand how these
three wheels interlock,
 let's stand in the shoes of
a management team one year
 later, as they look back to
evaluate their performance.
 Imagine that Boston Retail
beat their sales projections.
 With more revenue and careful
monitoring of their fixed
 and variable costs,
operating expenses
 became a smaller
percentage of their sales.
 Their profits are
higher than last year.
 With this higher level
of sales, Boston Retail
 has more cash in
its bank account
 than anticipated
throughout the year.
 As a result, with
careful cash management,
 they stayed cash positive even
in months when sales dipped.
 They did not have to borrow to
cover their operating expenses.
 And with this increased
profitability,
 they were able to
invest in new assets.
 They also paid attention
to utilizing their assets
 efficiently.
 With better supply
chain optimization,
 they were able to speed up
their inventory turnover,
 and maximize the returns
on shareholder equity.
 A year later, Boston Retail
finds itself not only with
 higher profits than
last year, they
 have also maximized
those profits
 by being smarter about
how they use their assets.
 As a result, the management
team at Boston Retail
 now has more resources to
invest in new opportunities.
 Their decision to monitor
cash flow variables
 and return on equity variables,
in addition to the profit wheel
 variables, has literally
paid dividends.
 If they continue
to invest wisely,
 they will enjoy even greater
success in the years to come.
 As other companies
struggle with cash flow
 and poor returns on
investment, Boston Retail
 finds itself quickly moving
to the head of the pack
 with its careful approach
to profit planning.

This holistic approach to profit planning is important to our study of performance
measurement because it allows managers to set and monitor a number of critical financial
goals that many businesses often overlook.
As we noted at the beginning of the lesson, nearly all businesses analyze the profit
wheel and set goals to measure the following variables:
 Sales revenue
 Operating expenses
 Net income
 Investment in assets
These goals are always important, but they are the bare minimum. Better businesses also
take cash flow into consideration and measure accounts receivable, operating cash, and
inventory, too.
The most successful businesses consider not only profit and cash flow, but also the extent
to which they are maximizing returns to shareholders. These businesses monitor their
return on equity (and the ROCE/ROIC of individual businesses) by setting goals to track
balance sheet assets, return on capital, and asset utilization.
CONTINUE


4.3.1 A Multidimensional Approach to Measurement
Sunday, June 13, 2021
5:05 PM

4.3.1 A Multidimensional Approach

to Measurement
 PROFESSOR SIMONS: In
our previous lesson,
 we learned about
the central role
 that profit plans play in
setting financial goals.
 At BD, Tom Polen
and his colleagues
 use their profit
planning process
 to set Key Driver Goals for
revenue, gross profit, cash
 flow, and return on
invested capital.
 These goals are critical for
measuring how successfully BD
 implements its strategy.
 However, profit plans
capture only activities
 that can be measured by
a traditional financial
 accounting system.
 And as you probably know,
financial accounting
 records only historical
cost transactions.
 If there's no accounting
transaction, a debit
 and a credit, it's not
captured by profit planning.
 Of course, many
important business assets
 are what we call "intangibles."
 You can't physically touch them.
 This might include research
capabilities, brand loyalty,
 and customer relationships.
 These are among the
most valuable assets
 in many of today's
businesses, but you
 won't find them anywhere on
an income statement or balance
 sheet.
 This means that while
profit plans are
 an essential tool
for pricing strategy,
 they don't tell the full story.
 To measure all important
business functions
 and initiatives, we need to
introduce new measures that
 capture the entire value
creation process from start
 to finish.
 Only then can we communicate the
full details of the strategy.
 In this lesson,
we will introduce
 a tool that will allow
you to track and measure
 non-financial variables.
 This is the balanced scorecard.
 My colleague and good
friend, Professor Bob Kaplan,
 developed this tool in the 1990s
with business consultant Dave
 Norton.
 Since then, the
balanced scorecard
 has been adopted by many
organizations around the world.
 The balanced scorecard combines
the traditional financial
 perspective with
additional perspectives
 that focus on customers,
internal business processes,
 and learning and growth.
 These additional
perspectives help
 businesses measure all
the activities that are
 essential to creating value.
 We will delve into each of
these perspectives in a moment.

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Learning Objectives
o Describe the limitations of using only financial measures to gauge
performance.
o Explain how a strategy map can be used to develop a balanced set of goals
for a business to measure.
o Create a strategy map that comprehensively reflects a business's underlying
theory of value creation.
on this lesson.
The definition of an asset is a resource owned or controlled by an entity that will yield
future economic benefits. Plants and equipment and inventory fall under this definition
and, as a result, are included on financial balance sheets. These are physical assets. Some
assets, however, do not have physical properties: they cannot be touched. These are
called intangible assets and are generally not included on financial balance sheets.
Common examples include research capabilities, brand loyalty, and customer
relationships.
Does your business set goals that recognize the value of intangible assets in strategy execution?


Now, let’s dig deeper into the four perspectives typically included on the balanced
scorecard:
 The financial perspective should be familiar, as it was the subject of our
last lesson on profit planning. This perspective ensures that plans and
processes lead to desired levels of economic value creation. Financial
measures are derived from the profit wheel analyses explored in the
previous lesson and are captured in traditional financial accounting systems.
 The customer perspective defines how a business’s products and services
are seen by customers in its target market. This perspective includes the
business’s product attributes, brand image, and reputation. Are they the
most trusted brand? The most innovative? The best value? Customer
measures should be designed to reflect the desired market position by
focusing on metrics such as quality, delivery speed, and customer service
experience.
 The internal business process perspective identifies critical functional
practices related to innovation, operations, marketing and sales, and
engineering that create value for customers. It is typically broken down into
the following processes: operations management, customer management,
innovation, regulatory, and social. Measures are developed for each of these
processes.
 The learning and growth perspective details how intangible human
capital and infrastructure resources can be utilized to meet company goals.
It typically considers the role of human capital (people, talents, and
knowledge required to meet goals); information capital (the databases,
networks, and IT systems needed to support long-term growth); and
organization capital (leadership capabilities and cultural alignment to
business goals). Measures are developed for each of these processes.


scorecard:
experience.
processes.


scorecard:
experience.
processes.


Measuring Non-Financial Perspectives at BD
At BD, Tom Polen and his team incorporate all four perspectives into their Key Driver
Goals. Here, Tom outlines the role that non-financial goals—especially quality goals
(within the internal business process perspective)—play at the company.


 TOM POLEN: We have goals
around quality levels,
 around customer service levels,
around associate retention
 goals and diversity goals,
are all part of our KDGs.
 It's not just a financial
 Actually, seven out of the eight
talent perspective.
 As a health care provider, the
most important thing, bar none,
 is quality.
 And that is, at
the end of the day,
 we do what we need
to do to hit quality.
 And so while we
are focused, and we
 have financial goals,
our quality goals, which
 cut across manufacturing,
regulatory, marketing, medical,
 every different element
of the organization,
 contributes to making sure
that we have quality product
 at the end of the day.
 And we'll never
sacrifice a quality goal
 for a financial goal.
 Quality is always a no brainer.
 It's always number
one in our mind.
 And so those are things
which we spend a lot of time
 in our culture making sure
that everyone is aware of
 and that we don't take
shortcuts from that regard.
 And that's why it's right
in there in our KDGs.
 It's what we talk about at our
operating reviews, every month,
 even more often, how we're
doing on those goals,
 at least as much.
 Actually, we end up
spending much more time
 on those other goals
versus financial goals,
 because if we take care of
them, the financial goals will
 follow at the end of the day.


Rethinking Performance Measurement at

Citibank
In this lesson, we will familiarize ourselves with the process of building a balanced
scorecard, and we will consider the implications of using one to select performance
goals. While the balanced scorecard comes with many benefits, there are special
considerations that you need to keep in mind when taking this approach to measurement.
To help us identify these considerations and appreciate the high stakes of getting it right,
we will study a difficult choice that Citibank managers had to make after they decided to
incorporate non-financial perspectives into their new performance scorecard.
Note: This online case is based on a case developed by Robert Simons and Antonio
Dávila (HBS Case No. 198-048).


 NARRATOR: Like many
businesses, Citibank
 initially used financial
measures as the sole criterion
 for evaluating performance.
 However, in an effort
to more broadly reflect
 the various components
of the Citibank strategy,
 senior management
introduced a new scorecard
 with a variety of
non-financial measures.
 This change would have
a significant impact
 on employee evaluations.
 We will examine in
particular the case of one
 especially high
performing branch manager
 in California, James McGaran.
 In his 11 years with
Citibank, McGaran
 had always delivered top
performance for his branch.
 He was widely viewed
as one of the best
 managers in the entire
California system,
 but McGaran's future
at the business
 was suddenly placed in
jeopardy with the introduction
 of this new scorecard system.
 At the time of the
change in evaluation,
 the bank's strategy was to
build profitable franchises
 by combining
relationship banking
 with a high level of customer
service for target customers.
 For affluent clients
especially, exceptional service
 required meeting
their high demands
 with careful personal
attention and a broad selection
 of financial products.
 Let's hear directly
from McGaran to learn
 more about the unique
challenges at his branch.
 JAMES MCGARAN: Hello.
 I'm James McGaran.
 I'm a branch manager for
Citibank in California.
 My branch is located in the
financial district of Los
 Angeles, and it's one of the
most demanding and diverse
 branches in the region.
 Financial performance
here is key.
 Our profit margins
are substantial.
 We play a major role in
the region's performance.
 Of course, our
clients are demanding
 and have high expectations,
but I see these challenges
 as opportunities.
 And I make sure that financial
performance at my branch
 always exceeds expectations.
 NARRATOR: While Citibank
California would never
 stop measuring
financial performance,
 President Frits
Seegers decided he
 wanted to begin measuring other
dimensions of their performance
 too.
 He introduced several new
categories of measurement
 to be used alongside
financial performance.
 This meant that the performance
of McGaran and other branch
 managers would now be evaluated
in a much different light,
 and one that would prove to
shine less brightly on McGaran.
 As the management team
gathered to complete
 its first round of performance
reviews under the new system,
 McGaran's longtime
manager Lisa Johnson
 knew she would have a very
difficult decision to make.


4.3.2 Creating a Strategy Map
5:22 PM

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Please classify the variables underpinning BD’s Key Driver Goals into each of these four
perspectives. Here are some of the variables reflected in their goals: revenue, gross profit,
operating margin, cash flow, net promoter score, repeat purchases, employee training,
innovation, quality, supplier risk, diversity and talent, and customer satisfaction.

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 PROFESSOR SIMONS: In a
moment we will find out
 which measurement
categories Frits Seegers
 and his colleagues selected.
 But first, we need to
discuss the two steps
 that anyone who wants to
use a balanced scorecard
 should follow.
 First, you should
create a strategy map.
 Second, you should select
measures based on that map.
 A strategy map illustrates the
cause and effect relationships
 that underpin your strategy.
 It shows how your business
creates value and serves
 as a foundation
for any scorecard.
 When I teach this
material at Harvard
 to executives from around the
world, I ask, how many of you
 used balanced scorecards?
 And nearly everyone's
hand goes up.
 And then I ask, how many of
you have drawn a strategy map
 as a foundation
for your scorecard?
 Most of the hands come down.
 This is a critical omission.
 Because without a
strategy map, what you
 are calling a balanced
scorecard is really
 just a list of measures.
 And those measures
may or may not
 tie back to your
intended strategy.
 Without a strategy
map to tell a story,
 people in your organization
will have no clue
 where those measures came from.
 They'll be asking
themselves, how
 do I know if those are
the right measures?
 So our job now is
to show you how
 to translate your
list of measures
 into a theory of value creation.
 As you'll see, a strategy map
gives everyone in your business
 a road map to understand the
relationship between goals
 and measures and how they build
on each other to create value.
 When you look at strategy
maps in different companies,
 you will find many
different approaches.
 The set of four perspectives
we've introduced here
 is one approach that many
managers have found useful,
 but it's not the only one.
 What matters in the end
is that you have formally
 drawn the cause and
effect relationships that
 illustrate how your
business creates value.

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Let's look at how well
 you did in terms of placing BD's
key driver goals into the four
 perspectives.
 We can start at the foundation,
which is a learning and growth
 perspective.
 Imagine that BD has set
Key Driver Goals to enhance
 employee skills.
 They want to recruit a diverse
and talented workforce.
 Senior managers believe
that if trained well,
 this workforce will provide
the capability for BD
 to continue developing
high quality,
 innovative medical products.
 As a result, managers
have set training goals
 for employees at all levels.
 In addition, they
have initiatives
 to develop a new compensation
and incentive system.
 Next, we move up to the
internal business perspective.
 Using information
collected from customers,
 these highly skilled
and motivated employees
 will develop and
test new products.
 For their part, the
manufacturing units
 have goals to increase
quality and reliability
 and reduce cycle time.
 In addition, they
have new initiatives
 to work with customers to help
manage their on-time delivery
 requirements.
 Moving up to the
customer perspective,
 BD executives expect that
customers will appreciate
 the high quality
of their products
 and the wide array of on-time
solutions they are providing.
 This will translate
into customer loyalty
 and repeat purchasing.
 At the end of the
day, this will lead
 to strong financial results.
 The business will
generate increased sales
 that will boost revenue, cash
flow, and return on equity.
 By drawing this
simple strategy map,
 we see that BD's
Key Driver Goals are
 much more than a random list.
 They tell an end-to-end story
about how the company creates
 value and how it intends
to implement its strategy.
 Two things are
important to note.
 First, the arrows are
the most important part
 of a strategy map.
 They reveal the
cause-and-effect relationships
 so that everyone in the
business can understand
 the theory of value creation.
 This brings us back to our
inputs-processes-outputs model.
 The outputs from one stage
are the inputs to the next.
 Second, if you look at the
strategy map we created,
 goals are expressed
using an action verb.
 We want to increase revenue
or enhance customer loyalty
 or reduce cycle time.
 You must state what
you're striving for.

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Module 4 Summary
5:31 PM

Module 4 Summary
Measuring and Monitoring Performance

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 PROFESSOR SIMONS: in our fourth
module of Strategy Execution,
 we studied how to
implement strategy
 as plans using diagnostic
control systems.
 Diagnostic control
systems allow businesses
 to monitor activities
and measure performance.
 As we've learned, designing
these systems effectively
 requires both an
understanding of key concepts
 and some important decisions.
 Part of our challenge is that we
have so much information today,
 it has never been
easier to collect data
 about business performance.
 But this also means
that it has never
 been easier to lose sight of the
information that matters most.
 The most basic and
important information
 in a diagnostic control system
flows from profit planning
 and the profit wheels.
 As we noted, good companies
plan and monitor profit.
 Better companies add
a focus on cash flow.
 And the best of the
best also pay attention
 to balance sheet assets
through return on equity.
 But we also made the
important observation
 that these financial
measures are not
 sufficient to truly
understand the business.
 You must have the ability
to monitor the entire value
 creation process
from start to finish,
 including many non-financial
goals and initiatives.
 This led us to introduce
the balanced scorecard.
 One of the key
takeaways here was
 that if you want to
transform your scorecard
 from a list of measures to
a theory of value creation,
 you need to build
a strategy map.
 If done correctly, this
will provide a clear cause
 and effect relationship
for all the key variables
 in your business.
 We also introduced the concept
of critical performance
 variables, factors that could
cause your strategy to fail,
 as a way of helping you decide
where to focus your management
 time and attention.
 We also looked at the nature
of the measures themselves
 and introduced a
series of tests to help
 you decide if you've
selected and designed
 good measures, ones that are
aligned with your strategy,
 have good measurement
properties,
 and are linked to
economic value.
 The Citibank case
illustrated how difficult
 it can be to translate strategy
into the right measures
 and scorecards.
 This case study also underscored
the risk of getting it wrong.
 Finally, we looked at
the incentives that power
 up your diagnostic
control system.
 This brought us back to
the theories of motivation
 that we introduced in Module 1--
 people's desire to
contribute, do right, achieve,
 and innovate.
 Like we saw at
Mary Kay, your job
 is to ensure that
your incentives,
 both extrinsic and
intrinsic, respond
 to these motivational
needs and position
 the business for both short-term
and long-term success.
 With diagnostic control
systems in place,
 you can monitor your progress
in achieving key goals
 and executing your
plans and strategies.
 But there is a
dark side to this,
 as you will remember from our
ATH case study in Module 1.
 As we saw there, high-powered
measures, goals, and incentives
 can lead employees into trouble.
 More than one business
has been derailed
 by overzealous employees
responding in bad ways
 to aggressive goals and targets.
 How can you ensure
that your business
 won't meet the same fate?
 In our next module, we
will turn our attention
 to how you can best identify
and manage such risks.

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4.3.3 Setting Goals with a Strategy Map
5:33 PM

4.3.3 Setting Goals with a Strategy

Map

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TRANSCRIPT
Autoscroll
ON
To illustrate how
 a business can use a strategy
map to set specific goals that
 reflect their theory of
value creation, let's return
 to Boston Retail.
 Their main financial goal
is to increase revenues
 by 150% over the
next five years.
 Boston Retail executives plan
to meet this goal by opening
 new stores in New York state.
 They also aim to decrease
costs by increasing inventory
 turnover and improving supply
chain efficiencies to lower
 merchandise costs.
 These financial goals are driven
by goals set for the customer
 perspective.
 Remember that Boston Retail
sells affordable fashion
 to Boston area students.
 To deliver that
value proposition,
 they set goals to be first
to market with new fashions,
 improve the customer experience,
penetrate the New York market,
 increase same store
sales in Boston,
 and increase brand awareness.
 Managers know that they must
enhance internal processes
 to support these customer goals.
 So they set goals to improve
warehouse efficiencies
 and ensure that key items
are always in stock.
 Expanding into new
markets means they
 must be sensitive to differences
and trends in those markets.
 So they have a goal to
create a new analyst
 position to perform this work.
 To hit their customer
goal of being
 first to market
with new fashions,
 Boston Retail needs to be
able to identify new fashion
 trends early.
 They set a goal to build
strategic relationships
 with suppliers to acquire
this information and a goal
 to launch new initiatives
that encourage employees
 to share their personal
sense of fashion trends.
 This brings us to the learning
and growth perspective.
 Managers have set goals
to train store employees
 to interact with customers
to create a superior shopping
 experience and to increase
sales by suggesting accessories
 to match clothing purchases.
 They've also set a goal to
install an updated inventory
 management system that will be
easier for employees to use.
 Finally, to achieve
their expansion goals,
 they set goals to hire a
New York leadership team
 and to bring the New York staff
to Boston to meet support staff
 and tour existing stores.
 I hope that you can see that by
working through Boston Retail's
 strategy map, we now have
a complete end-to-end story
 of how all their different
business activities create
 value.

Setting New Goals at Citibank

Now, let’s return to Citibank to see how their strategy influenced the selection of goals
and measures. Frits Seegers and his team chose five new measurement categories that they
cascaded down to all branch managers, including James McGaran. These were combined
with the financial category already in use, for a total of six categories:
Categories Measures
Financial Citibank obtained financial measures from their regular accounting
system and focused primarily on total revenue and profit margin against
targets.
People The “people” measure focused on the manager’s proactive efforts to
develop and communicate with subordinates, to encourage area-training
programs, and to be a role model to more junior people. Citibank
measured this category using non-quantifiable ratings determined
subjectively by a branch manager’s boss.
Standards “Standards” included an assessment of a manager’s business ethics and
involvement in community groups and trade associations. Citibank also
measured this category subjectively.
Customer Citibank measured this category through telephone interviews with
satisfaction approximately 25 customers who had visited a given branch in the past
month. Scores were derived from questions focusing on branch services
and other Citibank services such as 24-hour phone banking and ATMs.
The surveys were administered by an independent research firm.
Control Citibank measured this category through evaluations of the branch’s
internal control processes as evaluated by internal auditors.
Strategy Citibank used these measures to track revenue for different types of target
implementation customer segments relevant to the strategy of a given branch. For various
branches, the focus might have been on revenues from customers such as
businesses, households, or professionals.

Here are a few key attributes of the new performance review process:
 For individual performance reviews, each of these six components was
scored independently into one of three categories: “above par” (resulting in a
bonus of up to 30% of salary), “par” (bonus of 15%–20% of salary), and
“below par” (no bonus).
 For measures that could be evaluated quantitatively, managers assigned
predefined targets.
 Using the ratings from the six categories listed above, managers were also
required to assign an “Overall” rating to each employee. Employees needed
at least a “par” rating in each category to receive an “overall above par”
rating. Employees who received a “below par” rating in any one category
could not receive more than an overall rating of “par.”
What would this new performance measurement system mean for James McGaran’s
future at Citibank? Let’s find out.


 NARRATOR: James
McGaran continued
 to deliver outstanding
financial performance
 for his branch,
which was reflected
 in the new
performance scorecard.
 In other categories-- strategy
implementation, control,
 people, and
standards-- he likewise
 received above par
ratings on his quarterly
 and annual reviews,
with the exception
 of a single par rating in the
control category one quarter.
 However, as the
manager of a branch
 with one of the most demanding
clienteles and exceptionally
 high levels of competition
with other banks,
 he struggled to hit the par
rating on the new customer
 satisfaction measure.
 On the satisfaction
surveys administered
 to customers who
visited the branch,
 he did not achieve
the target score
 of 80 required to receive
an above par rating,
 nor did he score
between 74 to 79
 as was required to
receive a par rating.
 McGaran, therefore,
received a below par rating
 for customer satisfaction.
 If Citibank wanted to stick
with their new system,
 they could not award him
more than an overall rating
 of par on his performance
review that year
 due to his below par rating
on customer satisfaction.
 Awarding him a global
rating of above par
 would mean overriding
the system.
 The management team would
need to make a tough decision,
 and Lisa Johnson
knew that if they
 did decide to adhere
to the new system
 and give him only a par
rating, the decision
 would have a major impact on
McGaran's morale and his bonus.
 LISA JOHNSON: James
is the kind of manager
 who puts a great deal of weight
on his performance reviews.
 And I'm worried
about what a lower
 rating might do to his spirits.
 Not only that, I'm
worried about what
 a drop in morale related
to this new scorecard
 could mean for Citibank
California as a whole.
 I know that Wells Fargo, our
main competitor in this market,
 has been chasing
him for a while.
 I worry that if
we signal that we
 think he's not
doing a great job,
 he may just pack up and go.
 That would be a
huge loss for us.
 We also know how
incredibly hard he's worked
 to overcome these challenges.
 He made staffing changes,
added a branch greeter,
 and introduced employee
coaching and branch meetings.
 NARRATOR: McGaran also voiced
his concerns to Johnson
 about the new
customer survey that
 was used to generate the
customer satisfaction score.
 This survey asked
customers to rate services
 that were seemingly beyond
the branch manager's
 control, such as the
quality of the ATMs
 and telephone and
online banking.
 On the one hand, Johnson
thought he had a valid point.
 On the other hand, she felt that
entrepreneurial branch managers
 could nevertheless influence
customers' expectations
 around these services.
 LISA JOHNSON: It was an
incredibly difficult situation,
 one of the toughest
of my career.
 I went about
preparing my comments
 for McGaran's scorecard, but I
didn't assign the final rating
 just yet.
 I wanted to have an
opportunity to speak
 with Frits Seegers and the
rest of the evaluation team.


4.4.1 Choosing the Right Goals: Identifying Your Critical
Performance Variables
Monday, June 14, 2021
9:14 PM

In our last session,
 we learned how important
it is to create a strategy
 map as a basis for
performance measurement
 and explore the problems you
can face as you use measures
 to hold people accountable
for the variables on that map.
 In this lesson, we'll show you
how to select and implement
 measures that reflect the
value creation process
 you have identified.
 As we mentioned in
the first lesson,
 it's easy to get in
trouble here by trying
 to measure too many things.
 When you add up all the
variables from the profit
 wheels, and then add the
multiple perspectives
 from the balanced
scorecard, you can end up
 with a very long list of
performance variables.
 But remember our
analogy to the pilot.
 You can fly the
plane effectively
 by paying attention to a
relatively small number
 of gauges.
 Every summer Professor
Bob Kaplan and I
 teach our Harvard
Executive Program called
 Driving Corporate Performance.
 We ask executives to bring
their balanced scorecards,
 so that we can work with
them to improve their design.
 We find that some
executives proudly
 bring scorecards with 50,
60, or even more measures.
 Unfortunately, when you
measure this many variables,
 you lose your ability to
focus on the things that
 are most important.
 People often ask me, how many
measures should a manager
 be accountable for?
 The answer is found
in a famous article
 by psychologist George Miller,
with the title, "The Magic
 Number Seven, Plus
or Minus Two."
 The idea is straightforward.
 People can easily remember
seven things, or even as
 many as nine, if they have to.
 Think of all the things
in our daily lives
 that are configured in sevens--
 days of the week, notes
on the musical scale,
 colors in the rainbow,
wonders of the world.
 What does this mean
for you as a manager?
 If someone can remember what
they're accountable for,
 this will influence the way
they make choices as they
 go about their daily work.
 This is very easy to test.
 Stop someone who works for you
in the hallway and ask them,
 what measures are
you accountable for?
 If they have 20 or 30
measures on their scorecard,
 there's no way they
can remember them all.
 But if the answer
is five to seven,
 they'll have no
trouble reciting back
 to you what those measures are.
 On the flip side of the
coin, Miller's article
 suggests that we shouldn't
have fewer than five measures.
 Why?
 Because with fewer
than five, there's
 not enough variety to
stimulate creativity.
 So to summarize, an
individual manager
 should be held accountable for
no more than seven measures,
 plus or minus two.
 The rest can and
should be delegated.

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Learning Objectives
 Identify the most critical goals for a business to measure.
 Design effective performance measures to track and evaluate goal
achievement.
 Describe the potential drawbacks that can arise when using non-financial
goals.
Here is Tom Polen on the emphasis BD places on selecting a handful of key goals to
prioritize.


 TOM POLEN: We're very focused
on keeping a narrow set of goals
 that we must achieve for the
company to be successful,
 putting the blinders
on when it comes
 to all the other
distractions that we could
 be having, and staying
focused on the few things
 that we must do.
 While always keeping an eye
out for what could derail us
 or the risks that are
coming, we certainly
 have a wide aperture for those.
 But then quickly zone
back in when there's
 ideas of "why don't we
start this initiative,"
 or we come out of a fun meeting
and say, "let's go do this.
 Let's go do that."
 They sound cool and they
sound interesting, often.
 But you really have to
maintain the discipline
 and say, is this really
something that we have
 to do right now or that
we should do right now,
 versus the goals
that we've already
 set for the organization.
 If I look back on my own career,
25 years in the industry,
 there's never--
 and I always share
this story with folks--
 there's never a year where I can
look back and say more than two
 or three things that
I achieved were really
 tremendous and substantial.
 You always look back
on any year and say,
 here's the two or
three things that I did
 that really moved the needle.
 And obviously there's
many other things
 that one achieves
in a given year.
 But at the end of the
day and you look back
 a few years later, there's
rarely more than a few things
 that really change the
trajectory of the company
 that any one leader
or team can do.
 Great things don't
get built overnight.
 They take a lot of
effort and focus.


In our previous discussion of the Citibank case, we started a discussion of what to do
about James McGaran without first stepping back to ask whether Citibank should place
so much weight on the customer satisfaction measure in the first place. This is a
discussion that every company should have before deciding on scorecard measures and
cascading them down to employees for individual performance evaluation.
At this point, the senior management team needs to closely examine which of the
variables they chose to measure would cause their strategy to fail. Those variables should
then receive the most importance on the scorecard and thus in performance reviews.
This is precisely why it is so important to draw a strategy map that identifies the cause
and effect relationship underlying your strategy. Citibank’s new scorecard is based on the
assumption that a drop in customer satisfaction would cause their strategy to fail. But do
they know this for sure? What if some other aspect of the customer perspective, such as
customer loyalty among high-net-worth customers, is in fact more critical to their
strategy?
In this case, Citibank should determine how big of an impact dissatisfied customers who
visited the branch would likely have on the branch’s ability to hit their market share and
financial goals. We will explore this matter more deeply next by introducing tests you
can use to see how effective your performance measures will be before you implement
them.


4.4.2 Selecting Measures and Targets
9:47 PM

4.4.2 Selecting Measures and Targets

Much of the power of using a balanced scorecard as a diagnostic control
system lies in its ability to translate strategy into goals that clarify for employees
what they are expected to achieve. To accurately track people’s success in
achieving those goals, however, you must also ensure that measures link to critical
goals.
A measure is a quantitative value that can be scaled and used for purposes of
comparison. When designed properly, measures are an important tool for
communicating, aligning, and motivating employee behavior to ensure the
successful execution of strategy.
Imagine a recreational boat manufacturer looking to diversify its product lines.
Managers set a goal to introduce a new line of mid-size sailboats for the cruising
market. How will they evaluate their success in hitting this goal? They could do
this in a number of ways, but they decide to select as their measure the number of
new orders received from customers.
Once you have selected one or more measures for a goal, you need to decide on
a target—the specific level of performance and timeframe against which to gauge
progress. Drawing on its own sales history and industry benchmarks, the boat
manufacturer set a target to have 20 firm orders in hand for the new model in the
next nine months.
Consider Boston Retail from our profit planning lesson. Here are some of the goals
their marketing department might define on their strategy map, along with the
specific measures and targets they could develop for each:
Strategy Map Goal Measure Target
Perspective
Financial Expand revenue Total revenue Reach 150% revenue
Perspective opportunities growth growth within five
years
Customer Improve shopping Volume growth Grow per-store
Perspective experience per store volume by 15%
annually
Process Identify and execute % of revenue Ensure 30% annual
Perspective new trends from new items revenue from new
items
Learning and Develop in-store Employee Achieve 90%
Growth training program surveys satisfaction level in
Perspective one year
To set these measures and targets effectively, businesses should identify which
firms in their industry set the standards for the most effective use of resources and
calibrate their own efforts accordingly. For example, a business seeking to
streamline its transaction processing might commission or consult a study of
similar firms to determine which ones excel at transaction processing and identify
their levels of efficiency and effectiveness with various indicators. This process is
called benchmarking.
Test #1: Does the Measure Align with

Strategy?

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 PROFESSOR SIMONS: When
designing measures,
 there are three tests
you should apply
 to see how effective your
selective measures will
 be in tracking
progress to key goals.
 The first test brings us back
to the balanced scorecard.
 Do the measures
align with strategy?
 Ask yourself, if I
picked up a scorecard
 and examined the measures
on that scorecard, could
 I infer what the
business's strategy was.
 If you've designed measures
well, the answer should be yes.
 INFERRING GOALS
 As you probably noted,
each set of measures
 tells a different story
in terms of priorities
 and ultimately business strategy
for these two companies.
 Because they are measured
on different things,
 employees in these two plants
will perform their work
 much differently, even though
their functional roles and job
 titles may be the same.
 And that is why this
test is so important.
 You could have the best
strategy in the world.
 You can communicate
that strategy
 to employees in different
ways-- town hall meetings,
 videos, company newsletters.
 But at the end of the day,
what everyone pays attention to
 is what they are measured on.
 So you need to be
sure that measures
 throughout the business
reflect your strategy so
 that every employee will
devote his or her efforts
 to implementing that strategy.


Test #2: Is the Measure Objective, Complete,
and Responsive?


Our second test
 focuses on the technical
properties of a measure.
 Is it objective,
complete, and responsive?
 Let's examine objectivity first.
 If a measure is objective, you
can independently verify it.
 You and I could look
at the same set of data
 and draw the same conclusion.
 The measures that we
studied in the profit
 wheel derived from
your accounting system
 would meet this test.
 A subjective measure by
contrast requires judgment.
 A subjective measure
might attempt to rate
 an employee's professionalism
or leadership capabilities.
 However, these
measures work well only
 when there's a high
degree of trust
 between employees and managers.
 Employees must feel confident
that subjective measures
 are applied fairly.
 Now let's examine completeness.
 A measure is complete
when it captures
 the full range of
activities you need
 to undertake to achieve a goal.
 Where we get in trouble is
where measures are incomplete
 and employees can
influence them.
 Let's say your goal
is to encourage
 salespeople to increase revenue
with important customers.
 You decide to hold
them accountable
 for the number of sales
calls they make each week.
 This measure is incomplete
because it does not
 capture the full
range of behavior
 to meet the desired goal.
 It's very likely
that your salespeople
 will choose to visit
easy-to-reach customers instead
 of those with the highest
revenue potential.
 They will be able to maximize
the measure, hit their targets,
 while not bringing in any
substantial new business.
 In this example, a
more complete measure
 would be the amount of new
revenue they generated.
 Employees would
then be motivated
 to focus on customers
with the highest potential
 and apply their energy to
converting those sales calls
 into new business.
 Finally, we need to look
at whether the measure is
 responsive to the
action of a manager.
 A measure is responsive when
the employee can directly
 influence the measure.
 In other words, when you
step on the gas pedal,
 does the speedometer move?
 So for example, return
on equity and stock price
 are responsive
measures for a CEO.
 Their strategic actions can
actually move those dials.
 But this is not true for
lower-level employees.
 They may have
performed very well.
 But you would not
expect their efforts
 to directly affect the
stock price of the company.
 As you've probably guessed by
now, designing good measures,
 ones that are objective,
complete, and responsive,
 is not easy for many
management jobs.
 This is why the
accounting measures
 that we studied in our
analysis of the profit
 wheels are so prevalent.
 Measures such as profit, cash
flow, and return on capital
 employed can be tailored to
any management job or business
 unit in a way that
everyone would agree
 is objective, complete,
and responsive.


You may have rated the measure as very unresponsive. After all, James could not control
the experience his customers had while using ATMs, nor while using phone banking or
online services.
On the other hand, while he may not have been able to influence those experiences
directly, you could argue that he had the ability to influence customer expectations and
experiences. From that perspective, we can describe the measure as at least moderately
responsive.
You should also remember the concept of the entrepreneurial gap from Module 2. Even
if James cannot control all the dimensions that affect customer satisfaction, holding him
accountable for a wide measure that is partly outside his control may encourage him to
innovate and be entrepreneurial in ways to improve the customer experience. For
example, he created a new greeter position in the lobby and instituted new training
programs for his staff in his efforts to improve his customer satisfaction scores.


Test #3: Does the Measure Link to Economic

Value?

 PROFESSOR SIMONS: We've
covered the first two
 tests of an effective measure.
 Number one, does it
link to strategy?
 And number two, is it objective,
complete, and responsive?
 Now, let's turn to the
third and final test,
 does the measure link
to economic value?
 This takes us back
to the value creation
 process and our
inputs-process-outputs model.
 The more that a measure focuses
on outputs, the more confident
 you can be that it
is creating value.
 For example, if you increase
revenue and profits,
 it's very likely that you've
created economic value
 for the business.
 As we move upstream
to consider processes,
 we're less certain about the
link with value creation.
 If, for example, we
build new relationships
 with our customers, will
that create economic value?
 The answer is probably yes,
but we might not be 100% sure.
 Not all new relationships
will lead to increased revenue
 and profit, so maybe
the correlation
 is something like 80%.
 Moving further
upstream to inputs,
 let's say we decide
to invest in more
 training for our employees.
 We like to think that this
will build long-term value
 for the business, but
how confident are we
 that every dollar
spent on that training
 will lead to economic value?
 Of course, we can't
be totally sure,
 so our confidence level might
decline to a 50% probability.
 There's an important
implication here.
 The further you go to the right,
the closer you are to outputs,
 the more you can use
objective measures derived
 from formulas to measure
and reward performance.
 You can link those measures
to employees' bonuses
 and know that you
were doing so fairly.
 The more that you
move to the left,
 however, the more you need
to rely on your own judgment
 when evaluating performance.
 In these instances,
subjective measures
 are often more valuable.
 This is precisely the
tension Citibank faces.
 Until now, they have always
evaluated their employees
 and awarded bonuses based
on financial measures.
 Because financial
measures reflect outputs,
 they knew those
measures reflected
 how effectively employees
were creating economic value
 for the business.
 They could ensure that
the rewards they allocated
 reflected the value
that was being created.
 Now, they are trying to
measure customer satisfaction
 objectively using a survey.
 But they're realizing
that they're not
 100% sure that this measure
leads to economic value.
 So Frits Seegers
and Lisa Johnson
 need to decide whether
they want to stick
 with the new objective measures
or if they should fall back
 on their subjective judgment
when evaluating James McGaran's
 performance.

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4.4.4 Considering Measures at Citibank
10:38 PM

You will now complete a Cold Call. Once you click “Start,” you will have three minutes
to respond. After three minutes, your answer will automatically be submitted and will be
reviewed by some of your peers. You will also be able to review and rate a few responses
from others. Click “Start” when you are ready to begin.
Given the complexity of James McGaran’s case, the evaluation committee introduced the
possibility of overriding the new system to grant him an exception and award him an
overall rating of “above par.” Based on what you have learned in this lesson about goal
and measurement design, do you think that the committee is right to pursue this
exception?

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No. Possibility of overriding the new system to grant him an exception and award him an
overall rating of “above par.” is not fair. Customer Satisfaction is set as one of the
accountable measure and being communication from leader to employee. A good
manager/ employee should learn from mistake and don't take this personal and
Leadership should stick to its new plan and make employee accountable all their key
responsibility and don't have double stands.

 NARRATOR: Johnson, Seegers,
and the rest of the evaluation
 team faced a complex dilemma.
 Should they stay true to the new
scorecard and measure customer
 satisfaction
objectively, even if it
 meant losing James McGaran?
 Or should they take a
more subjective approach?
 As McGaran's manager,
Johnson presented much
 of this subjective feedback.
 Let's hear some of
her arguments in favor
 of overriding the new system.
 LISA JOHNSON: Some
of us in the room
 argued that the new score card
needed to be flexible enough
 to accommodate exceptions.
 James McGaran was an
exceptionally high
 performing manager,
who has consistently
 produced excellent
results for Citibank, even
 with all the challenges
his branch faced.
 How could we not acknowledge
this with an overall above par
 rating and full bonus?
 Also, between you
and me, I worry
 that if we give him a low
rating and cut his bonus,
 he may walk out the door and go
down the street to Wells Fargo.
 NARRATOR: Others on the
evaluation team considered
 the opposite side of the
coin, presenting arguments
 in favor of adhering to
the rules of the new system
 and assigning James an
overall rating of par.
 Here is Jennifer Diaz
on why she decided
 to make such an argument.
 JENNIFER DIAZ: If
you all remember,
 we created the new
scorecard for a reason.
 We wanted to communicate
and reinforce
 our new strategy of
customer engagement
 for our target market of
high-potential customers.
 Sticking with the measures
on the new scorecard,
 especially in a case like
this, gives it credibility.
 If we ignore those
rules, we will
 undermine the scorecard
and the strategy
 it's supposed to reflect.
 We need to reinforce our belief
that customer satisfaction is
 key to our success.
 And we can only do this if we
stick with objective measures
 and give McGaran the
rating he deserves
 based on those
customer survey scores.
 Everyone is watching us
on this first go-around.
 If we back down,
the organization
 will think we aren't taking
the measures seriously.
 There's also the risk that if we
relax the standard for McGaran,
 some may think we are
playing favorites.
 Objective means objective.
 It's important to keep
morale and motivation
 high throughout the
entire organization,
 not just at one branch.
 NARRATOR: After much debate,
Lisa Johnson, Frits Seegers,
 Jennifer Diaz, and the rest
of the performance evaluation
 committee decided to
stick with the below
 par rating for
customer satisfaction
 but override the
system and give McGaran
 an overall rating of above par.
 However, to signal the
importance of the customer
 satisfaction measure, they
awarded McGaran a 25% bonus,
 rather than the maximum 30%.


If the senior management team at Citibank California had shared a strategy map with the
entire organization before introducing the new performance scorecard, they could have
avoided this difficult situation with James McGaran. A discussion about the validity of
their strategy map would have revealed that customer satisfaction may be the wrong
measure. The critical performance variable that they were trying to capture was more
likely to be “customer loyalty” for their target market of high-net-worth individuals.
James's rating was based on a customer survey representing people who came to the bank
for routine transactions such as cashing a check, but these individuals did not represent
Citibank’s target market. A better measure of customer loyalty may have been “cross-
selling of high-margin products.”
If top managers had presented a strategy map that showed customer satisfaction (based
on a survey of 25 people who visited the branch) as a critical performance variable, it is
likely that the branch managers would have pushed back and argued for a more valid
measure. Therefore, the customer satisfaction measure likely fails the first test we
introduced earlier: Does the measure align with our strategy? It likely fails our second
test as well because the sampling of 25 customers who visited the branch for a routine
transaction was not a “complete” measure—it did not capture all the relevant aspects of
customer value creation.
Thus, the evaluation team had good reason to back away from a mechanical formula and
use their subjective judgement when evaluating James McGaran.
To conclude our lesson, let’s turn to Susanna Gallani, whom you first met in Module 3
during our study of ranking systems. Here, she discusses the importance of transparency
when introducing a subjective component into performance measurement, as Citibank did
here. In the next lesson, she will share more of her insights on how to design incentives
that motivate employees to hit their performance targets.
TRANSCRIPT
Autoscroll
ON
 SUSANNA GALLANI: The tension
between objective performance
 metrics and subjective
evaluations is always there.
 Personally, I
don't think that we
 have many systems
of evaluation that
 are entirely based on
objective performance metrics.
 I don't think that's possible in
the complexity of organizations
 unless we really are talking
about a very simple activity
 that can be measured very, very
simply and very objectively.
 There are good and
bad things about using
 subjective evaluations.
 When you talk about being
evaluated subjectively,
 the reaction that you get
is most likely negative,
 because people worry that
subjective evaluations may
 open the door to bias and that
bias might play against them.
 But we have to
remember that there's
 a lot of good that comes
from subjective evaluations.
 In an organization where you
don't have ranking systems,
 subjective evaluation
could be a way
 to correct for the negative
shocks that might have happened
 to your performance
because of an event
 that was out of your control
or that could not be predicted.
 So imagine that you
work at a checkout line
 at a grocery store.
 And imagine that you are
evaluated and rewarded
 based on the number
of customers that you
 process throughout your shift.
 Now, imagine that your
scanner is broken,
 and it misses a beat every
so often, unpredictably.
 So every so often,
you are forced
 to rescan the product
that the customer is
 buying, over and over, until the
machine actually picks it up.
 Now, of course, that will impact
your performance negatively
 because it will
extend the time it
 takes for you to
process many customers,
 and the number of customers
processed in a shift
 will decrease.
 Should you be evaluated
objectively in that situation?
 I think that, as a
worker, you would
 hope that somebody
would subjectively
 override that
situation and give you
 credit for having
worked the hardest you
 could given the circumstances.
 So we have to remember that
there's a lot of upside
 of subjectivity as well.
 One of the main characteristics
of an incentive system
 is its credibility.
 If the incentive system
loses credibility,
 you might as well not have it.
 It's just going to be useless
because people will not
 attach the rewards or the
penalty or the feedback
 to anything they really do.
 That link is broken.
 So one of the things that
we recommend for managers
 to do when they
evaluate subjectively
 is to be as transparent
as you can possibly be.
 Transparency is a
great characteristic
 of objective
performance metrics.
 There's no debate.
 The measure is what
the measure is.
 That number is undebatable.
 It's not an opinion.
 So you have to create the
same amount of transparency
 and information about
the reasons that
 made you, as a manager, override
the objective performance
 metric to adjust the
evaluation of the employee.
 So transparency
is very important
 for the credibility of
the incentive system
 but also for the perception of
fairness on the employee side.
 So, to some extent, it
is important to provide
 information and transparency
not only to the people that
 are impacted directly by
that subjective adjustment
 but also to those
that are watching.
 Because whether
you want it or not,
 people notice, and
people will know
 who got the subjective
reward and who
 got the subjective penalty.
 So it's important to
maintain the consistency
 and transparency and the trust
in the system organization-wide
 and be very
transparent about that.


4.5.1 Harnessing Human Motivation
Wednesday, June 16, 2021
11:42 PM

Selecting Incentives
At this point, we've
 built the key design attributes
of your diagnostic control
 system.
 You've learned how to design
effective profit plans using
 the profit wheel, cash
wheel, and ROE wheel,
 map out the cause and effect
linkages of your strategy
 in a strategy map, choose
critical performance variables,
 and build a balanced scorecard.
 The critical final step is
powering up this system.
 Goals, measures, and
targets are of little value
 unless you can motivate
your employees to work
 hard to hit those targets.
 Therefore, in our
final lesson, we
 will introduce strategies
for motivating employees
 to provide their
very best efforts.
 Typically, businesses
motivate employees
 by using formal incentives.
 These incentives tap
into everyone's desire
 for rewards and
recognition-- what
 we call extrinsic motivation.
 We begin with the most basic
and frequently used incentive--
 cash bonuses and other
financial incentives.
 Financial incentives
are especially
 good at responding to our
need to achieve and enjoy
 visible signs of success.
 As you will recall
from Module 1,
 this is one of the
basic human drives.
 But people are motivated
by other desires, too.
 We want to contribute,
do right, and innovate.
 We need to ensure that
our incentives respond
 to these different
motivations as well.
 To meet these needs, we will
introduce a range of incentives
 and explain when and why
you may want to use them.
 Throughout this lesson,
we will spend time
 with Denise Montgomery.
 Denise works as an
independent sales
 director on behalf of Mary Kay.
 Mary Kay sells beauty products
to independent contractors who
 are called beauty consultants.
 The beauty consultants
then sell those products
 to their customer base.
 We will learn how Denise uses
various strategies to motivate
 her beauty consultants
to hit their targets.

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Learning Objectives
By the end of the next two lessons, you will be able to:
 Describe a variety of financial and non-financial incentive types and their
unique benefits.
 Explain why it is valuable to offer employees a mix of financial and non-
 Evaluate the effectiveness of existing incentive structures and identify the
best mix of incentives to respond to a range of motivational needs on a
team.
 Create incentive packages that effectively manage the tensions between
short-term results and long-term growth and capabilities as well as between
innovation and control.


 like is a study that I performed
with a hospital in California.
 And the problem that
the CEO of this hospital
 was trying to address was that
the hand hygiene performance
 at the hospital level
was not at the level
 that she wanted it to be.
 She needed the hand
hygiene performance
 to improve in order to
qualify for certain programs
 that the government puts
in place to incentivize
 good quality in
health care services.
 The physicians-- and this is
unfortunately a global trend--
 tended to be less good at being
compliant with hand hygiene
 requirements compared to
instead the other members
 of the clinical staff
like the nurses,
 technicians, physical
therapists, and so forth that
 were actually pretty good.
 Now, there's an additional
complication for her.
 The problem is that in
California you cannot hire
 physicians as employees
of the hospital.
 This is a law.
 So the complication
that this created
 was that she couldn't
put in place an incentive
 program in which
she would establish
 a bonus for physicians to
improve on hand hygiene
 performance.
 So that was one problem.
 The second problem was that
hand hygiene performance
 in hospitals is typically
measured and reported
 at the organization level and
not at the individual level,
 so she could not single out the
performance of the physicians
 from the performance
of other people
 in order to focus and maybe
give feedback to the physicians
 that they have to improve
their performance.
 So she thought about a way
that she could indirectly
 incentivize the physicians
by setting in place a bonus
 program for the non-physicians
that however was
 linked to overall performance.
 So the idea was if I
set a bonus program that
 will offer a monetary incentive
to the non-physicians that
 are employees of the
hospital, and therefore I
 can pay them without
a problem, they
 will in turn bring
along the physicians
 to improve performance.
 Now, as we all know, in
the hospital hierarchy,
 physicians tend to enjoy
higher organizational status
 than the nurses, for example.
 So it is unlikely that a
nurse could go around, tell
 a physician what
they need to do.
 So what they did--
 the nurses realized that their
only chance to get the bonus
 was to nudge the physicians
to improve their hand hygiene
 performance.
 And they devised all kinds of
very creative and spontaneous
 ways to reward and put
pressure on the physicians
 to improve their hand hygiene.
 My favorite among
the many examples
 is a certain department started
to cut out hand-shaped cards.
 And when they saw a physician
doing good hand hygiene,
 they wrote the name
of the physician
 and they put it on a wall.
 And now this wall
started populating
 with names of hand hygiene
compliant physicians.
 The other physicians whose
name was not on the wall
 started asking, how do I
get my name on the wall?
 And that incentivized them
to do good hand hygiene
 so that they could get
their name on the wall.
 What's interesting about
this, though, for me at least,
 is that the physicians kept
improving their hand hygiene
 performance after the
end of this intervention.
 So what are the lessons
that we can learn from this?
 REFLECTION
 First of all, I think there's a
lesson in finding indirect ways
 to incentivize people that you
cannot directly motivate with
 the tools that you have at hand.
 And this is what the CEO did.
 She couldn't pay the
physician directly,
 so she put in place a system
whereby she would put pressure
 on one group to then indirectly
nudge or put pressure
 on this other group that was
the one that was eventually
 the target of the intervention.
 The second lesson
is that when we
 create these informal incentive
structures that highlight
 the behaviors that are in
line with a certain image
 of the type of workers, the
type of person you want to be,
 this creates this
link in our head
 between the behavior
and the identity
 that we want to
have for ourselves.
 Now, we know from psychology
that we choose our actions
 based on the consistency
with the image
 that we want to have for
ourselves-- our identity.
 And so with this
intervention, the physician
 started associating
the good hand
 hygiene protocols and
behaviors with the image of "I
 am a good doctor--
 I am respected by my peers
and by my colleagues."
 And so this kept
going afterwards,
 and it produced a
long-term effect
 that was very beneficial.


 SUSANNA GALLANI: One
study that I very much
 like is a study that I performed
with a hospital in California.
 And the problem that
the CEO of this hospital
 was trying to address was that
the hand hygiene performance
 at the hospital level
was not at the level
 that she wanted it to be.
 She needed the hand
hygiene performance
 to improve in order to
qualify for certain programs
 that the government puts
in place to incentivize
 good quality in
health care services.
 The physicians-- and this is
unfortunately a global trend--
 tended to be less good at being
compliant with hand hygiene
 requirements compared to
instead the other members
 of the clinical staff
like the nurses,
 technicians, physical
therapists, and so forth that
 were actually pretty good.
 Now, there's an additional
complication for her.
 The problem is that in
California you cannot hire
 physicians as employees
of the hospital.
 This is a law.
 So the complication
that this created
 was that she couldn't
put in place an incentive
 program in which
she would establish
 a bonus for physicians to
improve on hand hygiene
 performance.
 So that was one problem.
 The second problem was that
hand hygiene performance
 in hospitals is typically
measured and reported
 at the organization level and
not at the individual level,
 so she could not single out the
performance of the physicians
 from the performance
of other people
 in order to focus and maybe
give feedback to the physicians
 that they have to improve
their performance.
 So she thought about a way
that she could indirectly
 incentivize the physicians
by setting in place a bonus
 program for the non-physicians
that however was
 linked to overall performance.
 So the idea was if I
set a bonus program that
 will offer a monetary incentive
to the non-physicians that
 are employees of the
hospital, and therefore I
 can pay them without
a problem, they
 will in turn bring
along the physicians
 to improve performance.
 Now, as we all know, in
the hospital hierarchy,
 physicians tend to enjoy
higher organizational status
 than the nurses, for example.
 So it is unlikely that a
nurse could go around, tell
 a physician what
they need to do.
 So what they did--
 the nurses realized that their
only chance to get the bonus
 was to nudge the physicians
to improve their hand hygiene
 performance.
 And they devised all kinds of
very creative and spontaneous
 ways to reward and put
pressure on the physicians
 to improve their hand hygiene.
 My favorite among
the many examples
 is a certain department started
to cut out hand-shaped cards.
 And when they saw a physician
doing good hand hygiene,
 they wrote the name
of the physician
 and they put it on a wall.
 And now this wall
started populating
 with names of hand hygiene
compliant physicians.
 The other physicians whose
name was not on the wall
 started asking, how do I
get my name on the wall?
 And that incentivized them
to do good hand hygiene
 so that they could get
their name on the wall.
 What's interesting about
this, though, for me at least,
 is that the physicians kept
improving their hand hygiene
 performance after the
end of this intervention.
 So what are the lessons
that we can learn from this?
 REFLECTION
 First of all, I think there's a
lesson in finding indirect ways
 to incentivize people that you
cannot directly motivate with
 the tools that you have at hand.
 And this is what the CEO did.
 She couldn't pay the
physician directly,
 so she put in place a system
whereby she would put pressure
 on one group to then indirectly
nudge or put pressure
 on this other group that was
the one that was eventually
 the target of the intervention.
 The second lesson
is that when we
 create these informal incentive
structures that highlight
 the behaviors that are in
line with a certain image
 of the type of workers, the
type of person you want to be,
 this creates this
link in our head
 between the behavior
and the identity
 that we want to
have for ourselves.
 Now, we know from psychology
that we choose our actions
 based on the consistency
with the image


First of all, I would like to commend the team for all their thoughtfulness and rigor in going
through this new performance measurement system. As we strive to emphasis the
importance of customer satisfaction measures, we have successfully implemented this
across all branches for the first time this performance cycle.

However, we acknowledge that the metric we have used previously may not have been an
accurate representation of Citibank's target market. Thus, going forward we will be using a
different metric, with input and feedback from branch managers, as a more representative
measure for customer satisfaction.

Taking into account all these circumstances and to ensure our employees are still rewarded
fairly: branch managers may still obtain a "below par" score for individual dimensions
(including customer satisfaction), however we have decided to relax the requirement to
obtain all "par" scores to achieve an overall "above par" score.

With the new rating system focusing on multiple metrics, there have been some changes for
some of your performance ratings. We take this system very seriously and are committed to
increasing our customer service perspective in the company and from our members.

We recognized that James McGaran has outperformed the financial benchmarks and
targets for multiple years and his bonus was adjusted accordingly based on that factor and
the customer service rating. We understand the changes have been new and difficult but
we stand committed to both maintaining and recognizing high performers in our financial
goals but also want to achieve that same level of success with our customer service
perspective in order to maintain our current customers and attract new ones.

609d8e6f29c5fc0b825a1db4/54b2dd96-da4e-4b3c-a3bc-a1ca789fd3c5/1071/908/#/>

Taking into account all these circumstances and to ensure our employees are still rewarded
fairly: branch managers may still obtain a "below par" score for individual dimensions
(including customer satisfaction), however we have decided to relax the requirement to
obtain all "par" scores to achieve an overall "above par" score

With the new rating system focusing on multiple metrics, there have been some changes for
some of your performance ratings. We take this system very seriously and are committed to
increasing our customer service perspective in the company and from our members.

We recognized that James McGaran has outperformed the financial benchmarks and
targets for multiple years and his bonus was adjusted accordingly based on that factor and
the customer service rating. We understand the changes have been new and difficult but
we stand committed to both maintaining and recognizing high performers in our financial
goals but also want to achieve that same level of success with our customer service
perspective in order to maintain our current customers and attract new ones.


most effective incentive for branch managers, given their performance measures? Why or
why not?
No. It is not most effective incentive for branch managers. There can be no uncertainty in
terms of which products count toward scorecard goals and what values various actions
carry. Branch staff should be able to replicate the scorecard results and payout calculations
in a simple spreadsheet, or even on the back of a deposit slip. If staff cannot understand the
direct link between specific behaviors and specific compensation, they’ll see less value in
pursuing the scorecard goals.

Are there additional incentives Citibank should introduce to motivate branch managers?

 Emphasizing a shared experience puts the responsibility to succeed on the
group rather than the individual. Team incentives versus individual incentives
are more powerful and produce better results.

Motivating Performance among Mary Kay

Consultants
In the next two lessons, we will also spend time with Denise Montgomery, an
independent sales director for Mary Kay. As a sales director, Denise oversees a team of
beauty consultants who earn money by purchasing beauty products from Mary Kay and
selling those products directly to consumers. Consultants also earn commissions for
recruiting new consultants to the sales force. Income for an entry-level consultant is
calculated as the difference between (1) the retail value of the products sold and (2) the
price they pay to purchase the product from Mary Kay (usually 50% of suggested retail).
Additionally, non-director consultants receive 4% to 12% commission on the sales of all
consultants they recruited to the sales force.
As consultants hit increasingly challenging sales and recruiting goals, a promotion path
opens up to them that awards higher commission rates, monthly bonuses, and other
rewards, including use of the famous pink Mary Kay car. The highest position in the
independent sales force is the national sales director role. Top national sales directors
earn over $1 million per year.
We will learn how Denise uses a range of incentives to motivate the beauty consultants
in her unit. To begin, she will share her perspective on the type of individual most often
drawn to and likely to succeed in the consultant role.

609d8e6f29c5fc0b825a1db4/c3517e7d-1eba-4df1-8fef-6c95771a2341/1071/908/#/>

 DENISE MONTGOMERY:
I think some of what
 makes for a successful
consultant is
 someone willing, first of
all, willing to hear the plan
 and then willing
to give it a try.
 They know that they
don't know whether it's
 going to be for them or not.
 But they're willing to
give it a try and see.
 And when I say willing to hear
it and then willing to try,
 so that means you're willing
to put some effort into it.
 So it takes a certain
amount of, I guess,
 courage, boldness, confidence
to step out on faith.
 So you need faith
to try something
 that just wasn't
even in the cards
 for you and you never
even thought about.
 And then you're willing
to give it a try.
 But then you've got to be
willing to stick with it too,
 because there's going to be
ups and downs as in anything.
 And when you're an entrepreneur
and you own your own business,
 now that's challenging.
 But it's so much fun,
and it's so rewarding.
 You have to push yourself.
 You have to set the goal.
 Then you have to push yourself
to put the effort out and then
 keep putting it out and
keep putting it out.
 That's what entrepreneurs do.
 Sometimes the
results are coming.
 Sometimes they're not
coming, but you believe.
 You believe that you're
capable, and it can happen,
 and it will happen--
 you deserve this.
 And if you keep plugging,
you know it will happen.
 And so you want to have--
 and build some of
those characteristics
 of determination,
perseverance, persistence.
 I am trying to inspire.
 I'm trying to educate.
 I'm trying to lift, and
I'm trying to recognize.
 So I want to commend them on
what they did the previous week
 or in showing up and in
continuing their business.
 And sometimes I simply do
a thing that I love to do,
 which is we just list off
businesses that are gone.
 Tell me another one.
 What other business you know
that's gone, used to be here
 but is gone?
 We name them.
 And I mean, the list
is just endless.
 They used to be here.
 I don't want to name no names.
 And guess whose
business is still here.
 Yours.
 And so there's this credit
that has to be given for that.
 And as an entrepreneur,
you work for yourself.
 You have to learn to
give yourself credit,
 because nobody else is going
to know what you've done.
 And sometimes people run
this business part time.
 And they're not even
recognizing the accomplishments
 that they've had and how
steadfast they are just
 staying in the race.
 Their customers
appreciate them so much.
 And I remind them of that often.


Analysis: Motivational Attributes of Beauty Consultants

Based on the entrepreneurial spirit Denise describes, those who choose to be consultants
for Mary Kay likely have an especially strong desire to achieve. In a decentralized
organization such as Mary Kay, however, achievement may prove especially
challenging, because its independent contractors are working with a
significant entrepreneurial gap: Their span of control is narrow—they have few
resources under their direct control, and all significant decisions regarding product type
and prices are determined by Mary Kay management. Meanwhile, the measures used to
evaluate their performance—including personal sales volume, number of new recruits,
and sales volume of recruits, and, for sales directors, number of consultants at various
levels—require the wide range of tradeoffs inherent to being an entrepreneur.



4.5.2 The STORM Framework at Mary Kay
1:23 AM

Guiding Formal and Informal Incentive
Design
Mary Kay has developed a framework to describe beauty consultants’ motives,
including, but not limited to, their need to achieve. Recall from Module 1 the notion
that each of us possesses some theory of human motivation, even if we aren’t
conscious of it or have not articulated it. The Mary Kay framework, abbreviated as
STORM, is itself a theory of motivation. According to Mary Kay, there are five
things that all consultants seek:
o Satisfaction with a task well done (self-worth)
o Teamwork (a sense of belonging)
o Opportunity (to succeed)
o Recognition
o Money
Mary Kay uses this STORM framework not only to design formal incentive
packages, but also to motivate effort in more informal ways. Here is Denise
Montgomery on the importance of Monday night meetings in helping to motivate
consultants. Mary Kay encourages sales directors such as Denise to host such
weekly meetings to share product information, selling tips, and success stories and
to create a venue for group praise in order to spur healthy peer pressure among
consultants.

609d8e6f29c5fc0b825a1db4/c229e0bb-0147-4a98-b29c-8009c7c191fd/1071/908/#/>

he consultant meeting addresses all of the needs covered in the STORM framework. You
may have observed that the consultant meeting is especially well designed for addressing
consultants’ needs for teamwork and a sense of belonging (by facilitating peer
connections and information exchange in what can otherwise be a lonely profession),
satisfaction with a task well done (by presenting accolades and prizes to consultants to
celebrate their achievements), recognition (by presenting those accolades in front of
peers), and finally, their desires to earn money and succeed by teaching them best
practices and building confidence in their selling abilities.
In fact, Mary Kay encourages sales directors such as Denise to hold these Monday night
meetings precisely to create a forum for praise and recognition—and, in turn, a healthy
sense of peer pressure and competition among consultants. Mary Kay also encourages
these meetings as a place to share product information, selling tips, and success stories.
Notice that the latter two of these activities—providing recognition and sharing best
practices—motivate effort by focusing on extrinsic motivation, even though they do not
involve the promise of a monetary payout.
Here Denise explains why she believes it is important to acknowledge a variety of needs
beyond money when deciding how to incentivize employee behavior.

609d8e6f29c5fc0b825a1db4/c229e0bb-0147-4a98-b29c-8009c7c191fd/1071/908/#/syllabus>

 DENISE MONTGOMERY:
Mary Kay Ash used
 to say, if you had a great week,
you need to be at the meeting
 so that you can
help lift others.
 It's not just the director's
job to lift the room.
 It's everybody's job.
 And if you had a
not-so-great week,
 you really need to
come to the meeting
 so that you can be lifted.
 So either way, you
need to be there.
 And we love coming
together every week,
 at least once a week.
 You're going to be applauded.
 You're going to be recognized.
 You're going to be celebrated.
 You're going to be lifted,
trained, and shared.
 And you're going to get a chance
to hear what other people did
 and didn't do and learn.
 And you're going to leave
feeling so much better.
 Sometimes when they
tell me, oh, I've
 just had an exhausting week.
 And I say, oh, well,
then you definitely
 need to be here, because you're
going to be so full of energy
 when you leave.
 And sometimes they'll try to
come up with different excuses.
 But it is the place to be,
and again, wherever it is.
 Sometimes we do our weekly
meetings now on a Zoom call.
 Or sometimes we'll do
it on a conference call.
 But wherever it's
happening at, you
 want to be there because
we need each other.
 And we do need to pull each
other along and just stimulate
 each other.


 DENISE MONTGOMERY: I don't think
money is enough of a motivator.
 I always say there's so many
ways in America to make money.
 But everybody needs
and wants more money.
 But they're not willing to
do anything just for money.
 In Mary Kay, there's
money plus so much more.
 And sometimes we
have a saying that
 says we're looking for women
or men who want something more.
 Money plus.
 It could be an opportunity
to build self-esteem;
 to build personal and
professional growth
 and development; an opportunity
that provides flexibility
 and money; an
opportunity that provides
 training, and
development, and money;
 an opportunity that provides
trips around the world,
 and fun, and money.
 So that's a little bit
of the something more,
 an opportunity that rewards you
and recognizes you with gifts,
 and jewelry, and money.
 So people do want
more than just money.
 I think they're all important
as far as STORM and all
 the different ways to
motivate and recognize people,
 because people are
all so different.
 And throughout our life
and throughout our career,
 we have different motivators
at different times.
 And I think it's so smart that
the company has so many avenues
 and channels that we're
always working on.
 We're offering prizes.
 We're offering recognition.
 We're offering money.
 We're offering time.
 As a matter of fact,
one of the things
 that I'm going to talk
with my group about tonight
 is what is their love language.
 How do they like
to be shown love?
 Is it through time
with the director?
 Would they like one-on-one
time with the director?
 Would that be really,
really special for them?
 Do they really value
mostly recognition
 in front of their peers?
 Is it the prizes and the
jewelry that we earn that really
 excites them the most?
 Is it gratification?
 Is it words of affirmation?
 Some people love getting the
card, the letter in the mail.
 And so Mary Kay taught us to
write so many postcards a day,
 to actually, even though with
technology today as it is,
 there's nothing like
getting something
 in the mail that says
I appreciate you.
 And so we talk about that.
 And I think it's so smart
that the company understands
 all that and is driving to
cover all of that knowing
 that, at different times,
different people need
 different levels and are
motivated by different things.


Mary Kay uses the STORM framework to guide the design of its incentives for sales
consultants. Here, we provide a table illustrating how each of these incentives aligns to
one or more of the STORM motives.
You have already learned about the role recruiting, team meetings, and financial
incentives play at Mary Kay. Later in the lesson, you will learn more about
communications, events, prizes, and their flagship car program.
S T O R M
SALESFORCE (Satisfaction (Teamwork (Opportunity (Recognition) (Money)
SUPPORT / Self- / to Succeed)
Worth) Belonging)
COMMUNICATIO X X X
NS
EVENTS X X
RECRUITING and X X
TEAM MEETINGS
PRIZES X X
FINANCIAL X
VIP CAR X X X X
PROGRAM
Source: Robert Simons and Hilary Weston, “Mary Kay Cosmetics: Sales Force Incentives (A) and (B),” HBS Teaching
Note No. 191-198.
Offering an incentive package that provides both financial and non-financial rewards has
been key to Mary Kay’s success. This is not surprising when you consider Denise’s
observation that Mary Kay attracts those who are looking for “money plus.” As Mary Kay
has discovered, financial incentives alone are often not sufficient for achieving
exceptional results. Later in the lesson, we will learn more about some of those non-
Nevertheless, Mary Kay’s financial incentives are an essential dimension of their
incentive program, and they are an essential part of any business’s incentive program—as
Denise noted earlier, all of us need and want financial rewards for the work we do.
We will now turn to best practices for designing the formal, financial incentives. First up
—the cash bonus.
Reminder: If you have not returned to the Team Discussion thread recently, please revisit
it now to review your peers' latest responses and share your latest thinking on the
discussion topic.


4.5.3 Designing Cash Bonuses
1:59 AM

 PROFESSOR SIMONS: One of the
most common types of incentives
 takes us back to money--
 the cash bonus.
 Employees who hit
individual or business goals
 receive additional compensation
on top of their base salary.
 To work effectively,
top managers
 must assign bonuses carefully.
 In particular, you must attend
to three key design decisions.
 First, you must
decide how much money
 is available to distribute--
 the size of your bonus pool.
 You can think of
this pool as the pot
 of money reserved for paying out
incentives and other rewards.
 Managers typically set
the size of the bonus pool
 as a function of business
or corporate-level financial
 performance.
 Second, you need
to decide on how
 you want to allocate
payouts based
 on individual performance,
business performance,
 and corporate performance.
 Then you can assign weights to
each of these three categories.
 Your position in the
organizational hierarchy
 is an important factor
when making this decision.
 Generally speaking,
higher-up managers
 with wide spans of control
will have more weight
 assigned to business performance
than individual performance.
 For example, if you consider the
president of a business unit,
 it makes sense to
allocate his or her bonus
 based in large part on
the business's performance
 as a whole rather than on
any individual initiative
 that person undertook.
 Also, in a
multi-business company,
 the degree to which a business
unit successfully interacts
 with other business units to
achieve overall company profits
 will likely increase
the weight given
 to corporate-level or
company-wide performance.

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 So going back to the Citibank
case, when the executive team
 overrode the new system to give
McGaran an above par rating
 but cut his bonus by
5%, it is very important
 that McGaran view this
decision as fair and informed
 in the circumstances.


 PROFESSOR SIMONS: For
your third and final step,
 you must decide how you
will calibrate and pay
 for different levels
of performance
 within each of these
three categories.
 You can either use a
formula, or you can rely
 on your subjective judgment.
 Formulas come with a
number of advantages.
 First, they eliminate
ambiguity and provide clarity
 for those being measured.
 Employees know exactly
what they must achieve,
 and they understand exactly
how they will be rewarded.
 Second, you can set
payout formulas relatively
 infrequently, say once per
year, and then set them aside,
 helping maximize your
 If you instead choose to make
these decisions subjectively,
 you risk sacrificing
some of this clarity.
 In addition, using subjective
judgment to allocate rewards
 will demand more of
your time and attention
 because you must gather
all the information you
 need to make a fair assessment.
 However, you will
gain the ability
 to more closely tailor rewards
to the true contribution
 of employees in circumstances
where objective measures
 may give a false reading.
 For example, you may want
to put your best manager
 into your most
troubled business.
 One that has recurring losses.
 In this case, you would
want to use judgment--
 your personal assessment
of that manager's
 commitment, innovation,
and effort--
 to evaluate and reward
their performance.
 To use subjective
assessment effectively,
 trust must be high.
 Otherwise, employees
will not be confident
 that their bonuses have
been allocated fairly.
 So going back to the Citibank
case, when the executive team
 overrode the new system to give
McGaran an above par rating
 but cut his bonus by
5%, it is very important
 that McGaran view this
decision as fair and informed
 in the circumstances.


Mary Kay responds to consultants’ desire for recognition by presenting prizes for every
significant achievement. These prizes are an important part of the incentive package. In
fact, founder Mary Kay Ash once said, “A $5 ribbon plus $20 worth of recognition is
worth more than a $25 prize.”
Here is Denise Montgomery with more on the role that quarterly prizes play in
responding to consultants’ desire for recognition. Such quarterly prizes are awarded for
hitting sales and recruiting goals, and they are typically presented in front of a group.

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Strategy Execution: 4.6.1 Types and Mixes of Incentives
1:06 AM

Alternatives to the Cash Bonus

We have been focusing on bonuses in the form of immediate cash payments—certainly
one of the most common types of incentives—but let’s not forget that you can and should
provide other types of incentives to employees too.

Beyond cash, you can offer:
1. Gifts and prizes
2. Deferred cash payments
3. Awards of company stock
4. Grants of options for the future purchase of company stock
Mary Kay responds to consultants’ desire for recognition by presenting prizes for every
significant achievement. These prizes are an important part of the incentive package. In
fact, founder Mary Kay Ash once said, “A $5 ribbon plus $20 worth of recognition is
worth more than a $25 prize.”
Here is Denise Montgomery with more on the role that quarterly prizes play in
responding to consultants’ desire for recognition. Such quarterly prizes are awarded for
hitting sales and recruiting goals, and they are typically presented in front of a group.

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 DENISE MONTGOMERY: One of the
exciting things in Mary Kay
 is that we try to recognize
you all year long along the way
 for the accomplishments
that you're making.
 And I think one of
the things that I've
 learned through the company
is that each of them
 is sort of like a
benchmark as you go.
 And if you accomplish
something in three months,
 you get a little
piece of recognition,
 and then another three months,
you're getting another piece.
 And it all leads up to
the big win at the end.
 And so for quarterly
prizes this year,
 there was certain jewelry.
 And the theme was
"you hold the key."
 And, of course, that was
very, very appropriate
 for accountability.
 You hold the key.
 And every quarter,
every month rather,
 we earned a piece of jewelry.
 And it all related to the key.
 And so I'm wearing my favorite
one, which is the key bracelet.
 And so that was key every month.
 And some of us hit
that every month.
 And some we celebrate
because they
 hit that three months
of the year, and some
 made it six months
of the year, and some
 made it 12 months of the year.
 And, of course, it was
strategically positioning you
 for bigger wins every time.
 Now, these pins here
are annual wins.
 And the bumblebee
is for bringing
 in 24 qualified individuals in
one year, in one calendar year.
 And so that's an exciting win.
 And you can always take
the pin or even the prizes.
 You have choices.
 It's all about choices.
 Some people like the
pin on their lapel.
 Some like to wear
the bumblebee ring.
 Some like to wear
it on a necklace--
 all different things.
 And then the bar pins--
 my favorite are the bar pins
that reflect annual sales
 for your group, for your unit.
 So these are all diamonds, shhh.
 I always say that at
the meeting on Monday,
 you get practice diamonds.
 From Mary Kay, you
get the real diamonds.
 The bar pins reflect annual
sales at the end of the year.
 And one of the things
that's interesting
 is that you don't
get another bar pin
 unless you do a higher year.
 And so even if you
do lower years,
 you don't get that
same number again.
 But it's exciting anyway.
 So here I have the $250,000
year, the $300, the $400,000,
 and the $500,000 year
as a diamond bar pin.

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Gifts and prizes
 satisfy our need
to be recognized
 for our achievements.
 These tangible
incentives are very
 powerful in supplying motivation
to hit short-term targets.
 But we need to
revisit the tension
 between short-term results
and long-term capabilities
 we introduced in
our first module.
 When it comes to selecting
your mix of incentives,
 you need to keep
this tension in mind.
of ways you can
 design incentives to
encourage long-term thinking.
 One is to defer cash payments.
 Imagine that you're the
manager of a sales team,
 and you award bonuses to
your sales representatives
 based on the amount of
revenue they bring in.
 You might decide to
defer those bonuses
 and pay them three months
after the revenue is booked.
 With this approach,
the bonus can
 be pulled back if
customers do not
 pay their invoices when due.
 With this approach,
your sales reps
 will be less inclined to
pursue deals with customers
 who have poor credit ratings.
 They know that if the
customer doesn't pay,
 they will effectively
lose their bonus.
 Another long-term
incentive you can use
 is stock grants
and stock options.
 Giving stock to employees,
effectively making them owners,
 allows you to motivate them to
take a long-term perspective
 in building the business.
 They are smart enough to
know that today's stock
 price reflects the present
value of anticipated future cash
 flows.
 This will motivate managers to
make long-term investments that
 will ensure the future
health of the business.
 Instead of outright
grants of stock,
 you might also consider
granting stock options
 as many startups do.
 This means giving
employees the right
 to purchase stock in the future
at a specified price set today,
 known as the strike price.
 Again, stock options will
keep your employees focused
 on the trajectory of the
business's stock price
 and encourage them
to make investments
 that will increase
the likelihood
 that the future exercise
of their options
 will be financially rewarding.


Using Incentives to Encourage Long-Term

Thinking at BD
Here is Tom Polen on the role that stock ownership plays in incentive plans for BD
employees. Together with the design of their bonus plans, this mix of incentives helps
BD manage the tension between achieving short-term results and long-term growth and
capabilities. Reaching back to our exploration of cash bonus design, notice the care BD
takes in thinking through how to factor individual, business unit, and company
performance into both bonus design and stock plan design.


 TOM POLEN: We've been evolving
our compensation system
 over the last couple of years.
 So today, we've increased
the line of sight
 around people's
annual bonus plans.
 So we used to have
their annual bonus
 plans had a large element of
the company performance, maybe
 the broader region performance.
 So if you were in China,
part of your bonus
 could come from how
the company did.
 Part could come
from how Asia did.
 And then a part would
come from how China did.
 Where we've moved to
is much greater line
 of sight to how your
specific team did.
 So now for example in
this case of China,
 the vast majority of
their annual bonus
 comes from how the
China team did.
 And actually if you're in
a business unit in China,
 the majority of your
bonus comes from how
 that business unit that
you're part of in China did.
 So we want very high line
of sight on annual bonuses
 to specifically what you did.
 That's different from
stock incentives.
 So stock comp is,
of course by nature,
 it's how the company stock did.
 For most of our managers,
their stock plan
 is a greater portion of
their overall incentive
 plan than their annual bonus.
 And I think that's
true at most companies.
 And so we reinforce that that
stock plan is a BDX, which
 is our stock symbol.
 That's a company-wide incentive.
 So you're incentivized to do
what's right for the company.
 If there's something that
maybe your business unit has
 a tough decision
to make one year,
 and it may be bad for
your business unit,
 but it's good for the
company, our stock plan
 would incentivize someone
to make the right decision
 for the company.
 The bonus plan is
helping people to really
 get rewarded for achieving
the goals that they can most
 control.
 And of course in a company this
size, as we've grown larger,
 it's something that we've
looked to re-balance, again
 making the annual bonus
more specific to what
 an individual can control, and
doubling down and discussing
 how the stock plan is an
incentive for them to do what's
 right for the company.


Analysis: Motivating Employees to Find Ways to

Benefit both the Business and Themselves at BD
BD uses stock ownership to motivate employee behaviors that will benefit the larger
company (even when those behaviors may not benefit individual employees themselves
or their teams). At the same time, through the design of their bonus plans, employees are
motivated to create short-term gains for the business that provide them, personally, with
immediate benefit, fulfilling their needs to achieve and be recognized on a more frequent
basis.


Linking Stock Options to Performance
Here is Susanna Gallani on one technique businesses can use to promote long-term
behaviors that are likely to help the entire business succeed, much as BD does. This
involves linking stock options and stock grant payouts to performance rather than to a
fixed vesting period, as is done typically.


4.6.2 Motivating Beyond Money
2:02 AM

4.6.2 Motivating Beyond Money

Additional Strategies for Motivating Mary
Kay Consultants
Now that we have studied a range of financial incentives, let’s consider the
important role of non-financial incentives by returning to the STORM framework
at Mary Kay. Here, Denise Montgomery discusses some of the other incentives and
strategies the business uses to motivate independent sales consultants:
communications, recruiting, events, and the Mary Kay car program.

Tailoring Incentives to Individual

Motivations
Some scholars believe that in today’s multigenerational work environment, studying the
motivational makeup of each employee is more important than ever before.
Here, Susanna Gallani advocates for continually tailoring incentive packages to reflect
the unique motives of individual employees.

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TRANSCRIPT
Autoscroll
ON
 SUSANNA GALLANI: So if you
run a company that is large,
 obviously performing this
personalization of incentives
 could be quite
challenging and difficult.
 And you might even need to put
it in writing, because it's
 a contract.
 So the ways that I
imagine could be followed,
 deliver this
personalization, one way
 could possibly be providing
people with a manual
 and letting them choose.
 I actually have recently
talked to a company that
 is doing exactly that,
not for their base pay,
 but for their incentives.
 They give people choices.
 There is a menu of options
going from gift cards,
 to actual money, to time off,
to opportunities for growth--
 so enrollment to
training programs.
 And they are literally
allowing people to--
 it's a point-based system.
 And the more points you make,
the more options you have.
 And so then you can cash
out those points for things
 that are important to you.
 So that's one way to do it.
 The other way that I
think is more long term,
 is to maybe start
with the current way,
 so shooting for the
middle, but then
 over time learning how the
different people are responding
 to different incentives,
and over time changing
 their compensation or
the incentive structure
 to personalize, as we get
to know these people better.
 We have to keep in mind that
the employment relationship is
 a repeated game.
 People get evaluated
periodically.
 Nowadays we're starting to
evaluate people really often,
 and not anymore once a
year like we used to do.
 But it's a repeated game.
 So we'll evaluate you this
year and then again next year,
 or this month and
then again next month.
 And we can learn
from this evaluation,
 and we can learn what really
motivated the person or not.
 And I think that
organizations need
 to start thinking
about this much
 more as an ongoing exercise,
instead of setting a contract,
 hiring the person, and
then moving on with life.
 I think-- I'm hoping--
 that organizations
will start reading
 this as part of the everyday
management of the company,
 and tweaking and adjusting
the incentive programs
 as the relationship between the
employee and the organization
 evolves.
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4.6.3 Balancing Innovation and Control through
Incentives
3:13 AM

For our final activity, let’s bring one of the central tensions of the course back into play—the tension
between innovation and control. If a measure is well designed, remember that you should be able to
infer your business’s strategy, or some dimension of it, through the measure itself. If you can’t do
this, the engine powering your diagnostic control systems is likely misaligned and thus useless in
helping your business monitor and measure its success. We tend to pay attention to what we are
measured on, even though measures may be an imperfect way to assess goal achievement.

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6bad-4f43-84f5-f5daa686838a/1071/908/#/syllabus>

5.1.1 Understanding Strategic Risk
Wednesday, June 23, 2021
10:58 PM

Module 5 Roadmap

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Learning Objectives
 Understand and describe the different types of strategic risk and explain
how they can undermine a business.
 Analyze and explain the sources of operations risk.
 Identify different types of asset impairment risk and explain how they can
jeopardize the value of assets.

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to the fifth module
 In our time together,
we've introduced techniques
 to help you turn up the
dial on performance.
 We've also noted that many of
these techniques bring risks.
 This is not a coincidence.
 Competing successfully
in any industry
 involves some level of risk,
but high performing businesses
 with high pressure cultures
are especially vulnerable.
 As a manager, you need to know
how and why these risks arise
 and how to avoid them.
 In our first two
lessons, we will
 introduce three major
sources of strategic risk
 and show you why failing
to address these risks
 can undermine a
business's reputation
 and jeopardize its future.
 Consider Boeing.
 In 2019, two of their
new 737 Max aircraft
 crashed within a few
months of each other--
 347 people were killed.
 Investigators discovered that
the automated flight control
 system malfunctioned
in both cases.
 They eventually discovered
several other defects
 in the system as well.
 It turned out that Boeing had
been aware of these defects
 but had downplayed
any safety concerns.
 After the crashes, the
company defended its design
 and blamed the pilots.
 But in the end, CEO
Dennis Muilenburg
 was forced to resign when
airlines, such as United,
 refused to fly the new plane.
 Public confidence in
the company plummeted.
 In an industry where
design errors are literally
 a matter of life and
death, Boeing's path
 to repairing its
damaged reputation
 would be steep and uncertain.
 How did Boeing end
up in this situation?
 As we will learn in
our third lesson,
 a number of conditions within
a business can increase risk.
introduce the risk exposure
 calculator, a tool
you can use to analyze
 the level of internal risk
pressure in your own business.
 Some risks are inevitable.
 Unfortunately, risk
can also be introduced
 by employee wrongdoing.
 In Lesson 4, we will study
how performance pressure,
 opportunity, and the
ability to rationalize
 can combine to lead to
some very bad outcomes.
 We will explore the case
of a beer distributor
 where the misdeeds
of a few employees
 put the entire business at risk.
 Then we will consider
the internal controls
 that managers should
have installed to prevent
 these unfortunate events.
 Internal controls are essential,
but they alone are not enough.
 We also need our third
lever of control--
 boundary systems.
 Recall that beliefs systems tell
employees what they should do.
 Boundary systems, by
contrast, tell employees
 what they should not do.
 Together, beliefs systems
and boundary systems
 provide the yin
and the yang that
 underpin effective
control, helping
 to ensure that you can
avoid the risks you've
 identified for your business.
 Our focus on
boundary systems will
 ask you to assume the
role of commander,
 drawing clear lines
for acceptable behavior
 and ensuring that
they are enforced.

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Lack of security,3rd Reputational Damage,Fraud by ExternalParty,Fraud by
InternalParty,Leak Of InternalInfo

he CEOs’ surveys ranked the following five risks among those that concern them most:
 Fiscal crisis / recession
 Cyberattacks / data theft
 Unemployment / underemployment
 Energy price shocks
 Failure of national governance
Other worries cited by those surveyed include supply chain disruptions, regulation
changes, social media incidents, the introduction of new technologies, asset bubbles—
and the list goes on.
Those are just the risks that are already on managers’ radars. What about the ones that are
not? As you may know from experience, it can be challenging for managers to accurately
pinpoint all the risks that threaten their businesses. Here is Eugene Soltes, Professor of
Business Administration at Harvard Business School, with more on this subject. He is the
author of the book Why They Do It: Inside the Mind of the White-Collar Criminal, which
presents insights from the seven years he spent interviewing individuals who were caught
in some of the largest corporate crimes in history. He will share his insights with us
throughout the module.


Impediments to Identifying Risks


 PROFESSOR SOLTES:
I'm Eugene Soltes.
 I'm a recently new Professor
of Business Administration
 at Harvard Business
School, where
 I've been for the past decade.
 And I teach classes on corporate
misconduct and managing risk.
 I'm also the author
of Why They Do It:
 Inside the Mind of the
White-Collar Criminal.
 I think one of the
challenges that firms face
 is the ability to actually
properly identify their risks.
 I think one example, which I've
spent a lot of time pondering,
 is, a couple of years ago,
one of the major airlines
 actually had an incident
in which a passenger
 was pulled off the plane.
 It created a lot of
social media attention,
 the stock price lost a couple
hundred million dollars because
 of it, and the airline
had a tremendous amount
 of negative press.
 Now, what was interesting is, if
we look preceding what happened
 to this incident, is
that the airline actually
 made a strategic decision to
prioritize on-time departures.
 That's something
that actually was
 an important metric
airlines were
 scored against one another.
 And so they decided they would
start boarding the planes,
 and if a passenger
had to be pulled off
 because it was
overbooked, they would
 do that after they started
the boarding process.
 Strategically--
made a lot of sense.
 Now, gate agents, fairly
low-level employees
 in the hierarchy of an
airline, so they don't
 sit the corporate
office, understood
 that there was
always the potential
 for a conflict that could
arise if a passenger refused
 to get off.
 Now, the challenge is, there's
no real risk management way
 for them to voice that concern.
 People call a hotline when
something has already happened.
 If you actually just see a
risk that's on the horizon,
 and you're not sitting at a
high-level managerial office,
 how do you actually voice that?
 A lot of organizations
don't have the ability
 to really grasp those ideas.
 And so what happened
to this airline is,
 although the gate agents
identified that this could
 happen, no one was able to
report that and bring that
 to the senior
management of the firm.
 As a result, when this actually
happened, and the airline did
 a deep dive to understand, could
we have identified the risk,
 it turned out there was, at
the very least, hundreds,
 if not potentially thousands, of
people who actually understood
 this risk and believed it was a
risk that was inevitably going
 to actually come to fruition.
 However, there was no way
for them to actually raise it
 within the organization.


Common Sources of Risk

You might have observed that the airline found itself in this unfortunate position because
of goals that were established without considering related risks coupled with poor
information management systems. As we will discover, this is a common area of risk
exposure that managers must monitor. Senior executives at this particular airline failed to
design mechanisms to move critical early-warning information from frontline employees
up the chain of command. Frontline employees were well aware of the risks the airline
could face if they pulled angry passengers off their planes, but senior managers only
became aware of these risks when it was too late.
Of course, this airline is not the only organization to discover its biggest risks only after
they have spiraled out of control. This reality might feel overwhelming, especially when
you consider the fact that as the world rapidly changes, and as business strategies adapt in
response, the list of risks will only grow and evolve. How can a business possibly
identify every risk it might face? How can managers know which ones require the
greatest amount of attention and monitoring?
The first step in managing this task is to build management awareness and understanding
by categorizing different types of risks. Our focus in this module is on strategic risk,
defined as an unexpected event or set of conditions that significantly reduces
management’s ability to implement an intended business strategy.
We will introduce three types of risk: operations risk, asset impairment risk,
and competitive risk. Then we will illustrate how any of these risks, if they grow large
enough, can become a franchise risk. A franchise risk threatens not only management’s
ability to implement strategy, but also the business’s very survival as customers and other
constituents lose faith in the enterprise.
We will explore each of these three sources of risk in this lesson, beginning with those
that sit closest to a business’s operating core and then moving outward to the competitive
environment.

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us>

this lesson and the one that follows, you will gain a deeper understanding of each type of
strategic risk so that you are prepared to identify them going forward. Here are brief
definitions for each to get us started.
 Operations risk: The risk that operational errors will interrupt the flow of
high-quality products or services. This might include the shipment of
tainted products in a food distribution company or a breakdown in a critical
settlement system at an online securities firm.
 Asset impairment risk: The risk of a business’s assets losing a significant
portion of their current value because of a reduction in the likelihood of
receiving future cash flows. Examples here could include the bankruptcy of
a major customer with a large unpaid balance or the loss of a manufacturing
plant due to a natural disaster.
 Competitive risk: The risk that changes in the competitive environment
will interrupt a business’s ability to create value and differentiate its
offerings. This might arise when a competitor offers a new product with
significantly better features at a lower price or when a business’s suppliers
cut off critical production inputs.
 Franchise risk: The risk that the value of the entire business erodes due to
a loss of confidence by critical constituents. Also known as reputation or
headline risk, this type of risk is a consequence of failing to control any of
the three sources of strategic risk listed above.


5.1.2 Operations Risk
12:19 AM

 PROFESSOR SIMONS: Let's turn
to operations risk first.
 Think of a financial
institution whose transactions
 might be disrupted or
processed incorrectly
 because of a systems breakdown.
 Or consider many of today's
technology companies.
 Their users demand
around the clock access
 to their platforms.
 As a result, these
companies are very concerned
 about system downtime.
 Even a brief
service interruption
 can chase away
customers for good.
 To mitigate this risk,
many tech companies
 build significant redundancy
and fail-safe backups
 in their operating procedures.
 Operations risk
becomes critical when
 a breakdown in a core
operating capability
 threatens the very
survival of the business.
 Left unaddressed,
an operations risk
 can spiral into franchise risk.
 Think of Boeing.
 This is precisely what happened
when the company failed
 to alert its customers
about the defects
 in the design of the 737 Max.
 This is also what happened
at ATH Technologies.
 Management failed to
identify that employees
 were cutting corners
on product quality
 to hit their
performance targets.
 As a result, they lost
the trust of both the FDA
 and their customers.
 Like Boeing, they would
need to find a way
 to regain confidence
in an industry
 where safety is everything.
 Operations risk exists
in every industry.
 Let's turn to Bruce
Welty at Quiet Logistics
 to learn about one of the risks
faced by this order fulfillment
 business.

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You met Bruce Welty briefly in Module 1. He is the founder and CEO of Quiet
Logistics, an e-commerce fulfillment company that has worked with many popular
clothing retailers including Bonobos, Gilt Group, and Zara. When consumers purchase
online products from these and other retailers, businesses such as Quiet Logistics pick
the item from their warehouse shelves, pack it, and ship it to consumers’ doorsteps. Quiet
Logistics uses a combination of human labor and robots to fulfill orders with care,
accuracy, and speed.
Operations risks typically originate internally. However, due to Quiet Logistics’ strategy
—fulfilling consumer orders for the various brands they take on as customers—
management must also keep close tabs on customers whose demands may interfere with
their anticipated order processing plans on a given day, as Bruce explains here.


 BRUCE WELTY: Every single
day, we have a new challenge.
 When somebody decides
that they want
 to buy a product because
they can get it--
 buy a big quantity of a
product because they can
 reach a better price point--
 so some merchandiser somewhere
in the middle of New York City
 decides oh, hey, I can get a
great price on this product
 if I buy 10,000 of them.
 And then we get the phone
call and say, oh, by the way,
 you're about to receive
10,000 of these units.
 And then, we're sort of
like, well, wait a minute,
 we didn't anticipate that.
 And how do we figure that out?
 So that happens in our business.
 And if we make mistakes in
terms of our customer selection,
 if we make mistakes in terms
of the types of products
 we're shipping and how
they fit into our slots
 or don't fit into our
slots, we can end up
 getting ourselves in a pretty
bad spot pretty quickly.
 So we have to be
very, very diligent,
 and we spend a lot of
time vetting these.
 And a lot of customers
don't necessarily
 know what they're going to do.
 They may say to us one day,
oh yeah, we ship just bedding.
 Then the next day, they tell you
that they're a bedroom company,
 and they're going to
ship lamps because lamps
 go in the bedroom.
 And you can't tell your
customer, well, sorry,
 we don't have room for lamps.
 That's just the
way it is, right?

Some common examples of operations risks include:
 shipping defective products
 accidents and injuries
 failure of computer systems
 losing packages or orders
 erroneously processing transactions
Operations risks are often triggered by unintentional system or employee errors.
However, some operations risks are introduced intentionally, either through self-serving
behavior (for example, a manager cuts corners to achieve a bonus) or reluctance to speak
up (for example, an employee goes to work in a food preparation facility, even though
she is sick, because she cannot afford to give up pay).
To identify areas where these kinds of operations risks might occur, we can once again
use the organizational process model. By analyzing inputs, processes, and outputs, we
can pinpoint risk indicators such as bottlenecks and supply chain deficiencies.
Quiet Logistics, for example, has developed a dashboard called QuietView to help track
such risks. QuietView organizes inventory data into color-coded charts that reveal how
Quiet Logistics’s facilities are performing in real time. QuietView also shows data about
performance over longer periods, from weeks to months. You might have observed that
QuietView is a classic example of a diagnostic control system. By helping managers
identify when processes have gone off-track—perhaps due to customers making very
large orders unexpectedly—QuietView allows managers to spot potential operations
risks and address them before they become problematic. Here is Bruce on the role
QuietView plays in the business.
CONTINUE

 BRUCE WELTY: When we first
started the business, because I
 came from a
programming background
 and Michael, my partner, was
very, very technically capable,
 we opted to build some really
deep, real time dashboards.
 And a lot of it came out
of just our interactions.
 I would say to Mike,
"Hey, Mike, what's
 the volume in building A, or
what's the customer's volume
 right now, and how much
have we shipped so far,
 and how much do we have
left to ship today?"
 And every time I asked him a
question, that would almost
 become a dashboard,
because he would
 be sick of trying to
answer my questions.
 And so we have this
very rich data set,
 and it's visible on my PC, it's
visible on my iPhone and iPad,
 and I can pretty much answer the
major questions I want answered
 in real time, and
generally, if there
 are questions that
we can't answer,
 then we'll go find a way to
build a new dashboard so we
 can get it answered.
 And we're pretty good at that.
 I even at one point had it
on the dashboard of my car--
 on my computer
screen on my car--
 so that I could literally
know as I was driving down
 the highway how the
business was performing.
 Everybody has access to whatever
they need to have access to.
 My system has access
to everything,
 but we have the
ability to cut it out
 by building so that the
general manager of the building
 can see what he needs to see,
and we also have customer views
 so a particular customer
can see their results,
 and then we have it
broken down by brand.
 So if you have
multiple brands, you
 can see the data by the
particular brand you're
 interested in, and it's
more or less the same data,
 but it's sliced and diced to
be relevant to your particular
 business, and it's
all password protected
 so you can't see anything that
you're not allowed to see.


5.1.3 Asset Impairment Risk
12:58 AM
Businesses need
 to monitor their core
operating processes closely
 to avoid operations risk.
 They also need to
keep very close tabs
 on their valuable assets.
 We introduced the concept of
an asset in our Profit Planning
 Lesson in Module 4.
 An asset is a
resource a business
 owns for the purpose of
generating future cash flows.
 For Tom Polen's
team at BD, assets
 include manufacturing
plants and equipment,
 real estate, and the
intellectual property
 around their medical technology.
 Other examples of assets
include cash, brand names,
 distribution
networks, trademarks,
 and proprietary formulas, like
the formula to make Coca-Cola.
 When there is risk
that an asset will
 lose a significant
portion of its value,
 a business faces our
second source of risk--
 asset impairment risk.
 We will study three types
of asset impairment--
 financial impairment, impairment
of intellectual property,
 and physical impairment.
 Let's start with
financial impairment.
 This is when an
important balance sheet
 asset declines in value.
 For businesses that sell
goods or services on account,
 this often takes the
shape of credit risk.
 Essentially, there
is always a risk
 that customers won't
pay what they owe.
 Consider the case
of Amy's Cookies,
 a small bakery in New York
City selling high-end pastries.
 For many years, Amy sold its
cookies to gourmet grocer Dean
 & DeLuca.
 In 2018, however, Dean & DeLuca
started to miss payments.
 Amy's continued to
send cookies, trusting
 promises the debt
would be settled.
 Whenever managers at
Amy's became uneasy,
 Dean & DeLuca would
send just enough money
 to keep the product coming.
 You can probably guess
how this turned out.
 Amy's faced growing challenges
to their cash flow as accounts
 receivable piled up.
 And Dean & DeLuca never
fulfilled its promises
 of full payment.
 In the end, Dean & DeLuca closed
the majority of its stores.
 The company faced
lawsuits from landlords
 and several other vendors.
 By the time Amy's had stopped
shipping to Dean & DeLuca,
 the grocer owed them more than
$70,000 for goods delivered--
 a sum that nearly put
Amy's out of business.
 Other vendors were also forced
to accept cents on the dollar
 to settle their claims.
 All businesses selling
goods or services on account
 face credit risk.
 However, some strategies make
businesses more vulnerable.
 To minimize credit
risk, managers
 need to evaluate the conditions
under which they issue credit.
 How generous should
credit terms be?
 What happens when
payments are missed?
 How much slack should an
important long-term client
 receive?
 Should you trust a client to
provide an honest assessment
 of their cash flow problems?
 You can never eliminate
credit risk altogether.
 Turning away sales on
account may remove the risk,
 but it also removes the revenue.
 It's important to
strike a balance,
 and it's important
to remain vigilant
 to signs that credit
risk is growing
 so that you can act swiftly.

02:08
03:36

While credit risk
 is one of the most common
forms of financial impairment,
 others exist as well.
 For example, assets
held overseas
 in a different currency can
pose a substantial financial
 impairment risk.
 If the currency is
devalued, those assets
 will become less valuable
and therefore impaired too.
to assets held in the UK
 during their recession
in the early 1990s,
 and more recently to
assets held in Venezuela
 in 2016, when President Nicolas
Maduro devalued the exchange
 rate of the Bolivar.
 Financial impairment
can also come
 from the intentional
actions of employees,
 such as accounting tricks
intended to cover up losses
 or investing excess cash in
risky short-term assets that
 don't pay off.
 The second type of
asset impairment risk,
 the impairment of
intellectual property,
 is an increasingly common risk
in today's knowledge economy.
 Such risk can arise from
patent infringement, disclosure
 of trade secrets, or the
ability of a competitor
 to exploit new
discoveries in a way that
 makes your product
inferior or obsolete.
 Technology companies
whose value is
 based on intellectual property
face heightened exposure
 to this risk.
 Think of Microsoft's
purchase of LinkedIn in 2016.
 Of the $27 billion purchase
price, $24.6 billion--
 more than 91%--
was for intangible
 assets and goodwill related to
the value of LinkedIn's brand
 and user base.
 If those assets were compromised
by cybersecurity breakdowns,
 lack of investment, or
intellectual property theft,
 much of the business's true
value would be impaired.
 The third and final form
of asset impairment risk
 is physical impairment,
which describes
 the physical destruction
of assets or facilities.
 This includes losses
from natural disasters
 like fires and floods,
industrial accidents, and even
 terrorist attacks.

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TRANSCRIPT
Autoscroll
ON
While credit risk
 is one of the most common
forms of financial impairment,
 others exist as well.
 For example, assets
held overseas
 in a different currency can
pose a substantial financial
 impairment risk.
 If the currency is
devalued, those assets
 will become less valuable
and therefore impaired too.
to assets held in the UK
 during their recession
in the early 1990s,
 and more recently to
assets held in Venezuela
 in 2016, when President Nicolas
Maduro devalued the exchange
 rate of the Bolivar.
 Financial impairment
can also come
 from the intentional
actions of employees,
 such as accounting tricks
intended to cover up losses
 or investing excess cash in
risky short-term assets that
 don't pay off.
 The second type of
 the impairment of
intellectual property,
 is an increasingly common risk
in today's knowledge economy.
 Such risk can arise from
patent infringement, disclosure
 of trade secrets, or the
ability of a competitor
 to exploit new
discoveries in a way that
 makes your product
inferior or obsolete.
 Technology companies
whose value is
 based on intellectual property
face heightened exposure
 to this risk.
 Think of Microsoft's
purchase of LinkedIn in 2016.
 Of the $27 billion purchase
price, $24.6 billion--
 more than 91%--
was for intangible
 assets and goodwill related to
the value of LinkedIn's brand
 and user base.
 If those assets were compromised
by cybersecurity breakdowns,
 lack of investment, or
intellectual property theft,
 much of the business's true
value would be impaired.
 The third and final form
of asset impairment risk
 is physical impairment,
which describes
 the physical destruction
of assets or facilities.
 This includes losses
from natural disasters
 like fires and floods,
industrial accidents, and even
 terrorist attacks.
Here, we explain why each business is especially vulnerable to the type of asset
impairment risk listed.
Business Why does this business's strategy make it so susceptible to this type of asset
(Type of impairment risk?
asset
impairment
risk)
Go Mobile Much of Go Mobile's strategy relies on them having ample stock of mobile
(Financial phones in inventory in each store for consumers to purchase. If employees
impairment) steal phones—what is known in the retail business as shrinkage—or if their
inventory becomes obsolete, the value of inventory on their balance sheet
will take a major hit.
C3.ai C3.ai differentiates itself by building tailored artificial intelligence solutions
(Intellectual for large-scale customers, including government entities. Most of the
property company's value lies in these proprietary solutions and in the brainpower of
impairment) the employees who design them. If one of those solutions were faulty, C3.ai
might risk customers broadcasting their poor experience to other potential
clients. This is especially concerning given how much of C3.ai’s success
depends on selecting the right customers and maintaining strong
relationships with them.

C3.ai must also recognize the possibility that a departing employee will steal
company secrets, bringing them to a competitor or using them to develop a
competing technology. Employee exit procedures must be rigorous to
minimize this risk.

C3.ai sets strategic boundaries to help protect intellectual property from
external theft as well. For example, C3.ai refuses to do business in China
because of concerns about intellectual property theft given the government's
poor track record in protecting intellectual property rights.
BD (Physical Because BD produces a high volume of medical devices, their
impairment) manufacturing plants are critical to their success. If one of their
manufacturing plants is damaged due to weather or another event, they won't
be able to manufacture and sell the products they anticipated bringing to
market.
Now, Tom Polen will share with us how BD attempts to mitigate the risks that severe
weather poses to one especially valuable asset: its manufacturing plants. Tom goes on to
discuss other risks to the business and explains how his management team prioritizes its
attention when deciding how to manage these various risks.
As you watch the video, note which risks Tom describes and his team's approach to
managing them.
Risk Management at BD


 TOM POLEN: We have
plants, again,
 all throughout the
world, including
 in areas like the
Caribbean, where
 we've had storms, etc.,
impact our plants.
 Those are contingency
plans that we
 are very focused
on-- understanding
 if one of our plants
were to be impacted,
 what would that mean
for the company?
 What would be our mitigation
plan as a result of that?
 Of course, we then
take longer-term steps
 to look at where are we putting
our manufacturing network.
 As global warming's
happening, are there changes
 in the weather environment that
are expected over the next 10
 years that we need
to move plants?
 Or put in redundant
capacity in certain areas
 to help mitigate revenue risk,
but even more importantly,
 for us, because our products
are so essential to health care,
 to mitigate patient
risk, and that's
 something we spend
a lot of time on.
 At the end of the day, we
meet with our board multiple
 times a year and we
talk about key risks.
 We talk about risks, such as
weather-related risks impacting
 our plant.
 Supplier risks--
going out of business.
 We have whole IT systems that
just track our suppliers.
 We track storms that could
be hitting our suppliers'
 manufacturing sites.
 We track the financial
solvency of our suppliers.
 We track any issues that they're
having in their production
 system or quality issues,
and we're constantly
 looking for anything that could
interrupt our supply chain,
 and that's part of us
managing our risks.
 And the number one factor
that we prioritize--
 where we focus--
are products that
 are relied on most by patients.
 So if we're in a category that
we have 90% category share in.
 So 90% of health care requires
our product to be available
 and it's a critical component--
something like basic syringes,
 for example--
 we're going to put that
at the top of the list.
 Whether or not it's driving
revenue growth or high margin
 growth, that's not
our first screen.
 Our first screen is--
 is it critical to
patient care, and if so,
 that's the number one
product that we're
 focused on making
sure that we have
 redundant capacity in--
that we're mitigating risks
 most aggressively in from a
supplier perspective-- getting
 multiple sources of suppliers.
 And then right after
that, we'll start
 looking at revenue
and profit risk,
 but we always start
with the patient.


5.2.1 Introduction to Competitive Risk
2:20 AM

Detecting Change in the Competitive

Environment

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Learning Objectives
 Define competitive risk and provide examples from your own organization.
 Understand the consequences of failing to monitor competitive risk.
 Identify how you can best prevent, manage, and respond to competitive
risk.
 Define franchise risk and explain how it arises from the failure to control
the three sources of strategic risk.
between 55 and 100 minutes


 PROFESSOR SIMONS: So far,
we've studied operations risk--
 risks that arise from
breakdowns within a company's
 internal operations--
 and asset impairment risk--
 risks that arise from damage
to the assets a business owns.
 But any firm operating
in a competitive market
 must also focus
attention on changes
 in the external environment
that could impair its ability
 to create value
for its customers.
 This is our third
source of risk--
 competitive risk.
 To illustrate competitive
risk, consider
 BlackBerry, the
leading mobile phone
 company in the early 2000s.
 BlackBerry was the preferred
choice for busy professionals
 who valued secure email access.
 President Obama, for example,
favored BlackBerry phones.
 Unfortunately, BlackBerry
was slow to respond
 to changing consumer
preferences at a time
 when Apple and Google were
launching new smartphones that
 gave users access to
the entire internet
 and a rich array
of applications.
 As a result, BlackBerry fell
far behind its competition.
 Although it eventually
made a partial comeback
 by licensing its software
to other companies,
 BlackBerry's failure
to respond to changes
 in its competitive
environment forced
 it to retreat from the
consumer retail market.


Identifying Sources of Competitive Risk: The

Five Forces Analysis


 PROFESSOR SIMONS: Perhaps
the competitive risk
 you identified stems,
like BlackBerry's,
 from the emergence
of new products
 reflecting changes in
customer preferences.
 The risk of customers switching
to competitor products
 presents one common source
of competitive risk,
 but it's not the only one.
 As we will see in the
case we're about to study,
 it's imperative that every
business leader monitors
 the potential impact of changes
in their competitive landscape.
 To get a more complete picture
of these competitive risks,
 let's turn to the work of my
colleague, Michael Porter.
 You might be familiar with
Professor Porter's Five Forces
 Analysis, which helps
managers analyze
 the competitive
dynamics and profit
 potential within an industry.
 Using this framework,
managers can
 assess the nature of competition
by examining five variables.
 The first variable
is the potential
 for substitute products to
steal away your customers.
 This is the BlackBerry example.
 How easy is it
for your customers
 to switch to a competitor's
products or services?
 The second variable focuses
on customers themselves.
 What are your
customers' preferences,
 and how much power do they
have to dictate the pricing
 and features of the
products and services
 that you bring to market?
 Third, we must consider
suppliers and their bargaining
 power.
 How important are
the resources they
 provide to your value chain?
 Fourth is a potential for new
players to enter the market.
 How easy or difficult is
it for a new competitor
 to enter the segment of the
industry in which you compete?
 Finally, the culmination
of all these forces
 will determine the intensity
of rivalry in your industry.
 Is this a fragmented industry
with many competitors,
 an intense rivalry, or is
it a more stable industry
 with just a small number
of entrenched firms?

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5.2.2 Case: Quiet Logistics, Part I
2:44 AM

The Need for Speed: Meeting the Demands

of Online Shoppers
Now that you have reflected on some of the competitive risks faced by your business,
let’s turn our attention to a case that will give you an opportunity to examine the ways in
which competitive risk can impact strategy. This case features Bruce Welty’s business,
Quiet Logistics.
Here, Bruce reflects on the shipping and pricing challenges posed by changing consumer
expectations as the popularity of e-commerce grows.
Note: This online case is based on the case developed by Robert Simons and Natalie
Kindred (HBS Case No. 115-001).

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 BRUCE WELTY: As soon as
people see something,
 then it becomes
something they want.
 And then once they get it,
then it becomes an entitlement.
 And you have to be
able to provide that.
 We think that, within a short
time, maybe three years or so,
 people will be expecting
just about everything
 same day or next day.
 And that's really, really hard.
 It's just a lot of coverage.
 It's a lot of square miles
in the United States.
 We have to have the
inventory in the right place.
 We have to be able to
deliver it quickly.
 It's hard to
optimize when you're
 working on such short time
frames and small quantities.
 So you have to be very, very
clever in how you do this.


 BRUCE WELTY: Amazon came
through the building for a tour.
 And we chatted them up, and we
told them how great Kiva was.
 And we thought it was
just a regular diligence
 visit for them to buy the robots
and be a user like we were.
 So we just did our typical
routine of how much
 we loved Kiva and how
much we loved the people
 and how great it was and so on.
 And then, I was actually
in a Neiman Marcus
 shopping for my wife,
and I was with my son.
 It was, I think, coming
up on a birthday.
 I got a text message,
and I was standing
 at the top of an escalator.
 And I read this
text message, and it
 said, "Amazon acquired Kiva."
 And I was with my son.
 I just-- he was out of college,
and he was fairly up to date
 in the workings of the business.
 So I just turned to him, and
I said, "Wow, my life just
 changed."
 And he was like,
"What's up, dad?"
 And so I showed him the text,
and he just sort of went, whoa,
 because he knew what it meant.
 And so we tried to process that.
 When Kiva first got acquired,
I remember the day--
 you know, it made
the national news.
 And a lot of people knew
us as being a Kiva user.
 And I think there was
this general question.
 It's like, what are Bruce
and Mike going to do now?
 And there was a lot of
talk about should we
 call the customer base?
 Should we put out a press
release and say, "Don't worry,
 everything's going to be fine"?
 And how should we react to this?


5.2.3 Case: Quiet Logistics, Part II
3:20 AM
Building Locus
Managers at Quiet Logistics decided to go about their daily duties just as they had before
the acquisition. Rather than raise red flags, they opted to keep quiet about the news with
customers. The Kiva management team had assured them that the acquisition would be
beneficial for all involved. Amazon, they said, planned to put a lot of capital behind the
robot and support new initiatives. They were confident that Amazon would continue to
support Quiet Logistics's use of the Kiva system.
But as time passed and Bruce failed to receive the direct reassurance from Amazon he
hoped for, he began to grow nervous.

609d8e6f29c5fc0b825a1db4/1d031287-4c66-4b69-bc7b-19de0f28d5c5/1071/908/#/syllabus>

 BRUCE WELTY: All
that time, we had
 been trying to figure out
what we were going to do.
 I had talked to other
vendors about building
 us an alternative robot just
so we had a fallback position.
 I had researched with my
partner, Michael, what
 if we wanted to build a robot--
 just chating, just casual.
 We had done some work
around that area,
 but we weren't that
serious about it
 because we were still
fairly comfortable.
 And I remember, it was sort
of the end of August of 2013.
 I was sitting in my
driveway just about
 ready to get out
of the car at home
 around 6:00 or 7:00 one
night, and my phone rang,
 and I looked at the phone, and
it had this guy's name on it
 from Kiva, and he was the
head of sales from Kiva.
 And I knew the guy, but I
never interacted with him
 because he was always
dealing with operations
 folks in my company,
and I just had never
 had any interaction with him.
 And I thought it was odd.
 Why would he call me?
 And so I got the call
and answered the call
 and said hello, and
then he actually told me
 that Amazon was taking the
product off the market and more
 details to follow.
 So that was sort of the moment
at which I realized, hey, now
 we really have to do something.
 So I immediately called Michael.
 I remember, in the
driveway, I called Michael.
 Jeez, I talk to
him all the time.
 I think I'd just hung
up the phone with him
 when I got home to talk
to the sales guy from--
 I called him right back,
and I said, Michael--
 we talked for 2 and 1/2 hours.
 I stayed in the driveway.
 We talked for 2 and 1/2 hours.
 What are we going to do?
 After that, I decided to amp up
the effort to buy a new robot
 or find a new robot.
 And so I spent
September in the air.
 I bought a one-way ticket.
 I flew around the globe.
 I stopped and visited
every single robot company
 that I knew about in places like
Canada, the West Coast, Japan,
 China, India, Eastern
Europe, Western Europe,
 and I looked at
all these robots.
 And I was-- two things
came to my attention,
 first was the robots
weren't that complicated
 and, second, that nobody knew
anything about fulfillment.
 Everybody really wanted
us to buy their robot.
 And when I would ask
them, how does the robot
 work, what does it
do, and they'd say,
 well, it's just a robot.
 It just goes forward
and backward and spins.
 But if we want it to do
whatever you want it to do,
 we can make it do that.
 It'll do everything
you need to do.
 We just have to build it.
 And I said, well, if you
have to build it, I mean,
 I'd have to build it because
you don't know what to build.
 So I got home from that trip and
I called Michael, and I said,
 Michael, I have an idea.
 And I said, let's
build our own robot.
 First of all, he said,
no, that's a crazy idea.
 We can't do that.
 We're a software company.
 We're a fulfillment company.
 We don't do that kind of thing.
 WHICH POSITION?
 But he got intrigued by it.
 So by this time, we had
hired his brother, his son,
 and my son.
 We just gave them a task.
 We said to his son,
go buy this kit robot.
 And we asked my son to go
do some market research.
 And the two of them kind
of disappeared and did this
 and came back, and
his son had a robot
 built in a couple of weeks,
which totally impressed me.
 He bought a kit, put
the thing together,
 and we are off to the races.
 We realized very quickly
that the robot is a software
 problem, and we knew
how to do software.
 And we knew the
fulfillment problem,
 and we thought we could make
a better product than Kiva.
 So it's kind of a long-winded
answer, but that's what we did.
 And that was about 18 months--
 well, I guess about two years
if you add before we actually
 had a robot that we could use.
 So I realized that it was just--
 it's a problem that
we knew how to solve.
 We knew how to make the robot
do what we wanted it to do.
 What we didn't know how
to do, though, was--
 we didn't know
how to communicate
 with these remote devices.
 We didn't know how
sensors worked.
 We didn't know how to
interpret sensor data.
 We didn't know how to
navigate geometrically,
 meaning how do you--
 these warehouse floors are like
a big piece of graph paper--
 XY coordinates.
 And how do you geometrically
navigate from one XY coordinate
 to another XY coordinate when
you have racks in the way
 and you have
obstacles in the way?
 And then how do you make
robots work with people?
 And how do you make robots
avoid other obstacles
 and other robots and
all these things?
 We needed to figure
that stuff out.
 And I thought that we could
find some roboticists that knew
 how to do that and hire them.
 And so we partnered with a local
college that had an engineering
 team, and we
worked-- we basically
 hired the senior class
as a class project.
 And then, at the same time
they built us a robot,
 we built a similar robot.
 And so the two teams
learned together.
 And we hired some really
brilliant people--
 guys that knew this
navigation stuff,
 knew how to navigate in
two-dimensional space,
 and the sensors have
come down in price now.
 They were more expensive
when we started.
 There were a lot of
things, honestly,
 when I suggested how we do
them, the team would look at me
 and say, well, nobody's ever
figured out how to do that.
 So we ended up with
about 85 patents
 and about 35 inventions.
 And some of these are the
most important patents
 in this space, this
autonomous mobile robot
 space, which is what we
call our device, an AMR--
 is we have some of the
seminal patents in that area.
 And we did figure it out.
 It was a lot of hard work.


 BRUCE WELTY: This new
company we started
 that has developed a
competing robot to Kiva.
 We think it's the
next generation.
 That company is now
separated from Quiet.
 We started it inside
Quiet, but we spun it out.
 And now that is
being used in dozens
 of warehouses around the
country and now in Europe.
 And I think that
people have started
 to see these robots as
less of a differentiator
 and more of an ante that
you sort of need them
 to be successful in this space.
 They're becoming more and
more of just common sight
 in a warehouse.
 And we built a very
valuable business in Locus.
 It's more valuable than
Quiet at this point.
 And I'm back at
Quiet now, working
 to build that value up again.
 Michael stayed at Locus, so
we separated as partners,
 but happily, and he's
doing what he wants to do,
 and I'm doing what I want to do.
 And we're still talking
almost every day.


5.2.4 Franchise Risk
3:53 AM

We've introduced
 three sources of strategic
risk you must monitor--
 operations risk,
 and competitive risk.
 When any of these
risks becomes so
 big it threatens the
viability of the business,
 it becomes what we
call a franchise risk.
 Consider Quiet Logistics.
 Their customers had come to rely
on the company's unique blend
 of robots and human
labor to deliver items
 to their doorsteps
swiftly and accurately.
 When Amazon acquired Kiva and
then pulled it from the market,
 their entire value
proposition was suddenly
 at risk of collapsing.
 This is why Bruce Welty decided
at first to not reveal the fact
 that Amazon had acquired Kiva.
 He knew that worried
customers could easily
 take their business
elsewhere and probably would.
 Franchise risk is a
concern for all businesses.
 However, it's especially
pressing for businesses
 whose reputations depend on
the trust of key constituents.
 These include airlines,
defense contractors,
 pharmaceutical companies,
and public accounting firms.
 When trust is compromised,
reputation can erode overnight.
 Consider the crisis that
Equifax experienced in 2017.
 Equifax is one of
three national credit
 bureaus in the United States.
 Americans depend
on these bureaus
 to compile and report
their credit scores.
 Banks, landlords,
and other entities
 request these ratings before
approving leases, car loans,
 and mortgages.
 To compile these credit scores,
credit bureaus like Equifax
 collect sensitive customer
information from lenders.
 In turn, they sell
this information
 to other businesses
that are deciding
 whether or not to grant a loan.
 In 2017, hackers infiltrated
Equifax's computer network.
 They then divulged
confidential data
 for over 147 million consumers.
 Investigations revealed that
the hackers gained access
 to the network using
a vulnerability
 Equifax had known
about for months--
 an operations risk
they failed to address.
 As a result,
millions of Americans
 fell victim to identity
theft and struggled
 to correct the
credit scores they
 had worked so hard to build.
 Equifax paid a heavy
price for this failure.
 They paid out
hundreds of millions
 of dollars in settlements.
 They also witnessed
a strong decline
 in sales of credit reports,
as their customers switched
 to other credit providers.
 Many new customers deferred
their contracts with Equifax
 until the bureau could
prove that they had improved
 their data security practices.
 So in this example, the fallout
from an operational breakdown
 became so serious that
it put the survival
 of the entire business at risk.
 This is the definition
of franchise risk.

609d8e6f29c5fc0b825a1db4/01fa7688-25ea-4b58-8b22-fd31344b4f26/1071/908/#/syllabus>
While operations risk took center stage in the Equifax debacle, all three sources of
strategic risk can lead to franchise risk for a business. The system will now assign one of
these three sources of risk to you, in preparation for our next activity:
Asset impairment risk


There is clearly a lot riding on a business’s ability to control franchise risk. But how can
businesses control such enormous risk effectively? While we focus our later lessons on the
role that internal controls and boundary systems can play in managing risk,
effective diagnostic control system design is once again crucial as well. Think back to that
airline that suffered the passenger removal controversy—executives measured on-time
departures, but they failed to measure the risks that might arise when trying to prioritize
timeliness.
Here is Eugene Soltes on the importance of designing measures that effectively monitor
risks.


 EUGENE SOLTES: Measurement
is incredibly important
 when it comes to the integrity
and culture of an organization,
 more so than the
failures of measurement.
 Oftentimes, one of the
most significant issues
 is the lack of measurement
within organizations.
 So if we take a simple example--
 all organizations do some types
of trainings around compliance
 and internal controls.
 What's the most frequent
metric that firms
 use to measure the
effectiveness of that training?
 It's percent completion.
 And as a professor, that
would be the equivalent
 of if the dean of our school
was to evaluate my teaching
 effectiveness based upon the
percentage of final exams
 that I received back at
the end of the semester.
 Obviously, I think
students and my colleagues
 would find that a fairly
absurd metric of effectiveness.
 Did students learn?
 Were they engaged?
 What did they take away?
 It simply just means
they could check the box.
 And so I think so often when it
comes to controls and processes
 and compliance,
we've unfortunately
 tended to find ways of
evaluating or measuring
 that are ticking boxes rather
than actual genuine measures
 of--
 is it actually achieving
the desired goal?
 Is it affecting behavior?
 Is it changing people's mindset?
 And how is that
actually sitting in?


As Eugene Soltes observes, if you want to manage risk effectively, it is not enough to
simply track whether or not employees are falling in line with established rules and
regulations.
We have provided a list of common indicators businesses can track in diagnostic control
systems for each type of risk:


perations Risk Asset Impairment Risk Competitive R
 System  Unhedged  R
downtime derivatives on i
 Number of balance sheet b
errors  Unrealized c
 Unexplained holding  R
variances gains/losses r
 Unreconciled  Concentration c
accounts of credit or  C
 Defect counterparty c
rates/quality exposure b
standards  Default history r
 Customer t
complaints  C
d
s
 D
p
Here is the goal you developed to monitor the critical performance variable you
identified in the previous module.
IMAGINE THAT YOUR BUSINESS STRATEGY IS FAILING. WHAT CRITICAL PERFORMANCE
VARIABLES MIGHT BE THE CAUSE OF THAT FAILURE?
WHAT MIGHT YOU MONITOR TO GATHER INFORMATION ABOUT THESE VARIABLES?
WHAT IS ONE GOAL YOU COULD DEVELOP TO PROVIDE EARLY WARNING ABOUT ONE
OF THESE VARIABLES?

I am Aarthi from CRM team. I just wanted to introduce myself and so happy to see our 1st
woman Architect in MF.

Strategy Execution: 5.3.1 The Specter of Risk from
Within
8:32 AM

Learning Objectives
 Describe the common forms of internal pressures that expose a business to
risk.
 Identify specific behaviors and choices within businesses that increase each
of these internal pressures.
 Evaluate the levels of internal pressure present within a business.
on this lesson.

efad2ed6-7937-4eb9-a340-35997bc04ebc/1071/908/#/syllabus>
PROFESSOR SIMONS: In our last lesson, we introduced sources of strategic risk that all
businesses face-- operations risk, asset impairment risk, competitive risk, and franchise
risk.
BEGIN TYPES OF RISK DIAGRAM
Four concentric circles surround a middle circle titled Business Strategy. From the center
outwards, those circles are titled Operations Risk, Asset Impairment Risk, Competitive
Risk, and Franchise Risk.
END TYPES OF RISK DIAGRAM
When a business is already struggling, such risks are probably top of mind for managers.
But when things are going well, when revenues are rising and operations are growing, it
can be easy to believe your business is immune. Yet, it's precisely in times of success that
managers need to be most attuned to potential danger, not only from outside players, such
as competitors and regulators, but from practices within the business too.
When managers of successful businesses choose to ignore these risks, the consequences
can be profound. Barings Bank, Enron, Arthur Andersen-- these are just a few examples of
leaders in their industries that were forced into bankruptcy and disappeared because they
failed to monitor the pressures we will introduce in this lesson.
How can managers identify their level of risk exposure? In this lesson, we will study three
types of internal pressures that expose a business to strategic risk-- pressures from high
growth, pressures from culture, pressures from information management.
BEGIN PRESSURES TABLE
Pressures Due to Pressure Point #1: Pressure Point #2: Pressure Point #3:
Growth High Performance Rate of Expansion Inexperience of
Expectations Key Employees
Culture Rewards for Executive Resistance Levels of Internal
Entrepreneurial Risk- to Bad News Competition
Taking
Information Transaction Gaps in Diagnostic Degree of
Management complexity and Performance Decentralized
velocity Measures Decision Making
END PRESSURES TABLE
Using a tool called the Risk Exposure Calculator, you will have the opportunity to assess
each of these pressures in your own business. In later lessons, we will introduce strategies
you can use to manage these risks.

efad2ed6-7937-4eb9-a340-35997bc04ebc/1071/908/#/syllabus>

In our last lesson,
 we introduced sources
of strategic risk
 that all businesses face--
 competitive risk,
and franchise risk.
 When a business is
already struggling,
 such risks are probably
top of mind for managers.
 But when things are going
well, when revenues are rising
 and operations are
growing, it can
 easy to believe your
be
business is immune.
 Yet, it's precisely
in times of success
 that managers need to be most
attuned to potential danger,
 not only from outside
players, such as competitors
 and regulators, but from
practices within the business
 too.
 When managers of
successful businesses
 choose to ignore these
risks, the consequences
 can be profound.
 Barings Bank, Enron,
Arthur Andersen--
 these are just a few examples
of leaders in their industries
 that were forced into bankruptcy
and disappeared because they
 failed to monitor
the pressures we
 will introduce in this lesson.
 How can managers identify
their level of risk exposure?
 In this lesson, we
will study three types
 of internal
pressures that expose
 a business to strategic risk--
 pressures from high growth,
pressures from culture,
 pressures from
information management.
 Using a tool called the
Risk Exposure Calculator,
 you will have the
opportunity to assess
 each of these pressures
in your own business.
 In later lessons,
we will introduce
 strategies you can use
to manage these risks.

00:07
01:46

PROFESSOR SIMONS: In our last lesson, we introduced sources of strategic risk that all
businesses face-- operations risk, asset impairment risk, competitive risk, and franchise
risk.
BEGIN TYPES OF RISK DIAGRAM
Four concentric circles surround a middle circle titled Business Strategy. From the center
outwards, those circles are titled Operations Risk, Asset Impairment Risk, Competitive
Risk, and Franchise Risk.
END TYPES OF RISK DIAGRAM
When a business is already struggling, such risks are probably top of mind for managers.
But when things are going well, when revenues are rising and operations are growing, it
can be easy to believe your business is immune. Yet, it's precisely in times of success that
managers need to be most attuned to potential danger, not only from outside players, such
as competitors and regulators, but from practices within the business too.
When managers of successful businesses choose to ignore these risks, the consequences
can be profound. Barings Bank, Enron, Arthur Andersen-- these are just a few examples of
leaders in their industries that were forced into bankruptcy and disappeared because they
failed to monitor the pressures we will introduce in this lesson.
How can managers identify their level of risk exposure? In this lesson, we will study three
types of internal pressures that expose a business to strategic risk-- pressures from high
growth, pressures from culture, pressures from information management.
BEGIN PRESSURES TABLE
Growth High Performance Rate of Expansion Inexperience of
Expectations Key Employees
Culture Rewards for Executive Resistance Levels of Internal
Entrepreneurial Risk- to Bad News Competition
Taking
Information Transaction Gaps in Diagnostic Degree of
Management complexity and Performance Decentralized
velocity Measures Decision Making
END PRESSURES TABLE
Using a tool called the Risk Exposure Calculator, you will have the opportunity to assess
each of these pressures in your own business. In later lessons, we will introduce strategies
you can use to manage these risks.
Learning Objectives
o Describe the common forms of internal pressures that expose a business to
risk.
o Identify specific behaviors and choices within businesses that increase each
of these internal pressures.
o Evaluate the levels of internal pressure present within a business.
on this lesson.
Of the three types of pressure introduced in the video, which do you think is of greatest
concern to the business you have chosen to analyze throughout the course?
o Pressures from high growth
o Pressures from culture
o Pressures from information management
Why? Please elaborate in a few sentences. By the end of this lesson, you will know if your
intuition was correct.
Please note that all reflection activities in this lesson will be private.
Your Reflection:
Minimum undefined words; maximum undefined words.

Strategy Execution: 5.3.2 Pressures Due to Growth
9:08 AM

 PROFESSOR SIMONS: Let's begin
with the first of our three
 internal risk
pressures-- rapid growth.
 Fast growth is often
a reason to celebrate,
 but if managed
poorly, rapid growth
 can also lead to serious
errors and breakdowns.
 How can you assess
how likely a business
 is to face risks due to growth?
 There are three
questions you should ask.
 First, are performance
expectations
 exceptionally high?
 When managers pursue strategies
that emphasize growth,
 they often set ambitious
sales and profit goals.
 Employees who deliver are
rewarded for their work,
 while those who fail
to meet expectations
 do not share in the bonuses.
 If managed well, pressure
to achieve challenging goals
 can stimulate innovation,
entrepreneurship,
 and impressive
financial performance.
 Think back to our lesson on
generating creative tension
 in Module 3.
 When Kasper Rorsted
turned up the dial
 on performance
pressure at Henkel,
 he saw very positive results.
 Such pressure, however, can
also lead to risky behavior.
 Employees might be
afraid that failing
 to meet performance expectations
will jeopardize their status
 or compensation.
 They may feel intense pressure
to succeed at all costs,
 even if their actions
overstep ethical bounds
 or contravene company policy.
 This happened at ATH where
employees cut corners
 on product quality to
help the business hit
 the earn-out goals.
 If pushed hard enough,
employees may even
 report false data to
cover up any shortfalls
 against expectations.
 Unfortunately, examples
of this kind of behavior
 are not hard to find.
 Consider Wells Fargo.
 Beginning in the late 2000s,
employees at Wells Fargo
 were under enormous pressure
to hit aggressive targets
 for opening new
customer accounts.
 In response, they opened
unauthorized accounts
 using customers' names without
their knowledge, applied
 for credit cards using
those customer names,
 and forged customer signatures.
 By 2016, more than two
million such accounts
 were created,
generating millions
 of dollars in fee revenue
from unsuspecting customers.
 When the scale of the
fraud became public,
 managers were fired,
the CEO of the bank
 resigned, and the U.S.
Congress opened investigations.
 And Wells Fargo's
stock dropped swiftly
 as they found themselves owing
billions of dollars in fines.
 MEASURING PERFORMANCE PRESSURES
 We've identified our
first pressure point
 for fast growth--
 unrelenting pressure
for performance.
 Now, let's turn to our
next pressure point--
 rapidly expanding operations.
 Ask yourself this.
 Are operations expanding
faster than your capacity
 to invest in effective
systems and technology?
 When business is
booming, organizations
 need new production facilities,
distribution channels,
 and information systems.
 But without careful planning
and allocation of resources,
 the infrastructure to
support rapid expansion
 may quickly become overloaded.
 As a result, quality
is often sacrificed.
 Errors and breakdowns occur.
 A good example is Chipotle
Mexican Grill, the fast food
 burrito chain that grew
from 500 locations in 2006
 to 2,500 locations in 2018.
 They made a name for
themselves by pledging
 to source high-quality
ingredients from local vendors
 close to each store
site, rather than use
 just a few large vendors
across many stores.
 But this commitment
posed challenges
 as they watched their number
of vendors in the supply chain
 increase dramatically.
 As a result, it became harder
and harder for Chipotle
 to closely monitor each local
supplier for food safety.
 In 2015, outbreaks of
foodborne illnesses
 such as E. coli,
Salmonella, and Norovirus
 were traced to
Chipotle restaurants
 throughout the country.
 Hundreds of customers fell sick.
 They eventually faced
federal criminal charges
 and owed millions
of dollars in fines.
 RATE OF EXPANSION
 When it comes to assessing
risk pressures due to growth,
 you also need to consider
the skills and capabilities
 of your employees.
 Ask yourself, what
percentage of our jobs
 are filled with newcomers?
 People with, say, less
than 12 to 24 months
 experience with the company.
 If the answer is quite a few,
you should pay close attention
 to our third pressure point--
 inexperienced staff.
 When large numbers of people
come on board quickly,
 managers sometimes waive
background checks or lower
 educational qualifications.
 This means businesses
end up with employees
 who lack the necessary
skills and experience
 or who don't fully
understand their jobs.
 What happens next?
 Once again, businesses
find themselves
 at risk for errors
and breakdowns.
 Mistakes pile up.
 A sales representative
misinforms important clients.
 Factory workers mishandle
dangerous equipment.
 Customer service
complaints pile up.
 These problems may seem
like simple irritants
 to senior managers of
a growing business,
 but they are
important alarm bells.
 Inexperience brings with it
additional risk, especially
 in unstructured, high
innovation businesses.
 It takes a lot of
time for new people
 to learn, let alone
internalize a company's values.
 Often, they simply
don't know what
 constitutes acceptable
behavior or, put
 another way, what
kind of behavior
 is completely out of bounds.
 Consider what happened
to ValuJet in the 1990s.
 At the time, ValuJet
was a rapidly growing,
 low fare, discount airline.
 On May 11, 1996, on a trip
from Miami to Atlanta,
 flight 592 crashed into
the Florida Everglades.
 Everyone on board was killed.
 Investigators discovered that
inexperienced operators were
 at the root of the problem.
 Trouble started when ValuJet
hired an outside firm
 to replace the oxygen
systems in their planes.
 Unfortunately,
employees at that firm
 cut corners on preparing
old oxygen generators
 for safe transport.
 The problem was compounded when
a ValuJet ramp agent overseeing
 the cargo loading of flight
592 accepted the old generators
 that contained highly
flammable oxygen.
 He did not realize that this
was a violation of Federal
 Regulations, since ValuJet
was not licensed to transport
 hazardous material.
 The ramp agent and
the co-pilot then
 decided to place
the heavy oxygen
 containers in the
forward hold to balance
 the weight of the aircraft.
 The uncapped canisters
ignited during takeoff
 causing the flight to burn
and crash into the Everglades.
 If the ramp agent
and co-pilot had
 followed federal
guidelines, they
 would have rejected
the cargo and avoided
 a catastrophe that
ultimately drove
 the airline into bankruptcy.
 In studying this horrific crash,
Federal Aviation Regulators
 concluded that ValuJet
was growing too quickly
 and, as a result, did not have
the properly trained staff
 or procedures in place to
ensure safety and compliance
 with FAA regulations.

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5.3.3 Pressures Due to Culture
9:17 AM

Earlier in the course,
 we looked at techniques
for pushing employees
 to be innovative,
high performers.
 In businesses that push
hard for performance,
 risk taking is often
encouraged and rewarded.
 But sometimes,
employees can take
 advantage of these
norms in dangerous ways.
 This is why culture is
the second internal risk
 pressure we will explore.
 For example, employees working
in a high performance culture
 might invest in
excessively risky deals,
 or they might forge alliances
with people or businesses who
 don't honor their contracts.
 Or they might make
promises to customers
 that they know
they can't fulfill.
 Perhaps you're
familiar with the story
 of Jerome Kerviel, a trader
at the French investment bank
 Societe Generale.
 He had been successful
in smaller trades,
 but then began
making trades that
 went well beyond his
decision-making authority.
 But by 2007, the total
value of his trades
 were close to 50 billion euro,
more than the entire market
 capitalization of the bank.
 He was making so much
money in early trades
 that he began to intentionally
make unprofitable trades
 to hide the scale of the risks.
 In January 2008,
Kerviel's managers
 finally discovered his
large, uncovered positions
 and quickly tried
to unwind them.
 The bank lost nearly five
billion euros in three days.
 Kerviel was fired and later
charged with financial crimes.
 How can you determine
how likely you
 are to have a Kerviel
in your midst?
 First, ask yourself, what
percentage of the business
 is based on new products
and services generated
 by innovative
risk-taking employees?
 The higher the number,
the higher the score.
 Kerviel's actions
at Societe Generale
 were driven precisely by
a culture that rewarded
 entrepreneurial risk-taking.
 Another cause for a high
score on this pressure point
 is an environment in which
people are allowed, even urged,
 to operate like the Lone Ranger,
only returning to base when
 they have captured the spoils.
 Finally, if you are
noticing an uptick
 in the number of new products
or services that are failing
 or an increasing number
of unsuccessful deals,
 it's very likely that your
exposure to risk is mounting.
 REWARDING RISK-TAKING
 Our second cultural
pressure point
 is executive
resistance to bad news.
 Executives running
successful organizations
 often want to be surrounded
by people who share
 their optimism in the business.
 They look for employees who
exude confidence about reaching
 demanding performance goals.
 People who speak of obstacles,
problems, or impending dangers
 are derided as
annoying naysayers.
 Yet, it is often those
individuals who are best
 able to see risk creeping in.
 This is because they speak every
day with front line employees,
 customers, and suppliers.
 Unfortunately, in cultures
where the philosophy
 is "the boss knows best,"
many discover that they
 are better off not speaking up.
 What's the result?
 In the worst case,
top-level managers
 are the last to know
about critical changes
 in the competitive environment.
 At Volkswagen, CEO
Martin Winterkorn
 set a goal of becoming
the largest car
 company in the world by 2015.
 To reach this ambitious
goal, the company
 knew it would have to
sell more cars in the U.S.
 Executives believe the company's
clean diesel technology would
 be the key to wooing
American buyers.
 However, diesel engines, which
produce more nitrous oxide
 emissions than gasoline
cars, were also
 more heavily
regulated in the U.S.
 Winterkorn's executive team
set impossibly difficult
 performance targets
for the engineers
 who were building a
diesel engine to meet
 the American regulations.
 Winterkorn ruled his
company like a dictator.
 One German publication
referred to Volkswagen
 under his leadership as like
North Korea without the labor
 camps.
 Rather than upset
the top leadership,
 the engineers who couldn't meet
Winterkorn's demands cheated.
 They created a device that
fooled regulators' computer
 systems, until it was
discovered in 2015.
 The result was the largest
set of fines ever imposed
 for violations to
the U.S. Clean Air
 Act and billions of dollars
in lost sales and customer
 refunds.
 OPENNESS OF EXECUTIVE TEAM
 The third explosive ingredient
in the mix of cultural pressure
 points is internal competition.
 In many organizations,
managers believe
 that they are in a horse race
with their peers for promotions
 and rewards.
 And often, they are right.
 Senior executives
set up contests
 to stimulate exceptional effort.
 Think of the forced
ranking systems at Henkel
 we studied in Module 3.
 However, when employees perceive
advancement and promotion
 as a zero-sum game,
internal competition
 can have unintended
side effects.
 The most common
result is a decrease
 in information sharing.
 After all, if you know something
important about your customers
 or processes that your
rival doesn't, why would you
 give away your advantage?
 To compound the problem,
employees feeling the pressures
 of internal competition may
gamble with business assets,
 potential credit losses,
and the company's reputation
 in their attempts to enhance
short-term performance.
 In such instances,
risks and rewards
 are not evenly distributed.
 If the gamble succeeds, there
is upside for both the employee
 and the company.
 But if the gamble fails,
the employee at worst
 loses his or her job.
 The organization,
however, can be
 left with catastrophic losses.
 Enron is a classic example.
 The now defamed
energy powerhouse
 cultivated an intensely
competitive culture
 among employees.
 Enron based individual
employee bonuses
 on business center profitability
and the ranked contribution
 of each employee
within the unit.
 The incentive structure fueled
a mercenary "me first" culture,
 where employees constantly
jockeyed to transfer
 to more profitable groups.
 Sabotage was common.
 Employees knew to lock their
screens when they were away
 from their desks.
 If they didn't, someone
might steal their trade
 or change their position
on a trade in a way that
 would make them look bad.
 It is perhaps no surprise that
such a competitive culture
 fueled accounting tricks and
other fraudulent activities
 that would eventually bring
about the company's demise
 and send its executives to jail.

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5.3.4 Pressures Due to Information Management
9:40 AM

 PROFESSOR SIMONS: So
far in this lesson,
 we've studied pressures
from fast growth
 and a fast-moving culture.
 Now we will turn to our
final set of pressures--
 those that come from
weak information systems.
 This is why you spent
an entire module
 learning how to design effective
diagnostic control systems.
 When the systems aren't up
to par, risk exposure mounts.
 Success, again, can create
unintended consequences.
 Businesses often
succeed because they
 develop more sophisticated
products, new customer service
 methods, and new
production technologies.
 All of these great
innovations can also
 make transactions more complex.
 This means that fewer
people will understand
 the risks they might
introduce and the best
 ways to control them.
 The 2007 to 2009
financial crisis
 provides us with a
well-known example
 of what can happen
when transactions
 become too complex.
 One company, Bear Stearns,
embodied the crisis.
 Bear Stearns was the fifth
largest investment bank
 in the U.S. However, the
company's CEO, Jimmy Cayne,
 did not actively
monitor or manage
 the risks in the company's
investment portfolio.
 By the mid 2000s,
the company's traders
 had bought up $50 billion worth
of mortgage-backed securities.
 Bear Stearns repackaged
these investments
 into derivative products
that they sold to investors.
 This was a very
profitable strategy,
 but there were hidden risks
in these mortgage-backed
 securities.
 During the mid 2000s,
politicians in Washington
 made a policy decision
that home ownership
 should be more widely available
to low income families.
 As a result, government
agencies were instructed
 to lower lending standards.
 Mortgages were given to
many people who could not
 afford the monthly payments.
 When delinquencies
began to rise,
 investors realized that
the assets underlying
 these derivative products
were a lot riskier than they
 had initially believed.
 The market for these
derivatives began to dry up,
 and their value
rapidly declined.
 Bear Stearns, which
was heavily leveraged
 using these securities
as collateral,
 faced a liquidity crisis as
other financial institutions
 refused to fund its
short-term cash needs.
 Its shares, which were
valued at $65 per share
 at the start of the crisis,
tumbled to $2 per share
 when JP Morgan bought the
company in March 2008.
 Success can also
mean an increase
 in the volume and
velocity of transactions.
 This can often overload
information systems.
 The dangers here are obvious.
 Managers have less
opportunity to ensure
 that the transactions meet
pre-approved policies,
 and overloaded or
inadequate computer systems
 may not be able to capture
the information needed
 to support growth.
 EXCHANGE OF INFORMATION
 Success can also put pressure
on the diagnostic control
 systems that measure critical
performance variables.
 In bad times, managers
usually pore over
 such facts and figures
as they try to identify
 the source of their problems.
 In good times, however,
managers will frequently
 let this process slide.
 There are two reasons for this.
 First, rapid growth
often renders
 these systems outdated
and inadequate
 to meet the new demands
of the business.
 And second, it's human nature.
 If everything is
going well, there's
 little reason to plow
through mounds of data
 in order to find anomalies
or ways of making
 small improvements.
 Why can this spell trouble?
 Once diagnostic control
systems become outdated,
 they will no longer provide
the proper indicators
 to alert managers to the
different types of risks
 we have discussed--
 competitive risk,
and franchise risk.
 The cosmetic company Revlon fell
victim to this problem in 2018
 when they attempted to implement
a new enterprise resource
 planning system, or ERP.
 A few years earlier, they
had purchased rival company
 Elizabeth Arden.
 Because the two companies
use different ERP systems,
 Revlon decided to put
their newly merged company
 on an entirely new system.
 Neither Revlon nor
Elizabeth Arden
 had any past experience
with this new ERP.
 And due to poor planning
and coordination,
 the rollout was unsuccessful.
 Rather than aiding the business
in collecting and analyzing
 critical information,
this poorly
 implemented ERP failed
to deliver Revlon
 the information it needed.
 As a result, plants operated
below their full capacity,
 shipments were delayed,
and stores ran out
 of popular products.
 Are your diagnostic control
systems helping or hindering
 your business?
 Here are a few
questions to consider.
 How easy is it for you
to get the right data
 at the right time?
 How much of your day is
spent making phone calls,
 walking over to employees'
desks for information you need,
 fighting fires?
 If your diagnostic control
systems are working well,
 the information you need
should be coming to you,
 and it should be coming
before problems arise.
 Your own attitude
plays a role here, too.
 When have you last
reviewed performance data?
 How upset do you get
if performance reports
 are late or missing?
 If it's been a while
and if you don't even
 notice these reports
are late or missing,
 chances are that your
business's diagnostic control
 systems are not playing
the role they need to play.
 LACKING INFORMATION
 The final pressure
point we must consider
 when it comes to information
management pertains
 to decentralized
decision-making.
 When companies expand
quickly, local managers
 are often given more
autonomy over decisions.
 Top level corporate
managers, by contrast,
 are typically involved
only in matters
 of resource allocation, goal
setting, and performance
 reviews.
 Of course, there are many
benefits to decentralization.
 It enables local business
units to respond quickly
 to market demands.
 It allows for more
creativity and innovation,
 and it can enhance the
motivation and career
 satisfaction of managers.
 But again, these
positive effects
 also have their downsides.
 First, local managers may
be acting without a larger
 sense of their organization's
corporate strategy
 and unknowingly taking
on too much risk.
 Second, decentralized
organizations
 do not have well-defined
information channels
 for sharing information
either sideways or upwards.
 If senior executives are not
hearing important information
 until it's too
late, then they need
 to give themselves a high
score on this pressure point.

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5.3.5 Your Business's Overall Level of Risk
10:22 AM

In a moment, you will have the opportunity to see your business’s grand total on
the Risk Exposure Calculator. First, let’s recap the three types of pressure we
studied in this lesson and the pressure points within each of them:
Pressure Point #1 Pressure Point #2 Pressure Point #3
1) Pressures due to High performance Rate of expansion Inexperience of
GROWTH expectations key employees
2) Pressures due to Rewards for Executive Level of internal
CULTURE entrepreneurial resistance to bad competition
risk-taking news
3) Pressures due to Transaction Gaps in diagnostic Degree of
INFORMATION complexity and performance decentralized
MANAGEMENT velocity measures decision-making
Now, let’s reveal the overall risk exposure score that your inputs generated for your
business:

609d8e6f29c5fc0b825a1db4/abe79ec3-a13e-4944-94c0-5059ee18dda1/1071/908/#/>
5.3.5 Your Business's Overall Level
of Risk
In a moment, you will have the opportunity to see your business’s grand total on
the Risk Exposure Calculator. First, let’s recap the three types of pressure we
studied in this lesson and the pressure points within each of them:
Pressure Point #1 Pressure Point #2 Pressure Point #3
1) Pressures due to High performance Rate of expansion Inexperience of
GROWTH expectations key employees
2) Pressures due to Rewards for Executive Level of internal
CULTURE entrepreneurial resistance to bad competition
risk-taking news
3) Pressures due to Transaction Gaps in diagnostic Degree of
INFORMATION complexity and performance decentralized
MANAGEMENT velocity measures decision-making
Now, let’s reveal the overall risk exposure score that your inputs generated for your
business:

609d8e6f29c5fc0b825a1db4/abe79ec3-a13e-4944-94c0-5059ee18dda1/1071/908/#/>

 PROFESSOR SIMONS: If your
business received a high score,
 you should not panic.
 Typically, a high
score is good news.
 It means you probably have
a very dynamic business, one
 that is entrepreneurial,
one that is growing,
 one that is turning up the
dial on performance pressure
 and seeing the payoff.
 Notice that nearly all
of our pressure points
 are also the
hallmarks of success.
 You want these things
in your business.
 Take C3.ai, for example.
 They are likely to score
high in many of these areas
 and for good reason.
 Rather than playing
it safe, they
 are pursuing an aggressive
growth strategy.
 And that is what you need
to do if you want to win.
 In fact, a low score
is its own kind
 of warning sign, one
that your business is
 at risk for becoming a happy
underperformer like Henkel
 in the days before Kasper
Rorsted renewed the business.
 If you ended up in
the safety zone,
 you should try to
fight this complacency
 and take on higher
levels of risk.
 If you do have a
high overall score,
 the risk exposure calculator
will show you the risk areas
 you must monitor closely.
 You need to be sure that you
have created adequate controls
 to help you manage the risk
areas you have identified.
 We've studied some of
these actions already.
 Notice that some of the pressure
points in the risk calculator
 measure the likelihood that
employees are misconstruing
 the intentions of
senior managers
 or that they are taking on
unacceptable levels of risk
 for personal gain.
 The beliefs systems
we studied in Module 3
 can go a long way toward
creating a culture that
 rewards integrity.
 These systems make
clear the types
 of choices that should be made
when confronted with temptation
 or unfamiliar situations.
 The diagnostic control
systems we studied in Module 4
 are also critical.
 Success makes it easy
to neglect or dismiss
 diagnostic control systems.
 Managers must be sure to
invest in these early warning
 systems in boom times
and ensure that everyone
 is focusing on the right
critical performance variables.
 Sometimes existing systems
and variables are adequate.
 In other cases, success calls
for new systems and variables.
 You must be sure to
communicate these changes
 and build systems capable
of monitoring them.
 We will introduce
additional steps
 you can take in the
next few lessons.
 The first of these is
implementing internal controls,
 such as external audits.
 The second is clearly
identifying off-limit behaviors
 and communicating them
through boundary systems.
 The third involves using your
control systems interactively,
 forcing your managers
to discuss uncertainties
 about the future that
might introduce risk.

609d8e6f29c5fc0b825a1db4/abe79ec3-a13e-4944-94c
PROFESSOR SIMONS: If your business received a high score, you should not panic.
Typically, a high score is good news. It means you probably have a very dynamic
business, one that is entrepreneurial, one that is growing, one that is turning up the dial
on performance pressure and seeing the payoff.
Notice that nearly all of our pressure points are also the hallmarks of success. You want
these things in your business. Take C3.ai, for example. They are likely to score high in
many of these areas and for good reason. Rather than playing it safe, they are pursuing an
aggressive growth strategy.
And that is what you need to do if you want to win. In fact, a low score is its own kind of
warning sign, one that your business is at risk for becoming a happy underperformer like
Henkel in the days before Kasper Rorsted renewed the business.
If you ended up in the safety zone, you should try to fight this complacency and take on
higher levels of risk. If you do have a high overall score, the risk exposure calculator will
show you the risk areas you must monitor closely. You need to be sure that you have
created adequate controls to help you manage the risk areas you have identified. We've
studied some of these actions already. Notice that some of the pressure points in the risk
calculator measure the likelihood that employees are misconstruing the intentions of
senior managers or that they are taking on unacceptable levels of risk for personal gain.
BEGIN DESCRIPTION OF PRESSURE POINT #1
Text box titled Pressures Due to Culture. Pressure Point #1. Rewards for entrepreneurial
risk-taking. Emphasized text warns: gambling with company assets and reputation.
END DESCRIPTION OF PRESSURE POINT #1
The beliefs systems we studied in Module 3 can go a long way toward creating a culture
that rewards integrity. These systems make clear the types of choices that should be
made when confronted with temptation or unfamiliar situations. The diagnostic control
systems we studied in Module 4 are also critical.
Success makes it easy to neglect or dismiss diagnostic control systems. Managers must
be sure to invest in these early warning systems in boom times and ensure that everyone
is focusing on the right critical performance variables. Sometimes existing systems and
variables are adequate.
In other cases, success calls for new systems and variables. You must be sure to
communicate these changes and build systems capable of monitoring them. We will
introduce additional steps you can take in the next few lessons.
The first of these is implementing internal controls, such as external audits. The second is
clearly identifying off-limit behaviors and communicating them through boundary
systems. The third involves using your control systems interactively, forcing your
managers to discuss uncertainties about the future that might introduce risk.
If you received a score in the Safety Zone:
Draft a one-paragraph memo to your senior management team to 1) report your analysis
of risk pressures to the business and 2) encourage the organization to bolster its
innovative spirit. Drawing on our own study of creative tension in Module 3, propose
one practice senior management might introduce. Which internal risk pressure(s) might
increase from implementing this practice?
If you received a score in the Caution or Danger Zones:
Draft a one-paragraph memo to your senior management team summarizing the highest
risk pressures your business faces. Drawing on our study of beliefs
systems and diagnostic control systems in previous modules, select one of the risk
pressures for which you scored highest and propose, in a few sentences, a solution to
help mitigate this risk.

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0-5059ee18dda1/1071/908/#/syllabus>
PROFESSOR SIMONS: If your business received a high score, you should not panic.
Typically, a high score is good news. It means you probably have a very dynamic
business, one that is entrepreneurial, one that is growing, one that is turning up the dial
on performance pressure and seeing the payoff.
Notice that nearly all of our pressure points are also the hallmarks of success. You want
these things in your business. Take C3.ai, for example. They are likely to score high in
many of these areas and for good reason. Rather than playing it safe, they are pursuing an
aggressive growth strategy.
And that is what you need to do if you want to win. In fact, a low score is its own kind of
warning sign, one that your business is at risk for becoming a happy underperformer like
Henkel in the days before Kasper Rorsted renewed the business.
If you ended up in the safety zone, you should try to fight this complacency and take on
higher levels of risk. If you do have a high overall score, the risk exposure calculator will
show you the risk areas you must monitor closely. You need to be sure that you have
created adequate controls to help you manage the risk areas you have identified. We've
studied some of these actions already. Notice that some of the pressure points in the risk
calculator measure the likelihood that employees are misconstruing the intentions of
senior managers or that they are taking on unacceptable levels of risk for personal gain.
BEGIN DESCRIPTION OF PRESSURE POINT #1
Text box titled Pressures Due to Culture. Pressure Point #1. Rewards for entrepreneurial
risk-taking. Emphasized text warns: gambling with company assets and reputation.
END DESCRIPTION OF PRESSURE POINT #1
The beliefs systems we studied in Module 3 can go a long way toward creating a culture
that rewards integrity. These systems make clear the types of choices that should be
made when confronted with temptation or unfamiliar situations. The diagnostic control
systems we studied in Module 4 are also critical.
Success makes it easy to neglect or dismiss diagnostic control systems. Managers must
be sure to invest in these early warning systems in boom times and ensure that everyone
is focusing on the right critical performance variables. Sometimes existing systems and
variables are adequate.
In other cases, success calls for new systems and variables. You must be sure to
communicate these changes and build systems capable of monitoring them. We will
introduce additional steps you can take in the next few lessons.
The first of these is implementing internal controls, such as external audits. The second is
clearly identifying off-limit behaviors and communicating them through boundary
systems. The third involves using your control systems interactively, forcing your
managers to discuss uncertainties about the future that might introduce risk.
If you received a score in the Safety Zone:
Draft a one-paragraph memo to your senior management team to 1) report your analysis
of risk pressures to the business and 2) encourage the organization to bolster its
innovative spirit. Drawing on our own study of creative tension in Module 3, propose
one practice senior management might introduce. Which internal risk pressure(s) might
increase from implementing this practice?
If you received a score in the Caution or Danger Zones:
Draft a one-paragraph memo to your senior management team summarizing the highest
risk pressures your business faces. Drawing on our study of beliefs
systems and diagnostic control systems in previous modules, select one of the risk
pressures for which you scored highest and propose, in a few sentences, a solution to
help mitigate this risk.

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5.4.1 Trouble Brewing at Westchester Distributing, Inc.
10:50 AM

Reckoning with Employee Misconduct

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far in this module,
 we've introduced major
sources of strategic risk,
 and we've identified
the pressures
 within a business that amplify
exposure to those risks.
 Now, we will tackle
an additional risk.
 This one may not be
pleasant to think about,
 but it's one you must
acknowledge and address.
 It's the possibility
that employees
 will engage in
unethical actions,
 specifically,
misrepresentation and fraud.
 We've said before that we can
generally assume that employees
 want to do what is right.
 But what happens
when an employee
 chooses to do something wrong?
 Who is to blame?
uncover the conditions
 that can lead to
lapses in judgment,
 even among the most
well-intentioned employees.
 We will then introduce
internal controls
 as a way of safeguarding
against employee misdeeds.
 These systems are essential
for businesses of all sizes,
 including smaller,
less formal firms that
 may deem them unnecessary.
 The fact is that very few
managers focus enough attention
 on internal control systems.
 This is to their detriment,
because the consequences
 of ignoring them can be grave.
 We will now explore
a case study that
 documents a real set of
incidents at Westchester
 Distributing, Inc. The owner
of this California beer
 distributor was appalled to
learn that employees had bribed
 a customer,
reimbursed themselves
 through fraudulent
expense reports,
 and covered up their tracks.
 At the time, Westchester had
been enjoying a strong market
 share in a competitive
industry, thanks to a reputation
 for excellent customer service.
 Suddenly, they found
their future in jeopardy.
 To safeguard against
future incidents,
 they realized they
would need to overhaul
 their internal controls.

Learning Objectives
 Explain how pressure, opportunity, and rationalization can tempt
employees to engage in misrepresentation and fraud.
 Define internal controls and explain why managers must pay close
attention to them.
 Distinguish between three major types of internal controls.
 Evaluate whether internal controls are adequate and recommend design
improvements.
Employee Misconduct in a Globalized World

While we would all prefer to believe that employee misconduct did not happen under our
watch, the reality is that it is widespread—and, in an era of global business, it is growing
more complex. Here is Eugene Soltes with the state of corporate misconduct today.


 EUGENE SOLTES:
Corporate misconduct's
 nasty, and much
more so than I think
 even a casual reading of
the Wall Street Journal
 would suggest.
 Just to give you a sense of the
trends, in the last 20 years,
 corporate fines for
misconduct have risen 40-fold
 in the United States.
 And just that's
looking at fines.
 If you look at the legal
bills that firms incur,
 facing a bill of $100
or $200 or $300 million
 for the internal
investigation costs
 is increasingly not uncommon.
 Walmart-- a firm that recently
settled its allegations
 for bribery with the Foreign
Corrupt Practices Act--
 they spent $900 million simply
on the internal investigation
 and compliance processes
associated with those charges.
 What's interesting is it's
also emerging-- it's not simply
 a U.S. issue anymore.
 At one point in
time, this was viewed
 and a lot of the misconduct
and the sanctioning
 was occurring in the U.S.,
but this is a global issue.
 In the U.S., eight of the
10 largest fines for Foreign
 Corrupt Practices Act
have actually been foreign
 companies--
 companies entirely headquartered
outside the United States.
 And what's really interesting in
the corporate misconduct world
 is how different
jurisdictions are increasingly
 intersecting with one another.
 And so a firm that's operating
in Japan, doing business
 in Argentina, but uses a
U.S. bank to pay a bribe,
 all of a sudden can now be
fined by U.S. regulators.
 Now, increasingly, as we see
more regulators get involved
 in this, we can see this
get really complicated,
 where you're a firm
headquartered in Europe, doing
 business in Asia
and South America,
 and now you have regulators from
three different continents now
 investigating your actions.
 All of a sudden,
your focus as a firm
 goes from running a business
and doing the strategy
 and innovation associated
with that business to managing
 a global investigation occurring
on several different continents
 with dozens of
different investigators,
 and I think we're going to see
that trend continue to increase
 going forward in the future.
 So it becomes very messy.
 OTHER UNETHICAL ACTIONS
 Corporate misconduct
really runs the gamut.
 The financial
fraud, which we all
 know and think about
or the Ponzi scheme
 like Bernie Madoff, but
it's even much more wider.
 Money laundering,
which we oftentimes
 associate with
terrorists and mafia,
 are actually something
that we actually
 see increasingly common, even
within a corporate context.
 And even on the
non-criminal side,
 things like harassment
and discrimination.
 The things that might not
have criminal sanctions
 associated with it but
extraordinary reputational
 sanctions are another area
of corporate misconduct.


Employee Misconduct at Westchester

Distributing
Now, let’s uncover the types of misconduct that occurred at Westchester Distributing.
First, case protagonist and Westchester President Vince Patton will share the company’s
history and describe how it was performing at the time he uncovered his employees’
misdeeds.
Note: This online case is based on a case developed by Robert Simons and Robert J.
Boxwell (HBS Case No. 191-118).


 NARRATOR: Westchester
Distributing, Incorporated
 was founded by
ex-marine Vince Patton.
 Distributors like
Westchester purchase beer
 and other beverage products
to hold in inventory
 and then resell these products
to stores, restaurants,
 and other retail locations.
 Patton was working as a regional
manager for MillerCoors, known
 as Miller Brewing
Company at the time,
 when he was offered exclusive
rights by Miller to distribute
 their products in the region.
 VINCE PATTON: I've
never been one
 to back down from a challenge
and this was no exception.
 Before I found my
way into management,
 I'd driven a semi
truck for years.
 It was how I put myself
through college, in fact.
 It may sound easy enough, but
it's incredibly hard work.
 That didn't stop me though.
 If anything, it fueled me.
 I knew early on that this was
the business I wanted to be in.
 NARRATOR: Westchester was a
small distributor overall,
 operating four warehouses
from one central office.
 They distributed 800,000 cases
per year, employed 60 people,
 and brought in $30
million in revenue.
 Patton was the
majority shareholder.
 He was known for having a
larger-than-life, hard-driving
 personality, and a
cadre of employee fans
 who were in awe of him.
 VINCE PATTON: At
Westchester, we don't just
 look for people who
can get the job done.
 We hire the cream of the crop.
 And then we demand perfection.
 It's how we set ourselves apart.
 It drives us crazy sometimes.
 But is it worth it?
 Absolutely.
 I think the results
speak for themselves.
 NARRATOR: To spur employees
to work to their highest
 potential,
Westchester used sales
 quotas and financial
incentives tied to performance.
 In addition, breweries
provided their own incentives
 to Westchester's
salespeople in attempts
 to have them focus on pushing
their specific brands.
 This meant that if
employees succeeded,
 they could enjoy
lucrative bonuses
 on top of their salaries.
 Westchester set
itself apart by trying
 to offer the best customer
service in the industry.
 They treated both their
suppliers and their retailers
 as customers who could easily
take their business elsewhere.
 For this reason, their
critical performance variable
 was volume, specifically
cases per stop.
 This was the number of case
orders taken from salespeople
 and delivered by their drivers.
 Westchester's commitment to
high-quality customer service
 paid dividends.
 Their drivers and salespeople
were generally considered
 the best in the market.
 MillerCoors, their
major customer,
 enjoyed a share of
market almost 40%
 higher in Westchester's
market area
 than its average national share.
 Not surprisingly,
Westchester consistently
 won quality competitions
from the brewery.
 VINCE PATTON:
Business was booming.
 You could feel the
energy in the air.
 The optimism about
what was ahead for us.
 And I was busier than ever
assimilating some new brands
 we had acquired.
 So it never occurred to me
that some longtime employees
 might go and screw up everything
we'd worked so hard to build.
 That was the furthest
thing from my mind.


Employee misconduct was the furthest thing from Vince Patton’s mind until the day he
received this unexpected letter in the mail. At the time of receipt, success at Westchester
was still at an all-time high.

From the Law Offices of:
CORNELIUS VAN BUREN
One Main Street, Suite 200
Los Angeles, California 92777
FAX 213-555-0553 | OFFICE 213-555-0101 | MOBILE 213-555-7685
June 1, 2019
Westchester Distributing, Inc.
13477 San Luis Boulevard
Cosgrove, California 94000
Attn: Vince Patton, President
Dear Mr. Patton:
This office represents Wilson Moon. Mr. Moon has requested that I correspond
with you regarding a recent transaction between Mr. Moon and Westchester
Distributing.
Mr. Moon purchased beer from Westchester but subsequently returned the beer as
a result of conversations with Mr. Joe Roberts. Mr. Roberts informed Mr. Moon
that he believed Carter Mario and George Pavlov, employees of Westchester,
improperly discounted the sale of beer to Mr. Moon. This information is absolutely
untrue, and Mr. Moon therefore returned the beer in the interest of avoiding any
unfair prejudice to Mr. Mario or Mr. Pavlov. I would like to emphasize that the
accusations against the employees have no basis in fact, and I would be happy to
discuss the transaction with you at your convenience.
I will also take this opportunity to request that Westchester forward to Mr. Moon
the refund for this purchase. Thank you in advance for your anticipated
cooperation.
Sincerely,
Cornelius Van Buren
CVB/fme
cc: Wilson Moon


Meeting the Employees Involved

Before we delve into Vince Patton’s response, let’s take a moment to review some key
industry details that will be relevant to our analysis of what happened and how the
distributor can best respond.
First, it is important to note that beverage distribution is a highly competitive industry:
 All breweries (i.e., beer manufacturers) are constantly trying to increase
their market share and are looking to work with distributors who can best
represent their interests.
 The barriers to entry for new distributors are low.
 Distributors report low margins as well as high fixed costs and must
respond to the fact that demand can vary unpredictably based on seasonal
weather conditions.
 Switching costs are low. If a beer manufacturer is not happy with a
distributor, it can easily find another distributor for its products.
Given these factors, we can recognize why Westchester chose to compete on customer
service to differentiate itself in a crowded market.
In addition to being highly competitive, the beer and liquor industry is also heavily
regulated: In California, distributors are regulated by the California Alcoholic Beverage
Control (ABC). The ABC maintains extremely strict regulations enforced through
equally strict sanctions. For example, giving gifts to retailers as an inducement to
purchase products will result in a distributor losing its license to distribute. These
penalties are primarily directed at owners rather than at employees. Employees who offer
free gifts or kickbacks to customers, as employees at Westchester did, would not face
reprimand from the ABC.
Now, we will learn who was behind the kickbacks and other transgressions at
Westchester.


 NARRATOR: Let's meet
the three employees
 involved in the incident.
 Carter Mario had been working
at Westchester for eight years
 at the time of the incident.
 He started working
there as a truck driver.
 He eventually moved into
sales and was responsible
 for visiting retail
accounts regularly
 to take orders that would
be delivered the next day
 and for working with customers
to design in-store promotions.
 George Pavlov had also been
at Westchester for eight years
 and had also started
there as a truck driver.
 He was one of three sales
managers and was Mario's boss.
 Sales managers were
jacks of all trades
 who oversaw customer
relationship management
 and oversaw teams of
salesmen and drivers.
 Both had incentive sales quotas
and would receive bonuses
 if they hit them.
 Joe Roberts, who
had been working
 at Westchester for six years,
served as Vice President
 of Administration.
 He was number three in
the company under Patton
 and the VP of Finance.
 CARTER MARIO: So what happened
was my boss, George Pavlov,
 and I found ourselves with some
slow moving specialty beer.
 The manufacturer-- the brewery--
 was offering us special cash
incentives to move this stuff.
 So we both had incentives to
hit our overall sales quota
 and receive a nice extra
bonus from the brewery.
 We put our heads
together and figured,
 let's offer a kickback
on this slow-moving beer
 to some of our customers.
 We thought, if we could
lower the price point a bit,
 it would increase
their incentive
 to move the product
out the door.
 NARRATOR: Kickbacks,
or discounts,
 like the one that Carter Mario
and George Pavlov were planning
 to offer their
customer, directly
 violated ABC regulations.
 Distributors who were
caught offering them
 could lose their
licenses for 45 days.
 CARTER MARIO: So we
went ahead with our plan
 and offered Wilson Moon, the
owner of West Coast Korean
 Market, a discount.
 Then we had to figure out
how to reimburse ourselves
 for the kickback we were paying.
 So we decided to submit a
few fictitious broken bottle
 claims.
 Typically, when we break bottles
in the course of delivery,
 we reimburse our customers.
 We'd filed enough
of those claims
 to know that no one was
looking at them too closely.
 We also filed false
expense reports
 for meals and entertainment--
again, nothing huge, nothing
 that would hurt Westchester.
 And it was easy to
do because we didn't
 have a lot of oversight around
meal reimbursements either.
 You didn't even need a receipt.
 It was such a
small staff, people
 didn't always have the
time to sign off on them.
 And the customer,
Wilson Moon, he
 was happy to take the discount.
 But then he had trouble
moving the cases.
 Next thing you know,
he's telling me
 he wants us to take
the beer back and be
 reimbursed for his purchase.
 I panicked.
 I was scared that our
kickback would be revealed.
 Maybe we would be fine
bringing the cases back.
 Maybe we wouldn't get caught.
 It was true that the warehouse
was typically pretty empty.
 People came and went
as they pleased.
 But I wasn't going
to take any chances.
 I said to Moon, we'll give
you three vintage neon beer
 signs from our inventory
if you keep the beer.
 Those neons were a hot
commodity that you could easily
 sell on eBay.
 GEORGE PAVLOV: That
neon sign exchange,
 it really unnerved me.
 I'd convinced myself that
our actions wouldn't add up
 to anything troubling in
the grand scheme of things.
 But I began to
worry that we were
 treading into hot
water with Wilson Moon
 once he started complaining.
 So I decided to go to
Joe Roberts for advice
 on what to do.
 JOE ROBERTS: I should have
gone to Vince then and there.
 But I knew that he would
not look kindly on what
 had happened under my watch.
 So I figured it was best to
try to resolve the situation
 myself.
 I took Wilson Moon to lunch.
 I offered him another
neon if he would just
 keep quiet and keep the beer.
 I said the situation
was bad news all around
 and it was best if we
all just forgot about it.
 Well, Moon blew up.
 He accused me of blaming him
for something he didn't do.
 He took the neon
sign, and he left.
 NARRATOR: Two days
later, Vince Patton
 received the letter
shown previously
 from Wilson Moon's attorney.
 Moon requested that
Westchester refund the purchase
 price of the slow-moving
beer and absolved himself
 of any blame in the incident.
 Patton read the
letter in disbelief.
 He was livid.


5.4.2 What Went Wrong? Understanding the Dangerous
Triad
11:35 AM
5.4.2 What Went Wrong?

Understanding the Dangerous Triad

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Weighing Next Steps at Westchester

These risks were top of mind for Vince Patton. He knew that the steps he took next would
have long-term ramifications for signaling to his employees that this behavior was
absolutely unacceptable. But what were the best next steps to take? As you work through
the next video, take note of the different courses of action Patton considered.

TRANSCRIPT
Autoscroll
ON
 PROFESSOR SIMONS: When your
employees cross a line,
 it's important to remember that
most people do not start out
 intending to do bad things.
 Rather, they often find
themselves sliding down
 a slippery slope.
 They may make a small
transgression at first.
 Soon though, they
find themselves
 in a situation that has
spiraled out of control.
 Employees typically
find themselves
 on these slippery slopes
when three conditions
 exist simultaneously.
 The first condition you
will recognize from the risk
 exposure calculator--
 pressure.
 When employees are under
intense pressure to hit goals,
 they may be more likely
to engage in wrongful acts
 to achieve those goals.
 They know that if
they succeed they
 will receive considerable
reward and recognition.
 They also know that if
they miss their goals,
 their reputations and
compensation will suffer,
 and that their future
at the business
 may even be in jeopardy.
 In these conditions,
a drive to succeed
 can become a drive to
succeed at any and all costs.
 The second condition
is opportunity.
 An employee who feels pressure
to succeed at all costs
 can only break the rules if
they are given the chance
 to do so in the first place.
 Do they have access
to valuable assets?
 Can they manipulate accounting
and performance measurement
 systems to their advantage
and do so secretly?
 Are they receiving
less oversight
 than they should
from their managers?
 If so, employees in
high-pressure organizations
 may feel temptation to
use this opportunity
 to their own advantage.
 We should recognize
that temptation
 due to pressure and opportunity
is part of the human condition.
 Each of us, every
day faces temptation
 in our work lives and
our personal lives.
 Typically, we don't
act on temptation
 because we want to be
proud of who we are.
 As human beings, we are
very creative in finding
 ways of rationalizing
our bad behaviors.
 We might say that, everyone
does it or that no one is hurt.
 We might tell ourselves that we
are very unlikely to be caught,
 or if caught, our boss
would condone our actions
 because he or she
would understand
 that we were acting in the
best interests of the business.
 Carter Mario's letter
is a classic example
 of such rationalization.
 When all three conditions
are present in a business,
 it is very possible that
employee misdeeds will occur.
 Together, we can think
of these conditions
 as forming a dangerous triad.
 Again, all three of
these conditions,
 not just one or two, need
to be present for employees
 to commit wrongdoing.
 To ensure that employees do
not succumb to temptation,
 managers must remove one or
more of these three variables.
 We do not want to reduce
performance pressure,
 since it facilitates
entrepreneurial behavior.
 And we do not want to fully
eliminate opportunity,
 because it facilitates
innovation.
 But what we can and must
do is remove the ability
 to rationalize.
 Managers can do this by
creating boundary systems that
 clearly outline which
behaviors are unacceptable.
 We will study boundary
systems in our next lesson.
 Managers can also limit
opportunities for misdeeds
 by installing the proper
internal controls.
 In a moment, we will look
at how internal controls can
 be designed successfully.

Graphic shows temptation in a dotted circle at center. Boxes labeled pressure and
opportunity appear on either side, each with a solid arrow pointing toward temptation,
demonstrating that the presence of each of these conditions leads employees to temptation.
Box labeled rationalization sits above temptation circle. Dotted line with arrows pointing
in both directions connects temptation to rationalization, demonstrating that when
employees have the ability to rationalize their actions, it leads to temptation, and that
when employees are tempted, they will rationalize their actions.


Here are some of the examples you should have identified in your response:
Pressure  Employees were under intense pressure to
perform, as explicitly indicated by Patton,
who demanded perfection.
 Many employees were in awe of Patton—
likely a double-edged sword. While they
admired him, their fear of him may have
made employees hesitant to bring him bad
news.
 Incentive quotas and incentives were tied to
performance goals that were augmented by
suppliers, i.e., salespeople received additional
incentives from beer suppliers eager for their
attention.
Opportunity  Patton noted that he was busy integrating
newly acquired brands at the time the
incidents took place. He and others in senior
management may have, therefore, had less
attention to devote to existing business
activities. Evidence includes:
1) Failure of management to act on their
suspicion that Mario was going home in the
day and taking long lunches.
2) Failure of management to adequately
reprimand Mario when he was caught leaving
with products he did not sign out.
 Internal controls appear to be inadequate or
poorly enforced. Otherwise, Mario and
Pavlov’s attempts to submit falsified expense
reports would have been identified before
they were reimbursed, or someone would
have noticed that a neon sign had gone
missing from inventory.
 Additional opportunity for transgression was
facilitated by the larger industry: Recall that
the ABC penalized businesses rather than
individual employees, even when individual
employees, or employees colluding, were at
fault. Mario and Pavlov likely knew that they
would avoid sanction by the ABC if caught.
They also may have known that, if
Westchester dismissed them, they could
retaliate by reporting their own misdeeds to
the ABC, and their former employer would
suffer the consequences.
Rationalization  Carter Mario may have told himself, with good
reason, that he would not get caught, since he
had gotten away with smaller transgressions
in the past.
 Evidence pointed to a culture where
management would sometimes provide cover
for employees: Mario was able to enlist his
own manager, and they were both able to get
Roberts to cover for them; Roberts, in turn,
might have assumed Patton would condone
the situation.
 The employees might have convinced
themselves that their actions were in the best
interest of the business: “It is better for
Westchester if this lingering inventory is
moved once and for all, even if the price paid
is a small kickback to a customer, because
sales volume is a critical indicator of our
success.” Notice that in the letter Carter
Mario sent to Patton, he says he believed he
was acting in the company’s best interest.
Mario also expressed in his letter a sentiment
that Patton was typically reluctant to hear bad
news from employees.


 EUGENE SOLTES: Within
the dangerous triad,
 I think one of
the factors that I
 found most interesting to think
about during my conversations
 was rationalization and
that I think many of us,
 when we sit within the comfort
of a classroom or a boardroom,
 we think that you
need to explicitly
 have that rationalization
to go ahead.
 In speaking with many
of the executives who
 I found that were
getting into trouble,
 it was actually the lack
of explicit rationalization
 that actually allowed
them to go ahead.
 They didn't actually spend the
time and effort actually fully
 considering their actions.
 And then after a fact, what
was interesting to observe
 is the ability to then
later rationalize it.
 What I heard in notably sitting
with managers when they're
 sitting in prison is the ability
to really rationalize even
 after the fact.
 The people who were
engaged in insider trading
 I saw saying that, insider
trading, it's a violation.
 But in the scheme of
things, it's not that bad.
 It's not like I
defrauded someone
 who engaged in financial fraud.
 And the managers who engaged
in financial fraud would say,
 ultimately,
investors lost money,
 but I was really trying
to build something.
 It's not as bad
as the people who
 engaged in things like a
pyramid scheme who weren't
 trying to build something.
 And then the people who were
sitting in prison engaging
 in pyramid schemes
and Ponzi schemes
 said, yeah, I know people
lost a lot of money,
 but, you know what,
compared to some
 of the people who
were managing banks
 during the last financial crisis
that lost hundreds of billions
 effectively for
the entire market,
 my scheme was pretty small.
 And so we have an
extraordinary ability
 to sometimes not
rationalize at all,
 which allows us to go ahead.
 And then even when
people are prompted
 to force a rationalization,
they come up
 with creative explanations
that really diminishes
 the net effect of our actions.


 VINCE PATTON: It was
a tough call to make.
 Probably the toughest
of my career.
 At the end of the day, I was
probably just too soft hearted
 to fire them without
any sort of warning,
 even though I know that probably
would have been the right thing
 to do.
 NARRATOR: Patton decided instead
to suspend Mario and Pavlov
 for two weeks without pay.
 Each employee also
received a formal notice
 that, if they violated
company policy again,
 they would be dismissed
without further warning.
 As it turned out,
Patton would have
 to fire Carter Mario
a few months later,
 after he was caught stealing
beer from the warehouse.
 Roberts received the same
reprimand and warning;
 although he wasn't suspended, he
lost his annual profit sharing
 bonus.
 Patton also docked his
annual salary for six months,
 pending a review to determine
whether he had sufficiently
 cleaned up his act.
 Patton contacted an
acquaintance of his at the ABC
 in confidence.
 His friend confirmed
that the ABC would indeed
 have suspended them,
but said that Patton
 had acted reasonably
given the circumstances.
 No action was brought
against Westchester.
 Now that Patton had decided
what to do with Mario, Pavlov,
 and Roberts, he would have to
answer his earlier question--
 was this incident an anomaly
or was it part of a trend?
 Would he have to make
the same decisions
 about firing employees
over and over again?
 To find his answer, Patton began
visiting five customer sites
 each week.
 He spot checked the
neon signs and confirmed
 that entertainment and other
customer-relations activities
 were recorded appropriately.
 All of the evidence he gathered
suggested that this was indeed
 an isolated incident.
 VINCE PATTON: Still, I wasn't
about to take any chances.
 One screw up is still
one screw up too many,
 and it risked putting our
entire business in jeopardy.
 We had to make it crystal
clear to every single employee
 that cheating and stealing
were unacceptable.
 We had to make sure that this
never, ever happened again.
 And a big part of
that, I knew, was
 going to come down to improving
our internal controls.
 I'd let them fall by the wayside
a bit if I'm being honest,
 but I knew I was going
to have to give them
 a big overhaul, and fast.

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12:50 PM

 EUGENE SOLTES: A year ago, I
visited a large oil and gas
 company, an energy
company that, in the past,
 had a number of issues
in regards to its safety.
 And the firm put actually
a lot of processes in place
 to try to improve
that and actually
 trying to change the
culture around safety.
 And one of the things I
was most intrigued with
 is as I was walking
up the stairs
 with their head of
compliance, he mentioned to me
 to hold the railing,
something that, frankly, I
 haven't done in years.
 And I said, why?
 And he said, that's
part of our culture.
 We all hold the railing.
 We want to do that in
the corporate office
 because we need to do that when
people are in the field, where
 it actually turns out to be
really important if you're
 on a ship or an oil rig.
 And I actually
looked around, and it
 was one of these very
transparent, open offices.
 And I saw every person that was
walking up stairs throughout
 was actually
holding the railing.
 And it's actually an
extraordinary kind
 of manifestation of, I would
say, a simple control process.
 They want people to be abiding
by safety rules and holding
 railings when they're on a
ship to actually translate
 that so every single
person is even doing
 that in the corporate office.
 Now, some people
could potentially
 criticize this as saying that's
overdoing a potential control.
 On the other hand, it
was a very, very powerful
 symbolic gesture to
show that we're all
 concerned about safety within
this larger organization.

609d8e6f29c5fc0b825a1db4/4a70cc85-516f-4939-9bac-c0300ea4dbbc/1071/908/#/syllabus>

In a moment, you will have the opportunity to step into Patton’s shoes as he thinks
through how to improve his own business’s internal controls. As you think through your
options, you may find it useful to refer to this chart, which lists in more detail common
types of relevant controls and why each is valuable.
COMMON
TYPES OF
INTERNAL
CONTROLS
Examples How They Work Why They Help
Structural
Safeguards
Segregation of More than one person involved Provides double check and
duties in each transaction ensures that individuals with
control of assets do not record
asset transactions
Authorization Superior reviews and signs or Provides double check of
initials key documents accuracy and authority limits
Independent Independent checks by internal Expert assurance that procedures
audits auditors, external auditors, or are adequate and that no
management irregularities exist
Physical security Gates, locks, and security Prevents theft or damage to
devices valuable assets
Systems
Safeguards
Adequate Accounting and other Provides early warnings of
accounting information systems problems
systems
Documentation Written backup for all Provides audit trail and allows ex
transactions post review and reconciliation
Written Policies and manuals Provides clear guidelines as to
procedures how transactions are to be
handled and recorded
Staff Safeguards
Adequate Hiring staff with specialized Ensure that individuals in control

expertise and skills (e.g., professional roles have needed expertise
training accountants) and offering
training programs
Sufficient Adequate staffing, systems, and Ensure that enough resources are
resources budget allocated to the internal control
function
Rotation in key Assign an independent person A fresh set of eyes will expose
jobs to temporarily perform a key any irregularities
control job


Here is a table showing which changes to internal controls would be best for Westchester
to make (and which changes they should not make), along with explanations for each.

Internal Control Changes Westchester Should Make Internal Control Changes
Westchester Should Not Make
Require receipts for all lunch and entertainment Establish segregation of duties.
expenses.
(This is impractical for a small
(This change would directly address the opportunity business such as Westchester.
Mario seized and would not entail any additional Emphasis should instead be on
costs beyond a modest increase in improving documentation and
employee/management time and attention.) review and relying more heavily on
written guidelines.)
Change procedures so that broken bottle claims Establish an internal audit
can only be paid by credit memo countersigned by function.
the customer and approved by management.
General sales manager would spot-check validity (Again, this is impractical for a
during routine customer visits. small business. Owners/managers
will need to devote more
(This change would directly address the opportunity management attention to
Pavlov seized. Again, it would not entail any compliance and actively seek out
additional costs beyond a possible, occasional, and irregularities.)
relatively modest increase in mid-level management
time and attention--with no increased demand on
senior management attention.)
Increase physical security and record keeping for Add another layer of
neon signs and perform spot checks to ensure all management oversight.
signs are being used as indicated.
(Westchester can find other means
(This change would directly address the opportunity of safeguarding assets and
Roberts seized. Once again, it would not entail any activities without increasing
additional costs beyond a modest increase in headcount.)
employee and mid-level management time and
attention--with no increased demand on senior
management attention.)
Require that employees read and sign the existing Hire professional accountants or
code of conduct annually. internal control staff.

(This change would eliminate possible employee (Company is too small to support
rationalizations. It would involve a more significant dedicated professional control
investment of senior management time upfront but a staff.)
much smaller investment in the long run, likely
limited to reviewing and updating the document as
needed.)
Provide annual training on ABC policies.

(Training on ABC regulations would ensure that no
one could plead ignorance or rationalize their
behavior because they didn’t know the rules or the
consequences.)


Vince Patton’s Approach


 PROFESSOR SIMONS: Vince
Patton and his team
 made a concerted
effort to revitalize
 their internal controls
following the series
 of incidents that we studied.
 In fact, Patton
took it upon himself
 to begin visiting five
customers each week,
 spot checking neon signs, and
confirming that his employees'
 expense claims were legitimate.
 He concluded that the incident
involving Mario, Pavlov,
 and Roberts was an
anomaly rather than
 an indicator of troubling
patterns of behavior.
 Nevertheless, Patton
had to acknowledge,
 and all managers
must acknowledge,
 that, without the proper
internal controls in place,
 employees may always be
tempted to make bad choices,
 especially in
high-pressure environments
 such as Westchester.
 In small companies,
senior managers
 may think that internal
controls are not
 appropriate or necessary,
but the principles
 for internal
controls are the same
 for companies of 100
people as they are
 in companies of 100,000 people.
 While you can and should
delegate much of this work
 to skilled accountants
and controllers,
 you should always
be sure to keep tabs
 on your structural systems
and staff safeguards.
 Are they being
enforced sufficiently?
 Do yesterday's safeguards
still adequately address
 the errors and temptations
that might arise from today's
 transactions and activities?
 These are questions you
need to continually ask.
 At the same time, you don't want
to go overboard and lock down
 everything.
 Nobody wants to
work for a business
 where opportunities for
creativity and innovation
 have been completely wiped out.
 This is why internal
controls alone cannot address
 the dangerous triad.
 You need to keep
opportunity on the table
 but provide guidance
to employees
 around how they should and
should not act on those
 opportunities.
 We will study how you can
develop these guidelines
 in our final lesson of the
module on boundary systems.

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Internal Controls and Business Performance

To conclude our study of internal controls, let’s return to Eugene Soltes. He argues that
internal controls, which are so often seen by leaders as a compliance checkbox, ultimately
impact organizational performance—and a business’s bottom line.

 EUGENE SOLTES: Internal
controls are so often
 viewed as a cost center
within an organization, which
 I think is really unfortunate.
 Just to give one
example, we actually
 did a study with a large
manufacturing firm.
 And the nice part of
manufacturing firm,
 we could look at actually the
plant level and line level
 productivity.
 And we actually
found when the firm
 had unsubstantiated
allegations of harassment,
 so this is means that
an employee actually
 raised an issue around
harassment and nothing
 happened.
 The firm obviously
didn't take action.
 They didn't violate any
kind of control or process,
 so nothing happened.
 But for those employees who
actually raised that concern,
 it was subjectively
substantiated.
 They thought it happened.
 And so what do we
see happening six
 and nine months later down the
road when no action is taken?
 We actually see on that
specific plant line,
 we started to see employees
start showing up late.
 We start seeing audit
quality issues occurring.
 We see embezzlement arising.
 Our hypothesis is that when
the firm doesn't take action,
 the employee subjectively
sees the firm doesn't
 respect his or her concerns.
 As a result, they're not going
to respect the firm back.
 And then we see this
actually manifesting
 in the firm's
operational performance.
 And so there's a
lot of opportunities
 if we start thinking
about internal controls
 and what it's trying to prevent.
 It's an opportunity cost.
 But it's one that's, I think,
within the leadership circles
 is viewed as a cost center.
 But if one starts to think
through it much more carefully,
 one can directly actually trace
how that actually influences
 the firm's operational
performance
 and ultimately
its profitability.


 PROFESSOR SIMONS: There
are different ways
 of guiding employee behavior.
 In environments with a
high degree of control,
 where processes are
standardized and employees
 have little autonomy,
standard operating procedures
 are generally sufficient.
 But in highly
competitive environments,
 ones where people are
encouraged to innovate
for outcomes,
 businesses need to take
a different approach.
 Instead of telling
people what to do,
 they need to communicate
what not to do by means
 of formal boundary systems.
 As the level of performance
pressure increases and managers
 give more freedom to innovate
to meet customer needs,
 boundary systems
become more essential.
 They are also critical when
franchise risk is high.
 Think back to ATH.
 Would it have made a difference
if employees were told clearly
 and consistently
that they must never
 cut corners on product
quality in a way that
 could impair patient safety?
 I believe that it would.
 Because boundaries place
limits on behaviors,
 it's easy to assume that
they reduce innovation.
 In fact, boundaries do
precisely the opposite.
 When designed well,
boundaries allow
 employees to respond
to new opportunities,
 both creatively and safely.
 Without boundaries
in place, employees
 may be reluctant to
reach for opportunities.
 They may be unsure which
courses of action are permitted.
 They may worry that any attempt
to innovate in new areas
 will result in disapproval.
 With clear boundaries
in place, employees
 know which behaviors
are acceptable.
 They can forge
ahead limited only
 by their abilities
and imagination.
 Examined through this lens,
we can see boundary systems
 as a lever that fuels, rather
than hinders, innovation.
 They allow businesses
to capitalize
 on what we might call the
power of negative thinking.
 Boundary systems
exist in two forms,
 business conduct
boundaries typically
 found in documents such
as codes of conduct,
 and strategic boundaries.
 Strategic boundaries identify
which opportunities should not
 be pursued because they do
not align with the strategy.
focus on ethical boundaries
 before turning to strategic
boundaries in the next lesson.
 Conduct boundaries have a
long history in human society.
 We mentioned the
Ten Commandments,
 which, like all boundaries,
are stated in the negative.
 You shall not kill;
you shall not steal.
 These boundaries
make it crystal clear
 what behaviors
are out of bounds.
 For Americans, the
First Amendment
 to the U.S. Constitution
is another classic example.
 It is also stated
in the negative
 to limit the power of
government over the people.
 It says quite simply,
Congress shall
 make no law limiting citizens'
freedom to speak, assemble,
 or practice their religion.
 This places clear limits
on the power and reach
 of the federal government.
 In the business
world, some boundaries
 have likewise made their way
into the cultural lexicon.
 Perhaps you are familiar with
Google's founding business
 conduct boundary, stated
simply as, "Don't be evil."
 Let's turn our
attention now to Adidas.
 Kasper Rorsted
will share with us
 the role that business conduct
boundaries play at the sporting
 goods company.

609d8e6f29c5fc0b825a1db4/ccc22203-9444-4b24-91ce-d4161dd89f2a/1071/908/#/>

5.5.1 The Power of Negative Thinking: Understanding
Boundary Systems
1:09 PM

Learning Objectives
 Define boundary systems and explain their role in managing risk.
 Describe the characteristics of effective business conduct boundaries.
 Evaluate codes of conduct and recommend design improvements.
 Create business conduct boundaries geared at managing risk in specific
business contexts.
on this lesson.

ccc22203-9444-4b24-91ce-d4161dd89f2a/1071/908/#/>
oundaries are always stated in the negative—they tell people what they must not do. Here
are some common behaviors that most businesses deem off-limits:
Off-Limit Behavior Example
Accepting gifts Employees are forbidden from accepting gifts
from suppliers.
Conflicts of interest Employees are forbidden from owning a
significant stake in a business that supplies goods
or services to the business.
Activities that violate Employees are forbidden from colluding to fix
anti-trust laws prices with competitors.
Disclosure of Employees are forbidden from revealing private
confidential company company information to anyone not entitled to
information know it.
Trading in company Employees are forbidden from buying or selling
securities based on shares of the company in anticipation of market
nonpublic information price reactions when private inside information
becomes available to the public.
Illegal payments to Employees are forbidden from making any
government officials payments in violation of local laws to expedite
services or receive preferential treatment.

ccc22203-9444-4b24-91ce-d4161dd89f2a/1071/908/#/>

 EUGENE SOLTES: As important
as guiding people positively
 about what to do
within an organization,
 also describing what not to
do is incredibly important
 because a lot of times
there are actual rules
 and policies and regulations
which are not so intuitive.
 To give one example, in
a bribery context, when
 meeting a client from
overseas-- for example,
 a government
minister-- they might
 have a son or
daughter that's just
 trying to get an internship
for the following summer.
 And so they ask
the sales manager,
 I have a promising
son who's just
 about heading to university.
 Could you take a
look at his resume?
 And potentially, could he work
at the company for the summer?
 Something that's all
well intentioned.
 From the sales manager that
wants to complete the deal,
 it makes a lot of sense
to say, sure thing.
 We'll take a look and give
the minister's son something
 to do for the summer.
 That action, something that
most of the major banks
 actually paid criminal
fines for doing,
 is something that's
not immediately
 obvious is a violation of
international bribery law--
 something that can lead to
literally criminal sanctions
 in the United States.
 So this is one of those
areas where telling people
 explicitly, if someone asks
for a summer internship
 while you're on a sales
meeting, you actually
 can't give it to them.
 You can politely say we
would bring this to HR,
 but you can't give them
that internship right
 then and there.
 Telling people explicitly what
they cannot do is exceedingly
 important in that context--
 actually far more
so than telling them
 what they should be
doing in that context.

01:21
01:27

 PROFESSOR SIMONS: There
are different ways
 of guiding employee behavior.
 In environments with a
high degree of control,
 where processes are
standardized and employees
 have little autonomy,
standard operating procedures
 are generally sufficient.
 But in highly
competitive environments,
 ones where people are
encouraged to innovate
for outcomes,
 businesses need to take
a different approach.
 Instead of telling
people what to do,
 they need to communicate
what not to do by means
 of formal boundary systems.
 As the level of performance
pressure increases and managers
 give more freedom to innovate
to meet customer needs,
become more essential.
 They are also critical when
franchise risk is high.
 Think back to ATH.
 Would it have made a difference
if employees were told clearly
 and consistently
that they must never
 cut corners on product
quality in a way that
 could impair patient safety?
 I believe that it would.
 Because boundaries place
limits on behaviors,
 it's easy to assume that
they reduce innovation.
 In fact, boundaries do
precisely the opposite.
 When designed well,
boundaries allow
 employees to respond
to new opportunities,
 both creatively and safely.
 Without boundaries
in place, employees
 may be reluctant to
reach for opportunities.
 They may be unsure which
courses of action are permitted.
 They may worry that any attempt
to innovate in new areas
 will result in disapproval.
 With clear boundaries
in place, employees
 know which behaviors
are acceptable.
 They can forge
ahead limited only
 by their abilities
and imagination.
 Examined through this lens,
we can see boundary systems
 as a lever that fuels, rather
than hinders, innovation.
 They allow businesses
to capitalize
 on what we might call the
power of negative thinking.
exist in two forms,
 business conduct
boundaries typically
 found in documents such
as codes of conduct,
 and strategic boundaries.
 Strategic boundaries identify
which opportunities should not
 be pursued because they do
not align with the strategy.
focus on ethical boundaries
 before turning to strategic
boundaries in the next lesson.
 Conduct boundaries have a
long history in human society.
 We mentioned the
Ten Commandments,
 which, like all boundaries,
are stated in the negative.
 You shall not kill;
you shall not steal.
 These boundaries
make it crystal clear
 what behaviors
are out of bounds.
 For Americans, the
First Amendment
 to the U.S. Constitution
is another classic example.
 It is also stated
in the negative
 to limit the power of
government over the people.
 It says quite simply,
Congress shall
 make no law limiting citizens'
freedom to speak, assemble,
 or practice their religion.
 This places clear limits
on the power and reach
 of the federal government.
 In the business
world, some boundaries
 have likewise made their way
into the cultural lexicon.
 Perhaps you are familiar with
Google's founding business
 conduct boundary, stated
simply as, "Don't be evil."
 Let's turn our
attention now to Adidas.
 Kasper Rorsted
will share with us
 the role that business conduct
boundaries play at the sporting
 goods company.

ccc22203-9444-4b24-91ce-d4161dd89f2a/1071/908/#/>

5.5.2 Designing Effective Business Conduct Boundaries
1:35 PM

5.5.2 Designing Effective Business

Conduct Boundaries
Business Conduct Boundaries at Adidas
Here is Kasper Rorsted on the approach he took while implementing business
conduct boundaries upon joining Adidas. Notice the point he makes about employee
intent—Adidas maintains business conduct boundaries not merely because they
recognize that some employees may willingly engage in unethical behavior, but
because they also recognize that without clearly stated limits, employees may engage
in such behaviors out of ignorance—a common reality Eugene Soltes pointed out
earlier.

609d8e6f29c5fc0b825a1db4/5bf92cd3-2894-48fe-a218-ff294bcb87de/1071/908/#/>
 Include ethical issues in corporate training programmes.
 Set up a board committee to monitor the effectiveness of the code

From <https://www.google.com/search?
q=better+communicate+and+reinforce+their+code+of+conduct&rlz=1C1GCEA_enUS920US920&oq=better+commu
nicate+and+reinforce+their+code+of+conduct&aqs=chrome..69i57.623j0j7&sourceid=chrome&ie=UTF-8>

 EUGENE SOLTES: The concern
about too many controls
 is actually a very real one.
 One of the world's
largest technology firms,
 actually, several
years ago, actually
 had the general counsel create
a challenge for the organization
 to try to significantly
reduce controls
 within the organization
because the feeling
 was that was actually
making the firm less
 competitive against these
smaller, more nimble technology
 firms that didn't
have those controls.
 Obviously, that made
people really nervous
 because every control was put in
place for a particular reason.
 But the idea was, can
we actually balance
 between having the right
controls to mitigate
 the right kind of risks and
not simply creating controls
 simply as a way of eliminating
every possible concern
 that we might have?
 And so there is that balance
that I think a lot of firms
 are trying to achieve.
 Young, nimble startup firms
tend to maybe not have
 enough controls.
 And some very
large organizations
 potentially have too many.
 I don't think any of us
expects that we'll ever
 face any issues with a regulator
or an enforcement agency.
 But that's the same
thing that every manager
 that I was sitting
with in prison
 also thought at
one point in time.
 And so how do we design
the systems and processes
 to really help us help ourselves
better spot and identify
 those issues at the time?
 How do we create those
systems which prevent us
 from falling down
that slippery slope
 when we might be compromised?

609d8e6f29c5fc0b825a1db4/789cef76-9676-4042-aa0b-3e06629ac022/1071/908/#/syllabus>

Congratulations
 on completing the fifth
module of Strategy Execution.
 In this module, you put
on the hat of a commander,
 as you identified the
risks in your business
 and learned how to manage them.
 Risks may not be
pleasant to think about,
 but they are
inevitable if you want
 to push your business
to innovate and remain
 competitive.
 Fortunately, even the most
competitive businesses
 can identify the risks
they must avoid and lessen
 the chances of harm.
 And they can do so
without sacrificing
 the entrepreneurial
behaviors and innovation
 you need to succeed.
 The first step is
understanding the types of risk
 your business might face.
 We introduced three
common sources of risk,
 and we explored how they can
blow up into franchise risk,
 jeopardizing the very
future of your business.
 You also need to consider
how internal conditions
 in your business
open it up to risk.
 We introduced the risk
exposure calculator
 as a tool you can use to
pinpoint problem areas
 and identify your overall
level of risk exposure.
 Unfortunately,
employee misbehavior
 can create risk too.
 Internal controls, such
as segregation of duties,
 can go a long way toward
eliminating opportunities
 for misbehavior.
 But we also need
boundary systems.
 They prevent employees
from rationalizing behavior
 by clearly stating what
they must never do.
 Boundary systems are
essential levers in businesses
 where you give people freedom.
 In such circumstances,
you do not
 want to stifle innovation
or entrepreneurial behavior
 by telling people
how to do their jobs.
 And if you want to
remain competitive,
 you will need to
innovate and adapt.
 So far, our course has
focused on implementing
 intended strategy.
 But this is not enough.
 To stay on the cutting
edge, businesses
 must also use patterns of
action to detect and capitalize
 on emergent strategy too.
 How can they do this?
 We will explore that question in
our final module of the course.

02:11
02:18

MODULE 5 LEARNING SUMMARY
We have provided a downloadable document summarizing the key points from this
module. We hope you will find this document useful both during the course and once you
have finished it.
Module 5 Learning Summary

PDF file summarizing key points and takeaways from the module
Module 5 Learning Summary.pdf

6.1.1 Module 6 Roadmap
Friday, July 2, 2021
8:27 PM

to the final module
 In this module, we return
to the fundamental tension
 that all managers face when
implementing strategy--
 balancing innovation
and control.
 We will begin by studying
two techniques that
 are important for
maintaining this balance.
 The first involves
placing limits
 on the types of
opportunities you
 pursue by setting
strategic boundaries.
 These are the subject
of our first lesson.
 Strategic boundaries have
never been more important.
 Thanks to new technologies,
globalization, and alliances,
 we are faced with more
opportunities than ever before.
 And it's easy to feel
that we can and should
 pursue all of them.
 But management time and
attention are limited.
 We simply cannot pursue
everything that comes our way.
 If we want to succeed,
we need to make
 tough choices about which
opportunities we will pursue.
 And this means clarifying
which opportunities are out
 of bounds.
 Of course, when we do
this, we inevitably
 place some restrictions on
people's desire to innovate.
 We need to set strategic
boundaries wisely and revisit
 them continuously to make
sure we don't inadvertently
 interfere with a business's
ability to stay relevant.
 This is where our
second technique
 and the subject of our next
lesson comes into play.
 We must use control
systems interactively,
 involving employees
at all levels
 in detecting and
adapting to change.
 Interactive control systems
are our fourth and final lever
 of control.
 They will help your
business remain
 innovative without
sacrificing the controls
 necessary for executing
strategy effectively.
 Next, we will pull it
together and review everything
 we've learned in the course.
 At this point, you will
be able to describe
 the role of each lever
in strategy execution.
 In our fourth and
final lesson, you
 will practice designing and
implementing a set of levers
 to help managers of a small
consulting firm, Automation
 Consulting Services,
address the challenges
 they face as they scale.
 Finally, in our
capstone activity,
 you will have the
opportunity to apply all
 that you have learned
throughout the course
 by developing an action
plan for implementing
 the levers of control
at your business.
 I am confident that you
will leave the course
 with the knowledge to
successfully use these ideas
 and techniques now and
in the years to come.

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6.1.1 Module 6 Roadmap

Maintaining the Balance Between
Innovation and Control


Course Capstone Preparation: Meeting

Reminder
At the end of Module 3, we asked you to coordinate a time to meet with a colleague, a
course peer, or another individual who can provide you with feedback on your work for
the course capstone exercise.
Please note the time and date you selected for this meeting. Before this meeting, you will
need to have completed all content in this module through 6.6.6: Course Capstone
Exercise: Implementing/Improving the Levers of Control for Your
Business (approximately 5.5 hours of work), so please plan your time accordingly.

Learning Objectives
o Define strategic boundaries and explain why they are valuable.
o Describe how to communicate and monitor strategic boundaries.
o Identify the tradeoffs and risks inherent in using strategic boundaries.


 DAVID RODRIGUEZ: One of the
things that's important for us
 to not just be successful but
to ensure that we continue
 to be relevant to
the public is yes, we
 have to ensure that what
the customer is buying today
 is being delivered faithfully
and measures up to that
 promise we have made to them.
 But at the same time,
it's so important
 that we're constantly asking the
question, being attentive to,
 what are our opportunities
to elevate that experience?
 And a lot of that comes
from our own associates
 and how we're
interacting with them
 and getting their insights
about the experience.
 Our focus on a day-to-day
basis on the properties
 has to be on execution of
the service experience.
 Having said that, I
will tell you certainly
 over the last
several years, we've
 also done quite
a bit of training
 in things like design thinking
and innovation skills.
 In fact, here at
corporate headquarters,
 we have a program we
call Innovation Days.
 It occurs over a couple days.
 It's open enrollment.
 We have dozens of courses.
 But what we're teaching are
skills related to innovation,
 sensitivity to
customer expectations,
 and how do you
experiment with things?
 And over time, we've rolled
that out through our continent
 divisions.
 And slowly but
surely, many hotels
 have implemented that training.
 So we remain very focused
on delivering and executing
 the service experience.
 But over time, we have
upskilled our organization
 so that more and
more associates also
 have a different
set of skills that's
 more about thinking
about the future,
 thinking about what's
changing, and again,
 bubbling up
suggestions about how
 we might refine the
products and services
 that we provide the public.

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6.1.2 Setting Strategic Boundaries
8:36 PM

6.1.2 Setting Strategic Boundaries

To balance innovation and control effectively, businesses must encourage
creativity and entrepreneurship while also ensuring that people are channeling
those behaviors in ways that align with strategy. Otherwise, employees’
entrepreneurial efforts may end up detracting from the business’s ability to execute
its intended strategy efficiently and successfully. Once again, tough choices must
be made: managers must think carefully about the kinds of opportunities
employees should and should not pursue. In this lesson, we will introduce a
technique to help you make and communicate these decisions: setting strategic
boundaries.

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TRANSCRIPT
Autoscroll
ON
In our last lesson,
 we identified how
important it is
 to protect the reputation
of your business
 by telling employees
what they must not do,
 and what behaviors are
unacceptable when carrying out
 their jobs.
 We do this by setting
business conduct boundaries.
 You should also tell
employees what opportunities
 they must not pursue.
 You can communicate
these restrictions
 by setting strategic boundaries.
 Together with business
conduct boundaries,
 strategic boundaries form one
of our levers of control--
 boundary systems.
 Business conduct
boundaries help businesses
 manage risks that arise from
employees making mistakes
 or committing misdeeds.
 Strategic boundaries
will help you
 manage another important risk--
 squandering your scarce
attention and resources
 on opportunities that do not
align with your strategy.
 It can be tempting to
try to be all things
 to all potential customers.
 But strategy by definition
involves choice,
 choosing what to do and
choosing what not to do.
 These are tough but
necessary decisions.
 Think back to our
lesson on core values.
 We saw that businesses that
prioritize certain constituents
 in their core values were better
equipped to provide direction
 to employees.
 The same principle applies here.
 Rather than encourage employees
to pursue each and every idea
 they come up with, you
must define the domain
 in which they can experiment.
 That way, you can ensure
that all their efforts
 are productive.
 Much like business
conduct boundaries,
 strategic boundaries
are most important
 when your business desires
high levels of freedom
 and innovation.
 You should not think
of this as a box that
 restricts innovation.
 Rather, you should
think of it as a way
 of ensuring that the
innovations your employees
 pursue align with the direction
of your business strategy.
 Again, like business
conduct boundaries,
 strategic boundaries are
stated in the negative.
 Here is one classic example.
 When he was CEO
of GE, Jack Welch
 told his managers that
the company would not
 retain any business
that could not
 achieve a number one or number
two position in its market.
 Many other businesses have
since used a similar directive.
 Note that Welch was not
saying what kind of businesses
 he would support, only
what kind of businesses
 he would not support.
 If you fail to set
strategic boundaries,
 your more focused competitors
will leap ahead of you
 as you waste time and money on
activities that do not produce
 value for your business.

Strategic Boundaries at BD
Here is Tom Polen with one example of how BD set a strategic boundary after acquiring
a new business, CareFusion. Recall that BD’s strategy is to combine technologies and
manufacturing capabilities to bring differentiated and integrated solutions to patients. As
Tom explains, the company decided to divest one of CareFusion’s portfolios after
deciding that they would not be able to bring differentiated value to that market.


 TOM POLEN: I think
that's something
 that's quite unique about
BD and allows us to--
 in the spaces that
we do play in,
 we're typically always
number one or number two.
 We don't play in
spaces where we can't
 reach those levels of
differentiation and value
 to the customer.
 So we're constantly
evaluating which markets
 we're best to participate in.
 And that allows us to
sometimes exit markets,
 sometimes make decisions
not to invest in markets
 that are being proposed.
 A good example is
just in the last year,
 we exited a billion dollar
respiratory business
 that we had acquired as
part of a broader portfolio.
 We did a $12 billion acquisition
of CareFusion a number of years
 ago.
 And they had a large
respiratory portfolio
 that as we looked
over our future,
 we didn't see us reaching
number one or number two.
 We didn't see an
opportunity to really bring
 differentiated technologies
into that space.
 And so we spun that
out in partnership
 with a private
equity group, where
 they can do much better
outside of the company
 and allow us to focus our
investments in the spaces
 that we can really add value to.


Which of these hypothetical statements is an example of a strategic boundary?
Check all that apply.
Marriott: “We will focus our attention on opening new luxury properties.”
While this statement does describe types of opportunities to focus attention on, it does
not clearly state in the negative what opportunities employees should avoid.
Go Mobile: “Team leaders must not take old phone models sitting in inventory for their
own use.”
While this is a boundary stated in the negative, it does not tell employees what
opportunities they should not pursue. It instead tells them what behaviors are off-limits.
Therefore, it is a business conduct boundary.
Quiet Logistics: “We will not accept customers who sell low-margin products, such as
groceries.”
This statement outlines in the negative which opportunities employees should not pursue.
Later in the lesson, Bruce Welty will elaborate on this strategic boundary.


Strategic Boundaries at Adidas

In our last lesson, we learned about business conduct boundaries at Adidas. Now, Kasper
Rorsted will describe the strategic boundaries he has established for the company.


 KASPER RORSTED:
We're quite clear
 on our strategic
directions and also
 where we want to be and not be.
 So the first one is
the overriding one--
 we want to be the best
sport company in the world.
 That means we don't want
to be the best fashion
 So it's a very
important part, meaning
 the vast majority of our
revenue has to come from sport.
 Then we have-- within one of
our strategic initiatives,
 we have what we call portfolio.
 We've decided we are in
the software business, not
 the hardware business.
 So in order to make certain that
we had a very clear portfolio,
 one of the first things
we decided when I started
 was to sell our golf business.
 Our golf business is
called TaylorMade.
 The next part was to sell our
business related to ice hockey
 equipment, which is called CCM.
 So we separated those
from the Adidas business,
 because they're predominant
producers of equipment,
 and we are based in
manufacturing shoes
 and apparel.
 So we are clear on which part
of the sporting goods business
 do we want to be in, not
equipment, but sport.
 And then we break it down
on a category level and say,
 we want to be in football.
 We want to be in running.
 We want to be in x sports.
 We're not in sailing.
 We're not in cycling.
 And we define where we
are and where we're not.
 And at the same time from
a country standpoint,
 we define where we
want to be and not.
 That is a more fluid one,
because eventually the "not"
 is also related to-- can
we make money in the region
 or country we are in?
 And eventually if we can't
make money in a country,
 we will not be there.
 The same, by the way,
goes for a category.
 Unless it has a very high
brand exposure or value for us,
 that category.
 I believe when you tell
people what not to do,
 you create freedom
in a framework,
 so it allows a higher
freedom in order
 to explore the boundaries.
 When you tell them what to do,
you become very prescriptive.

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Analysis: Stipulating Market Positions to be Avoided at

Adidas
Notice that the strategic boundaries Kasper describes focus on market segments to avoid.
Although the company draws on celebrity influencers to design its athletic apparel
(which, as a result, is often more fashionable than competitors'), the goal is not to be the
best fashion company. Senior executives want to focus the attention of the organization
on being the best sports company in the world. Rather than focusing on fashion design in
ways that will divert attention from that goal, employees must devote all their efforts to
support their sports-focused goal.
Kasper does not stop there. Sporting goods is a very broad category. A business could
easily try to enter every sporting market in an attempt to dominate the industry. But no
company has the resources to do everything well. As a result, Kasper restricts Adidas’s
activities to the markets where they are best positioned to succeed—running shoes and
apparel. He has established strategic boundaries that will not allow the business to invest
in sporting equipment. Similarly, he is clear that, within running shoes and apparel, the
focus will be on football (soccer in the United States) and running: no sailing or cycling.
In addition to stipulating market positions to be avoided, strategic boundaries can also
stipulate minimum levels of financial performance and minimum competitive position in
the market.
For example, for many years ADP, the payroll processing company, maintained strategic
boundaries stipulating that they would not invest in a new business opportunity unless it
could achieve a number one or number two position in the industry within five years,
deliver 15% annualized growth, achieve a minimum revenue threshold, generate a price
premium versus competition, and standardize its product.
Importantly, these boundaries did not say what opportunities to pursue: instead, they
clarified the types of opportunities that would not be supported.
These boundaries brought great success for ADP. Before Amazon and Google and the
rest of today’s technology companies took off, ADP had the longest run of double-digit
earnings per share increases of any company traded on any U.S. stock exchange.
Proposing a Strategic Boundary

Identify and describe a strategic boundary for your business (e.g., a market segment,
customer type, deal, project, or region to be avoided). This could be a strategic
boundary that currently exists or one you believe should exist.

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6.2.3 Using Control Systems Interactively
Sunday, July 4, 2021
12:57 AM

TRANSCRIPT
Autoscroll
ON
 PROFESSOR SIMONS: We know that
strategic uncertainties keep
 top managers awake at night.
 If a business actually wants
to do something about them,
 they need to get everyone else
in the organization monitoring
 them too.
 But how can a business,
especially a large one
 with 10,000 or even 50,000
people, actually do this?
 To answer this question, I
want to share a brief story
 with you.
 Some years ago, I
was interviewing
 the CEO of a large company.
 On his desk, he had a
brown leather binder.
 He explained that
it was where he
 kept track of all the projects
he was personally monitoring.
 In fact, the tabs of that
binder dictated the agenda
 of his Monday morning meetings.
 The binder was clearly
a very big deal to him.
 A few weeks later, I went
back to interview people who
 were two and three levels down.
 And what I discovered was
that every single one of them
 had a brown leather
binder just like his.
 Now the company had not
handed out the binders.
 Instead, the managers who
reported up to the CEO
 recognized that if
they wanted to survive,
 they had to copy the
boss's information system.
 So every Monday morning, they
all went into that meeting
 with their own brown
leather binders.
 And they knew that questions
about those particular projects
 were coming.
 What's the lesson in this story?
 It's that everyone watches
what the boss watches.
 If you devote your
time and attention
 to asking questions about
certain projects or systems
 about specific customer
data and initiatives,
 and if you pull your employees
into frequent conversations
 about them, you can bet that
those strategic uncertainties
 will be keeping them
awake at night too.
 When you use a
system in this way,
 you are using it interactively.
 Let's pause for a
brief definition
 of our final lever of control.
are the formal information
 systems managers use to
personally involve themselves
 in the decision activities
of subordinates-- decision
 activities that relate to and
impact strategic uncertainties.
 Managers focus a
disproportionate amount
 of their time and attention
on the information collected
 by these systems,
encouraging employees
to do the same.
 By refocusing
attention in this way,
 interactive control systems
help managers shape the patterns
 of action in a business.
 They put pressure on employees
throughout the organization
 to monitor changes in the
 and to respond to them with
innovative action plans.
 To apply this pressure, you
must remember that you're not
 the one with the answers.
 You need to be the one
asking the questions,
 the right questions about
what has changed, why,
 and what are we
going to do about it.
 With this focused
top-down questioning,
 you will drive that critical
information up from the bottom.
 Even if you hire smart people
and encourage innovation
 and learning, this
information sharing
 will not happen on its own.
 You need to push people
out of their comfort zone,
 forcing them to
take risks and move
 the needle for the business.
 To make that happen, you must
drive the top-down questioning.
 For the CEO with a
brown leather binder,
 this is precisely what happened.
 Because employees
knew that they would
 be grilled about the
projects that were summarized
 in that binder, they
devoted much more
 of their own attention to them.
 They came to those
meetings prepared.
 This attention translated
into productive dialogue
 at those Monday meetings as
they shared new information,
 discussed ways to respond,
and learned together
 about how to adapt the
business going forward.
 And this focus
trickled down through
 the entire organization.
 All driven by the maxim--
 everybody watches
what the boss watches.
ccess the elaborated transcript
PROFESSOR SIMONS: We know that strategic uncertainties keep top managers awake
at night. If a business actually wants to do something about them, they need to get
everyone else in the organization monitoring them too. But how can a business,
especially a large one with 10,000 or even 50,000 people, actually do this?
To answer this question, I want to share a brief story with you. Some years ago, I was
interviewing the CEO of a large company. On his desk, he had a brown leather binder.
He explained that it was where he kept track of all the projects he was personally
monitoring. In fact, the tabs of that binder dictated the agenda of his Monday morning
meetings. The binder was clearly a very big deal to him.
A few weeks later, I went back to interview people who were two and three levels down.
And what I discovered was that every single one of them had a brown leather binder just
like his. Now the company had not handed out the binders. Instead, the managers who
reported up to the CEO recognized that if they wanted to survive, they had to copy the
boss's information system.
So every Monday morning, they all went into that meeting with their own brown leather
binders. And they knew that questions about those particular projects were coming.
What's the lesson in this story? It's that everyone watches what the boss watches. If you
devote your time and attention to asking questions about certain projects or systems
about specific customer data and initiatives, and if you pull your employees into frequent
conversations about them, you can bet that those strategic uncertainties will be keeping
them awake at night too.
When you use a system in this way, you are using it interactively. Let's pause for a brief
definition of our final lever of control. Interactive control systems are the formal
information systems managers use to personally involve themselves in the decision
activities of subordinates-- decision activities that relate to and impact strategic
uncertainties.
Managers focus a disproportionate amount of their time and attention on the information
collected by these systems, encouraging employees throughout the organization to do the
same. By refocusing attention in this way, interactive control systems help managers
shape the patterns of action in a business. They put pressure on employees throughout the
organization to monitor changes in the competitive environment and to respond to them
with innovative action plans.
To apply this pressure, you must remember that you're not the one with the answers. You
need to be the one asking the questions, the right questions about what has changed, why,
and what are we going to do about it.
BEGIN PYRAMID DESCRIPTION
Pyramid top labeled TOP-DOWN QUESTIONS. 4 levels appear beneath the top and are
named Strategies, Learning, Tactics, and Actions. Downward arrows point from TOP-
DOWN QUESTIONS to each of these 4 levels. A question mark sits on top of each
arrow. Arrows on the left point upwards from Actions to Tactics, from Tactics to
Learning, and from Learning to Strategies. Another arrow points upward from Actions to
Learning. Arrows on the right point downward from Strategies to Learning, from
Learning to Tactics, and from Tactics to Actions. Another arrow points downward from
Learning to Actions. Animated arrows emphasizing upward motion point upward from
the middle of each term: from Actions to Tactics, Tactics to Learning, and Learning to
Strategies.
END PYRAMID DESCRIPTION
With this focused top-down questioning, you will drive that critical information up from
the bottom.
Even if you hire smart people and encourage innovation and learning, this information
sharing will not happen on its own. You need to push people out of their comfort zone,
forcing them to take risks and move the needle for the business. To make that happen,
you must drive the top-down questioning.
For the CEO with a brown leather binder, this is precisely what happened. Because
employees knew that they would be grilled about the projects that were summarized in
that binder, they devoted much more of their own attention to them. They came to those
meetings prepared. This attention translated into productive dialogue at those Monday
meetings as they shared new information, discussed ways to respond, and learned
together about how to adapt the business going forward. And this focus trickled down
through the entire organization. All driven by the maxim-- everybody watches what the
boss watches.
It is important to note that interactive control systems are not a unique set of systems that
managers design. Instead, they are existing control systems that managers choose to use
to stimulate debate rather than for diagnostic purposes. Imagine if Tom Polen decided to
begin reviewing reports on one of BD’s Key Driver Goals more intensively—perhaps
their innovation goal. Previously, he might only turn his attention to new product
development reports if a report came back with “red” warning areas—a negative
variation compared to a target. Now, he decides to review the report in full every week,
engaging peers and subordinates in frequent dialogue and debate over BD’s plans. In his
questioning, he would be just as interested in positive surprises as he would be in
negative variances. By his consistent focus and questioning of subordinates, he would
then be using that system interactively.
Interactive control systems are defined not by their technical features but
by how managers use them. You know that a system is being used interactively when:
 Top managers devote a great deal of their personal time and attention to the
information produced by the system. (Notice that this is the opposite of the
“management by exception" approach used for diagnostic control systems.)
 Data in the system provides information related to strategic uncertainties.
 Managers at all levels of the organization debate and discuss this
information in face-to-face meetings (in anticipation of questioning by their
bosses).
 Debate and dialogue from the interactive system triggers revised action
plans.

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Interactive Control Systems at Johnson &

Johnson

TRANSCRIPT
Autoscroll
ON
To better understand
 the importance of interactive
control systems, let's turn
 to Johnson & Johnson.
 We will study how they use
profit plans interactively
 to remain at the forefront
of their industry decade
 after decade.
 I want to draw your
attention to one of J&J's
 Boston-based subsidiaries.
 This company designed
surgical equipment
 as part of J&J's professional
products business.
 Historically, the
subsidiary competed
 through high-quality innovation.
 But as hospitals began to place
more emphasis on cost cutting,
 they realized their strategy
would have to change.
 Fortunately, Johnson
& Johnson was already
 using a rigorous process
to detect and address
 changes like this.
 The chart here
emphasizes how involved
 everyone in the organization
was in this process.
 All J&J companies were
required to produce annual 5-
 and 10-year financial plans.
 Senior managers began working on
these reports in early January.
 They typically took
six months to complete
 and required a high
degree of interaction
 with managers throughout
the organization.
 Now many companies
do this and you
 may be cringing at the
amount of work involved.
 But what is different
in the J&J approach
 is that it's entirely bottom-up.
 Beginning with the previous
year's 5- to 10-year forecast,
 local managers developed
business plans by segment
 and created pro forma income
statements for competitors.
 A key part of the
process involved
 developing new forecasts for
the current and upcoming year
 while keeping the same long-term
5- and 10-year forecasts.
 This created input for
debate and dialogue.
 Managers look not only
for negative variances,
 as they would when using
diagnostic control systems,
 but for positive surprises too.
 The key to the system was
the ongoing questioning
 from top managers, which
generated debate and discussion
 throughout the organization.
 Would the new forecast
for the upcoming year
 change expectations for
hitting the five-year goal?
 If not, what had changed?
 And importantly, what are
we going to do about it?
 The questions that managers
ask their subordinates
 encouraged a continuing
bottom-up flow
 of critical information.
 Notice that these questions
are grounded in actual data.
 This is not scenario
planning or people
 sitting around a table
brainstorming about the future.
 J&J's process instead relies
on reporting actual data
 and changed assumptions to
trigger debate and action
 plans about how to
respond going forward.
 Once functional managers
completed these forecasts,
 the information was
sent up the chain.
 It was thoroughly
reviewed and debated
 by the executive committee and
the CEO of Johnson & Johnson.
 STRENGTHS AND DRAWBACKS
 As you may have
noted, J&J's process
 demands a substantial commitment
of time and attention.
 Indeed, interactive
control systems
 are attention enhancers.
 If you want to maximize
your return on management,
 you must be sure that the
system you have chosen to use
 interactively is the right one.
 In other words, you must be
careful to devote your time
 and attention to
the most pressing
 strategic uncertainties
for your business.
 The most important
point is this.
 Your choice of which
system to use interactively
 signals to the rest
of the organization
 where they should be focusing
their time and attention as
 well.

PROFESSOR SIMONS: To better understand the importance of interactive control
systems, let's turn to Johnson & Johnson. We will study how they use profit plans
interactively to remain at the forefront of their industry decade after decade. I want to
draw your attention to one of J&J's Boston-based subsidiaries. This company designed
surgical equipment as part of J&J's professional products business.
Historically, the subsidiary competed through high-quality innovation. But as hospitals
began to place more emphasis on cost cutting, they realized their strategy would have to
change. Fortunately, Johnson & Johnson was already using a rigorous process to detect
and address changes like this. The chart here emphasizes how involved everyone in the
organization was in this process.
BEGIN CHART DESCRIPTION
Chart with Executive Committee, Group V.P., Company Board, and Functional
Departments on the left side. At the top are listed months of the year: January, February,
March, April, May, June, July, August, September, October, November, and December.
The Executive Committee reviews and adjusts the plans and the Group V.P. and
Company Board debate and adjust those plans. The Functional Departments review.
Animated arrows point from each step in a column both upward and downward,
emphasizing discussion.
An animated arrow points from box titled Mission Statement to boxes titled 5/10 Year
Plan and Profit Plan.
END CHART DESCRIPTION
All J&J companies were required to produce annual 5- and 10-year financial plans.
Senior managers began working on these reports in early January. They typically took
six months to complete and required a high degree of interaction with managers
throughout the organization.
BEGIN CHART DESCRIPTION
Same chart from above with the months January through July emphasized. An animated
arrow points through the chart, emphasizing bottom-up review.
END CHART DESCRIPTION
Now many companies do this and you may be cringing at the amount of work involved.
But what is different in the J&J approach is that it's entirely bottom-up. Beginning with
the previous year's 5- to 10-year forecast, local managers developed business plans by
segment and created pro forma income statements for competitors.
A key part of the process involved developing new forecasts for the current and
upcoming year while keeping the same long-term 5- and 10-year forecasts. This created
input for debate and dialogue. Managers look not only for negative variances, as they
would when using diagnostic control systems, but for positive surprises too. The key to
the system was the ongoing questioning from top managers, which generated debate and
discussion throughout the organization.
Would the new forecast for the upcoming year change expectations for hitting the five-
year goal? If not, what had changed? And importantly, what are we going to do about it?
The questions that managers ask their subordinates encouraged a continuing bottom-up
flow of critical information. Notice that these questions are grounded in actual data. This
is not scenario planning or people sitting around a table brainstorming about the future.
J&J's process instead relies on reporting actual data and changed assumptions to trigger
debate and action plans about how to respond going forward.
Once functional managers completed these forecasts, the information was sent up the
chain. It was thoroughly reviewed and debated by the executive committee and the CEO
of Johnson & Johnson. As you may have noted, J&J's process demands a substantial
commitment of time and attention. Indeed, interactive control systems are attention
enhancers.
If you want to maximize your return on management, you must be sure that the system
you have chosen to use interactively is the right one. In other words, you must be careful
to devote your time and attention to the most pressing strategic uncertainties for your
business. The most important point is this. Your choice of which system to use
interactively signals to the rest of the organization where they should be focusing their
time and attention as well.


6.1.3 Communicating Strategic Boundaries
11:52 PM

At this point, you
 should have a
clear understanding
 of strategic boundaries.
 Now I want to take
some time to focus
 on why they are so important to
successful strategy execution.
 We know that people have
a deep desire to innovate.
 And we know that organizations
often block employees
 from acting on that desire.
 How so?
 By failing to tell people
what types of innovation
 are acceptable.
 Strategic boundaries help
to manage this tension.
 This is not an easy
tension to deal with.
 When your success depends on the
creativity of your employees,
 the last thing you want
to do is to tell them
 what to do or dictate
what opportunities
 they should pursue.
 You want them to exercise their
creativity and surprise you.
 You want them to come up
with ideas that you never
 would have thought up yourself.
 You don't want to stifle them.
 But the flip side of this is you
don't want those same employees
 chasing ideas and spending
their time on opportunities
 that aren't going to support
your business strategy.
 You need to have some
guardrails in place.
 Boundaries are effective
guardrails for two reasons.
 First, people pay
much more attention
 when they're told what
not to do instead of when
 they're told what to do.
 They sit up straight
and listen carefully.
 And second, even your
most creative employees
 want to know which
opportunities are off limits.
 Often, businesses will
use statements like,
 "We do whatever it takes
to satisfy our customers."
 And then an employee will try
some innovation or experiment
 that they believe will provide
benefit to the customer,
 but then they get
their wrist slapped.
 Oh, we don't do that
at this company.
 He or she tries
another experiment
 and gets their
wrist slapped again.
 In this kind of environment,
people quickly get gun-shy.
 They no longer feel confident
that they know what is allowed
 and what is not allowed.
 So they stop experimenting.
 And the business loses
out on the innovation
 they might have uncovered.
 This is why you must be
crystal clear on what customers
 your business will not serve,
what discounts you will not
 give, what tie-in arrangements
they must avoid, and so on.
 Once you've shared
these boundaries,
 employees will know by deduction
that any opportunities not
 listed are fair
game for innovation.
 And then they can
proceed with confidence,
 knowing that their efforts
won't come back to bite them.

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Communicating Strategic Boundaries at
Quiet Logistics
Here is Bruce Welty commenting on a strategic boundary he established at Quiet
Logistics—the business will not accept customers who sell low-margin products. As you
watch the video, note the reasoning Bruce provides for setting this boundary. As you will
learn, communicating your reasons for setting a strategic boundary will help your
employees understand why adhering to it will help the business succeed.


 BRUCE WELTY: We decided
a long time ago,
 and this goes back to our
own personal experience,
 that there are markets that
are very difficult to be
 successful in in e-commerce.
 And one of them, for instance,
is the food delivery business.
 Because if you think about
a typical grocery order,
 it contains about 50 line items.
 And most of those items cost a
couple dollars each on average.
 It's not very much.
 And yet we're layering on
a lot of cost, new cost,
 to that order in the form
of handling and delivery
 or shipping and handling.
 You may have seen
that on your invoices.
 So how do you layer
that much cost
 onto something that just is
fundamentally that low price?
 And the answer is you can't.
 So we started out and
immediately thought,
 fundamentally, the product
has to have enough value in it
 that you can afford to
put that cost on it.
 And we looked around at
all the different markets.
 We fell into apparel because our
first customer was Gilt Groupe.
 And Gilt Groupe was born
in a fortuitous time.
 They picked up a lot
of the extra inventory
 in the late recessionary
era, 2008 and 2009.
 And most of their customers
were high-end apparel.
 And we saw that that market
was a very attractive market
 for shoppers.
 They like to be able
to buy things online.
 And we were able to latch
onto that as a market.
 And I'm constantly reinforced
that that's the right thing
 to do.
 Because every time we deviate
from that, we regret it.
 So we're very happy
in that market,
 and we intend to stay there.
 I think over time, we'll start
to see that the industry will
 evolve and there will be maybe
fewer things available online.
 Because I think that you can't
run an unprofitable business
 forever.
 You see companies like Peapod
and FreshDirect out there--
 no offense to those guys.
 But they've been at it for
a long time, over a decade,
 and they still don't make money.
 So at some point, people will
tire of that business model
 and say, we're no longer
going to support that.
 And I think we're seeing it
even in companies like Amazon
 and Walmart, where they're
just changing their model
 to say, look, we have to
sell higher-margin products
 on the web.
 We have to be thinking
about profits.
 The idea of just constantly
selling and gaining
 market share, it's a good
way to start a business,
 but at some point you have
to get serious about profits.


Analysis: Describing the Logic Behind Strategic

Boundaries
Quiet Logistics has decided that they will not accept customers who sell low-margin
commodity products. Instead, they focus their attention on customers who sell premium-
priced luxury goods to brand-conscious consumers. Notice how clearly Bruce outlines
the reasoning behind this strategic boundary. As he explains, accepting low-margin
customers would hurt Quiet Logistics’ financial viability. The pick, pack, and ship
processes underlying e-commerce entail high costs: layering those costs onto low-cost
products is a recipe for financial losses. A business that follows this strategy may gain
market share and revenue, but it will be very difficult (if not impossible) to operate
profitably.
Bruce supports his reasoning by pointing out that other businesses that have chosen to
accept low-margin customers, such as Peapod and Fresh Direct, have been unable to
produce a profit. Bruce thus not only communicates the value of this boundary, he also
outlines the risks Quiet Logistics would face if they violated it—compromised
profitability.
Announcing Your Strategic Boundary

Imagine that you are preparing to announce the strategic boundary you identified in the
previous activity. Draft a one-paragraph email to employees that communicates the
reasoning behind this boundary and describes the role it will play in helping your
business succeed.
If the boundary you identified already exists, use this announcement as an opportunity to
articulate the precise opportunities that are off-limits and reinforce the boundary’s
benefits.


6.1.4 Considering Opportunity Costs
Saturday, July 3, 2021
12:29 AM

6.1.4 Considering Opportunity Costs
The Risks of Setting Strategic Boundaries
At the start of the lesson, we said that strategic boundaries help managers
maximize return on management by focusing scarce attention on the opportunities
most critical to success. What is one potential downside or risk that you think
businesses should consider when setting strategic boundaries?

609d8e6f29c5fc0b825a1db4/025b135c-4614-4f7d-8c6a-cef7bd7b9dca/1071/908/#/syllabus>

 PROFESSOR SIMONS: When you
set strategic boundaries,
 there are two risks you
need to keep in mind.
 The first is the
opportunity cost
 that comes with turning
away potential new business.
 In essence, you are
trading growth for focus.
 Without any boundaries, you
will almost always grow faster.
 But you will lose focus.
 And focus is the
essence of strategy.
 Earlier in the
lesson, you read about
 the minimum
 standards set by ADP.
 ADP was upfront about the fact
that they sacrificed growth
 by setting this boundary.
 But the one thing
they did say was
 that, by setting
this boundary, no one
 is more focused than them.
 And their focus paid off.
 As you learned, ADP
had the longest run
 of double-digit earnings
per share increases
 of any company traded on
any U.S. stock exchange.
 The second risk is that
you will inadvertently
 close off opportunities that
are essential for remaining
 on the cutting edge
of the marketplace
 and end up falling
behind competitors.
 To make sure this
doesn't happen,
 you need to revisit your
strategic boundaries
 on a regular basis to
ensure that they still
 reflect the realities
of your marketplace.
 ADP once again provides
us with a great example.
 Their strategic
boundaries take the form
 of a one-page checklist.
 Every three years, they
review that checklist
 to make sure it's still
relevant to the changing
 competitive dynamics
of their industry.
 You must be prepared
to revisit and revise
 your strategic boundaries.
 Unlike business
conduct boundaries,
 such as the ten
commandments, they
 should not be set in stone.
 You should revise
them to reflect
 the changing competitive
dynamics of your industry.


Strategic Boundaries and Opportunity Costs

at C3.ai
Let’s consider opportunity costs first. Tom Siebel has shared with us how selective C3.ai
is when choosing the types of customers they will work with. Employees throughout the
organization know that they should turn away potential customers that do not meet these
criteria. Here, Tom reviews those customer selection criteria.


 TOM SIEBEL: Our customer
today is typically
 a $30 to $300 billion business.
 And we cannot fail at
one of these projects.
 We need 100% project success.
 And so we have to
be very careful
 as it relates to the
organizations with which we
 elect to do business, OK.
 Number one, it needs to be
a high level of commitment,
 like at the level of
the CEO, where there's
 a mandate to get it done.
 Secondly, we need to be sure
that the organization has
 the technical wherewithal
to take to get the job done.
 Can they get the data?
 Can they clean the data?
 Can they provide us the data?
 Do they have the requisite
technical skills to succeed
 in a project this complex?
 And finally, is the
project tractable?
 One of the problems
with AI is people
 believe that AI is magic.
 And people believe that AI
that you can solve problems
 that are really unsolvable.
 And this idea that we can use
AI for demand forecasting,
 for example, I mean, you
know, it's not possible.
 If we could use AI for
demand forecasting,
 we could predict, you know, how
many shares of Google somebody
 is going to buy tomorrow
or the market is
 going to buy tomorrow.
 If we could predict how
many shares of Google
 that the market is going to buy
tomorrow or name the security,
 I can assure you we would not
be in the software business.
 And this would be-- this
is a non-tractable problem.


Analysis: Justifying the Long-Term Benefits of Strategic

Boundaries at C3.ai
By setting strategic boundaries for the type of customers they will not do business with,
C3.ai is undoubtedly sacrificing revenue growth in the short term. This may seem like an
unorthodox approach for a young company. Some startups are eager to accept all
potential new customers and believe they must try to serve all of their needs to generate
revenue, gain market share, and build brand awareness. They believe the opportunity
costs of sacrificing those gains are too high at this fragile stage. In other words, they
think they simply cannot afford to be picky.
C3.ai has determined that sacrificing such gains in the short term is essential to success
in the long term. Their strategic boundaries force them to focus their attention only on
opportunities that will eventually demonstrate their capabilities to the marketplace. This
is especially important in a sector where, because of the technical complexity of the
work, failure is very likely. Tom notes that many customers think that AI is “magic.” If a
failure were to occur, customers might not understand the reason. They might blame
C3.ai for the failure, when the issues may have actually originated with their own data
limitations, commitment to invest, or other constraints. Other potential customers could
then hear about this implementation failure and be reluctant to work with C3.ai.
To build their business, C3.ai is constantly seeking positive client referrals. Their large
clients have brand recognition, prestige, and connections to other large potential
customers that could become liabilities if the relationship deteriorated.
In other words, C3.ai cannot afford to not be picky. By ensuring that every customer they
accept will eventually be a happy customer, C3.ai is positioning itself to be seen as the
go-to solution for artificial intelligence challenges. They believe that long-term gains will
follow.
Let’s consider a different example: Imagine that a bank was adopting a new strategy of
focusing exclusively on services for high-net-worth customers. They developed
a strategic boundary stating that the bank should turn away clients who cannot generate
at least $10,000 in annual fee revenue. We can imagine that a branch manager might balk
at this directive. What if someone walks in for a one-time transaction that would generate
a $3,000 fee? Should that person really be turned away?
The answer, surprisingly, is yes. The reason is that these types of transactions may seem
like “low hanging fruit,” but they can lead to a slippery slope. Soon, it becomes
acceptable to do business outside the established boundaries, and employees find
themselves spending more and more of their time on customers outside the target market
… and then wondering why their strategy is faltering.
The prospect of turning away growth can be uncomfortable. But remember that 90% of
startups fail. Too often this failure is due to attempts to chase every potential revenue
stream that managers can think of—leaving the business spread too thin and without a
real strategy. Smaller but more focused startups, like C3.ai, have a better chance of
thriving in the long term because they have clearly defined their strategy and limit their
activities to those that are aligned to that strategy.


6.1.5 Reassessing Strategic Boundaries
1:10 AM
Opportunity costs inevitably
 arise when you set
 But if you set those
boundaries thoughtfully,
 you will find that the costs are
worth it, at least for a while.
 Let's turn our attention now
to the second risk of setting
 strategic boundaries--
 the risk that, in
the long term, they
 will prevent you from
responding to important changes
 in your competitive environment.
 Remember what Kasper
Rorsted said earlier.
 His team often revisits
strategic boundaries
 that prohibit businesses
in certain countries.
 If changes in the
 make doing business in a
country more attractive,
 they need to erase
that boundary.
 For example, perhaps
demand for soccer apparel
 has risen in a country where
soccer has become more popular.
 Adidas must now
invest rather than
 restrict attention in this area
in order to remain competitive.
 When businesses keep outdated
strategic boundaries in place,
 they risk failure.
 Many businesses have gone under
because of this oversight.
 One of the most
famous examples is
 Blockbuster, the movie
rental chain that
 rose to success in the 1990s.
 A decade later, Blockbuster
had the opportunity
 to purchase Netflix.
 They declined for a
number of reasons.
 One was that they had
set a boundary that
 prohibited pursuing
opportunities outside
 of traditional retail.
 For similar reasons, they also
ignored the threat of Redbox,
 a rental kiosk business.
 A number of factors
ultimately contributed
 to Blockbuster's downfall.
 But their commitment to an
outdated strategic boundary
 was a major mistake.
 Blockbuster spent
the next decade
 being reactive and
playing catch-up.
 Its executives could not
agree on a new strategy.
 Today, the business
is just a memory.
 To avoid a similar fate,
you must periodically
 revisit your
 These boundaries are
essential to the success
 of your current strategy.
 But few strategies are
effective in the long term
 if they're static
and fail to adapt
 to changes in the marketplace.

609d8e6f29c5fc0b825a1db4/f5c5067f-5ec3-4419-b97c-85bdb1812f07/1071/908/#/syllabus>
Revisiting Strategic Boundaries at Quiet
Logistics
Bruce Welty has set another strategic boundary at Quiet Logistics: They typically do not
do business with retailers, unless they prove that they can be competitive with Amazon.
Here is Bruce on the reason he has set that boundary.
This strategic boundary was active at Quiet Logistics as of 2019. As you watch the
video, consider how much of Bruce’s description of the competitive environment still
holds true today.

609d8e6f29c5fc0b825a1db4/f5c5067f-5ec3-4419-b97c-85bdb1812f07/1071/908/#/syllabus>

RANSCRIPT
Autoscroll
ON
 BRUCE WELTY: We don't
take low-margin clients
 because we know that eventually,
they won't be successful,
 and it's just a matter of time.
 We also tend to stay away a
little bit from retailers.
 And I know that's odd because
people might say, well,
 that's a big group of customers.
 But the truth is
retailers have, right now,
 a challenging environment.
 And it's mainly
because unless they're
 doing something
that's unique, they
 have to compete with Amazon.
 And Amazon has done
a very good job
 of dominating retail,
especially e-commerce retail.
 They're getting, right
now, 50% of the growth.
 And they've trained the customer
to just go to the Amazon site
 to buy whatever they need.
 So if you're competing
with Amazon right now,
 it's very, very difficult.
 And so we look at
all these retailers
 and we just say, "Huh,
what's making you
 able to compete with Amazon?"
 And the truth is right now,
it's hard to find that thing.
 There's some--Target
has done a good job,
 and Walmart is Walmart.
 And there's some other
great, big companies
 that compete well.
 But in general, if you don't
have a product that has some
 differentiation...
 And the brands,
on the other hand,
 they can dictate who
sells their products.
 They can actually
say, "No, we're
 not going to sell
through a retailer.
 We're not going to sell
through this particular online.
 We're going to control our
brand and control our channel."
 So it's a world now where the
brands dominate the channel.
 It used to be the
other way around.

6.2.1 Uncovering Emergent Strategy
1:28 AM


Identifying Opportunities and Threats in Your
Competitive Environment

From <https://safe.menlosecurity.com/https://courses.myhbx.org/student/concept/609d8e6f29c5fc0b825a1db4/b6437109-
5ba5-4c97-9699-c7f2b327161f/1071/908/#/syllabus>
Learning Objectives
 Explain why it is critical for managers to identify and monitor strategic uncertainties.
Describe how interactive control systems help businesses foster organizational

learning.
 Identify whether a control system satisfies the necessary criteria to be used
interactively.
 Identify which control systems will be most beneficial to use interactively based on the
nature of the strategic uncertainties a business faces.
Lesson Time Estimate: 85 minutes. Most participants spend between 60 and 115 minutes on this
lesson.


PROFESSOR SIMONS: So far in the course, we have focused on how you can implement your
intended strategy. Intended strategies are the plans managers attempt to implement in a specific
product market based on analysis of their competitive dynamics and current capabilities. We've also
discussed the levers that managers can use to implement those strategies-- belief systems, boundary
systems, and diagnostic control systems.
But not all strategies are intended. Some strategies emerge spontaneously in organizations as
employees respond to unplanned threats and opportunities. These are what we call emergent
strategies. Then, of course, is what actually happens. Realized strategies are a combination of
intended strategies and emergent strategies.
BEGIN FLOWCHART DESCRIPTION
Intended Strategy goes through a process, reaches a target, and yields output of realized strategy.
Emergent Strategy cycles through 4 states. Business Strategy leads to Strategic Uncertainties, which
lead to Interactive Control Systems, which lead to Debate and Dialogue, which lead back to Business
Strategy. Eventually this Emergent Strategy cycle yields a realized strategy.
END FLOWCHART DESCRIPTION
Consider Intel. Many people don't remember that Intel was originally a producer of low-cost memory
products. However, without the knowledge of top executives, engineers throughout the organization
were spending their own time bootstrapping what they believed was an exciting new technology-- the
microprocessor.
By the time executives at the top realized what was happening, there was so much momentum behind
these initiatives that they realized that Intel needed to shift gears, so they decided to sell off the
memory business and reinvest the proceeds in the new emerging microprocessor business. And that
shift, of course, is what made Intel what it is today. It's the reason Intel is still relevant in a fast-
changing market.
The moral from this story is that all of us have to recognize the fact that today's strategy will not
work tomorrow, and this means that to remain relevant you can't focus only on implementing the
strategies you planned in advance. You must identify and act on new threats and opportunities in
your competitive environment, too.
But how can you anticipate these opportunities? This question will be the focus of our next lesson,
where we will explore our fourth and final lever-- interactive control systems. This will require a
shift in approach. All of the management techniques we've studied so far are top-down. We've
assumed the role of a boss, a commander, and a coach. Studying interactive control systems will
demand a much different role from you, this time as a facilitator and sponsor.
Your task now will be to guide patterns of action as you facilitate the bottom-up flow of information
from subordinates who have their fingers on the pulse of change.
Pyramid top labeled TOP-DOWN QUESTIONS. 4 levels appear beneath the top and are named
Strategies, Learning, Tactics, and Actions. Downward arrows point from TOP-DOWN QUESTIONS
to each of these 4 levels. Upward arrows point up through the levels: from Actions to Tactics to
Learning to Strategies. Pairs of curved arrows, one pointing up and one pointing down, show cycles
between a level and the level above, showing Actions and Tactics cycling together, Tactics and
Learning cycling together, and Learning and Strategies cycling together. A pair of larger curved
arrows shows a cycle between the lowest level, Actions, and the level Learning, which is two levels
above. All the arrows show constant motion.
You can do this by asking probing questions and stimulating wide-ranging debate. As we will
discover, you do not need to develop a separate system to conduct this work. Instead, you can and
should use your existing control systems in a special way.
In this lesson, we will learn how you can make your control systems interactive as you focus your
entire organization on strategic uncertainties. If you do this well, your business will successfully
adapt to change and continue to thrive. If you do this poorly, however, you risk, like so many
companies, becoming a footnote in history.


11:48 PM
Identifying Opportunities and Threats in

Your Competitive Environment

609d8e6f29c5fc0b825a1db4/b6437109-5ba5-4c97-9699-c7f2b327161f/1071/908/#/>
TRANSCRIPT
Autoscroll
ON
far in the course,
 we have focused on how you
can implement your intended
 strategy.
 Intended strategies are
the plans managers attempt
 to implement in a specific
product market based
 on analysis of their
competitive dynamics
 and current capabilities.
 We've also discussed the
levers that managers can use
 to implement those strategies--
 belief systems,
boundary systems,
 and diagnostic control systems.
 But not all strategies
are intended.
 Some strategies emerge
spontaneously in organizations
 as employees respond
to unplanned threats
 and opportunities.
 These are what we call
emergent strategies.
 Then, of course, is
what actually happens.
 Realized strategies
are a combination
 of intended strategies
and emergent strategies.
 Consider Intel.
 Many people don't remember that
Intel was originally a producer
 of low-cost memory products.
 However, without the
knowledge of top executives,
 engineers throughout
the organization
 were spending their
own time bootstrapping
 what they believed was an
exciting new technology--
 the microprocessor.
 By the time executives
at the top realized what
 was happening, there
was so much momentum
 behind these initiatives that
they realized that Intel needed
 to shift gears, so they decided
to sell off the memory business
 and reinvest the proceeds in
the new emerging microprocessor
 business.
 And that shift,
of course, is what
 made Intel what it is today.
 It's the reason Intel
is still relevant
 in a fast-changing market.
 The moral from this
story is that all of us
 have to recognize the fact
that today's strategy will not
 work tomorrow, and this
means that to remain
 relevant you can't focus only on
implementing the strategies you
 planned in advance.
 You must identify and act on
new threats and opportunities
 in your competitive
environment, too.
 But how can you anticipate
these opportunities?
 This question will be the
focus of our next lesson,
 where we will explore our
fourth and final lever--
 interactive control systems.
 This will require a
shift in approach.
 All of the management
techniques we've studied so far
 are top-down.
 We've assumed the role of a
boss, a commander, and a coach.
 Studying interactive
control systems
 will demand a much different
role from you, this time
 as a facilitator and sponsor.
 Your task now will be to
guide patterns of action
 as you facilitate the
bottom-up flow of information
 from subordinates who have their
fingers on the pulse of change.
 You can do this by
asking probing questions
 and stimulating
wide-ranging debate.
 As we will discover,
you do not need
 to develop a separate
system to conduct this work.
 Instead, you can and should use
your existing control systems
 in a special way.
 In this lesson, we will learn
how you can make your control
 systems interactive as you
focus your entire organization
 on strategic uncertainties.
 If you do this
well, your business
 will successfully adapt to
change and continue to thrive.
 If you do this
poorly, however, you
 risk, like so many companies,
becoming a footnote in history.

PROFESSOR SIMONS: So far in the course, we have focused on how you can
implement your intended strategy. Intended strategies are the plans managers attempt to
implement in a specific product market based on analysis of their competitive dynamics
and current capabilities. We've also discussed the levers that managers can use to
implement those strategies-- belief systems, boundary systems, and diagnostic control
systems.
But not all strategies are intended. Some strategies emerge spontaneously in
organizations as employees respond to unplanned threats and opportunities. These are
what we call emergent strategies. Then, of course, is what actually happens. Realized
strategies are a combination of intended strategies and emergent strategies.
BEGIN FLOWCHART DESCRIPTION
Intended Strategy goes through a process, reaches a target, and yields output of realized
strategy. Emergent Strategy cycles through 4 states. Business Strategy leads to Strategic
Uncertainties, which lead to Interactive Control Systems, which lead to Debate and
Dialogue, which lead back to Business Strategy. Eventually this Emergent Strategy cycle
yields a realized strategy.
END FLOWCHART DESCRIPTION
Consider Intel. Many people don't remember that Intel was originally a producer of low-
cost memory products. However, without the knowledge of top executives, engineers
throughout the organization were spending their own time bootstrapping what they
believed was an exciting new technology-- the microprocessor.
By the time executives at the top realized what was happening, there was so much
momentum behind these initiatives that they realized that Intel needed to shift gears, so
they decided to sell off the memory business and reinvest the proceeds in the new
emerging microprocessor business. And that shift, of course, is what made Intel what it is
today. It's the reason Intel is still relevant in a fast-changing market.
The moral from this story is that all of us have to recognize the fact that today's strategy
will not work tomorrow, and this means that to remain relevant you can't focus only on
implementing the strategies you planned in advance. You must identify and act on new
threats and opportunities in your competitive environment, too.
But how can you anticipate these opportunities? This question will be the focus of our
next lesson, where we will explore our fourth and final lever-- interactive control
systems. This will require a shift in approach. All of the management techniques we've
studied so far are top-down. We've assumed the role of a boss, a commander, and a
coach. Studying interactive control systems will demand a much different role from you,
this time as a facilitator and sponsor.
Your task now will be to guide patterns of action as you facilitate the bottom-up flow of
information from subordinates who have their fingers on the pulse of change.
DOWN QUESTIONS to each of these 4 levels. Upward arrows point up through the
levels: from Actions to Tactics to Learning to Strategies. Pairs of curved arrows, one
pointing up and one pointing down, show cycles between a level and the level above,
showing Actions and Tactics cycling together, Tactics and Learning cycling together,
and Learning and Strategies cycling together. A pair of larger curved arrows shows a
cycle between the lowest level, Actions, and the level Learning, which is two levels
above. All the arrows show constant motion.
You can do this by asking probing questions and stimulating wide-ranging debate. As we
will discover, you do not need to develop a separate system to conduct this work.
Instead, you can and should use your existing control systems in a special way.
In this lesson, we will learn how you can make your control systems interactive as you
focus your entire organization on strategic uncertainties. If you do this well, your
business will successfully adapt to change and continue to thrive. If you do this poorly,
however, you risk, like so many companies, becoming a footnote in history.


Learning Objectives
o Explain why it is critical for managers to identify and monitor strategic
uncertainties.
o Describe how interactive control systems help businesses foster
organizational learning.
o Identify whether a control system satisfies the necessary criteria to be used
interactively.
o Identify which control systems will be most beneficial to use interactively
based on the nature of the strategic uncertainties a business faces.
Recall from the video the definition of emergent strategy: an emergent strategy is one
that emerges spontaneously in organizations as employees respond to unplanned threats
and opportunities.
Identify an emergent strategy from a business you are familiar with. What were the
emerging threats and opportunities in the business’s competitive environment that it
responded to?

Shaping Emergent Strategy at Marriott

We have said that a business’s best bet for identifying and responding to new threats and
opportunities is to facilitate the bottom-up flow of information about the competitive
environment from those who are closest to the customer and the most knowledgeable of
the latest technologies and trends. Here, David Rodriguez will share a few ways in which
Marriott facilitates the bottom-up flow of information to help shape emergent strategy at
a large, global company.


 DAVID RODRIGUEZ: One
of the important ways
 that we bubble up information
about our customers
 is probably our most
important asset,
 and that's our associates,
who are-- if we could contact
 with them and noticing things.
 You know, attention to
detail, again, is so--
 it's one of the things
that we scan for.
 We want our associates to
be observant and see what's
 resonating with customers.
 You know, we design something
in a hotel, try something out,
 all the customer searches
may have indicated
 that was the thing to
do, and very often it's
 our associates who, on
the ground, are saying,
 you know, it's not quite
working the way you thought,
 you might want to adjust that.
 So our associates are a very
important asset and resource
 for the company in how we stay
attentive to how we continue
 to refine our business.
 And we get that
data in many ways.
 You know, obviously,
we have formal surveys
 that we do with them.
 I find that the more
powerful mechanisms are
 more on the ground, day to day.
 For instance, at our hotels,
at the start of shifts,
 there are these small, 10- to
15-minute sessions where they
 can talk about, say, if there's
a big group that's coming
 into the hotel--
 who's the group, what are the
key things to keep in mind,
 and what has anybody
noticed lately.
 You know, or anything
you want to talk about.
 How do you feel about
the new bedspreads
 that have been put in place?
 Do you have any sense
of what customers
 are thinking about them?
 So very organically, we have,
again, hundreds of thousands
 of people who, part
of their job is
 to stay observant about how
is, again, their hotel, not
 the hotel, but how's
their hotel doing?
 How's it being received?
 And again, we find that
inspired associates constantly--
 they don't need to be asked.
 They are volunteering--
 I have an idea about
something I think is working
 or could work better.
 And it really fuels a lot of
our innovation and improvement
 efforts at the company.
 It's so important that
we remain ultra-sensitive
 to what's happening
on the ground,
 and particularly not just
from our perspective but from
 the perspective of
both our customers--
 well, the broad
class of customers,
 which is not just the
consumer, but also
 our owners to franchisees.
 And to do that, we'll have
continual communication.
 For instance, we have owner
advisory boards and franchisee
 advisory boards constantly
asking the question,
 how are they feeling
about the business?
 What are they noticing?
 What ideas they might have?
 Perceptions they might have
about consumers and capturing
 their perspective.
 Obviously, we do research
all the time with consumers.
 Asking the question, how are
our brands doing in their eyes?
 And secondly, just trying
to get a sense for any
 changes in how they
think about travel.
 You know, certainly as different
types of lodging alternatives
 have come on the
scene, right, very
 important to us is, how's that
resonating with the public?
 And is that informing us
about a possible opportunity
 or potentially a gap in
the portfolio of offerings?
 And so recently, we
started a new brand,
 Homes & Villas by Marriott, that
is in the alternative lodging
 space.
 It's more upscale and luxury.
 But you know, clearly,
we found and detected
 that there is a growing
consumer interest
 in those types of products.
 And so having detected
that from consumers
 and getting a sense for how that
would fit into our portfolio,
 we're working on that.

609d8e6f29c5fc0b825a1db4/b6437109-5ba5-4c97-9699-c7f2b327161f/1071/908/#/syllabus>

6.2.2 Analyzing Strategic Uncertainties
12:32 AM

TRANSCRIPT
Autoscroll
ON
Throughout the course,
 you have analyzed
strategic variables
 and designed levers aimed at
implementing intended strategy.
 These include the core values
that should guide employees,
 the critical
performance variables
 that would cause
strategy to fail,
 and the risks that must
be avoided as you execute.
 To uncover emergent strategies
and adapt to change,
 you must analyze a fourth
and final variable--
 strategic uncertainties.
 These are the assumptions
about customers, competition,
 and capabilities that
underpin your strategy.
 If these assumptions change
over time or prove to be false,
 your entire strategy
could collapse.
 This is what keeps senior
managers awake at night.
 By definition,
strategic uncertainties
 are unknowable in advance and
emerge unexpectedly over time.
 They reflect changes
in competitive dynamics
 and internal competencies
that the business
 needs to identify and harness
if it wants to survive.
 Think back to our study of Quiet
Logistics in the last module.
 In their case,
 centered on changes
in supplier power.
 Bruce Welty and his team
could not know in advance
 that Amazon would
acquire the Kiva robot
 and take it off the market.
 Quiet Logistics
had to find a way
 to retain their competitive
advantage by building robots
 in-house.
 In this instance,
Quiet Logistics
 had to react defensively
to Amazon's actions.
 Sometimes, going on
defense is inevitable.
 But it is also possible
to go on offense.
 As we will discover soon,
this is precisely what
 interactive control
systems allow you to do.
 Strategic uncertainties
should dictate
 which control systems you
and your organization focus
 attention on, the
types of information
 from those systems
that will prove
 most relevant, and the
nature of the debate
 and dialogue in which you
want your entire organization
 to engage.
 Identifying strategic
uncertainties
 is a critical first step
in any manager's attempt
 to use control
systems interactively.

Marriott
Depending on a business’s current strategy and its vision for the future, strategic
uncertainties may relate to changes in customer preferences, competitor actions, new
technology, or government regulations, among others. They reflect the issues that keep
managers awake at night—and they never cease. Quiet Logistics may have protected itself
from future supplier changes by bringing robot design in-house—and then spinning it out
into a company with whom they maintain a very close relationship—but there are new
uncertainties Bruce Welty must manage.
Here, Bruce shares some of those uncertainties. Then, David Rodriguez talks about
the strategic uncertainties facing Marriott.

609d8e6f29c5fc0b825a1db4/d8d7e259-78a2-4f80-b897-8b2f546fbf27/1071/908/#/syllabus>

TRANSCRIPT
Autoscroll
ON
 BRUCE WELTY: The three things
that keep me up at night are--
 my first is labor, and that's
my second and my third.
 We're in a low unemployment.
 This is a hard
business to staff.
 Many people do not
aspire to do this work.
 It's difficult, long hours.
 It's hard work.
 And we continually
have to pay more
 to attract the people to do it.
 And if you think again back
to the original comment
 I made around the number of
people we need to do this,
 it really is almost infinite
because we're only 10%
 of retail right now.
 And we're the fastest
growing piece of it.
 As quickly as the stores lose
revenue, e-commerce gains it.
 And it's right now
almost $1 for $1.
 So as we try to grow
this business that
 didn't used to exist,
remember people
 used to do this for free.
 They'd pick, pack,
and ship themselves.
 Now we do that.
 And right now, I
don't even know how
 to guess how many hundreds
of millions of people
 are shopping.
 But we have to replace those
people with this labor.
 And it's interesting
that everybody
 who's in the business comes to
the same conclusion, and says,
 well the best place in the
country to put our warehouse
 is in the middle of Indiana
or the middle of Kentucky
 or the middle of Ohio or
wherever their demographic is.
 So it ends up with these big
concentrations of facilities
 all competing for
the same labor.
 And then if Amazon's
there, which they are,
 because they're everywhere,
and they're paying a premium,
 we have to match that.
 So it's just-- it's
availability on a daily basis.
 It's the availability
during seasonal peaks.
 And it's the rising costs.
 So those are my three
biggest concerns.
 And they're all around labor.
 DAVID RODRIGUEZ: The things
that are on my mind right now,
 you know, right
on top of the list
 is how do I ensure that
Marriott's employment value
 proposition remains
strong in the marketplace,
 particularly as we continue
to change as a business.
 Obviously, we have our roots
as an operating company
 and running first
restaurants and then hotels.
 Those are certain
types of workers.
 And you know, increasingly
we are competing for talent
 with companies that are
outside the hospitality
 industry and different
types of profiles.
 And so one of the areas
that I am constantly
 thinking about these
days is, how do I
 take the attributes
that are strong assets
 and make sure that we are
tailoring them so that we can
 compete effectively
in the marketplace
 for the different
talent profiles that
 are going to be important for
our success in the future?
Distinguishing Between Critical Performance

Variables and Strategic Uncertainties
You may be wondering how strategic uncertainties differ from the critical performance
variables we studied in Module 4. Both focus management attention on potential failure,
but there is a crucial difference. Critical performance variables reflect the factors that
would cause your current strategy to fail. They are knowable in advance, and they are
accounted for and monitored using diagnostic control systems. By contrast, strategic
uncertainties reflect changes in conditions and assumptions that could undermine your
strategy in the future. They focus on questions rather than answers and trigger a search for
new information and meaning. The table here identifies the key differences.

CRITICAL PERFORMANCE STRATEGIC UNCERTAINTIES
VARIABLES
RECURRING What must we do well to What changes in assumptions could alter
QUESTIONS achieve our intended strategy? the way we achieve our vision for the
future?
FOCUS ON Implementing intended Testing and identifying new strategies
strategy
DRIVEN BY Goal achievement Top management unease and focus
SEARCH FOR Efficiency and effectiveness Disruptive change

609d8e6f29c5fc0b825a1db4/d8d7e259-78a2-4f80-b897-8b2f546fbf27/1071/908/#/syllabus>

6.2.4 Choosing a System to Use Interactively
1:13 AM

6.2.4 Choosing a System to Use

Interactively
As we have learned, interactive control systems demand significant management
time and attention. You must ensure that this time and attention is well used. As a
first step, you must choose the right system to use interactively. This involves
identifying the control system in your business that is best suited to focus attention
on changes in strategic uncertainties. This could be a market share monitoring
system, a project monitoring system, or a balanced scorecard, among many others.
In each business listed in the chart below, managers might use one of the following
control systems interactively, based on their competitive position and strategic
uncertainties:
Business Strategic Uncertainty System Used Interactively
Highly innovative Development and Profit planning systems reporting
consumer products protection of new planned and actual revenue and
(J&J) products and markets expenses for each business by
revenue and cost category
High-tech medical Changes in product Project management systems
devices (ATH technology reporting information about the
Technologies) discovery and integration of new
technology products
Branded consumer Extending the Brand revenue budgets reporting
goods (Pepsi/Coke) attractiveness of revenue, market share, and shipment
mature products data by brand or product category
Prescription drugs Changes in regulation Intelligence systems reporting on
(Merck) and government policy information about social, political,
and technical business issues
Turnaround business Acquiring new skills Human resource systems reporting
or rapidly growing to meet competitive information on skill inventories,
startup (Henkel) needs manpower planning, and succession
planning

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Eligibility Criteria for Interactive Control

Systems
Once you have identified a potential system to use interactively, you must determine
whether the information provided in the system satisfies four eligibility criteria. To be
effective, the data in an interactive control system:
 Must be simple to understand: Effective interactive control
systems provide simple, unambiguous data. This simplicity allows managers
to discuss and debate the data itself, rather than spend time arguing about its
calculation and validity.
 Must be used by managers at multiple levels of the
organization: Remember that interactive control systems should trigger the
bottom-up flow of information. This means the system must be used by and
useful to managers at all levels of the organization.
 Must provide information about strategic uncertainties: If
your interactive control system does not provide this data, it will not help
you develop emergent strategies. It may also misdirect the organization’s
attention. Interactive control systems signal to all employees the
uncertainties they should focus on. The process is driven by top-down
questioning and the fact that everyone watches what the boss watches.
 Must trigger debate and dialogue leading to new action
plans: Interactive control systems should help you not only detect changes
in strategic uncertainties but, most importantly, drive action plans and new
initiatives. The discussion triggered as managers debate the meaning of the
data in the interactive control system will foster the emergence of new (and
previously unpredicted) strategies.

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Using Control Systems Interactively at

Continental Media
To help us understand the importance of these criteria, let’s turn to a brief case on
Continental Media Group.


TRANSCRIPT
Autoscroll
ON
 NARRATOR: Continental
Media Group
 was a media publishing business
with a widely distributed
 product called
Business Highlights.
 This was a business
journal published
 in nine different markets
in the early 2000s.
 Business Highlights
featured a combination
 of national and regional news.
 So Texas Business Highlights
had a different focus
 than New England
Business Highlights.
 That mixture proved popular.
 And print circulation
remained high,
 even when other
publications were
 suffering during the
transition to online media.
 But despite its popularity,
Business Highlights
 wasn't profitable.
 And when the global
financial crisis of 2008 hit,
 the need to achieve
profitability became urgent.
 Employees there were guided
by a mission statement
 urging them to turn
problems into opportunities.
 So Patricia Harkins,
Senior Vice President
 of Advertising for
the business journals,
 formed a task force focused
on finding solutions.
 Here is Harkins on Continental's
strategic uncertainties.
 PATRICIA HARKINS: I
had a lot of concerns
 at the time about our
dependence on advertising.
 We got 50% of our
revenue from ad sales.
 But we saw a lot of
turnover among advertisers.
 It's a tight market.
 And any loss of a major account
or any change in advertiser
 buying patterns or
the industry at large
 could make or break us.
 It wasn't a
sustainable situation.
 I kept those worries
to myself for a while.
 But I knew I needed to get
everybody thinking about them
 if we were ever going
to address them head on
 and achieve profitability.
 That's when I decided to
convene the task force.
 The question then
was, how are we
 all going to go about
understanding and tackling
 this issue.
 We had so much information
at our disposal
 to analyze and debate.
 So I thought very carefully
about which system would be
 best to engage people around.
 NARRATOR: Harkins decided
to focus the organization's
 attention on the Friday packet.
 This was a weekly report on
ad pricing in terms of dollar
 per page versus
budget, printed versus
 billed, variances in color
and season, and other figures.
 The Friday packet also reported
ad bookings for the next three
 months as well as
data on new bookings
 and year-to-date bookings.
 Managers at
Continental Media Group
 used the Friday packet to
identify unexpected trends
 through debate and dialogue.
 For example, the data revealed
growth in midsize accounts.
 This led managers below Harkins
to create incentives to promote
 even more growth in that
area and planted seeds
 for new strategies.
 Additionally, managers
saw that ad bookings
 were low among financial
services clients.
 This spurred them
to create a referral
 service that would
bring more value
 to those types of clients.

later meetings discussing information in the Friday Packet—specifically, how advertising
spending was changing—Continental Media executives also decided to launch an email
newsletter and new websites to target each of their nine regions with local business-related
news. These new offerings were free to readers and paid for by advertising and a
membership program. These new programs were very successful: newsletter subscribers
opened the emails sent to them more than 50% of the time, compared to typical averages
for bulk emails running less than 20%.
The Friday Packet reports actual performance data versus pre-determined targets for the
business’s critical performance variables. In this sense, it operates as a diagnostic control
system.
What factors described by Patricia Harkins allow the Friday packet to be used as
an interactive control system too?


Analysis: Is the Friday Packet Being Used as an

Interactive System?
It is important to recognize that managers at Continental are not using the Friday Packet
simply to monitor negative deviations or shortfalls from preset standards for advertising
sales. They are also using it to stimulate creative responses to both positive and negative
surprises. Managers are responding to the data with changes to strategy, such as creating
incentives to attract clients in areas of unexpected growth.
You might wonder if Continental Media Group’s strategic changes are really the result of
the interactive control system or if they simply reflect the culture of the organization: If
employees are focused on “turning problems into opportunities,” wouldn’t they be looking
for similar initiatives?
We might like this to be true, but people in organizations are busy with their day-to-day
problems and issues. Managers need to employ mechanisms to focus the entire
organization on changes that could derail the current strategy. In fact, the discipline of
questioning—using the data in interactive control systems as a catalyst for debate and
dialogue—coupled with active discussions about how to guide the business going forward
is an important ingredient of a healthy culture.
The questions asked at Continental Media are the ones that all managers should ask when
reviewing the data contained in interactive control systems:
 What has changed?
 Why?
 What are we going to do about it?
The key point is that the debate and dialogue from the unexpected changes should lead to
a search for understanding, an assessment of the implications, and new action plans or
strategies.
However, for interactive control systems such as the Friday Packet to succeed, there are a
couple of rules that must be followed. First, managers like Patricia Harkins must leave
their titles at the door because the most junior person in the room may have the
breakthrough idea that triggers a new initiative and, eventually, a new strategy. What
matters is what is right, not who is right. Second, participation in the interactive process
must be rewarded subjectively. Managers must use their subjective judgement to reward
those who share information, challenge the status quo, and come up with new innovations
that can move the business forward.
Interactive control systems should also use simple, clear data that managers at all levels
can easily comprehend. Doing so ensures that time is not wasted in trying to understand
how numbers and data were calculated. By making the process more efficient, your team
can act more quickly on the strategic uncertainties you identify. This is precisely what
Harkins’ task force allowed Continental Media to do.


Here are the points your response should have identified:
Eligibility Criteria Presence in the Friday Packet
Data must be simple to The Friday Packet reports on dollar per page vs. budget,
understand printed vs. billed, variances in color and season, and other
accessible figures, rather than on complex accounting
figures.
Data must be used by The Friday Packet reports operating data that is created
managers at multiple levels and reviewed by managers throughout the organization.
of the organization
Data must provide The data in the Friday Packet focuses specifically on their
information about strategic concerns about changes in the economic health and
uncertainties business strategy of their key advertisers.
Data must trigger debate Continental Media revisited forecasting regarding revenue
and dialogue leading to from ad sales and developed new action plans to respond
new action plans to both unexpected shortfalls and unexpected increases.


Using Interactive Control Systems to

Stimulate Learning and Discovery


PROFESSOR SIMONS: Although control systems are made interactive by the attention
and questioning of senior managers, their benefits extend far beyond the executive suite.
Because they constantly move information up from lower levels of the organization,
interactive control systems trigger discussion, debate, and discovery among employees at
every level. They have the power to transform your entire organization into a learning
organization.
DOWN QUESTIONS to each of these 4 levels. Upward arrows point up through the
levels: from Actions to Tactics to Learning to Strategies. Pairs of curved arrows, one
pointing up and one pointing down, show cycles between a level and the level above,
showing Actions and Tactics cycling together, Tactics and Learning cycling together, and
Learning and Strategies cycling together. A pair of larger curved arrows shows a cycle
between the lowest level, Actions, and the level Learning, which is two levels above. All
the arrows show constant motion.
You may be surprised that control systems can be so important in helping businesses
adapt to change. We often assume that innovative organizations have few formal controls.
However, this is not true. When used interactively, formal control systems help businesses
respond quickly to change. This is precisely why J&J, a large and mature company by any
measure, continues to thrive and lead its industry decade after decade.
As we have learned, interactive control systems demand considerable management time
and attention. You must be sure you choose the right system to focus on so that you do not
waste a scarce resource. But if you choose wisely, your business will innovate and learn at
the same time it runs like a well-oiled machine. You will find that you have put another
building block in place to resolve the fundamental tension we introduced in our very first
lesson-- the tension between control and innovation.


Although control systems
 are made interactive
by the attention
 and questioning of
senior managers,
 their benefits extend far
beyond the executive suite.
 Because they constantly
move information up
 from lower levels
of the organization,
 interactive control systems
trigger discussion, debate,
 and discovery among
employees at every level.
 They have the power to transform
your entire organization
 into a learning organization.
 You may be surprised
that control systems
 can be so important in helping
businesses adapt to change.
 We often assume that
innovative organizations
 have few formal controls.
 However, this is not true.
 When used interactively,
formal control systems
 help businesses respond
quickly to change.
 This is precisely why J&J,
a large and mature company
 by any measure, continues to
thrive and lead its industry
 decade after decade.
 As we have learned,
interactive control systems
 demand considerable
management time and attention.
 You must be sure you
choose the right system
 to focus on so that you do
not waste a scarce resource.
 But if you choose
wisely, your business
 will innovate and
learn at the same time
 it runs like a
well-oiled machine.
 You will find that you have put
another building block in place
 to resolve the
fundamental tension
 we introduced in our
very first lesson--
 the tension between
control and innovation.


6.3.1 Levers of Control Review
11:40 PM

Revisiting the Levers of Control

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 PROFESSOR SIMONS: Now that
we have finished our lesson
 on interactive
control systems, you
 know all four
levers of control--
 beliefs systems,
boundary systems,
 diagnostic control systems, and
interactive control systems.
 During the course, we studied
each lever separately.
 We will take some time now
to step back and review
 each of them.
 Then we will explore
how the forces unleashed
 by the levers work together
to address the tensions we
 introduced in the first module.
 Let's begin by reviewing each
lever and its individual role
 in executing strategy.

00:30
00:37

Learning Objectives
 Describe how the levers of control work together to balance innovation and
control.
 Describe how the levers of control help manage the tension between too
many opportunities and too little attention.
 Describe how the levers of control remove organizational blockages to
unleash human potential.
on this lesson.

6.3.2 Providing Inspiration and Direction
Monday, July 5, 2021
12:04 AM

6.3.2 Providing Inspiration and

Direction
In our first lesson, we learned that the four levers of control are driven by four
different dimensions of business strategy: strategy as perspective, strategy as
position, strategy as plans, and strategy as patterns of action. In the videos that
follow, the executives you have met throughout the course will describe one of the
four Ps at their business. You will be asked to test your knowledge by identifying
the “P” they describe and linking it to its corresponding lever of control. First up is
Meghna Modi on the thinking beyond the tagline, “We give you more.”

609d8e6f29c5fc0b825a1db4/b696fb1f-b4f0-4b0d-8c93-1e2c921b6ab1/1071/908/#/>
Beliefs systems control strategy as perspective. Beliefs systems are the explicit set of organizational
definitions that senior managers communicate formally and reinforce systematically to
provide core values, purpose, and direction for the organization.
Image illustrating the levers of control model. Box in center represents business strategy.
Four strategic variables emanate from business strategy: going clockwise, core values,
risks to be avoided, critical performance variables, and strategic uncertainties.
Outer layer of image shows the corresponding lever of control and “P” of strategy for each
of the strategic variables. Clockwise, core values point to beliefs systems, which control
strategy as perspective. Risks to be avoided point to boundary systems, which control
strategy as position. Critical performance variables point to diagnostic control systems,
which control strategy as plans. Strategic uncertainties point to interactive control
systems, which control strategy as patterns of action.
NEXT QUESTION
Attempts left: 0
Previous QuestionQuestion 2 of 3
Next Question
 PROFESSOR SIMONS: Beliefs
systems control strategy
 as perspective.
 They expand opportunity
seeking by defining
 core values that
inspire employees
 and guide their behavior.
 Belief systems often take the
form of credos and mission
 statements.
 When a manager implements
a belief system,
 he or she takes on
the role of a coach,
 motivating a team to win.
 This is a role Meghna Modi
takes on when she inspires
 and directs her store
teams to provide
 great service to customers.
 It's also the role
that Denise Montgomery
 takes on when she gathers her
beauty consultants for Monday
 night meetings.
 She uses Mary Kay's
STORM framework
 to motivate and encourage them
to serve their customers well.
 Beliefs systems are foundational
to business strategy
 because they help employees
commit to the larger
 purpose of the organization.
 They remove one of the
organizational blocks
 we identified in Module 1.
 They eliminate
employees' uncertainty
 about how they can help fulfill
the organization's purpose.
 In doing so, beliefs systems
help unleash people's desire
 to contribute.
 This is why profit
is insufficient
 as a primary purpose
for an organization.
 All businesses must generate
a profit to survive.
 But employees need to feel more.
 They want to feel pride in
belonging to an organization
 and knowing that
they are aligning
 their actions to its strategy.
 Consider outdoor clothing
company Patagonia.
 Its mission statement is--
 build the best product,
cause no unnecessary harm,
 use business to inspire
and implement solutions
 to the environmental crisis.
 This mission
statement is intended
 to inspire people and
make them proud to work
 for a company that has
clear values rooted
 in product quality and
protecting the environment.
 When difficult decisions must
be made, everyone at Patagonia
 has clear guidelines on
which strategic choices are
 acceptable and which are not.
 The core values exemplified
in your beliefs system
 should stand the test of time.
 They should be immutable and
need only minor revisions
 or fine tuning over time.
 The return on management
for this small investment
 of your time will
be substantial.
 Instead of constantly
reminding your employees
 of your business's
larger purpose,
 your beliefs systems will
do this work for you,
 freeing up your scarce
time and attention
 for your most critical tasks.


We have provided a table that summarizes key considerations for implementing beliefs
systems. You will find this table useful as you complete the final case activity and the
capstone activity.
LEVER #1:
BELIEFS
SYSTEMS
WHAT explicit set of beliefs that define basic values, purpose, and direction,
including how value is created; level of desired performance; and
human relationships
WHY to provide momentum and guidance to opportunity-seeking
behaviors
HOW mission statements
vision statements
credos
statements of purpose
WHEN opportunities to expand dramatically
top managers desire to change strategic direction
top managers desire to energize workforce
WHO senior managers personally write substantive drafts
staff groups facilitate communication, feedback, and awareness
surveys


6.3.3 Defining the Rules of the Game
12:19 AM

6.3.3 Defining the Rules of the Game

Defining your strategy as perspective is only a starting point for building a
successful strategy. Let’s turn to Kasper Rorsted. As you move through the video,
think of which of the other four Ps he might be describing.

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TRANSCRIPT
Autoscroll
ON
 KASPER RORSTED: We want

 to be the best sport
 That means we don't want
to be the best fashion
 So it's a very
important part, meaning
 the vast majority of revenue
has to come from sport.
 We've decided we are in
the software business, not
 the hardware business.
 So we are clear on which part
of the sporting goods business
 do we want to be in, not
equipment, but sport.
 And then we break it
down on a category level
 and say we want
to be in football.
 We want to be in running.
 We want to be in x sports.
 We're not in sailing.
 We're not in cycling.

609d8e6f29c5fc0b825a1db4/77f57944-f009-4636-9dc2-0a24c0b735cb/1071/908/#/syllabus>

which control strategy as plans. Strategic uncertainties point to interactive control
systems, which control strategy as patterns of action.


TRANSCRIPT
Autoscroll
ON
 PROFESSOR SIMONS: Boundary
systems, our second lever,
 control strategy as position.
 They identify risks to be
avoided and communicate
 which opportunities and
behaviors are out of bounds.
 When a manager implements
boundary systems,
 he or she takes on the
role of a commander,
 establishing the appropriate
domain of activity
 for everyone in
the organization.
 This is the role
that Bruce Welty
 took on when he decided that
Quiet Logistics would not
 accept customers selling
low margin products.
come in two forms.
 First are business
conduct boundaries,
 which are often communicated
through codes of conduct.
 Second are strategic boundaries.
 These stake out the
territory for the business,
 answering the
questions of how it
 will create value
and differentiate
 its offerings from competitors.
 All strategies
require businesses
 to assume a number of risks.
 Strategic boundaries indicate
which risks and opportunities
 must be avoided.
 Businesses without a
clear strategic position
 may lapse into trying to
please everyone and thus please
 no one.
 Consider the mutual
fund industry.
 Fidelity, for example,
has established itself
 as a premium performer based
on its actively managed funds
 combined with high
levels of service.
 Customers are willing
to pay a premium
 price for its offerings.
 Vanguard, on the
other hand, has staked
 out a different
position, competing
 on low price and the long-term
payoff of its index funds.
 By aligning their strategies to
different groups of customers,
 managers at these
two companies know
 which actions to prioritize.
 By specifying and enforcing
the rules of the game,
remove another one
 of our organizational blocks--
 the temptation to
do wrong in response
 to pressure and opportunity.
 Boundary systems do so by
eliminating opportunities
 for employees to
rationalize their misdeeds,
 thereby responding to their
innate desires to do right.
 Like beliefs systems,
boundary systems
 require only a small periodic
investment of your time.
 But again, the return on
management is substantial.
 Rather than constantly
clarifying out
 of bounds behaviors
and opportunities
 and punishing
those who trespass,
 you can ensure that your
employees know these rules
 upfront.
 Your need to intervene
will be minimal, again,
 freeing up your time and
attention for higher value
 tasks.

We have provided a table that summarizes key considerations for implementing boundary
systems. You will find this table useful as you complete the final case activity and the
capstone activity in the course.
LEVER #2:
BOUNDARY
SYSTEMS
WHAT formally stated rules, limits, and proscriptions tied to defined
sanctions and credible threat of punishment
WHY to allow individual creativity within defined limits of freedom
HOW code of business conduct
strategic planning systems
asset acquisition systems
operational guidelines
WHEN Business Conduct Boundaries: when reputation costs are high
Strategic Boundaries: when excessive search and
experimentation risk dissipating the resources of the firm
WHO senior managers formulate with the technical assistance of staff
experts (e.g., lawyers) and personally mete out punishment
staff groups monitor compliance


6.3.4 Evaluating Performance
12:40 AM

6.3.4 Evaluating Performance

As you may remember, Tom Siebel set strict strategic boundaries at C3.ai. But once a business
has staked out a position, it also needs to decide how it will implement and monitor the
resulting strategy. Review the following clip of Tom Siebel and try to guess which one of the
two remaining Ps he is discussing:

From <https://safe.menlosecurity.com/https://courses.myhbx.org/student/concept/609d8e6f29c5fc0b825a1db4/0c0f503c-
d043-4ad6-8f9b-11472f54d3c3/1071/908/#/>

Image illustrating the levers of control model. Box in center represents business strategy. Four
strategic variables emanate from business strategy: going clockwise, core values, risks to be avoided,
critical performance variables, and strategic uncertainties.
Outer layer of image shows the corresponding lever of control and “P” of strategy for each of the
strategic variables. Clockwise, core values point to beliefs systems, which control strategy as
perspective. Risks to be avoided point to boundary systems, which control strategy as position.
Critical performance variables point to diagnostic control systems, which control strategy as plans.
Strategic uncertainties point to interactive control systems, which control strategy as patterns of
action.

From <https://safe.menlosecurity.com/https://courses.myhbx.org/student/concept/609d8e6f29c5fc0b825a1db4/0c0f503c-
d043-4ad6-8f9b-11472f54d3c3/1071/908/#/>

6.3.5 Staying Ahead of the Curve
12:56 AM

6.3.5 Staying Ahead of the Curve

There is only one of the four Ps left: strategy as patterns of action. Here, David
Rodriguez of Marriott describes how the search for changes in the competitive
environment can help leaders identify when changes to strategy might be necessary.

609d8e6f29c5fc0b825a1db4/5d74ab69-242f-49b5-9c82-5d20268745be/1071/908/#/syllabus>

TRANSCRIPT
Autoscroll
ON
 DAVID RODRIGUEZ: It's so
important that we remain ultra
 sensitive to what's happening on
the ground, particularly from--
 not just from our perspective
but from the perspective
 of both our customers --
 or the broad class of
customers, which is not just
 the consumer, but also our
owners and franchisees.
 And to do that, we'll have
continual communication.
 For instance, we have owner
advisory boards and franchisee
 advisory boards constantly
asking the question,
 how are they feeling
about the business, what
 are they noticing, what
ideas they might have,
 perceptions they may
have about consumers,
 and capturing their perspective.
 One of the important
ways that we bubble up
 information about our
customers is probably
 our most important asset.
 And that's our
associates who are
 in frequent contact with
them and noticing things.
 You know, attention to detail,
again, is one of the things
 that we scan for.
 We want our associates to
be observant and see what's
 resonating with customers.
 We may redesign something in
a hotel, try something out.
 All the customer research
may have indicated
 that was the thing to do.
 And very often it's our
associates who on the ground
 are saying, "You
know, it's not quite
 working the way you thought.
 You might want to adjust that."
 So our associates are very
important asset and resource
 for the company in how
we stay attentive to--
 how we continue to
refine our business.
 And we get that data many ways.
 You know, obviously,
we have formal surveys
 that we do with them.
 But I find that the more
powerful mechanisms are
 more on the ground day to day.

which control strategy as plans. Strategic uncertainties point to interactive control systems,
which control strategy as patterns of action.

 PROFESSOR SIMONS: Interactive
control systems control
 strategy as patterns of action.
 By focusing
organizational attention
 on strategic
uncertainties, they help
 managers detect
important changes that
 may shape emergent strategies.
 Interactive control
systems ensure
 that businesses can adapt to
change and remain relevant.
 When a manager uses a
control system interactively,
 he or she takes
on the dual roles
 of facilitator and sponsor,
encouraging and supporting
 employee innovation.
 This is the role David
Rodriguez at Marriott
 takes on as he encourages
associates and franchisees
 to bubble up important
discoveries about customer
 preferences to
senior management.
 Many of your employees
are eager to contribute
 their creative energies to help
drive the business forward.
 However, they may not know
what level of participation
 and creativity is acceptable.
 By using one or more control
systems interactively,
 you can remove another
organizational block.
 You can involve employees in the
process of detecting and acting
 on strategic uncertainties,
thereby unleashing their desire
 to innovate.
 Strategic uncertainties keep
top managers awake at night.
 To use a control
system interactively,
 leaders must encourage
employees to track information
 related to those
 and pass it up the chain
for discussion and debate.
 This alerts managers
to opportunities
 to adapt to change.
 With luck, new strategies
will emerge over time.
 In the end, ATH
Technologies failed
 because it dedicated
all of its attention
 to executing its
intended strategy.
 It ignored strategic
uncertainties
 when a competitor developed
a superior technology.
 As a result, ATH, once
on the cutting edge,
 found its products obsolete.
 No one wants to be
left behind, so you
 should be sure to
focus your attention
 on strategic uncertainties.
will help you to do this.
 And they will
signal to employees
where they should
 be devoting their attention.
 Working in tandem with
the other three levers
 that conserve attention,
 will allow you to spend more
of your scarce time driving
 the business forward without
sacrificing the success
 of your current strategy.

We have provided a table that summarizes key considerations for
implementing interactive control systems. You will find this table useful as you complete
the final case activity and the capstone activity.
LEVER #4:
INTERACTIVE
CONTROL SYSTEMS
WHAT control systems that managers use to involve themselves
regularly and personally in the decision activities of
subordinates

Examples:
profit planning systems
project management systems
project monitoring systems
brand revenue systems
intelligence systems
WHY to focus organizational attention on strategic
uncertainties and provoke the emergence of new initiatives
and strategies
HOW ensure that data generated by the system is the focus of
regular attention by managers throughout the organization
participate in face-to-face meetings with subordinates
continually challenge and debate data, assumptions, and
action plans
WHEN strategic uncertainties require search for disruptive change
and opportunities
WHO senior managers actively use the systems and assign
subjective, effort-based rewards
staff groups act as facilitators


00:18
02:38

6.3.6 Pulling It All Together
1:02 AM

6.3.6 Pulling It All Together

Now, let’s take a moment to recap how all of the pieces we have reviewed fit
together to help managers execute their business strategy:

f459f0fe-60b6-4d7a-8431-1991ab8c9b72/1071/908/#/>

No Strategy Issues Causes Solutions Risks/Assumptions
Type
1. Strategy as Inspire
Perspective consultants by
motivating them
to behave
entrepreneuriall
y
2. Strategy as Meet
position manufacturers’
increasing and
previously unmet
demand for
automation
expertise
3. Strategy as Obtain a first-

plan mover
advantage and
gain a large
share of a new,
fragmented
market
4. Strategy as Operate offices

plan in a mostly
decentralized
fashion
5. Strategy as Achieve first-

plan mover
advantage by
prioritizing
revenue growth:
set aggressive
revenue goals,
compensate
each partner
with a share of
the firm’s total
profits in
proportion to his
or her share of
total revenue
generation, tie
bonuses to
revenue growth,
and operate
each office as a
revenue center
(partnership as a
whole is the only
profit center)
6. Strategy as Hire a top-flight

plan class of
consultants and
provide
opportunities for
rapid growth
7. Strategy as Give partners full

plan autonomy in
running their
offices
8. Strategy as Highly
patterns of decentralized
action decision-making
9. Strategy as Give partners full

patterns of autonomy in
action running their
offices
Issue: 1 Operate offices in a mostly decentralized fashion
Strategy Type: Strategy as plan
Solutions: Authority for decision making is transferred completely to autonomous
organizational units
Risks: While decentralized organizations may have a hierarchy, they delegate decision-
making to individual teams, empowering them to take action on their own. This may cause
some lack of insight to leadership

Issue: 2 Achieve first-mover advantage by prioritizing revenue growth
Solutions: Set aggressive revenue goals, compensate each partner with a share of the firm’s
total profits in proportion to his or her share of total revenue generation, tie bonuses to
revenue growth, and operate each office as a revenue center (partnership as a whole is the
only profit center)
Risk: Partners may take advantage of new decision making power and do unethical business
process to hit the target

Issue: 3 Obtain a first-mover advantage and gain a large share of a new, fragmented market
Strategy Type: Strategy as position
Solutions: As they are 1st company to do Automation Consulting Services(Like Amazon) they
already have larger customer and potential customer. Plus having top-flight class of
consultants to delivery best service will keep them as Best is this services.
Assumptions: Assuming there are not lot of competitors and they continue hiring only top-
flight class of consultants

Issue: 4 Highly decentralized decision-making
Strategy Type: Strategy as patterns of action
Solutions: Decentralized decision-making tends to create less rigidity and flatter hierarchies
in organizations. When upper management delegates decision-making responsibilities, there
also exist wider spans of control among managers, creating a more lateral flow of
information. Thus there will be more bottom up directional information flow, allowing for
more innovation and efficiency closer to the means of production.
Risks: Partners may take advantage of new decision making power and do unethical business
process to hit the target. They need to have a proper performance and operational control
system which transplant to whole organization.

Flowchart illustrates the following: Strategy as perspective, one of the four Ps, shapes core
values, one of four strategic variables. Core values are managed using beliefs systems, one
of the four levers of control. To implement the beliefs systems lever, you must take on the
role of coach. In this role, you will unleash your employees’ motivation to contribute.
Next line. Strategy as position, one of the four Ps, shapes risks to be avoided, one of four
strategic variables. Risks to be avoided are managed using boundary systems, one of the
four levers of control. To implement the boundary systems lever, you must take on the
role of commander. In this role, you will unleash your employees’ motivation to do right.
Next line. Strategy as plans, one of the four Ps, shapes critical performance variables, one
of four strategic variables. Critical performance variables are managed using diagnostic
control systems, one of the four levers of control. To implement the diagnostic control
systems lever, you must take on the role of boss. In this role, you will unleash your
employees’ motivation to achieve.
Final line. Strategy as patterns of action, one of the four Ps, shapes strategic uncertainties,
one of four strategic variables. Strategic uncertainties are managed using interactive
control systems, one of the four levers of control. To implement the interactive control
systems lever, you must take on the roles of sponsor and facilitator. In those roles, you
will unleash your employees’ motivation to innovate.

f459f0fe-60b6-4d7a-8431-1991ab8c9b72/1071/908/#/>

TRANSCRIPT
Autoscroll
ON
 PROFESSOR SIMONS: At the
beginning of the course,
 I said that businesses cannot
succeed unless they are firing
 on all four cylinders,
in other words,
 unless they are using all
four levers of control.
 Hopefully, you'll
recognize by now
 the importance of each lever
for implementing strategy.
 But success doesn't
come from simply
 using each lever in isolation.
 Rather, it comes from
the dynamic interplay
 that arises between the
forces each lever unleashes.
 In our first lesson
of the course,
 we introduced the
fundamental tension
 at the heart of
strategy execution--
 balancing innovation
and control.
 We cast this as an interplay
of light and dark forces,
 of yin and yang.
 Every business needs
some level of discipline
 to ensure that intended
strategies are implemented
 successfully.
 Boundary systems and
 provide this yin,
or dark energy.
 They ensure that activities
remain in proper bounds
 and are carried out successfully
according to preset plans.
 They help shield a business
from unnecessary risk.
 Yet, relying too
exclusively on compliance
 presents its own risks.
 You don't want to
focus so heavily
 on how to implement
your existing
 strategy that you fail to
identify and adapt to change.
 And you don't want to
control employees themselves
 so heavily that they lack
the freedom to innovate.
 Beliefs systems and
 provide the yang, or
light energy, that
 counteracts these tendencies.
 Businesses succeed
when they transform
 the tension between
control and innovation
 into profitable growth.
 We tend to think
that businesses need
 to make a choice between being
efficient and being creative.
 But most successful
businesses do both.
 They remain
sufficiently controlled
 while encouraging
learning and creativity.

6.4.1 Automation Consulting Services:
1:08 AM
6.4.1 Automation Consulting Services:

History and Strategy
on this lesson.
Now that we have reviewed the four levers of control, it is time to draw on all that you have
learned throughout the course by trying your hand at implementing them.
In this case-based activity, you will step into the shoes of the three founding partners of a
rapidly growing technical consulting firm, Automation Consulting Services (ACS). They have
convened for their annual Executive Committee Retreat, where they are grappling with new
challenges at each of their four office locations—Boston, Philadelphia, Seattle, and San Jose.
After learning about the challenges at each office and discussing them with your peers, you will
select a particular office to further analyze. Then, you will draft a brief memo that proposes a
solution using the levers of control.
Afterward, we will provide feedback on effective solutions for each office location. You will
use this information to evaluate a peer’s proposal and consider the strength of your own in
comparison. Finally, we will take a step back to review how the levers of control can work
together to address each office’s individual challenges as well as help ACS as a whole execute
strategy more effectively as they scale.
In this opening video, you will learn about the history of the firm and its founders.
Note: This online case is based on a case developed by Robert Simons and Hilary A. Weston
(HBS Case No. 190-053).

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1a75-4bec-943f-bafe16839138/1071/908/#/syllabus>

Before you dig into the challenges facing ACS, please review these key facts about the firm:
 In addition to advising manufacturers on how to best develop an automation strategy,
ACS consulted on long-term facilities planning and provided guidance on how to
design and implement specific automation projects.
 At the time of their 2020 summer retreat, ACS employed 83 consultants and reported
revenues of $64 million.
 Office sizes varied by location. Each had between 3 and 6 partners and between 8 and
31 non-partner professionals.
 A managing partner headed each office. This managing partner was responsible for the
office’s revenues, recruiting efforts, staffing, and client development. Only the
Executive Committee (Cliff, Jack, and Angela) possessed firm-wide responsibilities.
 Managing partners were not responsible for profits. In keeping with their emphasis on
revenue growth, each office operated as a revenue center and the partnership as a whole
was the sole profit center.
 Each partner received a share of the firm’s total profits as compensation in proportion
to his or her share of total revenue generation. Additionally, the founders and other
managing partners received an additional bonus tied to firm-wide and office-specific
revenue growth respectively.
 Expenses were monitored at the firm level rather than by office location. Each ACS
office monitored total hours billed and utilization as proxies for profitability. Each
office also reported revenues, utilization, and several other performance measures at the
office level. The chart here shows ACS performance measures by office for 2019:
FY 2019 SUMMARY STATISTICS
(BY OFFICE)
Boston Philadelphia Seattle San Jose
Revenue $28,776,400 $15,602,275 $10,752,750 $9,270,000
Utilization* (annual average) 80% 78% 91% 82%
No. of projects completed during FY 52 24 8 15
No. of clients served during FY 29 12 5 11
*Utilization = (Professional hours billed to clients) / (Total available professional work hours).
Based on what you have learned about ACS so far, please try to describe their strategy using the
four Ps. We have provided a list of details about the firm; please drag each one into the box
representing the “P” to which it belongs.

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1a75-4bec-943f-bafe16839138/1071/908/#/>

11:54 PM

6.4.2 Discussing Challenges in San Jose
1:19 AM

6.4.2 Discussing Challenges in San Jose

The founding partners did not prepare a formal agenda for their weekend on Cape Cod. Instead,
they spent the first day sharing their thoughts and concerns about each office, based on recent
tours and conversations with consultants. Their discussions would determine the design of a
more formal agenda for the second day of the retreat.
You will now have the opportunity to witness their conversations concerning each office.
Module 6: Challenges at the ACS Offices

As you observe the debates that unfold, you may find it helpful to jot down a list of issues and
challenges as they arise in the discussion. You will also be placed in a discussion group so that
you can share your observations and analyze these scenarios alongside your peers. As you note
each of the challenges faced by ACS, please share and discuss your impressions using the
following set of questions as a guide:
o Where in the course have you seen similar issues arise?
o What actions or inactions created those issues?
o What solutions were introduced for addressing them?
o What special design considerations were presented for implementing those
solutions, and what risks, if any, must be considered when using them?

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6164-45c3-b58b-7bca00655d98/1071/908/#/syllabus>
Based on information provided so far, I see the following specific issues and challenges need to
discussed in the Executive Committee meeting
Issue: 1 Operate offices in a mostly decentralized fashion
Solutions: Authority for decision making is transferred completely to autonomous organizational units
Risks: While decentralized organizations may have a hierarchy, they delegate decision-making to
individual teams, empowering them to take action on their own. This may cause some lack of insight to
leadership

Issue: 2 Achieve first-mover advantage by prioritizing revenue growth
Solutions: Set aggressive revenue goals, compensate each partner with a share of the firm’s total profits
in proportion to his or her share of total revenue generation, tie bonuses to revenue growth, and
operate each office as a revenue center (partnership as a whole is the only profit center)
Risk: Partners may take advantage of new decision making power and do unethical business process to
hit the target

Issue: 3 Obtain a first-mover advantage and gain a large share of a new, fragmented market
Strategy Type: Strategy as position
Solutions: As they are 1st company to do Automation Consulting Services(Like Amazon) they already
have larger customer and potential customer. Plus having top-flight class of consultants to delivery best
service will keep them as Best is this services.
Assumptions: Assuming there are not lot of competitors and they continue hiring only top-flight class of
consultants

Issue: 4 Highly decentralized decision-making
Strategy Type: Strategy as patterns of action
Solutions: Decentralized decision-making tends to create less rigidity and flatter hierarchies in
organizations. When upper management delegates decision-making responsibilities, there also exist
wider spans of control among managers, creating a more lateral flow of information. Thus there will be
more bottom up directional information flow, allowing for more innovation and efficiency closer to the
means of production.
Risks: Partners may take advantage of new decision making power and do unethical business process to
hit the target. They need to have a proper performance and operational control system which transplant
to whole organization.

To address the issues at the San Jose office, it will be essential for the Executive Committee to
analyze risks to be avoided. This will allow them to clearly articulate which behaviors—in this case,
cross-billing customers—are unacceptable and subject to penalization. The Executive Committee
must develop a clear boundary system (focused here on business conduct boundaries) that provides
guardrails for employees navigating similar situations in the future.
Core values—the beliefs that define basic principles, purpose, and direction—are also relevant. They
guide employee behavior by establishing values based on integrity and identifying whose interests
should come first in difficult situations, such as the one Douglas Crowley encountered.
Critical performance variables and strategic uncertainties are not relevant to this challenge. Critical
performance variables focus on what execution variables would cause your current strategy to
fail. Strategic uncertainties are the emerging threats and opportunities that could invalidate the
assumptions upon which the current business strategy is based. The incident at the San Jose office
stems instead from issues centering on unacceptable employee behavior.

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6.4.3 Discussing Challenges in Seattle
11:20 PM

6.4.3 Discussing Challenges in

Seattle
Retreat Discussion: The Seattle Office
As you observe the Executive Committee’s conversation about the Seattle office,
please return to and build upon your team discussion thread using the following
prompts as a guide:
o What special design considerations were presented for implementing
those solutions, and what risks, if any, must be considered when using
them?

609d8e6f29c5fc0b825a1db4/b95a0ce2-661e-46d1-8b27-f78ed7672158/1071/908/#/syllabus>


TRANSCRIPT
Autoscroll
ON
 NARRATOR: A week before the
retreat, all three founders
 toured the Seattle office.
 While they were there, they
discovered a mounting problem.
 The staff was
running out of work.
 The consultants were slated
to wrap up 50% of their client
 activities within two months.
 And they didn't have any
new projects lined up
 to fill the gap.
 The bulk of the
work in the office
 had focused on three
large contracts.
 For two of those
clients, they were
 counting on large phase-two
implementation projects
 that had failed to materialize.
 Revenues, profit, and cash
flow would quickly dwindle.
 It was a grim situation,
one that was keeping all
 three founders up at night.
 Here is Angela on the
origins of the crisis.
 ANGELA GOLDBERG: This was a
brand new challenge for us--
 one that caught us
completely off guard.
 In the past, demand
for our services
 always exceeded supply.
 We were constantly working
to ensure our staff
 and resources could
keep up with demand.
 Now we face the
opposite problem.
 In hindsight though, we
shouldn't have been blindsided.
 The Seattle office is newer
than Boston and Philly.
 They haven't built up
the same client breadth.
 Instead, they rely on a small
number of very big clients.
 Of course, such
client concentration
 brings significant risk.
 There's no buffer against a
downturn in one or two clients.
 We should have told the managing
partners to create a business
 development plan to deal
with the possibilities
 that work from their
existing clients may dry up.
 Now I'm worried it's too
late to turn the ship around.
 NARRATOR: During their
visit to Seattle,
 the executive committee
developed a three-point crisis
 plan.
 First, they temporarily
transferred several Seattle
 consultants to projects
based at other offices.
 Second, they designed an
aggressive marketing plan
 to solicit work from
existing clients
 and potential new clients.
 Third, they
transferred a partner
 with exceptionally strong
selling skills from Boston
 to Seattle.
 But none of the
founders believed
 the plan could serve
as a long-term fix
 to Seattle's drought.
 CLIFF REED: It's a Band-Aid
solution, plain and simple.
 We need a solution
that's more permanent.
 Otherwise, we could find
that six months down the road
 we're in the same boat again.
 Before we went to
Seattle, I really
 thought our financial incentives
would keep this sort of thing
 from happening.
 With so much focus
on profit sharing
 based on revenue
growth, how could anyone
 ever lose sight of
prospecting for new business?
 JACK LELAND: I agree.
 We've always believed
that revenue incentives
 are simple to understand
and point everyone
 in the right direction.
 They make the
consultants and partners
 feel like they're the ones
in control of their destiny.
 But the Seattle situation
proves they aren't foolproof.
 The thing is, I'm worried other
people won't agree with us.
 They'll say the
incentives are just fine
 and that the Seattle crisis just
comes down to poor leadership
 by the local partners.
 ANGELA GOLDBERG: Look,
I think we all now agree
 that our incentives
aren't enough.
 We need to install some
preventative measures to make
 sure this doesn't happen again.
 I think we need a
full blown monitoring
 system that will alert us of
problems like this in time
 to take action.
 CLIFF REED: Do you mean like
the one we tried out before
 at the other offices?
 If you remember, that
didn't go over so well.
 Don't we think we'll get the
same pushback from the managing
 partners that we got last time?
 NARRATOR: Two years earlier,
the executive committee
 had tried to install a
client prospecting system.
 Angela had first
learned of the system
 through an old business school
friend in a large consulting
 firm.
 The system was designed to
monitor client prospecting
 activity and anticipate the
volume of upcoming work.
 Under the system,
each managing partner
 would use a chart to
track staffing needs
 for all existing and
potential new projects.
 A six-month timeline, starting
with the current month,
 would run across the top.
 Down the left side,
the partner would
 list projects grouped
into four categories:
 ongoing, sold but not
started, submitted
 proposals, and prospects.
 The partner would then
fill in the four boxes
 with the number of junior
and senior consultants
 each project demanded or was
predicted to demand per week
 and then calculate the
sum for each column.
 For bids not yet won,
the managing partner
 would calculate expected
staff utilization
 by applying to each contract
an estimated percentage
 of probability of winning it.
 He or she could then monitor
total project utilization
 for each week on the
chart and use the chart
 to run weekly staffing meetings
with the other partners.
 The chart would
allow staff meetings
 to focus on how to hit a
particular utilization target
 and where the pressure points
were for new client work.
 The chart could also
provide useful information
 to top management on the
activity at individual offices
 and stimulate discussions
about why certain project
 bids were won or lost.
 As part of the system,
 and managing partners
of each office
 would get together on a regular
basis for face-to-face meetings
 to discuss and
interpret that data
 from the charts and
the implications
 for executing
firm-wide strategy.

As the Executive Committee discussed the details of the client prospecting system
(presented again after the video for reference), their minds turned to the reasons they had
decided to scrap it in the first place. They needed to get the managing partners on board,
and the managing partners had been extremely critical. From their point of view, the
proposed system would be a time-consuming and bureaucratic activity. It would intrude on
their freedom to manage their offices autonomously. Cliff and Jack restated the managing
partners’ two opposing arguments.


TRANSCRIPT
Autoscroll
ON
 CLIFF REED: If I recall, there
were two major objections.
 First, as we were
saying earlier,
 there's the matter
of incentives.
 The managing partners
made the point then--
 and I think they will
make the point now--
 that our revenue- and
profit-based incentives
 already forced them to worry
daily about prospecting
 in billable hours.
 The size of their
paychecks depends on it.
 JACK LELAND: We can't
forget their other concerns.
 They were really
worried about the fact
 that the system we
proposed was centralized.
 They made the point
that we've always
 been a decentralized partnership
in both our philosophy
 and our practice.
 They felt that a
change like this
 would undercut their
autonomy, and they pointed out
 that nothing in our
 suggested our current
arrangements were inadequate,
 which they believe showed that
decentralization wasn't just
 an ideal.
 It was key to our success.
 ANGELA GOLDBERG:
Maybe we should insist
 on the implementation
of a new system
 but let the managing
partners run it themselves
 without any input from us.
 They would still be able
to get the information
 they need to divert
another crisis,
 and that's what's
most important.
 CLIFF REED: I hear
your point about trying
 to get the managing
partners to buy in,
 but I think we need to insist
that the system be centralized
 with us involved in the reviews
and discussions, especially
 given how much we've grown.
 Those staffing charts would
provide so much useful
 information to the three of us.
 If we know what sort
of prospecting activity
 is happening at
each office, we can
 be that much better
at resource planning
 for the firm as a whole.
 Think about the questions
it would help us answer.
 What sort of bids
are we losing out on,
 and why are we losing them?
 What are our competitors doing?
 What skills do we need to
recruit for in the future?
 Where should we open
our next office?
 We don't have any way to answer
those questions right now.
 And think about all
our multi-site clients.
 If we had a centralized view
of the prospecting charts,
 we could better
serve them, the ones
 we already work with or
that we could work with out
 of more than one office.
 In other words, I think
we're at a point where
 we need to make sure this
information travels all
 the way up to the three of us so
that we can understand and act
 on it.
 And a decentralized
system can't do that.
 JACK LELAND: All true.
 But I think there's an
even more basic reason
 to insist that this
information gets to our desks.
 If the three of us are
paying attention to it
 and asking questions about
the data, everyone in the firm
 will begin to pay attention
to the same issues.
 The updating of forecasts
and the discussion
 in those meetings will
become a key foundation
 for the way we do our
business and grow.
 NARRATOR: At this
point the founders
 discussed ways they might
implement a centralized system.
 Where should they start?
 How could they convince
the partners that using it
 wouldn't compromise their
freewheeling culture?
 Should the partners run
the system themselves,
 or should they hire
new staff specialists
 and put them in charge?
 How sophisticated
should the system be,
 and how often should
it be updated?
 How frequently should
the system send reports
 to the executive committee,
and how frequently
 should office partners meet
with the executive committee
 to review and discuss
the implications?
 As they discussed questions
of implementation,
 the executive
committee found itself
 returning to the same
question over and over again.
 Did they really need
the system to be
 centralized if they
had good managers using
 the data in each office?

Proposed Client Prospecting System

Key Details:
 System would use a six-month timeline (partial month-level view shown
here for detail).
 Managing partner would fill in the first four boxes with the anticipated
numbers of junior consultants and senior consultants for each project per
week and then calculate the sum.
 For bids not yet won, managing partner would calculate expected staff
utilization by applying to each contract an estimated percentage probability
of winning it.


The challenges facing the Seattle office center on the firm’s ability to monitor strategic
uncertainties. Strategic uncertainties are the emerging threats and opportunities that
could invalidate the assumptions upon which the current business strategy is based. In the
wake of decreasing client demand, the Executive Committee should analyze strategic
uncertainties relating to the changing automation needs of current and potential
customers, competitor offerings and tactical moves, and skills needed by and currently
available to the firm.
To help them detect and respond to these uncertainties, ACS should design an interactive
control system. Notice how the new system—driven by top down questioning by the
founders—would motivate local partners to spend more time understanding the economic
and strategic issues facing their clients, the actions of competitors, etc., allowing them to
forecast better and come up with action plans to offset imminent downturns.
Core values and critical performance variables play a secondary role in this
scenario. Core values are relevant to the discussion of how such an interactive control
system should be designed. Maintaining a hands-off management style and inspiring
entrepreneurialism and autonomy among employees has always been a central tenet of
the ACS philosophy. The Executive Committee must decide how critical it is for them to
carry that philosophy into the future, especially if it means potentially losing access to
important information regarding changes in the competitive environment.
We learned at the beginning of the lesson that revenue growth and employee retention are
important aspects of the firm’s strategy as plans. But as we have learned, the dwindling
project pipeline in Seattle was jeopardizing revenue and leaving staff without work,
putting the firm’s current strategy at risk of failure. Therefore, we can recognize
that critical performance variables are at play in this scenario.
However, the Seattle crisis does not only jeopardize the firm’s current strategy. As we’ve
learned, changes in client demand indicate possible strategic uncertainties around client
needs that should shape ACS’ strategy going forward. If ACS fails to detect and adapt to
these uncertainties, they will not be able to remain relevant and survive.
Risks to be avoided are not relevant in this scenario. Risks to be avoided focus on
designating which behaviors are unacceptable as well as deciding which new
opportunities not to pursue. The situation in Seattle does not stem from employees
behaving in unacceptable ways or pursuing the wrong opportunities. The crisis at the
Seattle office stems from changes in client demand for ACS services.


6.4.4 Discussing Challenges in Boston
11:35 PM


Boston
Retreat Discussion: The Boston Office
As you observe the Executive Committee’s conversation about the Boston office,
please return to and build upon your team discussion thread using the following
prompts as a guide:
those solutions, and what risks, if any, must be considered when
using them?

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TRANSCRIPT
Autoscroll
ON
 NARRATOR: The Boston office
was the original ACS office
 and the one the founders played
the greatest role in shaping.
 But as ACS grew, the Boston
office faced challenges too,
 ones the founders
worried could spiral
 into company-wide issues.
 As the conversation
turned to Boston,
 Jack Leland spent no time
cutting to the chase.
 JACK LELAND: What do we do about
the situation with Shapiro?
 He's one of our best
partners in Boston, maybe
 in the whole firm.
 But I think we allowed that
to cloud our judgment when
 we gave him the green light
to bid on the library project.
 It's running over budget.
 It's behind schedule.
 And when you consider
just how talented
 Alan Shapiro is, it's really a
testament, I think, to the fact
 that we just don't have
the skills to pull off
 this kind of work.
 NARRATOR: Angela and Cliff,
who jointly managed the Boston
 office, nodded in agreement.
 For the first time
in its history,
 ACS had taken on a client
outside of manufacturing.
 When partner Alan
Shapiro suggested
 they bid on the project to
oversee the next generation
 automation of a university
library cataloging system,
 both of them had been wary.
 CLIFF REED: I should
have listened to my gut
 when Shapiro walked up
to me after that meeting
 with his idea.
 He's such an enthusiastic
guy, it's hard
 not to fall under his sway.
 He was so excited about
the idea of branching out
 into a new client area
and expanding our reach.
 But I knew deep down that
the risks would probably
 be greater than the rewards.
 I was right.
 We're in so far
over our heads, it's
 looking like we'll have to
subcontract some of the work
 out to a database
management specialist.
 And subcontracting
is yet another thing
 we've never done before.
 I'm kicking myself here.
 ANGELA GOLDBERG: I agree.
 We should have stopped Shapiro.
 But there's no point
dwelling on the past.
 Let's turn back to the issues
with the library project
 tomorrow.
 Right now, we need
to figure out how
 we want to handle these sorts
of opportunities in the future.
 First off, how do we guide
the firm's strategic direction
 and expertise?
 We can't be working on an
ad hoc basis like this,
 relying on individual
partners' decisions
 to bid for one-time projects.
 We need to nail down a
strategic direction for the firm
 and identify what it should be
with respect to manufacturing
 clients versus service
sector clients.
 We know the service sector
is growing quickly right now
 and that it's
dramatically increasing
 its use of technology.
 Shapiro made these
points himself.
 But I still think the
most effective way
 to use our existing skill
base, given the sorts of people
 we've already hired
and developed,
 is to keep our focus on
manufacturing automation.
 JACK LELAND: I agree.
 Manufacturing is what
we've always been about.
 It's in our DNA.
 And I think we've always
assumed that everyone's
 on the same page about that.
 But the more we grow, the more
office locations that open up,
 the more likely
it is that people
 will see new opportunities
outside manufacturing,
 especially if we don't
walk the talk ourselves.
 And with Shapiro,
we didn't, did we?
 Maybe we've been lucky
the firm has kept
 its focus as long as it has.
 But I think it's time we bring
the whole partnership together
 to talk about and draft a
long-term strategic plan.
 We should develop a set
of criteria that defines
 our strategic direction.
 And we need to make sure that
the partners use that criteria
 as a checklist
when they're trying
 to figure out if a
prospective job is a good fit.
 If the project doesn't
check the boxes
 of our specific competencies,
the partner walks away from it,
 plain and simple.
 NARRATOR: Cliff and
Angela agreed with Jack
 that it was time to think
about a longer-term strategy
 and put it down on paper.
 But the talk of formal planning
and strategic checklists
 made them nervous.
 For the remainder
of the afternoon,
 the founders discussed
their concerns.
 They felt it was important
to involve everyone
 in strategic planning.
 But they knew the discussions
would be time consuming,
 especially if they were to
have them on an annual basis.
 Cliff in particular
worried the firm
 might not be able
to reach consensus.
 Additionally, the firm had never
pinned down a formal strategy
 and cascaded it to
teams and employees
 in a comprehensive set of
goals, measures, and targets.
 At the time, they measured
only a few financial variables
 at the firm level.
 Would the shift feel
too bureaucratic
 for the looser
culture of the firm?
 If they decided to develop
strategy guidelines,
 the founders were not sure
of the right approach.
 Above all else, they
wanted to be sure
 that they were not imposing any
bureaucratic requirements that
 would hurt the
entrepreneurial culture that
 was part of their DNA.
 So they debated
two alternatives.
 Should the strategy
guidelines prescribe
 what types of projects
the firm should pursue?
 Or alternatively, thinking
back to the failed library
 automation project,
should the new guidelines
 specify what types of work
the firm should avoid?

The decision of which opportunities ACS should pursue is the heart of the issue in the
Boston office. The Executive Committee must analyze risks to be avoided and
design boundary systems (in this case, focused here on strategic boundaries) that specify
out-of-bounds opportunities and communicate them to employees like Alan Shapiro.
Core values and critical performance variables are also relevant to resolving this
issue. Core values, together with strategic boundaries, will help employees identify
which opportunities are aligned to the firm’s larger purpose. When employees pursue
projects not aligned to the firm’s larger purpose and capabilities, they risk jeopardizing
client relationships. The ACS strategy depends heavily on building trustworthy, long-
term relationships with clients. This means they need to maintain a very high, if not
perfect, project success rate. Project failure due to botched client relationships is thus
a critical performance variable for ACS and should be recognized as such.
Strategic uncertainties do not factor into the challenges at the Boston office. In this
instance, the Executive Committee is concerned with the impact the library catalog
project will have on their ability to implement their current strategy rather than focusing
on threats to that strategy down the line.

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6.4.5 Discussing Challenges in Philadelphia
11:42 PM
Philadelphia
Retreat Discussion: The Philadelphia
Office
As you observe the Executive Committee’s conversation about the Philadelphia
office, please return to and build on your team discussion thread using the
following prompts as a guide:
those solutions, and what risks, if any, must be considered when using
them?

609d8e6f29c5fc0b825a1db4/608800c4-4458-44ef-9197-0d79a2e7677d/1071/908/#/syllabus>

We have provided the P&L for the Philadelphia office for you to analyze as you consider
whether and how the Executive Committee should convert offices to profit centers.


TRANSCRIPT
Autoscroll
ON
 NARRATOR: Jack Leland managed
the Philadelphia office.
 He wanted to use
the retreat weekend
 to discuss a problem there
that he worried might
 run through the whole firm.
 Currently, each office was
configured as a revenue center.
 This meant that
managing partners
 were given overall expense
budgets rather than line
 by line budgets.
 Jack worried that this practice
had allowed expense categories
 at the office level to creep
up and get out of control.
 JACK LELAND: Without
line-by-line budgets
 tied to office
profitability, I found
 that the managers don't really
worry about specific expense
 categories.
 In Philly, we're seeing spending
on recruiting events, office
 equipment, training, and other
supporting activities creep up.
 Partners are buying
more and more things
 in the "other expenses"
category on the P&L.
 I think it's time for a change.
 I think we need to
start itemizing costs
 so we can monitor them better.
 NARRATOR: The founders
discussed the pros and cons
 of converting each
office to a profit center
 so that partners would have
incentives to manage costs
 more closely.
 While the benefits of being
able to control costs was clear,
 the change also raised some
concerns for the founders.
 Angela presented hers first.
 ANGELA GOLDBERG: We'll need
to negotiate profit targets
 with each of the
managing partners.
 Are they going to resent
us for interfering in how
 they run their practices?
 The negotiations
for those targets
 could be time consuming too.
 If we're going to take
up partners' time,
 we need to be sure it's
for something so valuable,
 we'll see the payoff
down the line.
 NARRATOR: If the founders did
turn the offices into profit
 centers, they would also
need to change the incentive
 plan for partners.
 Their current incentive
plan awarded the partners
 primarily on firm-wide
growth and profitability
 rather than on
office-specific profits.
 But with their compensation
tied solely to individual office
 performance, would
partners still
 be motivated to
help other offices
 and maintain a unified,
firm-wide image?
 CLIFF REED: It's a
catch-22, isn't it?
 On the one hand, we
don't want to send out
 new signals that conflict with
our basic revenue growth goal.
 We've always sent the
message loud and clear
 that our success depends
on generating revenue.
 But on the other hand, as
our growth rate slows down,
 controlling costs becomes
more and more important.
 And it's only going to get
harder for us to absorb
 cost increases as we scale.

To address the challenges at the Philadelphia office, the Executive Committee must analyze
its critical performance variables. Recall that critical performance variables focus on what
would cause your current strategy to fail. Historically, ACS believed that if they did not hit
their aggressive revenue goals, they would fail to capture sizeable market share while the
market was young and fragmented. But as expenses begin to creep out of control and growth
slows, they must consider whether profit is now a critical performance variable instead. This
decision will impact the design of their diagnostic control systems.
Core values, risks to be avoided, and strategic uncertainties are not relevant to deciding
which financial goals and incentives will help the business succeed as it grows.


Includes salary, wages, and all benefits of professional and nonexempt staff; excludes
distribution of profits to partners.
b Includes office space, heat and electricity, and telecommunications.
c Includes stationery, office supplies, computers and leased copiers.
d Includes graphics services, temp employees, travel and entertainment, subscriptions,
online databases, library, recruiting support, training materials, and miscellaneous.
Selecting Strategic Variables to Analyze

Which strategic variable(s) should the founding partners analyze as they consider the
incident at the Philadelphia office? Sort each variable into the appropriate category.
Select only one variable for the "Most Relevant" category.


1. Their current incentive plan awarded the partners primarily on firm-wide growth and
profitability

6.5.1 Proposing Solutions to Challenges at ACS
11:57 PM

6.5.1 Proposing Solutions to

Challenges at ACS
Digging Deeper into Office-Level Issues
Now that you have gained an appreciation for the challenges the Executive
Committee is grappling with across its offices, we are going to ask you to dig deeper
into the issues at one specific office location so that you can propose a solution that
addresses those challenges.
At the beginning of the case, we categorized ACS’s strategy as we understood it at
that point using the four Ps. Here are the results of that work:
The Four Ps of Strategy at ACS

Strategy as Strategy as Strategy as Plans Strategy as
Perspective Position Patterns of
Action
Inspire consultants Meet Obtain a first-mover Encourage
by motivating manufacturers’ advantage and gain a large highly
them to behave increasing and share of a new, fragmented decentralized
entrepreneurially previously unmet market decision-
demand for making
automation
expertise
Achieve first-mover Give partners
advantage by prioritizing full autonomy
revenue growth: set in running
aggressive revenue goals, their offices
compensate each partner with
a share of the firm’s total
profits in proportion to his or
her share of total revenue
generation, tie bonuses to
revenue growth, and operate
each office as a revenue center
(partnership as a whole is the
only profit center)
Hire a top-flight class of
consultants and provide
opportunities for rapid growth
Operate offices in a mostly
decentralized fashion

609d8e6f29c5fc0b825a1db4/d2fd6dff-3080-4d6d-a9ea-0cb6598be8e0/1071/908/#/>

Here is a more comprehensive breakdown of the ACS strategy, based on what we have
learned. New additions to the list are bolded. Please note in particular the three questions
that remain unanswered.
Strategy as Strategy as Strategy as Plans Strategy as
Perspective Position Patterns of
Action
Inspire consultants Meet Obtain a first-mover Encourage highly
by motivating manufacturers’ advantage and gain a large decentralized
them to behave increasing and share of a new, fragmented decision-making
entrepreneurially previously unmet market
demand for
automation
expertise
Maintain the Unsettled: Only Achieve first-mover Give partners full
highest level of accept clients advantage by prioritizing autonomy in
integrity and within the revenue growth: set running their
respect in all manufacturing aggressive revenue goals, offices
dealings with sector? compensate each partner
clients with a share of the firm’s
total profits in proportion to
his or her share of total
revenue generation, tie
bonuses to revenue growth,
and operate each office as a
revenue center (partnership
as a whole is the only profit
center)
Hire a top-flight class of Unsettled: Focus
consultants and provide more attention
opportunities for rapid on changes in
growth client demand
patterns by
using a client
prospecting
system
interactively?
Operate offices in a mostly
decentralized fashion
Unsettled: Rethink
singular focus on revenue
growth and convert offices
to profit centers to better
control costs as growth
slows?

609d8e6f29c5fc0b825a1db4/d2fd6dff-3080-4d6d-a9ea-0cb6598be8e0/1071/908/#/>

TRANSCRIPT
Autoscroll
ON
 NARRATOR: The San
Jose office loomed
 large on the minds of
 as they kicked off
conversation at their retreat.
 They had acquired the office
less than a year before.
 And the merging of
management styles, practices,
 and personalities was
still sorting itself out.
 Acquisitions were a
new territory for ACS.
 They had built and molded
their other offices themselves.
 Overall, they were happy
with the San Jose office's
 performance.
 But one recent incident
had them concerned.
 Angela described her
discovery of the situation
 to Jack and Cliff.
 ANGELA GOLDBERG: During my last
tour of the San Jose office,
 a principal told me that one of
the partners, Douglas Crowley,
 was using a client billing
practice that I know
 would make all of us uneasy.
 Basically, he was overcharging
one client in order
 to subsidize another project
that was running over budget.
 We had a contract with the
client that outlined a price
 range for the job with a ceiling
rather than a fixed price.
 He decided to use that
clause to his advantage
 by inflating their bill.
 The way the
principal and Crowley
 saw it, as long as they
didn't go over the ceiling,
 they weren't doing
anything wrong.
 In fact, as they put
it, they were helping
 us hit our revenue goals.
 And they weren't hurting
anybody in the process.
 That's the reigning point of
view on the matter in San Jose.
 Apparently, even Kyle Ross,
our managing partner there,
 finds it acceptable.
 He signs off on the
practice all the time.
 I don't see it that way.
 It's unethical behavior,
plain and simple.
 And I think we
should fire Crowley
 and fire anyone else who
cross subsidizes too.
 JACK LELAND: I agree
with you, Angela.
 I don't buy their
rationalizations.
 Cross subsidizing
isn't something
 we should ever condone.
 I wrongly assumed everybody was
on the same page about that.
 But we've never actually put our
position in writing, have we?
 I think we were able to get
away without a formal directive
 in the past because of how
hands-on the three of us
 have been on every project.
 Because we were so involved
in decision-making,
 all our consultants
saw our philosophy
 about billing
practices firsthand
 and knew that cross
subsidizing is not something
 we would ever condone.
 But we're at a point
now where we can't
 be involved in every project.
 We have to trust
that consultants
 who rose up through the
ranks under our direction
 will keep practicing
our philosophy.
 And that's obviously
not a sure thing.
 In the case of an acquired
office like San Jose,
 nobody has worked with us
directly on client projects.
 And as the situation
has revealed,
 we don't know what
behaviors were
 acceptable in their
previous firm.
 CLIFF REED: Now, I
agree with you both.
 We need to do
something to make it
 clear to people what
types of billing practices
 are out of bounds.
 But I have to
admit, I'm concerned
 about tightening the reins
and the precedent it will set.
 So much of our success has
come from giving employees
 freedom to be entrepreneurs.
 We need to make sure our
consultants can still
 feel creative in their
approach to clients.
 If we take that away,
we'll lose them.
 And if we lose
them, we're toast.
 NARRATOR: Jack and Angela
nodded in agreement.
 All three founders
were on the same page.
 But Angela felt there was
another dimension of the issue
 they had to address.
 ANGELA GOLDBERG: You're
right, coming off
 as too authoritative is the
last thing we want to do.
 But if we don't
address this now,
 what happens down the
road as we keep growing?
 We will inevitably encounter
more and more situations
 like this one, especially
if local partners
 are condoning this behavior.
 If we don't take a
firm-wide stance,
 I worry we could
expose ourselves
 to some serious client risks.
 JACK LELAND: Let's sleep on
this and revisit it tomorrow.
 In the meantime, what
do we do about Crowley?
 Do we reprimand him,
or should we even let
 him go to send a signal?
 And how about the clients
who were affected?
 Do we inform the client
whose bill he boosted
 and return a portion
of their fees?
 Or do we let this one
slide until we figure out
 a more coordinated response
to the bigger issue?
 NARRATOR: All three
of the partners
 believed they should
return the fees.
 But they weren't sure yet
how much money was involved
 or what sort of explanation they
should provide to the clients.
 They put this on their
agenda for further discussion
 on the second day
of the retreat.

6.5.2 Selecting an Office
Thursday, July 8, 2021
12:15 AM

6.5.2 Selecting an Office

Now that you have gained familiarity with the challenges at each office, in which ACS office
do you wish to propose solutions? Please note that once you have made a selection, you cannot
change it.
Please select an office for which to propose solutions.
San Jose (Challenges around client billing practices—to be addressed primarily through
boundary systems focused on business conduct boundaries)
Seattle (Challenges around client prospecting practices—to be addressed primarily through
interactive control systems)
Boston (Challenges around new types of opportunities—to be addressed primarily through
boundary systems focused on strategic boundaries)
Philadelphia (Challenges around selecting the best financial goals and incentives—to be
addressed primarily through diagnostic control systems)
Results
o 33.800000000000004 percent selected Boston
o 33.1 percent selected San Jose
o 17.9 percent selected Philadelphia
o 15.199999999999992 percent selected Seattle
-3-2-1123-1133.8%Boston33.1%San Jose17.9%Philadelphia15.2%Seattle
151 of 346 participants have responded. You may return at any time for the latest results.
Poll submitted
Please review again the video for your chosen office. Then, complete the questions in the table
that follows. You do not need to write out your responses formally—think of this as
preparation for drafting your formal proposal.

Drafting a Proposal
Drawing on your notes, please prepare a brief proposal (100-300 words) detailing a solution to the
challenges at your selected office. Your solution should draw directly on the most relevant strategic
variable/lever of control for that office, which we identified in the first half of the activity:
 San Jose: risks to be avoided (boundary systems: business conduct boundaries)
 Seattle: strategic uncertainties (interactive control systems)
 Boston: risks to be avoided (boundary systems: strategic boundaries)
 Philadelphia: critical performance variables (diagnostic control systems)
You should also consider how the solution you propose might impact other ACS offices.
As you prepare your proposal, imagine that you are a member of the Executive Committee writing an
email memo to all employees at this particular office. You plan to hold a town hall soon after to
address questions, but you still want your memo to be as comprehensive as possible.
Within your proposal, please specify the office location you are addressing. You may find it helpful
to use the following approach to structure your response:
 Proposed levers of control solution (What)
 Reasons proposed changes will benefit ACS (Why)
 Parties involved in implementation (Who)
 Timeframe for changes (When)
 Implementation process (How)
As you write your proposal, you may find it useful to refer to the tables we provided in Lesson 3 that
summarize key considerations for implementing each lever. We have provided both those tables and
the Levers of Control model in the "Additional Resources" tab below the response box.

Additional Resources

Implementation Tables and the Levers of Control Model
LEVER #1:
BELIEFS
SYSTEMS
WHAT explicit set of beliefs that define basic values, purpose, and direction, including
how value is created; level of desired performance; and human relationships
WHY to provide momentum and guidance to opportunity-seeking behaviors
vision statements
credos
staff groups facilitate communication, feedback, and awareness surveys

LEVER #2:
BOUNDARY
SYSTEMS
WHAT formally stated rules, limits, and proscriptions tied to defined sanctions and
credible threat of punishment
Strategic Boundaries: when excessive search and experimentation risk
dissipating the resources of the firm
WHO senior managers formulate with the technical assistance of staff experts (e.g.,
lawyers) and personally mete out punishment

LEVER #3: DIAGNOSTIC
CONTROL SYSTEMS
WHAT feedback systems that monitor organizational outcomes and correct
deviations from preset standards of performance

Examples:
profit plans and budgets
goals and objective systems
brand revenue monitoring systems
WHY to allow effective resource allocation
to define goals
to provide motivation
to establish guidelines for corrective action
to allow ex post evaluation
to free scarce management attention
HOW set standards
measure outputs
link incentives to goal achievement
WHEN performance standards can be present
outputs can be measured
feedback information can be used to influence or correct deviations
from standard
process or output is a critical performance variable
WHO senior managers set or negotiate goals, receive and review exception
reports, follow up on significant exceptions
staff groups maintain systems, gather data, and prepare exception
reports

LEVER #4: INTERACTIVE
CONTROL SYSTEMS
WHAT control systems that managers use to involve themselves regularly and
personally in the decision activities of subordinates

Examples:
WHY to focus organizational attention on strategic uncertainties and provoke
the emergence of new initiatives and strategies
HOW ensure that data generated by the system is the focus of regular attention
by managers throughout the organization
continually challenge and debate data, assumptions, and action plans
WHEN strategic uncertainties require search for disruptive change and
opportunities
WHO senior managers actively use the systems and assign subjective, effort-
based rewards

Image illustrating the levers of control model. Box in center represents business strategy. Four
strategic variables emanate from business strategy: going clockwise, core values, risks to be avoided,
critical performance variables, and strategic uncertainties. The interdependence of the four variables
is illustrated through arrows connecting them.
Outer layer of image shows the corresponding lever of control and “P” of strategy for each of the
strategic variables. Clockwise, core values point to beliefs systems, which control strategy as
perspective. Risks to be avoided point to boundary systems, which control strategy as position.
Critical performance variables point to diagnostic control systems, which control strategy as plans.
Strategic uncertainties point to interactive control systems, which control strategy as patterns of
action.

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5e64-4020-b60b-5803b2bcead8/1071/908/#/syllabus>

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5e64-4020-b60b-5803b2bcead8/1071/908/#/syllabus>

10:26 PM

Team,
As we are getting closer to our town hall meeting, I wanted Shared key agenda items with you all . We
are in the midst of transformation and changes that will allow us to align with ACS's overall strategic
goals. Please check the list for transformation and changes . Please review and we are open for any
questions and discussion

1. Operate offices in a mostly decentralized fashion
Authority for decision making is transferred completely to autonomous organizational units

2. Achieve first-mover advantage by prioritizing revenue growth
Set aggressive revenue goals, compensate each partner with a share of the firm’s total profits in
proportion to his or her share of total revenue generation, tie bonuses to revenue growth, and operate
each office as a revenue center (partnership as a whole is the only profit center)

3. Obtain a first-mover advantage and gain a large share of a new, fragmented market
As they are 1st company to do Automation Consulting Services(Like Amazon) they already have larger
customer and potential customer. Plus having top-flight class of consultants to delivery best service will
keep them as Best is this services.

4 Highly decentralized decision-making
Decentralized decision-making tends to create less rigidity and flatter hierarchies in organizations.
When upper management delegates decision-making responsibilities, there also exist wider spans of
control among managers, creating a more lateral flow of information. Thus there will be more bottom
up directional information flow, allowing for more innovation and efficiency closer to the means of
production.

Thank You

Very important page - has core information
10:41 PM

Additional Resources

Implementation Tables and the Levers of Control Model
LEVER #1:
BELIEFS
SYSTEMS
WHAT explicit set of beliefs that define basic values, purpose, and direction, including
how value is created; level of desired performance; and human relationships
WHY to provide momentum and guidance to opportunity-seeking behaviors
vision statements
credos
staff groups facilitate communication, feedback, and awareness surveys

LEVER #2:
BOUNDARY
SYSTEMS
WHAT formally stated rules, limits, and proscriptions tied to defined sanctions and
credible threat of punishment
Strategic Boundaries: when excessive search and experimentation risk
dissipating the resources of the firm
WHO senior managers formulate with the technical assistance of staff experts (e.g.,
lawyers) and personally mete out punishment

LEVER #3: DIAGNOSTIC
CONTROL SYSTEMS
WHAT feedback systems that monitor organizational outcomes and correct
deviations from preset standards of performance

Examples:
profit plans and budgets
goals and objective systems
brand revenue monitoring systems
WHY to allow effective resource allocation
to define goals
to provide motivation
to establish guidelines for corrective action
to allow ex post evaluation
to free scarce management attention
HOW set standards
measure outputs
link incentives to goal achievement
WHEN performance standards can be present
outputs can be measured
feedback information can be used to influence or correct deviations
from standard
process or output is a critical performance variable
WHO senior managers set or negotiate goals, receive and review exception
reports, follow up on significant exceptions
staff groups maintain systems, gather data, and prepare exception
reports

LEVER #4: INTERACTIVE
CONTROL SYSTEMS
WHAT control systems that managers use to involve themselves regularly and
personally in the decision activities of subordinates

Examples:
WHY to focus organizational attention on strategic uncertainties and provoke
the emergence of new initiatives and strategies
HOW ensure that data generated by the system is the focus of regular attention
by managers throughout the organization
continually challenge and debate data, assumptions, and action plans
WHEN strategic uncertainties require search for disruptive change and
opportunities
WHO senior managers actively use the systems and assign subjective, effort-
based rewards

6.5.3 Reviewing Solutions
11:00 PM

6.5.3 Reviewing Solutions

Addressing the Challenges in San Jose
Now that you have submitted your proposal, let’s consider what effective solutions
for each office should look like. Once we have introduced these criteria, you will
select a peer’s proposal to evaluate.

609d8e6f29c5fc0b825a1db4/3552fd85-d186-4b6f-ac65-b6157f6cade3/1071/908/#/syllabus>

 PROFESSOR SIMONS: At the newly
acquired San Jose office,
 a partner who wanted to hit
his office's revenue goals used
 an unethical billing practice--
 cross-billing.
 This is effectively taking
money from one client
 to cover cost overruns
on another client.
 In the consulting business,
reputation is everything.
 When individuals
engage in activities
 such as cross-subsidizing,
they risk
 jeopardizing client
relationships and the viability
 of the entire firm.
 This brings us back to the
concept of franchise risk.
 In the early days,
everybody knew exactly
 which activities were
and were not permitted.
 It was easy for Jack,
Angela, and Cliff
 to communicate those
beliefs and boundaries
 informally to each employee
because they worked closely
 together.
 Now, as the firm grows
and opens new offices,
 the executive committee
is less involved
 in day-to-day project work.
 But they still need to make
sure that every employee knows
 both the behaviors
that ACS values
 and the behaviors they
will not tolerate.
 ACS needs to establish clear
ethical boundaries to protect
 against franchise risk.
 Boundaries are especially
important at ACS
 because their success
depends on the creativity
 of entrepreneurial partners.
 Remember that boundary systems
are most essential when people
 are given freedom to innovate.
 The executive team may also want
to formalize their core values
 by creating a beliefs system,
taking the form of a mission
 statement or credo.
 This beliefs system
should emphasize
 the importance of integrity
in all client-related work.


A successful proposal for the San Jose office will incorporate the following points:
 The new ethical boundary system should be stated in the negative—telling
people what behaviors are unacceptable.
 The boundary system should be short and to the point. Again, remember
Kasper Rorsted’s work—at Adidas, he trimmed the code of conduct
considerably, down to just a handful of pages that employees would
actually read and remember.
 The ACS boundary system should also outline sanctions—up to and
including dismissal—for those caught crossing the line. Thus, some of you
may have argued that Douglas Crowley should be fired. Others may
believe that he should be put on warning but given a second chance
because the boundaries had not previously been written out.
 As the firm grows larger, ACS must remember to have employees review
and acknowledge compliance with codes of conduct on a regular basis.
Recall what happened at Westchester Distributing. A code of conduct
existed, but it hadn’t been updated and it was not enforced. In the absence
of enforcement, Carter Mario and George Pavlov rationalized their
kickbacks and falsified receipts, creating a very precarious situation for
Vince Patton.
 Speaking of Westchester, one final action for ACS is installing internal
controls that safeguard against cross-charging.
Addressing the Challenges in Seattle


TRANSCRIPT
Autoscroll
ON
 PROFESSOR SIMONS: While
the San Jose office
 was the newest office in the
mix and the only acquisition
 for ACS so far, the Seattle
office was relatively new too.
 This meant that they didn't have
a diverse portfolio of projects
 to rely on.
 Nearly all of the revenue
came from a few big clients.
 When these existing
clients turned down
 later stages of work,
the Seattle office
 found itself in serious
financial trouble.
 The executive committee
granted the partners at Seattle
 a great deal of autonomy.
 They trusted that their
incentive plan, which
 focused on bonuses
linked to revenue growth,
 would motivate the partners
to keep the pipeline full.
 But the local
partners in Seattle
 failed to closely monitor
the economic health
 and strategic direction
of their major clients
 and what their
competitors were offering.
 As a result, they were
caught flat-footed
 when their hoped-for
work did not materialize.
 In other words, they
failed to monitor
 strategic uncertainties.
 As a result, the
executive committee
 remained unaware of
these changes too.
 Remember that as
firms grow larger,
 it becomes more and more
important to have a way
 to focus everyone's attention
on strategic uncertainties.
 Then they can engage
in debate and dialogue
 about how to position
the firm for the future.
 Recall that this is
what Marriott does
 through its associate meetings.
 They gather critical information
about changing customer trends
 from those on the ground.
 Then it travels up the chain
of command to top management.
 To solve this problem,
ACS needs to create
 an interactive control system.
 Their proposed client
prospecting system
 fits the bill.
 An interactive profit
planning system
 that requires partners
to reforecast revenue
 and expenses, like the
one we studied at J&J,
 would work as well.
 Remember that interactive
control systems
 serve as important catalysts
for information sharing
 and organizational learning.
 They signal to
employees where they
 should be focusing their
attention and information
 gathering.
 Financial incentives,
while always important,
 are not a substitute for
the interactive process
 that is designed to be
a catalyst for learning.

A successful proposal for the Seattle office will incorporate the following points:
 The strategic uncertainties for top managers relate to:
o the changing automation needs of customers and potential
customers
o competitor offerings and tactical moves
o skills needed by and currently available to the firm
 Whichever system the Executive Committee chooses to use interactively, it
is important that the system facilitates good local management rather
than controls local management behavior. Concerned that they would
restrict their creativity and add red tape, partners are accustomed to having
free rein, and they have pushed back against systems like these in the past.
The Executive Committee will need to demonstrate the utility of the system
in order to bring everybody on board.
 With that in mind, they might consider a phased implementation. They
could start with the original office—Boston—and roll it out to other offices
gradually to build buy-in. They should also be sure to design a system that
is simple and easy to use—much like the Friday Packet at Continental
Media. They should not hire additional staff to run the system—the
partners should be able to easily use the system themselves to discuss and
debate important information to guide the business forward.
 Once the system is in place, the Executive Committee must signal its
commitment to this endeavor by scheduling frequent, regular meetings—
maybe monthly or quarterly—to review the data with key partners in each
office. During these meetings, the Executive Committee should push the
partners to ensure they understand and have acted on emerging shifts in
their business environment.


Addressing the Challenges in Boston


When Alan Shapiro,
 a partner at the
Boston office, decided
 to pursue a catalog automation
project for a university
 library, the executive
committee was worried.
 ACS had never worked on projects
outside of the manufacturing
 sector.
 And their lack of
experience quickly showed.
 The project was running
over timeline and budget.
 They would need to bring in a
subcontractor to handle work
 where they had no expertise.
 It was tempting to explore
new areas as the firm grew.
 But Jack, Angela,
and Cliff realized
 that they needed to provide more
guidance on strategic direction
 to employees.
 Otherwise, they faced the risk
of more troubled projects.
 And project success was a
critical performance variable
 for this young firm,
much like it is
 for Tom Siebel's team at C3.ai.
 The most important
part of the solution
 here is to create a strategic
boundary system that
 specifically states what
types of projects and clients
 the firm will not pursue.
 Remember, strategy
involves choice.
 And trying to be everything
to everyone in every market
 can only mean one thing.
 You do not have
a clear strategy.
 As the firm learns what projects
it is not good at or what
 clients it cannot
successfully serve,
 it should formally state that
employees of the firm should
 not bid on these
types of projects.
 In this case, of course, this
will involve library database
 automation work.
 In addition, a new
mission statement
 can also provide more
clarity regarding
 markets they will serve and
the types of products they will
 offer to create customer value.


A successful proposal for the Boston office will incorporate the following points:
 Unlike the code of conduct developed in response to the incident in San
Jose, the strategic boundary systems stemming from the Boston incident
should focus on opportunities to be avoided. Over time, these boundaries
should reflect top management’s vision of the desired core competencies
for the business. Think of Quiet Logistics: Bruce Welty made the decision
not to take on customers who sell low-cost commodities. Their core
business is high-end apparel, because they are able to better justify the
additional costs that e-commerce logistics entails.
 Boundaries at ACS should also reflect and prohibit work in areas where the
firm has demonstrated a lack of competence through past attempts and
failures. Remember that unlike beliefs systems, boundaries should not be
set on stone. Businesses must continually revisit and adapt them to
changing trends, circumstances, and strategies.
Addressing the Challenges in Philadelphia


 PROFESSOR SIMONS: In
the early years of ACS,
 revenue growth was the
overriding objective.
 Jack, Cliff, and
Angela believed it
 was critical to gain as much
market share as possible
 while the manufacturing
automation market was still
 young and fragmented.
 But when expenses began
to spiral out of control
 at the Philadelphia office,
 was forced to rethink the
central role of revenue growth.
 They knew that their growth
would eventually slow,
 leaving them less cushion
to cover rising expenses.
 It seemed the time
had finally come
 to make profit the priority.
 At the retreat,
the three founders
 explored the idea of converting
offices into profit centers.
 This would mean asking
managing partners to give up
 some of their autonomy.
 It also raised other
important questions
 relating to the
strategy of the firm
 that you will read about next.


A successful proposal for the Philadelphia office will incorporate the following points:
 First, ACS must ensure that the switch from a revenue to a profit focus
does not impede client growth, their main goal. So, they need to figure out
whether they have truly moved out of the rapid growth stage or whether
they are still in the thick of it. If it is the latter, they may want to set
relatively low profit targets for individual offices. This would allow
managing partners to still focus on maximizing revenue while providing
some level of control over expenses.
 Second, a switch to profit centers would force managing partners at each
office to focus more heavily on their own margins. As the founders
themselves have realized, this presents a risk—encouraging a more inward
focus may detract from the single, unified image the firm intends to
present.
 The founders must also consider the additional logistical challenges of
measuring profit. It is a more complicated performance measure than
revenues (i.e., wider span of accountability), because more variables are
uncontrollable, and shared expenses are difficult to allocate. This means
ACS would need to enhance their information systems. They would also
need to identify the best process for negotiating and setting profit targets—
and since negotiations would need to happen annually, they must think
carefully about how much time to devote to them. As you have hopefully
realized, all of these challenges undercut return on management at ACS.
 Finally, ACS must consider the tension between short-term and long-term
goals. Profit objectives may generate different behaviors than revenue
objectives. For example, managing partners accountable for profit targets
may feel the need to sacrifice staff development or other long-term
investments in order to improve margins.
 If ACS were to deem these profit center drawbacks too concerning, there
are alternative paths they might consider. For example, they could keep
their offices as revenue centers but install a detailed diagnostic expense
monitoring system. This would be used as part of the budget and review
process. ACS would still need to enhance information systems to provide
line-by-line expense detail, but the overhaul would be less extensive, as
would monitoring. Exceptions could be monitored by reference to budget
spending levels.


11:15 PM

6.6.1 Scoring Your Business

Congratulations on reaching the end of Strategy Execution! Throughout the course, we have
given you opportunities to evaluate each of the levers of control at the business you chose to
analyze and to begin thinking about how you can integrate and improve them as they work
together to execute your strategy.

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9b83-4075-9210-586b747ea4fd/1071/908/#/syllabus>
In this capstone activity, you will have the opportunity to revisit your previous assessments of each
lever as it is used at your business. We will then ask you to assign an overall effectiveness rating to
each lever. This initial portion of the capstone will give you the opportunity to begin considering the
state of the four levers collectively rather than separately.
Next, you will use these ratings to identify the single lever most in need of urgent improvement. We
will ask you to propose a set of changes to that lever and draft a plan for implementing and
communicating those changes to the business. This will take the form of an executive summary.
Step One:
Our starting point—as it has been throughout the course—will be ensuring that you have a clear
understanding of your business strategy as the foundation for strategy execution. To this end, we
introduced the 4 Ps of strategy framework.
To begin our capstone exercise, please review your assessment of the four Ps at your business. (It is
very likely that your understanding of your business strategy will have evolved based on what you
have learned in the course.)
STRATEGY AS POSITION
STRATEGY AS PERSPECTIVE
STRATEGY AS PLANS
STRATEGY AS PATTERNS OF ACTION

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Step Two:
For our second step in the capstone exercise, we will ask you to evaluate two related dimensions of
strategy execution:
1. Does your business use the four levers of control effectively to manage each of the four Ps?
o Beliefs systems
o Boundary systems
o Diagnostic control systems
o Interactive control systems
2. Do managers in your business exhibit the right behaviors to allow individuals to achieve their
potential?
o Coach
o Commander
o Boss
o Facilitator and sponsor
Let’s now tackle each of the four levers in turn.

11:19 PM

Energizing Employees to Execute

Strategy
Generating Creative Tension, Part I
3.1.1 Module 3 Introduction
M3_Level of Pressure vs Complacency
Level of Competitive Pressure
Your Rating
You received 5 on a scale of 1 (Lowest) to 10 (Highest).
Your Cohort's Ratings
Level of Complacency
Your Rating
M3_Techniques to Discourage Complacency
Question
What are some techniques that you or your colleagues have used to discourage complacency and
keep employees attuned to competitive pressures? Describe at least one and evaluate its success.
Your Response
Competitive Pressure: We have work culture were you have to stay up to date with Industry or
technology. Also have openness in sharing opinion or ideas.

Complacency: We are so consumed with work and failed to build connection and also lack of
seeking new opportunities around us.
Submitted June 03, 2021 at 10:44 PM ET
3.1.3 Designing Stretch Goals
M3_Stretch Goal Examples
Question
Does your business currently use stretch goals?
Answer
Yes
Reflection Question
If yes, provide an example of a stretch goal. In what ways did those who were accountable for
this goal need to work differently, rather than simply harder, to hit it?

If no, what is a stretch goal that your business—perhaps your own team—might implement?
What do you see as the potential benefits of implementing this stretch goal?
Reflection Response
PI planning for every quarter, we have one or two stretch goals to key features which will bring
more business value. Teams reached their seem stretch goals always have two things in common
at the end totlly turns out but totally rewarding.
Results
Yes: 63 %
No: 37 %
Generating Creative Tension, Part II

3.2.2 Spurring Innovation Across Units (Cross-Unit
Teams and Matrix Organizations)
M3_Cross-Unit Interaction
Question
What does cross-unit interaction look like in your business? Is such communication mostly
informal, or are formal processes in place to encourage it?
Your Response
In our organization, we have lot of integration with other departments and we have cross-unit
teams which handles dependencies and risks. We also have formal processes to cover 85 % of
dependencies and risks. But this conversion is never been ease as each team will have their agent
coming to the meeting.
Submitted June 04, 2021 at 01:20 AM ET
M3_Cross-Unit Team Proposal
Your Response
What is one challenge facing your team that Performance will be improved as they
stems from lack of knowledge of what is will be shared information to make
happening in other units of your business? Or, better discussions
what is one aspect of your team’s performance
that could be improved by increased knowledge
sharing with another area of your organization?
If you were to establish a cross-unit team to Key PARTICIPATE - should be business

tackle this challenge, who should participate? owners, team leads and developers
Why? between different departments.
Would the cross-unit team be permanent or Yes. in this current world it is really
temporary? Why is this the best choice? hard to imagine any company working
in Silos. So cross unit team can be
permanent . But the members in cross
functional team should have
representation all departments.
M3_Matrix Use
Question
Do you use a matrix in your business? Recall that in a matrix organization, employees report to
two bosses.
Answer
No
Reflection Question
If your business does not use a matrix, please explain why. Do you believe the business would
benefit from using a matrix? Do you believe it would introduce any risks or costs? Please
elaborate.
Reflection Response
Matrix method may make decision-making process to slowdown and too much work can cause
overload. Also measuring employee performance might become difficult.
Results
No: 70 %
Yes: 30 %
3.2.3 Conclusion: Considering the Risks of Generating
Creative Tension
M3_Creative Tension Effectiveness
Your Rating
You received 34 on a scale of 6 (Not at all effective) to 60 (Highly effective).
You received 34 on a scale of 6 (Not at all effective) to 60 (Highly effective).
M3_Improving Creative Tension
Question
What is the most important change you can make to improve your ability to generate creative
tension, innovation, and high levels of performance? This might be introducing a new technique
(specify which one) or removing one of several techniques you already use to simplify and
enhance focus (again, please specify which technique or techniques you would remove). Why do
you think this particular change will be most beneficial?
Your Response
Management practices that support creating a culture of Innovation like David Rodgriguez
mentioned in Marriot. Appreciation for how employee contributes to the overall purpose of the
company.
Defining Core Values

3.3.1 Introduction: The Role of Core Values
M3_Ways Core Values Direct Behaviors
Your Response
CORE VALUE DIRECTION
 Be a very effective operating organization
 Be a market leader through customer focus and innovation.
 Manage risk and capital for quality risk-adjusted returns.
M3_Core Values Poll
Question
Answer
Yes
Reflection Question
None
Reflection Response
e will have a culture that is commercial in nature, i.e., competitive, executionfocused, innovative,
and team success-oriented, in pursuit of the Charter Mission
Results
Yes: 91 %
No: 9 %
3.3.2 Prioritizing Constituents in Your Core Values
M3_Constituent Priority Poll
Question
Answer
Shareholders
Reflection Question
None
Reflection Response
I work in a company which is a public government-sponsored enterprise. So any thing we do as a
company has to have compliance with the government. So in our case business values -
Shareholders, Customer and Employees
Results
Customers: 53 %
Employees: 31 %
Shareholders: 16 %
3.3.3 Connecting Value Creation to Core Values
M3_Constituent Priority Private Reflection
Question
Which constituent do you believe your business should prioritize? Please explain why you think
this choice is the best one for your business. It may help to think of a story—perhaps a real one
you or colleagues have encountered or perhaps imagined—in which the interests of these
constituents are in conflict. What would the outcome be of placing your chosen constituent first?
Your Response
Employee - Culture of learning and of respectfully questioning each other, to try to understand
the other perspectives. The whole emphasis on empathy is really shining through in situations
where there’s a dire need to innovate and create something individuals need and want.
Communicating Core Values

3.4.2 Communicating Core Values
M3_3.4.2 Linking Core Values to Tasks Reflection
Question
Propose one way that you personally can help your team link core values—either those already in
existence or those you have defined for your business—to actual tasks and projects, much as
employees and managers did at Henkel during the “Visions and Values” workshops or like the
actions at Marriott to prevent human trafficking.
Your Response
All OKRs for any team in our organization always aligned to Organization vision and goals . Each PI
planning, first goal is to compare team OKRs with Organization Vision and realign our OKRs if
needed.

6.6.3 Boundary Systems
11:38 PM

6.6.3 Boundary Systems

Evaluating Risks to be Avoided
Next, you will evaluate risks to be avoided. These shape the two types of boundary systems we
introduced: business conduct boundaries and strategic boundaries.
We focused on business conduct boundaries in Module 5: Identifying and Managing Risks. We
focused on strategic boundaries in Lesson 1 of this module (Module 6: Balancing Innovation
and Control).
You may wish to review material in that portion of the course as you answer the questions that
follow. We also encourage you to return to your response workbooks for Modules 5 and 6,
which contain your responses to activities concerning your chosen business. We have provided
the workbooks here for your reference.
Module 5 Response Workbook

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fbc6-435d-904d-90c5a51b1db6/1071/908/#/syllabus>

Strategy
Execution
Strategy Execution Response Report
STRATEGY EXECUTION
Identifying and
Managing Risks
Identifyin
g and
Managing
Risks
Identifying
Sources of Risk,
Part I
5.1.2 Operations Risk
M5_Operations Risks
Private Free Entry Table
Your Response
In a sentence, describe the
risk.
Cyber Security - Lack of
Stable, Resilient and
Controlled process and
technical ecosystem
How could an error or lapse
in this area create
Increase compliance gaps and
vulnerable to
strategic risk for the
business?
external sources
What steps has the business
taken to monitor
and manage the operations
risk you identified?
1. Scan and compare the
accounts against security
standards and policies (e.g.
vaulting, multi-factor
authentication, password
rotation policy, etc.)
2. Determine policy
noncompliance for the
onboarded accounts to
determine vulnerabilities
3. Ongoing assessment,
remediation, and prevention
of risks of privileged user
accounts across the landscape
What steps does the business
still need to take?
Automate monitoring and
scanning
Identifying and Managing Risks | Page
2 of 14
STRATEGY EXECUTION
Identifying and
Managing Risks
5.1.3 Asset Impairment
Risk
M5_New Operations or
Asset Impairment Risk
Reflection
Question
Name one development from
the past year that you believe
might introduce a new
operations risk or asset
impairment risk to your
business. This could be an
internal development, such as
the introduction of a new
product line, or an external
development, such as a change
in government regulations
pertaining to your
industry, or a global pandemic.
How would you describe this
risk and its possible
consequences?
Your Response
After pandemic, All home
inspections for done virtually
before we provide pricing to
the lender(banks). I
think this may be operation
risk as we depend on property
coordinates from virtual map
provider which
may be wrong some time.
Submitted June 24, 2021 at
02:04 AM ET
Identifying
Sources of Risk,
Part II
5.2.1 Introduction to
Competitive Risk
M5_Competitive Risks Free
Entry Table
Your Response
Type of Change in
Potential and/or Current
Risks in Your Organization
Demanding customers may
choose to switch suppliers
Freddie Mac and Fannie mae -
these two entities virtually
monopolized the secondary
mortgage market. So currently
we don't
have this issue.
3 of 14
STRATEGY EXECUTION
Identifying and
Managing Risks
Type of Change in
Potential and/or Current
Risks in Your Organization
Substitute products or
services may become
available with lower costs or
superior attributes
But growing federal regulation
and new legislation that
allowed
banks and other financial
companies to merge sparked
more
competition from conventional
companies. Still, Fannie Mae
and
Freddie Mac continue to
dominate the secondary
mortgage market in
the U.S. today
Suppliers may choose to
limit
availability or increase the
N/A
cost of critical inputs
New competitors may enter
the industry with new
technologies and products
N/A
Intense rivalry from existing
competitors can erode profit
N/A
margins
5.2.3 Case: Quiet
Logistics, Part II
M5_5.2.3 Competitive Tasks
Private Reflection
Question
Return to one of the
competitive risks in your own
organization that you
identified earlier. What is one
step
that you and/or your team can
take to better manage that
risk? If the risk you identified
was one that your
organization faced in the past,
what is one step your
organization might have taken
that would have
allowed them to more
effectively respond to that
risk?
Your Response
Freddie Mac and Fannie mae -
these two entities virtually
monopolized the secondary
mortgage market.
So currently we don't have this
issue
4 of 14
STRATEGY EXECUTION
Identifying and
Managing Risks
03:50 AM ET
5.2.4 Franchise Risk
M5_Risks for Critical
Performance Goal
Your Response
What risks, if any, might you
encounter in trying to
pursue
Lack of alert system that
monitor scope
this goal?
changes from business
requirement.
Is the risk an operations
risk, an asset impairment
risk, a
Operation risk as it require a
process
competitive risk, or a
franchise risk?
which includes many teams.
What are one or more
measures you can establish
to
effectively monitor and
manage the risks that might
arise
with this goal?
Daily stand up to monitor the
risks
JIRA risk tracker
Assessing Internal
Risk Pressures
5.3.1 The Specter of
Risk from Within
M5_Three Types of Pressure
Private Reflection
Question
Of the three types of pressure
introduced in the video, which
do you think is of greatest
concern to the
business you have chosen to
analyze throughout the course?
• Pressures from high growth
• Pressures from culture
• Pressures from information
management
Why? Please elaborate in a
few sentences. By the end of
this lesson, you will know if
your intuition was
correct.
Please note that all reflection
activities in this lesson will be
private.
5 of 14
STRATEGY EXECUTION
Identifying and
Managing Risks
Your Response
I choose Pressures from High
growth since that will lead to
pressure in organization
culture and bad
decision making
08:33 AM ET
5.3.2 Pressures Due to
Growth
M5_New Employee
Challenges Private
Reflection
Question
Do new employees face any of
the challenges or exhibit any
of the behaviors outlined in the
video? Please
describe.
Your Response
No. we do proper training
before they work on business
requirement
09:05 AM ET
Culture
M5_Encouraging
Competition Private
Reflection
Question
Does your business encourage
competition between
employees? If yes, what are
some techniques
management uses? If no, what
evidence do you observe of
employees choosing to
compete with each
other voluntarily?
Your Response
Business doesn't encourage
competition between
employees. But we do have
competition between
employees to get promotions.
Employees becoming single
point of source for project and
increase their
value in the company.
09:31 AM ET
6 of 14
STRATEGY EXECUTION
Identifying and
Managing Risks
Information
Management
M5_Changes in Authority
Private Reflection
Question
What changes in decision-
making authority have you
noticed across management
levels in the last year?
What was the impact of those
changes?
Your Response
Only few changes in
leadership level. Always end
up with redesign for
organizational structure
10:17 AM ET
5.3.5 Your Business's
Overall Level of Risk
M5_Risk Exposure
Calculator Total
Growth
Pressures for
Performance

3
Rate of
Expansion
+

3
Inexperience
of Key
+
Employees
3
Growth
Total
=

9
Culture
Rewards for
Entrepreneurial
Risk-Taking
3
Executive
Resistance
to Bad News
+

3
Level of
Internal
Competition
+

3
Culture
Total

=

9
7 of 14
STRATEGY EXECUTION
Identifying and
Managing Risks
Information Management
Transaction
Gaps in
Degree of
Information
Complexity
Diagnostic
Decentralized
Management
and
Velocity
+
Performance
Measures
+
Decision
Making
=
Total

44
4
12
Risk Exposure Score:
30
21 to 34: The Caution Zone
A total score between 21 and
34 indicates that the
organization is in the caution
zone. While this score
indicates that overall risk
levels are not excessive,
managers must still watch for
high scores in any
particular dimension. For
example, if scores are low for
growth and culture but high
for information
management, there is reason
for concern—information
management risks should be
addressed.
M5_Risk Exposure Score
Poll
Question
Answer
The Caution Zone
Results
The Caution Zone: 72 %
The Safety Zone: 21 %
8 of 14
STRATEGY EXECUTION
Identifying and
Managing Risks
The Danger Zone: 7 %
M5_Before & After Set of
Pressures Private Reflection
Question
How accurate was your
intuition? What outcomes
from your analysis of the Risk
Exposure Calculator
surprised you most? Least?
Your Response
Pretty Accurate
10:24 AM ET
M5_Memo Reflection
Activity
Question
If you received a score in the
Safety Zone:
Draft a one-paragraph memo
to your senior management
team to 1) report your analysis
of risk pressures
to the business and 2)
encourage the organization to
bolster its innovative spirit.
Drawing on our own study
of creative tension in Module
3, propose one practice senior
management might introduce.
Which internal
risk pressure(s) might increase
from implementing this
practice?
If you received a score in the
Caution or Danger Zones:
Draft a one-paragraph memo
to your senior management
team summarizing the highest
risk pressures
your business faces. Drawing
on our study of
beliefs systems
and
in previous
modules, select one of the risk
pressures for which you scored
highest and propose, in a few
sentences, a
solution to help mitigate this
risk.
Your Response
Description:
There will almost certainly be
general conflicts between
project needs and normal
business cycles of the
agency. An example may be a
cyclical peak in a given
business process converging
with a critical
timeframe in system
development or testing.
Assessment:
The project has not yet
identified any conflicts of
significance. The
implementation plan and
overall
timeline have been developed
to minimize these. However,
testing and training will
continue to require the
involvement of various users,
so scheduling will become
critical in the later stages of
each phase. Project
management will monitor this
issue and work with the
business units and the Steering
Committee to
resolve any conflicts.
9 of 14
STRATEGY EXECUTION
Identifying and
Managing Risks
Response Plan:
Business process schedules
and issues will be considered
as part of the analysis leading
to scheduling of
future phases of the project.
As specific conflicts arise
during the life of the project,
the project team will
work with the affected
business units to try to
optimally balance the needs of
both.
10:27 AM ET
Designing and
Enforcing Internal
Controls
5.4.4 The Importance of
Internal Controls
M5_Internal Control
Description Reflection
Question
Identify and describe an
internal control currently in
place at your business and
explain why you think it is
important.
Your Response
General Ledger Account
Reconciliation Standard
The responsibility for
reconciling General Ledger
account balances belongs to
the Decentralized
Accounting Units . DAUs
represent the accounting units
residing within the business
areas of the
Corporation. On a monthly
basis, each DAU is expected
to reconcile the General
Ledger accounts
assigned to them in
accordance with the
corporation's General Ledger
Account Reconciliation
Standard.
The standard indicates the
corporate guidelines to be used
in reconciling the accounts,
resolving
reconciling differences, and
writing off balances.
12:45 PM ET
Building Business
Conduct
Boundaries
5.5.1 The Power of
Negative Thinking:
Understanding
Boundary Systems
M5_Controversial Behaviors
Poll
Question
Which of these behaviors have
led to controversies in your
industry?
10 of 14
STRATEGY EXECUTION
Identifying and
Managing Risks
Answer
Accepting gifts Conflicts of
interest Activities that violate
anti-trust laws Disclosure of
confidential company
information Trading in
company securities based on
nonpublic information Illegal
payments to government
officials
Reflection Question
Please use this space to
identify any behaviors not
already covered in this list.
Otherwise, please type “N/
A.”
Reflection Response
N/A
01:13 PM ET
Results
Conflicts of interest: 60 %
Disclosure of confidential
company information: 59 %
Accepting gifts: 49 %
Illegal payments to
government officials: 32 %
Activities that violate anti-trust
laws: 28 %
Trading in company securities
based on nonpublic
information: 23 %
None of the above: 12 %
5.5.2 Designing Effective
Business Conduct
Boundaries
Traits of Effective Business
Conduct Boundaries
Question
How can you protect your
employees and the business as
a whole? Effective
business conduct
boundaries
share a number of common
traits:
• They provide a clear list of
actions that employees must
avoid.
• They are always stated in the
negative (you shall not …)
• They explain why those
behaviors are off limits.
• They are delivered concisely
so that employees will read
and remember them.
11 of 14
STRATEGY EXECUTION
Identifying and
Managing Risks
• They state clear sanctions
(punishments) for employees
who engage in prohibited
activities.
Answer
Yes
Reflection Question
If yes, please review the code
of conduct. Which of the five
traits of effectiveness does it
incorporate?
Which traits does it not
incorporate? What is the single
most important change you
believe management
should make to this code of
conduct in order to improve its
effectiveness?
Reflection Response
Explain why those behaviors
are off limits is the most
important code of conduct. If
employee know why it
is off limit then it will be easy
to follow because they
understand the rational behind
it.
01:37 PM ET
Results
Yes: 74 %
No: 26 %
Proposing New Business
Conduct Boundaries
Your Response
Drawing on your
analysis, propose a
business conduct
boundary here.
Harassment is still pervasive
in many workplaces—despite
the fact that
nearly every organization has
an anti-harassment policy in
place and
offers related training. How
can HR leaders—and leaders
in general—
proactively create safe and
healthy workplaces? What are
the standards
required?
What is the sanction for
trespassing it?
Harassment is still pervasive
in many workplaces—despite
the fact that
nearly every organization has
an anti-harassment policy in
place and
offers related training.
12 of 14
STRATEGY EXECUTION
Identifying and
Managing Risks
M5_Business Conduct
Boundary Memo
Question
Now, please draft a brief (one
paragraph) memo to senior
management arguing for the
incorporation of this
boundary into the business’s
code of conduct.
If this new boundary will
impact existing boundaries at
the business, note this and
discuss any
considerations and revisions
that should be made to the
larger code of conduct.
Finally, describe how you
believe this new boundary
should be announced to staff
and what methods
should be adopted to reinforce
it.
Your Response
[Company Name] strives to
create and maintain a work
environment in which people
are treated with
dignity, decency and respect.
The environment of the
company should be
characterized by mutual trust
and the absence of
intimidation, oppression and
exploitation. [Company Name]
will not tolerate unlawful
discrimination or harassment
of any kind. Through
enforcement of this policy and
by education of
employees, [Company Name]
will seek to prevent, correct
and discipline behavior that
violates this policy.
All employees, regardless of
their positions, are covered by
and are expected to comply
with this policy
and to take appropriate
measures to ensure that
prohibited conduct does not
occur. Appropriate
disciplinary action will be
taken against any employee
who violates this policy. Based
on the seriousness
of the offense, disciplinary
action may include verbal or
written reprimand, suspension,
or termination of
employment.
Managers and supervisors who
knowingly allow or tolerate
discrimination, harassment or
retaliation,
including the failure to
immediately report such
misconduct to human
resources (HR), are in
violation of
this policy and subject to
discipline
01:56 PM ET
M5_Improving Boundary
Communication
Question
What is one step your business
can take to better
communicate and reinforce
their code of conduct?
Your Response
Include ethical issues in
corporate training .
Set up a board committee to
monitor the effectiveness of
the code
02:05 PM ET
13 of 14
STRATEGY EXECUTION
Identifying and
Managing Risks
5.5.3 Considering the
Balance Between
Innovation and Control
M5_Innovation vs Control
Rating Scale
Your Rating
You received 9 on a scale of 1
(Highly ineffective) to 10
(Highly effective).
You received 6 on a scale of 1
(Highly ineffective) to 10
(Highly effective).
M5_Innovation vs Control
Rating Explanation
Question
Please explain your rating in a
few sentences.
Your Response
Our company have transparent
communication model where
leadership and employee can
have open
communication to create a
culture of excellence where
every employee will work
hard to understand what
is that they should be doing
and then doing that better.
02:09 PM ET
14 of 14

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1078b151d5adb46c1>

Conclusion: Raising a Family
8:57 PM

 PROFESSOR SIMONS: You're now
at the end of the course.
 And we've covered a lot
of material and ideas.
 But I would like to leave
you with one final thought.
 And that is, despite all
the theory and jargon
 we've shared with you, the ideas
behind the levers of control
 are simple common sense.
 This is the way we
raise our children.
 Starting with
beliefs systems, we
 want to teach our children
the core values and beliefs
 that we hope they'll carry
with them through life.
 Turning to boundaries,
we teach our children
 that there are some things they
shouldn't do and punish them
 when they're caught
breaking the rules.
 Even though this
is unpleasant, we
 do it because we want
them to understand
 that they have to
take responsibility
 for their actions and
make good choices as they
 grow into adults.
 For diagnostic
control systems, we
 devote our resources
and encouragement
 to help our children
successfully
 achieve goals as they
climb the ladder of life.
 As they explore, learn,
and build new skills,
 we monitor their progress and
implement remedial action plans
 when we sense they're
falling behind.
 As far as interactive
control systems,
 this can be as simple as
sitting around the dinner
 table on the weekend, asking
our children what they're
 reading in the news, what
they're learning at school,
 and helping them make sense
of our fast-moving world
 as it swirls around us.
 Now, for those of you
who have children,
 you'll note that this
is not easy to do even
 in a family situation.
 But I want to emphasize
that you don't
 need to hire a fancy
consulting firm to implement
 the ideas you've
learned in this course.
 They are really common sense.
 All you need is the
knowledge and discipline
 to apply these common sense
ideas to your own organization.
 And I believe we've given
you the tools to do just that
 and to excel at
strategy implementation.
 I hope you've enjoyed the
course and wish you great luck
 in implementing these ideas,
whether you're managing
 a business of 1,000
people or 100,000 people
 or even leading a team
of 10 individuals.
 On the final screen,
you will find
 a list of additional Harvard
Business School readings
 and resources that I've
created as reference guides
 as you implement strategy.
 I think you'll find them useful.
 Thank you for your
time and attention.
 It's been a pleasure
working with you.

609d8e6f29c5fc0b825a1db4/b11d7ba1-eead-427a-a1b5-ac7bb7d5df32/1071/908/#/syllabus>

Course Learning Summaries

We have provided a downloadable document summarizing the key points from this
module. We hope you will find this document useful both during the course and once
you have finished it.
We have also provided a document that summarizes the key concepts you learned
throughout the entire course. It's a combination of all of the learning summary documents
that we provided at the end of each module.

609d8e6f29c5fc0b825a1db4/b11d7ba1-eead-427a-a1b5-ac7bb7d5df32/1071/908/#/syllabus>

6.3.2 Providing Inspiration and Direction

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Strategy Execution: 1.1.

1.1.2 Making Tough Choices

1.Meeting Our Protagonists

Course Capstone Preparation

Managing the Tension Between Growth, Profit, and

1.2.2 Acquisition by Scepter

Table A: Structure of Earn-Out Payments

ATH Financial Performance, 2010–2014

Table B: Financial Performance, 2010–2013 (USD)

Turning Around the Bottom Line

Table C: Financial Performance, 2010–2015 (USD)

1.3.1 Push to Profitability: 2016

SEE WHAT YOUR PEERS ANSWERED

Table D: Financial Performance, 2010–2016 (USD)

1.3.2 Refocus on Process: 2017–2018

1.3.3 New Management: 2019–2020

Considering Janet Isabella’s Changes

1.4.1 Balancing Short-Term Results

SEE WHAT YOUR PEERS ANSWERED

Navigating the Tension Between Short-Term

SEE WHAT YOUR PEERS ANSWERED

Video Transcript : A Ratio for Maximizing Your Scarce

How Other Business Leaders Maximize

How Other Business Leaders Maximize

1.4.3 Unlocking Human Potential:

Organizational Blocks at ATH Technologies

Eliminating Organizational Blocks at

1.5.2 Strategy as Position

Customer Selection at C3.ai

Identifying Mission, Values, and Purpose

Translating Strategy into Measurable Goals

Strategic Planning and Measurement at C3.ai

Putting Profitability First at C3.ai

Detecting Change in the Competitive

Business Strategy at Go Mobile

The Team Leader Role at Go Mobile

JDOT: Setting Span of Control for Team Leaders

Analysis: Setting Span of Control for Team Leaders

Identifying Trade-offs in Performance

Moving from the “Hard Spans” to the “Soft

Go Mobile: Span of Accountability for Team

Using Job Design to Foster Creativity

2.3.1 Span of Influence

 distracted from their work.

2.3.2 Span of Support

Span of Support at Go Mobile

Scaling Support at Go Mobile: The District

2.4.3 Job Design Changes at Go

SEE WHAT YOUR PEERS ANSWERED

Analysis: Widening Span of Support for Team Leaders

Employee Growth at Go Mobile

Motivating and Inspiring Employees

ROCE: Measuring Asset Utilization at Scale

Marriott: Using Stretch Goals as Learning

nalysis: Creating a Safe Environment to Learn from

5% 25% 60% 10%

Clearly Moderate Strong Top

Alternatives to Ranking Systems

3.2.2 Spurring Innovation Across

Talent Network Teams at Marriott