From the Editor | What’s Changed?
O
NCE A crisis has exploded in our midst, the Center for Work-Life Policy have discovered
spread across the globe, devastated mil- that advancing Gen Y workers are on the same
lions, and then finally receded, how does wavelength as lingering baby boomers when it
it leave us? Mostly yearning for what comes to what they want from a workplace. And
Warren Harding, 29th president of the United because those cohorts are each about twice the
States, called a “return to normalcy.” Everyone size of different-minded Gen X, they’re bound to
recognizes that curious phrase, but let’s also re- get their way.
call its context: Harding was campaigning (here Wondering how economic power might shift
in Boston, as it happens) in the aftermath of the among nations? Gary Pisano and Willy Shih,
First World War, while the treaties that would re- both professors at Harvard Business School,
shape Europe were still being signed. Think how say the news isn’t good for the United States.
his message must have resonated with voters When boom followed bust a decade ago, people
sick of chaos and longing to go stopped worrying about America’s “competitive-
back to life as it had been. ness problem,” but all the while the country’s
Talk to corporate executives operational competencies were wasting away.
today as the world struggles Meanwhile, as HBR senior editor Anand Raman
to emerge from recession, and reports in “The New Frontiers,” emerging mar-
you’ll find few of them harbor- kets have come into their own. He explains why
ing such fantasies. Instead, the companies based in developing countries will
there’s a widespread sense be best positioned to make hay when the sun
that there will be no going home shines again.
again – that the landscape of Suffi ce it to say, in assembling this issue,
business has been forever al- HBR’s editors – with strong leadership from spe-
tered. Thus the inspiration for cial issue editor Julia Kirby – peered into every
this special issue of HBR: Hop- corner of the postcrisis world. Will your custom-
ing to put a finer point on those forebodings, we ers behave differently? Read “Understanding the
asked experts in many fields to explain what’s Postrecession Consumer,” by Paul Flatters and
really changed and how the shift will affect the Michael Willmott. Will organized labor survive
practice of management. the postindustrial age? Consider the case study,
One very smart set of answers comes from “The Knowledge Workers’ Strike,” by Jon Healey.
economic historian Niall Ferguson, whom we’re Will you be able to deal with “Government in Your
pleased to welcome to HBR’s pages for the first Business”? See the article so-named by former
time as a feature author. Reflecting on the evo- U.S. labor secretary Robert Reich.
lution of finance he so elegantly charted in his And finally, be aware that there’s even more
book The Ascent of Money, Ferguson outlines insight to be gained from our website, www.hbr.
here what might come after “the great dying.” org, where we’ve added content that expands
Among his predictions: The U.S. financial system on many of the articles in this issue. If nothing
will be a shadow of its former self, but America else, a visit to the web will remind you that new
will be stronger than ever. Read “The Descent of worlds can be wonderfully rich and inviting – and
Finance,” and you’ll understand why. that too much would go undiscovered if we could
Other territories remapped in this issue range only return to normalcy.
from the principles of economics to the composi-
tion of the workforce. Dan Ariely of Duke believes
that the crisis has driven the last nail into the
coffin of Homo economicus and that managers
will now devise better approaches, having dis-
pensed with the faulty assumption of rational be-
havior. Sylvia Ann Hewlett and her colleagues at Adi Ignatius
10 Harvard Business Review | July–August 2009 | hbr.org

STRATEGIC HUMOR
Next?
“
We have to accept what we
all know to be elemental – that
taking a defensive position
can, at best, only limit losses.
And we need gains.
Peter F. Drucker
“This Competitive World”
Harvard Business Review
”
March–April 1961
“It must be pretty bad if they’ve brought in the cash whisperer.”
“…and at this point, we began to be unsure of where
it all began and where it’s all going to end.”
Thomas Cheney, Roy Delgado, and P.C. Vey
“I hate limits on compensation – that’s where
our company was most creative!”
14 Harvard Business Review | July–August 2009 | hbr.org

A survey of ideas, trends, people, and practices on the business horizon
GRIST
Heed the Calls for Transparency by Sam Wilkin
As a consequence of the global crisis, fi - tion of organizations has kept extractive national governments, NGOs, and interna-
nancial services executives are preparing companies under a microscope for the tional institutions) monitoring transactions
for a regulatory overhaul. But few have past decade, demanding transparency between governments and businesses
probably considered how to deal with the and accountability. This has changed how in that sector, it’s increasingly rare for
intensive scrutiny of their sector that’s those companies operate, prompting resources policies to be formulated in
now coming from all corners – the public, them to take such measures as appoint- off-the-record discussions between politi-
NGOs, foreign governments, the media, ing sustainability managers to executive cians and executives. In fact, many oil,
think tanks, and organizations such as committees and performing in-depth as- gas, and mining companies have come to
the World Bank and the International sessments of the societal effects of their recognize that increased transparency can
Monetary Fund. operations. Anglo American, for instance, be in their own best interests, especially
If the experiences of the oil, gas, and produces a lengthy “Report to Society” in corrupt or unstable countries, where
mining industries are any guide, such detailing the company’s impact on indig- requests for bribes may be common.
Thomas Boucher
scrutiny will be a long-term force. In enous peoples and its management of Banks and asset management firms are
response to outcries against diamond human capital, among many other things. bound to see the same kind of pressure
trafficking and corruption in oil-producing With the Extractive Industries Transpar- applied to policy making in their industry.
and other resource-rich countries, a coali- ency Initiative (which involves numerous Some of the most influential figures in
16 Harvard Business Review | July–August 2009 | hbr.org

COMPUTING
the good-governance movement, which
has exposed and challenged corruption
The Disappearing Data Center
in Russia, Latin America, and Southeast by Robert Plant
Asia, have begun studying whether a lack Companies that allow the recession to sweep away their corporate data centers may
of transparency in the drafting of financial find themselves well positioned to rapidly increase or decrease computing capacity –
regulations contributed to the global crisis. which could offer a big advantage in volatile times.
Simon Johnson, a former chief economist Few CEOs ever visit their own data centers, and from IT’s point of view, that’s
of the IMF, has argued that governments
probably a good thing, because they’re not a pretty sight. The typical center is a
must break the “financial oligarchy” that
mishmash of new and out-of-date hardware that is often expensive to run and main-
he believes is blocking essential reform.
tain. In fact, costs of data-center facilities have been rising faster than IT budgets,
Daniel Kaufmann of the Brookings Institu-
according to the Uptime Institute.
tion, who has conducted research on
governance and corruption, has spoken To reduce overhead during hard times,
out about weak banking regulations in some companies have shrunk their capital-
wealthy countries. He says that once the intensive data centers and shifted much
world recognizes that “legal corruption” of their critical computing to remote
(the use of legal political contributions vendors. Juniper Networks, for example,
to get preferential regulatory treatment) saved money on equipment, energy, and
was at the root of the financial crisis, we’ll security by moving its critical applications
have to have more transparency. The to an IBM data center in Boulder, Colo-
G-20 nations have already taken a step
rado. Other firms have simply scaled back
in this direction, endorsing a peer review With “container-based” data centers,
in-house data operations. Rather than firms can quickly add IT capacity.
process by which member countries
purchasing expensive applications, many
would assess the stability of each other’s
pay a vendor such as Salesforce.com or Amazon for use of software on demand. A
financial systems.
Rather than hoping that public pressure McKinsey study suggests that this approach especially works well for small and mid-
will go away, banks and asset manage- size enterprises: With a 200-seat license, for instance, it can save companies 30% of
ment firms should embrace transparency. the cost of implementing customer relationship management systems.
Doing so will help them rebuild their A creative new option for remote arrangement is the “container-based” data
reputations more quickly. Indeed, banking center. With the help of companies such as HP, Microsoft, and Sun, firms can build
executives, like their counterparts in the their own portable data centers – server farms that can be moved to a new location
extractive industries, may well conclude where, say, utility costs are lower. These data centers are built from modular pieces
that they stand to benefit from a “Banking that look like giant Lego bricks; essentially, they’re made out of shipping containers
Industry Transparency Initiative” focused
that house IT equipment and are carted to a site on trucks and placed in rows. Many
on overhauling regulation in a deliberative
companies think of these centers primarily as backup facilities, but their modular
manner in consultation with a wide range
design makes it easy to add or subtract capacity rapidly.
of stakeholders. Without such an initiative,
The ability to scale computing and storage capacity up or down quickly makes
regulatory reforms may turn out to be
extreme or driven by populism. The last container-based centers especially attractive when business fluctuates and IT needs
thing the financial industry needs, after all, thus become hard to predict. According to IDC research, it takes three and a half
is politicized legislation made hastily while years to set up a traditional data center, whereas modular centers can be up and run-
public anger is at its highest. ning in eight to 12 weeks. The modular approach also costs about a third less than
Sam Wilkin (swilkin@oxford-analytica. retrofitting existing data centers.
com) is a senior consultant at Oxford Ana- Perhaps it’s time for the CEO to visit the corporate data center, determine its true
lytica and a coauthor of The Kimchi Matters: operational and capital costs, and reexamine the logic of data-center ownership.
Global Business and Local Politics in a Robert Plant (rplant@miami.edu) is an associate professor of computer information
Crisis-Driven World (Agate, 2003). systems at the University of Miami School of Business Administration.
Reprint F0907A Reprint F0907B
hbr.org | July–August 2009 | Harvard Business Review 17

ENERGY by Roger W. Sant, who founded the
energy giant AES. Sant’s article drew on
Fix Utilities Before They Need a Rescue concepts originally advanced by Amory
by Peter Fox-Penner Lovins but placed them in the context of
a business model. After talking to many
Something is seriously wrong with the to finance the $1.5 trillion transition to CEOs and leading thinkers in the industry,
basic assumption behind the busi- low-carbon production. It’s unrealistic to including Duke Energy CEO Jim Rogers,
ness model of utilities, and companies think that regulators will permit power I’ve come to the conclusion that selling
of every kind are likely to feel the companies to raise rates repeatedly, and services, not output, is the logical next
consequences. with sales declining, utilities won’t be business model for the industry.
Utilities have always assumed that able to attract enough capital. The world- To put it simply, customers would pay
their output would continue to grow, wide recession exacerbates the problem for each lumen of light generated rather
allowing for economies of scale and and, because it consumes most of busi- than each watt of power consumed.
lower prices. But electricity and gas ness and government leaders’ attention, The cellular industry provides a crude
customers – aided by the utilities them- threatens to postpone any real resolu- analogy: Your mobile phone service
selves – are reducing consumption. Sales tion of it. If utilities fail, governments charges you for minutes, text messages,
are already flattening, and they’ll only fall will have to step up and underwrite the and video downloads rather than for
faster as governments put in place more switch to low-carbon alternatives – an bits per second, which is the underlying
incentives to control greenhouse gas unappealing prospect at a time when commodity. In the new model, utilities
emissions. countries are going deep into debt to fix would charge you for the amounts of
In most industries, it’s all well and their economies. light, computer time, heat, cooling, and
good for companies with outmoded The solution, I believe, lies in an idea so forth that you use.
business models to collapse and disap- first advanced in HBR decades ago. For That would be a radical change with
pear, but not in utilities. We need healthy more than 30 years I’ve studied the util- far-reaching consequences: Because the
power companies to keep the economy ity industry, advised energy companies, use of such energy services will continue
running and underwrite the transition to and served as a federal energy official. to grow for the foreseeable future, utili-
climate-safe forms of energy. While working on a project for the ties could expect rising rather than falling
Right now utilities in the industrialized Edison Electric Institute, I came across revenues. Moreover, power companies
world need enormous amounts of capital an HBR article about energy services would have a strong incentive to develop
Wind turbine
A Better
Business Model
To survive, utilities will
need to charge customers Solar panels
not for units of power but
for hours of heating, cool-
Because they could
ing, and light provided,
gain from customers’
using data collected by Energy-efficient use of efficient tech-
new sensors placed in lighting
nologies, power com-
homes and workplaces.
panies would have a
strong incentive to
develop and market
solar panels, wind
turbines, and efficient
Bryan Christie Design
heating, cooling, and
lighting units.
Efficient heating
and cooling units

and market efficient new technolo-
OFFSHORING
gies. Utilities inevitably would get into
the business of selling or leasing such
technologies and persuading custom- Just How Healthy Is Your Global Partner?
ers to use energy-efficient appliances. by Josh Green
At the same time, all customers would Multinational corporations and their manufacturing partners in emerging markets
develop a much better understanding of need to rethink how they manage their relationships with each other in light of the
how they use energy and would be bet- global downturn.
ter able to lower their costs and carbon
Companies in advanced economies were shocked to see suppliers in Asia and
emissions.
elsewhere simply disappear as orders from abroad contracted. In China some
One reason the services idea didn’t
67,000 factories went bankrupt, according to that country’s authorities, in the first
take hold in the past was that the tech-
nology to implement it wasn’t mature. half of 2008 – even before the U.S. financial crisis sent the global economy into a
The recent emergence of the “smart tailspin. Manufacturers in emerging markets were equally shocked at the sudden
grid” – sensors that collect boatloads steep drop in orders from their multinational customers. For instance, from Janu-
of customer data and computers that ary to February of 2009 alone, the number of overseas suppliers shipping to the
interpret the information – now makes United States fell by 10%. Both sides felt blindsided, and many executives vowed
the energy-services model both possible
July 2007
and compelling.
160,000
Yes, the transition will be a colos- suppliers January 2008
sal challenge, but the shift has already
begun. Many utilities are experimenting
January 2009
with versions of the energy-services 120,000
Global manufacturers shipping to U.S.-based companies
model. Duke Energy has proposed to February 2009
regulators, for example, that it provide Source: Panjiva analysis of U.S. customs data.
energy-saving hardware to customers
and then be allowed to keep much of the they would never be caught unawares again. No longer will producers and buyers
difference in energy costs. tolerate the paucity of information about their partners that has characterized
Corporate leaders have long been offshoring for decades.
advocates for a robust, low-cost energy In my firm’s dealings with purchasers, manufacturers, and trade organizations,
supply, and recently many have cham- I’ve heard numerous recent accounts of multinationals’ seeking detailed informa-
pioned greenhouse gas controls. Other tion about the long-term health of foreign manufacturers. I’ve also heard suppliers
than that, the business community demanding, for the first time, to know more about the purchasing corporations’
hasn’t paid much attention to the power finances, markets, and sales projections. After being burned by a customer that
industry. But today’s economic and envi-
couldn’t pay, one Indian supplier stopped doing business with U.S. companies
ronmental realities call for business lead-
altogether.
ers to engage more deeply with the utili-
When the recession subsides and global business picks up, buyers and suppliers
ties’ challenges. Corporate executives,
after all, understand changing business must be more rigorous in evaluating potential trading partners. Specifically, they
models better than most regulators and will need to do the following:
policy makers do. Their ability to grasp ■ routinely ask for a partner’s sales projections,
and communicate the need for a regula- ■ request third-party validation of the partner’s financial health and its
tory and business model that provides sales or operational history,
financial stability for the utilities – and ■ ask to see references from other or past partners,
thereby a reliable energy supply – will be ■ create ongoing processes for tracking trading-partner risks (a buyer, for
crucial in the coming years. example, should create a map of its manufacturing partner’s supply chain),
Peter Fox-Penner (peter.fox-penner@ ■ develop backup options for each important partner,
brattle.com) is a principal and the chairman ■ prepare to provide more information to partners than ever before, and
emeritus of the Brattle Group, a global con- ■ learn to sell themselves to potential partners by demonstrating their
sulting firm. His book The Future of Power
own stability and long-term sales strength.
is due out from Island Press in February
These practices will give both sides greater confidence that a crisis won’t wipe out
2010. For more information on this subject,
their trading partners and leave them scrambling to find new ones.
go to www.brattle.com/return_of_the_
energy_services_model_2009. Josh Green (josh@panjiva.com) is a cofounder and the CEO of Panjiva, an information
resource for companies doing business across borders. Reprint F0907D
Reprint F0907C
hbr.org | July–August 2009 | Harvard Business Review 19

TRADE AGREEMENTS benefit tariff-savvy multinationals than to
aid indigenous development.
Preferential Treatment: The New Face And at individual firms, free trade
of Protectionism? by Regina M. Abrami agreements sometimes present execu-
tives with thorny strategic challenges.
The postrecession era will be a heady goods – not just Haier TVs and Li Ning An FTA might get a company’s goods
time for countries in the developing running shoes but Baosteel alloys and into, say, Chile on the cheap, but win-
world as they find themselves wooed Sinochem polymers as well. ning over customers there may require
not just for their materials and labor China already has a few free trade different marketing strategies or even
but – increasingly – for their consumers. agreements in place, and more are in the organizational changes. Executives pre-
All that attention will most likely lead pipeline. FTAs allow China to encourage sented with new low-tariff opportunities
to more free trade agreements (FTAs), imports in sectors that support national also need to be sure that the potential
in which countries arrange to lower or development goals without weakening gains outweigh the costs of following
eliminate tariffs on selected goods for domestic firms in industries that the stringent rules about where products’
each other. That scenario has implica- Chinese government wants to dominate, components come from. And if another
tions for global corporations’ strategy
and operations.
FTAs, which have been proliferating
since the 1990s, are a popular and po-
How China Is Changing the Rules
litically acceptable way for countries to
China’s free trade agreements will most likely differ from the United States’
give an edge to firms based inside their
and Europe’s in one respect that’s very important to developing countries: the
borders, at a time when “protectionism”
so-called soft issues.
is universally acknowledged as a dirty
Over the past decade, developed countries have been inserting into FTAs
word. Today protectionism isn’t practi-
and other trade arrangements language that links market access to compli-
cal; every country depends on imported
ance with standards in areas ranging from labor rights to restrictions on arms
goods and foreign markets. But with
trading. The U.S.–Cambodia Bilateral Textile Agreement, for example, gave
government bailout and stimulus money
increased preferential access to U.S. markets in return for improved working
flowing freely, politicians in developed
conditions in Cambodia’s apparel sector.
countries cannot argue too forcefully for
Such language, which is odious to free market and developing-world advo-
free trade, which is often blamed for job
cates alike, rarely takes center stage in China’s free trade agreements, if it’s
losses and declining competitiveness
included at all. Take China’s FTA with Chile. It says nothing explicit about work-
at home. Free trade agreements allow
ing conditions but includes a promise to improve “communication and coopera-
countries to be “preferentialist” instead
tion” on the matter. The U.S.–Chile FTA, in contrast, has elaborate mechanisms
of downright protectionist.
in place to ensure that each country enforces its own labor laws.
China will be among the countries
With China presenting a no-strings-attached alternative, developing coun-
showing the keenest interest in
tries just might find themselves in the unusual position of being able to demand
FTAs. Until recently it relied heavily
fewer conditions from the United States and other developed countries.
on strengthening its trade ties with
– R.M.A.
the United States and Europe, but the
worldwide recession has brought a
rude awakening. The collapse in orders
from the developed world and the
resultant shock to domestic manufac- such as petrochemicals and telecom. country’s FTA offers more-lenient rules
turing made clear to Chinese offi cials FTAs also cement China’s position as a of origin and thus a cost advantage for an
that their country had become danger- key player in the global economy. overseas competitor, a company must
ously dependent on U.S. and European Not everyone is so enthusiastic about sort through the pros and cons of mov-
markets. Unsold inventories fl ooded FTAs, however. The Columbia Univer- ing production to that country to reap
the Chinese market at bargain prices sity economist and free trade advocate those benefits. In this ever-changing
last year at Christmas, but domestic Jagdish Bhagwati has likened them landscape, the challenge is no longer
consumers offered no remedy for to termites nibbling away at the non- obtaining access to foreign markets; it’s
China’s downturn dilemma. Layoffs discrimination principles on which the figuring out how to enter them wisely.
numbering in the millions have spread a World Trade Organization depends. Oth- Regina M. Abrami (rabrami@hbs.edu)
chill even to the dynamic economies of ers question whether FTA rules giving is a senior fellow and faculty chair of the
Beijing and Shanghai. Offi cials in China preferential treatment to goods manu- Harvard Business School Immersion
need to find new markets for Chinese factured in specific countries do more to Experience Program. Reprint F0907E
20 Harvard Business Review | July–August 2009 | hbr.org

Conversation
Architect Ellen Dunham-Jones on the future of retail
in the postsprawl era
A
mong the downturn’s most visible effects are Where will the new oppor-
empty stores and dying malls. With consumers tunities be?
cutting back, many retailers are closing outlets The sprawl era is ending,
or simply going out of business. The result, so the action for retailers
says Ellen Dunham-Jones, is likely to be at won’t be at the fringes of metropolitan areas. With
least a doubling of 2008 vacancy rates, which could devas- both Gen Y and aging baby boomers showing a prefer-
tate shopping center owners who took on debt to expand ence for urban, mixed-use environments, the opportu-
during the boom years. Dunham-Jones is the director of nities will be at retrofitted underperforming suburban
the architecture program at the Georgia Institute of Tech- shopping areas close to city centers. Retailers that re-
nology and a coauthor with June Williamson of Retrofitting inhabit, redevelop, and enliven those sites will benefit
Suburbia, a book documenting the successful redevelop- from better integration into consumers’ everyday lives.
ment of shopping centers and other types of properties. This is happening already. At Mizner Park, in Boca
She believes that this is no ordinary recession and that big Raton, Florida; Belmar, outside Denver; and Santana
changes ahead call for new thinking on the part of retailers Row, in San Jose, California, shopping malls surrounded
and manufacturers. by parking lots have been transformed into pedestrian-
friendly neighborhoods with tree-lined streets and
For retail, how does this downturn differ from those ground-level shops and outdoor cafés topped by apart-
of the past? ments and offices. In dead-mall retrofits, food courts
Look at the demographics: During the golden age of new are being replaced by sit-down restaurants and night
mall construction in the 1970s, about half of U.S. house- spots that cater to suburbia’s growing population of
holds had kids, whereas fewer than empty nesters and young professionals.
a third do today, and the number of
Once an
single-person households is rising. It’s Sounds like unfamiliar terrain for retailers and
From Retrofitting Suburbia, reprinted with permission of John Wiley & Sons and Continuum Partners.
enclosed mall,
predicted that at least three-quarters manufacturers.
Belmar, near
of all new households formed be- Denver, is Retailers will have to figure out how to reach a mix
tween now and 2025 will be childless. now a mix of of workers and residents and integrate discretionary
That’s ominous news for some retail- stores, homes, goods with those that meet everyday needs. But they’ll
ers – because smaller households offices, and be able to build relationships with “regulars” and to
have less need for furniture and other public spaces, compete against online shopping by emphasizing local
consumer goods. And with the col- including a identity and community and offering a social experi-
lapse of the real estate market, the skating rink. ence. Manufacturers of retail products, for their part,
residential sprawl development that will have to rethink the “supersize
fueled retail growth for decades has me” approach and concentrate on
ground to a halt. So it’s questionable what the on-foot, cartless consumer
whether U.S. consumer demand will with her smaller living space will
be able to support the current level be interested in, such as health and
of more than 20 square feet of retail green living. Retailers and manufac-
space per capita – which is at least six turers alike should emphasize funda-
times the amount of retail space per mental quality over quantity, focus
capita in Europe. on weaving retail into community
I expect we’ll see dead retail sites life, and get creative about retooling
proliferate. And although no commu- for the neighborhood general store
nity relishes the prospect, they in fact of the future.
provide great opportunities for more – Andrew O’Connell
sustainable redevelopment. Reprint F0907F
hbr.org | July–August 2009 | Harvard Business Review 21

Health & Well-Being
BY JOHN D. HALAMKA, MD
Your Medical Information
in the Digital Age
The U.S. is moving toward electronic health records.
Here’s how to make that work for you.
YOU PROBABLY TAKE for granted that Compiling your medical data in one 40,000 patients of Boston’s Beth Israel
you should manage your own résumé. place lets you be the steward of your Deaconess Medical Center to view their
After all, it catalogs your professional health information. hospital records, send secure e-mails to
history and accomplishments – who Like first writing up a résumé, creat- doctors, make appointments, refill pre-
else would manage it well? But chances ing a personal health record takes time, scriptions online, and the like. But this
are you don’t oversee your own medi- but there are several payoffs. Having kind of service is not widespread. A re-
cal records. Until now, doing so has the record can prevent unnecessary cent study in the New England Journal
been difficult because bits and pieces testing and treatment (and, in turn, of Medicine found that only 9% of the
of your information are probably scat- save you money), reduce the chance of acute-care hospitals surveyed had an
tered across the files of several doctors, a medication error, and instantly pro- electronic-records system in place in
hospitals, labs, and pharmacies. That’s vide vital information in an emergency. even one clinical unit.
an inconvenient – and potentially dan- It also can be used to keep track of your ■ Payer-hosted records, such as
gerous – state of affairs, but one a new weight, blood sugar, and much more. HPHConnect from Harvard Pilgrim
federal law may help to remedy. (For a list of the minimum information Health Care, give you access to claims in-
The American Recovery and Rein- that your record should contain, see the formation relating to your medications,
vestment Act is providing about $30 bil- sidebar, “Tracking Your Health.”) doctor visits, and hospitalizations. Some
lion to improve the exchange of health So far, four types of electronic per- let you share information with family
care information. One trickle-down ef- sonal health records are available: members or doctors. On the downside,
fect will likely be greater access to your ■ Hospital- and clinician-hosted you may not be able to access all of your
iStockphoto
lifetime medical information through records are great if all your information lab and radiology results, and there’s no
a personal health record in electronic resides at a single institution. One ex- guarantee that you can take your record
form. The underlying idea is simple: ample is PatientSite, used by more than with you if you change insurers. ➤
22 Harvard Business Review | July–August 2009 | hbr.org

Health & Well-Being Your Medical Information in the Digital Age
hbr.org
■ Employer-sponsored doctors and other appropri- Google Health and Microsoft Health-
For more on the
records are typically hosted connection between ate parties. These services Vault. (I share it with you on my blog –
by a trusted outside firm, cre- personal health and let you keep your health http://services.bidmc.org/geekdoctor/
high performance,
ating a firewall between the record for life, regardless of johnhalamkaccddocument.xml – at my
visit health.hbr.org.
employer and the medical your job or insurer. Google own discretion.) Whatever record sys-
data. For example, computer recently implemented se- tem you choose, make sure it has robust
storage giant EMC partnered cure “social networking” for privacy policies that keep you in control
with WebMD to offer claims-based personal health records. Call it Facebook of your information at all times.
personal health records to all of its em- for health care. It allows you to invite This new world of connected health
ployees. Employer-sponsored systems caregivers or family members to access care has tremendous potential to in-
aim to keep you healthy and productive your personal health information. Invi- crease both personal and systemwide
by, say, recommending an exercise pro- tees can be removed at any time. efficiency. What’s in your interest com-
gram if you are overweight. They can What about privacy? Each of these plements what’s in the interests of the
also help you manage your health care– products has strict policies stipulat- larger health care system as we all try
spending account. However, you may ing that the host companies will not to reduce costs and improve care.
not be able to take yours with you if you mine personal health data, share them,
change jobs. or use them for targeted advertising. John D. Halamka is the chief informa-
■ Commercial offerings, such as Hospital and payer data are covered tion officer of CareGroup Healthcare
Google Health and Microsoft Health- by rules in the Health Insurance Por- System in Boston and the chief informa-
Vault, allow you to link to your electronic tability and Accountability Act of 1996. tion officer and dean for technology at
records stored at participating hospitals, Google’s and Microsoft’s offerings are Harvard Medical School. This article
pharmacies, and laboratories. In addi- outside HIPAA’s scope, but both firms was created in partnership with Harvard
tion to collecting existing data, you can have developed policies that are even Health Publications.
add your own, search for information stronger than the legislation mandates.
Reprint R0907A
about medical conditions and drug inter- I trust those policies enough to have
To order, see page 158.
actions, and share information with your stored my lifetime medical record on
De
Tracking Your Health al H i
stor y
r
S o ci Neve
se
A personal health record can store everything from how c co u
Toba No
often you work out to lab test results and medication lists. ure
e x p os No
At minimum, it should contain: oke
e sm se
a s si v hol u
A lc o <1
» Your name, date of birth, » A dated list of ay ) The Complete Picture:
r in ks/d 0 An electronic form
and vital statistics such as signifi cant illnesses
u s e (d 10 -2
height, weight, blood and hospitalizations affeine eek ) creates a shared space
C rs / w ly
Rare for details – big and small.
pressure, and pulse rate (hou
cise sure
» Your current health Exer expo t ar
S un Vege
» A list of emergency contacts, conditions and how on s
tricti Lab Tests
Tests
e
as well as contacts for all of they are being treatedd y res 10
10/22/07 10/24/06 9/13/05
D ietar
your health care providers Cholesterol (mg/dL) 135 143 137
» An inventory of the
» Information about your medications you take, Triglyceride (mg/dL) 121 80 59
health insurance including dosages and
frequency HDL (mg/dL) 40 47 43
» A brief history of your LDL (mg/dL)
health, along with a list of » Lab test results 71 60 62
illnesses and conditions Homocysteine (umol/L) 9.6 9.6
your parents, grandparents, » A dated list of immunizations
and siblings have had Platelets (10*3/mm3) 277 286 256
» Copies of your living will
» Information about and durable power of Sodium (mmol/L) 140
allergies or sensitivities attorney for health care, Calcium (mg/dL) 9.7 10.1 10.2
to medications if you have them
24 Harvard Business Review | July–August 2009 | hbr.org

HBR Case Study
BY JON HEALEY
COMMENTARY BY RICHARD L. TRUMKA,
RICHARD B. FREEMAN,
AND JEFFREY ANDERSON
The Knowledge
Workers’ Strike
How much leverage do unions have in a bad economic climate?
THE CHROME AND GLASS FACADE to peer out the window. A couple of
of Detonation Media’s headquar- coders passed behind him from the
ters in Mountain View, California, direction of the vending machines.
gleamed in the warm April sun. On “I’d sure rather be out there picket-
the broad front terrace, a crowd of ing,” said one to the other. “Detona-
camera-ready demonstrators from tion’s trying to screw us on the rev-
the Software Engineers Guild milled enue sharing.”
about and chanted: “No deal, no code, “Dude,” said the other coder, “the
no games!” longer this thing drags out, the
The protesters toted signs that lik- worse the market’s gonna be. If those
ened Detonation’s management to clowns don’t cut a deal soon, we’ll get
the blood-soaked villains of the video pink slips instead of a raise.”
games that had spurred the compa- Tetsui chuckled. The two held up
ny’s growth. Members of the SEG – their silver-and-blue cans in a mock
among them nearly half of Detona- toast and then hustled back to their
tion’s 10,000 employees – had been desks.
working without a contract for three Consumed by his work, Tetsui
months. The programmers were well paid, to be sure, but their hadn’t been giving much thought to the contract talks. Still,
deadline-driven, round-the-clock coding marathons made for the discord lurked in the back of his mind, triggering low-
careers about as short as an NFL running back’s. Adding to grade anxiety. A strike would prevent his team from working
labor-management tensions were the layoffs that had hit the on Couch Ninjas 2, but it wouldn’t stop Detonation from
gaming industry in waves since late 2008, fueling rumors of completing the job with nonunion programmers. Given the
potential cutbacks at Detonation. game’s current raw state, he was determined to see the proj-
The protest was loud but lightly attended – most of the ect through to completion – a thought that returned his at-
Daniel Vasconcellos
programmers remained at their computers. Couch Ninjas 2, tention from the protest outside to his call with the program-
the new title by star developer Tetsui Wakatanabe, was weeks ming teams.
behind schedule. (Though his hit rate with games was sky-high,
he wasn’t so hot with deadlines.) Tetsui drifted away from a HBR’s cases, which are fictional, present common managerial
conference call with coding teams in New York and Toronto dilemmas and offer concrete solutions from experts.
hbr.org | July–August 2009 | Harvard Business Review 27

HBR Case Study The Knowledge Workers’ Strike
hbr.org
Fighting for the Spoils was Detonation’s CEO, Emilio “That’s putting it mildly,”
Offer your solution
Two months after the protest, Carol Lee, Teti. “Hang on, Emilio,” she to the dilemma in this said Emilio. “And the latest
Detonation’s general counsel and lead yelled into the phone as virtual fictional case study sales figures show us down
at knowledge-
negotiator, wandered around the vast .50-caliber machine-gun shells year over year. The market
worker.hbr.org.
show floor of the E3 expo in Los Ange- tore through the air to her left. says we’re going to miss
les. She had just given a presentation on “I need to find a quieter place.” our numbers – and I have
strategies to combat online game piracy Carol knew Emilio hated no doubt we will, thanks
and was enjoying the chance to walk events like this. He would come for half to our talkative but deadline-impaired
off residual adrenaline. Her company’s a day, give his keynote, schmooze his star developer.” Tetsui had told CNET,
humongous booth showcased its forth- way around the show floor as though he on the record, that the ship date for
coming releases, including the latest loved it more than life itself, and then Couch Ninjas 2 was going to slip because
first-person shooter sensations, I Think, flee back to Mountain View – where he he wasn’t happy with the way the char-
Therefore I Kill and War Zone: Oakland, could badger people like her from a acters looked and was planning to over-
teed up for the holiday season. safe distance. haul the code.
As she meandered, Carol thought “Mob scene,” said Carol once she’d “Brilliant,” said Carol.
about two internal reports she’d re- gotten off the floor. “You’d think it was “Oh, yeah,” said Emilio. “Genius is a
cently read. The first asserted pessimisti- boom times.” curse – especially for those who depend
cally that Detonation’s revenue from in- But Emilio was immune to small talk. on it but can’t control it. Maybe the
ternet games would be negligible for at “Let’s start up negotiations again,” he said, economy gives us some leverage.”
“Let me see if I can set up a negotiat-
ing session,” said Carol.
The contract stalemate had worsened The Soundstage and the Fury
a rift in the guild between hard-liners On a foggy Friday in early July, Carol
stood in a downtown San Francisco
and pragmatists. soundstage watching the genius in ques-
tion redo the motion capture for Couch
Ninjas 2. Emilio had asked her both to
least the next three years. It concluded “while the GameCrack layoffs are fresh show Tetsui some love and to give him
that the ad-supported model would in everyone’s mind. Do you think it’s too a little push.
struggle to overcome advertiser squea- late to take the pay raise off the table?” As a black-garbed figure bounced and
mishness about Detonation’s gleefully Back in December, Detonation had pirouetted from a trampoline – “Soar!
violent stock-in-trade and that the pay- proposed a three-year deal with the SEG You are a crane, not a frog!” Tetsui
for-play model would meet with stiff re- that would boost pay and benefits 5% shouted – Carol scanned the room and
sistance from the free-content internet annually, a raise that looked even more noticed programmers gathering along a
culture. generous now than it had when the back wall. Detonation employees were
But from what Carol could see, the company first offered it. But the stick- caucusing with Dan Hontz, a coder who
expo told a different story: She noted ing points involved two other issues: the was on the SEG negotiating committee.
a big jump in internet games being of- company’s desire to transition the SEG She watched for a few minutes and real-
fered this year compared with last year. from revenue sharing to profit sharing, ized that the people gathered around
Almost every booth had a section de- and the guild’s demand to extend its ju- him were among Detonation’s most
voted to online gaming, and a number risdiction to games made for the inter- senior coders. And their body language
of web-based game companies were net as well as those for PCs and consoles. was vehement.
touting their multiplayer offerings. If Detonation could deny (or at least The contract stalemate had wors-
The second report provided hard evi- delay) SEG jurisdiction over internet ened a rift in the guild between hard-
dence that the sour economy was finally games, the company would be buying liners, who dominated the negotiating
hurting the supposedly recession-proof time to hire nonunion programming tal- committee, and pragmatists like Dan,
video game sector. For example, one ent for its fledgling online ventures. who were eager to claim the raises that
of Detonation’s top rivals, GameCrack “The raise is the least of our problems,” the company had offered late last year.
Software, had just laid off more than 10% said Carol. Carol wondered whether the action at
of its workforce. “Tell me about it – did you see what the back of the room might signal an
Carol’s BlackBerry vibrated against the stock did today?” impending coup. Up front, a heavyset
her hip, defeating the show floor’s din. It “It slid.” figure bounded on the trampoline like
28 Harvard Business Review | July–August 2009 | hbr.org

an overcaffeinated panda – “Yes! Yes!” is looking less tenable by the day,” she “He loves his creations, doesn’t he?”
Tetsui cried, delighted. “Perfect!” But said. “If SEG wants something resem- she said.
Carol suspected that the real gymnas- bling the deal that’s been on the table, “As well he should,” Dan replied. “He’s
tics were occurring in the soundstage’s you’d better not waste any time.” two years ahead of everybody else.”
shadows. Dan nodded. “I’ve been getting that “Are you ready to come back to the
Sure enough, she saw Dan huddling message from all comers.” table?” she asked.
later with Tetsui. “Tetsui?” Carol asked. Dan shrugged. “It’s not my call,” said Dan. “But this
Certain that something was up, Carol But she guessed that the developer had has dragged on way too long. Everyone’s
pulled Dan aside. “You know, the way pressed for a fast settlement to keep his stomach is in knots – including mine.”
the market is going, the company’s offer game from slipping away. “Mine too,” said Carol.
hbr.org | July–August 2009 | Harvard Business Review 29

HBR Case Study The Knowledge Workers’ Strike
New Cast, Same Story pay than the original offer. Detonation tion to profit sharing into the third year
Three days later, Dan entered the meet- needs Couch Ninjas 2, Carol. That means of the contract.”
ing room of the Crowne Plaza Hotel in it needs Tetsui. And he’s with us.” (He “Hey, if you want to make nice, that’s
Burlingame for the first formal talks with chose not to mention Tetsui’s threat.) your call,” said Emilio, “but I think you
Detonation since the contract lapsed in Dan and Carol looked hard at each other. ought to just declare a last, best, and fi-
January. Over the weekend his role had Somehow, they would have to find com- nal offer – no further concessions. The
changed – he’d become lead negotiator. mon ground. guild’s a mess! No way could they get the
Carol hardly seemed surprised that the 75% they’d need to authorize a strike.”
guild had shaken things up, and that Spoiling for a Fight “Maybe,” said Carol. “But…”
unnerved Dan slightly. He hoped there When the bargaining session wrapped Emilio interrupted her. “If we play
were still a few secrets she hadn’t found up, Carol called Emilio and told him that hardball, they’ll fall apart,” he said. “Jeez,
out, including Tetsui’s recent ultima- Dan and his team showed a much better they can’t even agree with themselves!
tum: that at the drop of a picket sign, he grasp of where the game business was They’ll have another power struggle
would leave to start his own nonunion headed than their predecessors had. and lose more members. And we’ll keep
internet game development shop – and “Dan seems more open to the idea of paying last year’s rates, plus buy time
lift out the Couch Ninjas team to staff it. replacing the current revenue-sharing to find new developers offshore. What’s
Dan cleared his throat and launched model,” said Carol, “just not right away. not to like?”
right in. “The members have made it But he knows those payments are going His phone rang. Carol stepped out
clear that they’re not happy with the im- down. And he knows we need an alter- and refilled her coffee, a little staggered
passe. It’s delayed raises and increased native to retail.” by her boss’s take-no-prisoners zeal. She
anxiety. We are ready to accept most of Emilio merely grunted. took a few sips, giving Emilio some time
the company’s offer from last year, pro- Driving home, Carol wondered if a to finish his phone call and settle down.
vided that the pay provisions are retro- good quid pro quo might be to give the She wondered how hard she could push
active to the end of the last contract.” SEG its coveted foothold online, where the guild without triggering a strike. On
the flip side, what minor concessions
could she offer that might yield a deal
“If we play hardball, they’ll fall apart,” saving both Detonation’s numbers and
its freedom to maneuver online?
said Emilio. “What’s not to like?” When she returned to Emilio’s office,
Carol asked whether she had any wiggle
room to build the raises back up closer
“Most of the offer?” Carol responded. a growing share of Detonation’s dollars to the original offer. He grimaced.
“What does that mean? What else are would inevitably be invested. “We could afford it – just barely – but
you looking for?” The next morning, Carol arrived at Wall Street will kill us if we don’t win
“We would drop our demand for ac- work to find Emilio reviewing market- more givebacks.”
celerated revenue sharing. But we don’t ing materials for Couch Ninjas 2. “They’ll also punish us if SEG walks
want to shift to profit sharing, and we “This is moronic,” he said, holding up out,” she said.
still want jurisdiction over games made poster art that showed a blue sky filled Emilio laughed. “No chance of that in
for the internet – at least for those with with dozens of couches, all bearing black- this economy. They’d be insane.”
budgets of $150,000 or higher.” clad ninjas in various combat poses. “It “You have no idea, Emilio. Who knows
“Dan, neither of those terms is ac- just screams, ‘DON’T BUY ME!’” how long they could hold out? They live
ceptable. The downturn is decimating Carol shrugged; she had heard that on ramen and Red Bull.”
sales, the holidays are shaping up to the art tested well with focus groups.
be a nightmare. Just look at the latest But she kept quiet and waited him Should Detonation Media blow up
quarterly report! Our offer has to reflect out before making her pitch about the or make nice with the SEG? Three
these market changes.” Dan watched her negotiating strategy. “It wouldn’t hurt commentators offer expert advice.
face darken as she paused before deliv- Detonation to give a little ground on
ering the really bad news. “We’re now internet jurisdiction,” she ventured, “as Jon Healey (jon.healey@latimes.com)
offering pay increases of 2% in the first long as we get the compensation provi- is a member of the editorial board at the
year, then 4% and 5% in the second and sions right. Plus, I’m confident that in Los Angeles Times. He writes primarily
third years. And no retroactivity.” the next contract cycle SEG will go for a about intellectual property, technology,
Dan looked startled. “The members shift from revenue sharing to profit shar- the economy, regulation, and general
won’t accept a deal with so much less ing. Maybe we could even build a transi- business issues.
30 Harvard Business Review | July–August 2009 | hbr.org

HBR Case Commentary Should Detonation Media Blow Up or Make Nice with the Software Engineers Guild?
Waging war on your own employees
is never a sound growth strategy.
THE DETONATION MEDIA STORY raises more than 80% of employees have union
a number of important questions. Unfortu- contracts.
nately, it doesn’t mention that the company Such data are routinely ignored by high-
undoubtedly would have battled to prevent tech employers, many of whom have never
its employees from ever forming a union to managed a unionized firm. That’s tragic – if
begin with. they listened to their own workers they might
Today, 91% of businesses respond to orga- realize that a union is just what their business
nizing campaigns by requiring workers to at- needs. As tech workers will tell you, an indus-
tend antiunion lectures. In one out of every four try that once prided itself on being different
union drives, companies fire employees. Even from the rest is now indistinguishable from
when workers succeed in winning union rep- any other that makes choices based on cost,
resentation, there’s still a one in three chance not value. They’ll point out that even though
that their employer will never agree to a con- past industry success was built on the tal-
tract. This pandemic of union busting explains ent of the workforce, few employers today
why the labor movement and its supporters reward workers for upgrading their skills.
are working to strengthen the right to organize Compounding the problem are short-
by passing the Employee Free Choice Act. sighted practices by companies like Microsoft
The consequences to U.S. workers of this that hold down costs by employing people as
assault on organized labor are obvious. Even “permatemps,” sometimes for years. Because
as the percentage of workers in unions has these workers are technically employed by
steadily declined, employees with a union the temp agency that sent them, they can’t di-
contract still earn 28% more than their non- rectly access the company’s wages and ben-
union counterparts. Other differences are efits. Yes, the industry’s use of contractors
even more stark: Union workers are 52% and freelancers has fostered cross-pollination
Richard L. Trumka is the more likely to have employer-provided health of ideas as workers move from firm to firm,
secretary-treasurer of the care and nearly three times as likely to have taking with them what they’ve learned. Few,
AFL-CIO and a member of guaranteed pensions than nonunion workers. however, are nomads by choice.
President Barack Obama’s But workers aren’t the only ones who suffer Joining with unions, employers could craft
Economic Recovery Advisory as a result of the animus toward unions; ulti- continuous training programs that would both
Board. He formerly served mately, business pays a price, too. teach new skills and reward workers for gain-
as president of the United Though union-busting CEOs have long had ing them. Together, they could ensure that
Mine Workers of America, superstar status on Wall Street, waging war workers freely share ideas and voice criti-
where he led two strikes on your own employees has never been a cisms without fear of retribution. And by pool-
that resulted in significant sound growth strategy. In fact, a unionized ing their political strengths, they could win
gains in employer-employee workforce can be highly instrumental in government policies that would grow the tech
cooperation. achieving business success, as our competi- industry and create the middle-class jobs that
tors overseas have discovered. According to America desperately needs. The leaders of
the Economic Policy Institute, the steep de- today’s high-tech industry should understand
cline in U.S. unionization from 1979 to 2005, that it takes new approaches to succeed in
which leveled off at 12%, failed to yield faster the new economy. That means working with
productivity growth than in the seven largest unions as partners, not fighting them as ad-
European countries, where more than 60% versaries. Employers might then come to real-
Wendy Wray
of the workers are union members. What’s ize that while their opposition to the Employee
more, output per hour worked is higher in the Free Choice Act may be in somebody’s inter-
Netherlands, France, and Belgium, where est, it certainly isn’t in their own.
32 Harvard Business Review | July–August 2009 | hbr.org

TODAY, PROGR AMMERS and other knowl- What about the management side? It’s
edge workers in the United States don’t have pretty clear that no one has actually commu-
a lot of leverage: Unlike all other advanced nicated directly with the programmers. Carol
countries, the U.S. allows firms to hire substi- Lee isn’t the person to do it – she has to at-
tutes for striking workers. Even so, while Det- tend to the balancing act.
onation Media’s management can huff and If the company wants to be a tough bar-
puff and talk about what Wall Street wants, gainer, it might borrow a page from Lemuel
it will have problems of its own shifting a Boulware, a former vice president of General
project to a new set of workers elsewhere. Electric, who spent a lot of time evaluating
Surprising as it may seem, knowledge work- the needs of unionized workers at GE as
ers are more organized in the United States part of his strategy before beginning collec-
than such other professionals as teachers, tive bargaining. While his take-it-or-leave-
writers, nurses, and professors in the public it, “first, last, and best” counteroffer to the Richard B. Freeman is the
sector. That’s because knowledge workers workers was later declared illegal (and led Herbert S. Ascherman Profes-
have specialized expertise inside their heads to strikes in 1960 and 1969), his efforts to sor of Economics at Harvard
that cannot be readily replaced. In 2008, the pay attention to what workers thought and University. He is currently
most successful union drive in the country to present the company view to them often serving as a faculty codirec-
was the organization of approximately 6,000 served the interests of both sides. He kept tor of the Labor and Worklife
postdoctoral students in California who are the unions at GE on their toes in assessing Program at Harvard Law
now affiliated with the UAW! members’ needs. School and the director of
Nevertheless, a strike would surely reduce Assuming that management and the pro- the Labor Studies Program
productivity and profits, hurting both sides. grammers want to maintain a long relation- at the National Bureau of
Both management and the programmers ship, they could turn to a mediator to help Economic Research.
have an interest in completing the project as fi nd a resolution. They could split the me-
quickly and profitably as possible so every- diator’s fees between them. If mediation is
one can get a bigger share of the revenue pie. unsuccessful, an arbitrator could design a
What can they do? legal resolution. The advantage of using such
Switching to the profit-sharing model
makes the most sense.
Switching to the profit-sharing model that third parties is that leaders on either side
Detonation Media desires makes the most can blame them for suggesting or imposing
sense. In tough times, when profits are down compromises that make the negotiators look
and reductions in labor costs save jobs, profit weak to their respective managers or union
sharing stabilizes labor costs. By the same members.
token, when the economy turns around, such On a broader level, unionism in the United
an arrangement guarantees that workers will States is at its lowest point since the 1920s.
share in the prosperity. Most unions are just trying to keep them-
That said, it’s important to determine ex- selves alive. But they are far from dead, and
actly what “profit” is. As the sad cases of En- there’s a reasonable chance that they may
ron, Lehman Brothers, and AIG have taught us, gain more power, as workers and the Obama
trust without verification is a dangerous thing. administration strive to make it easier to or-
Union members need to know that someone ganize and rectify the massive imbalance in
from their side – maybe Dan Hontz – has an income distribution that has hurt the middle
eye on Detonation Media’s books. class and the economy as a whole.
hbr.org | July–August 2009 | Harvard Business Review 33

HBR Case Commentary Should Detonation Media Blow Up or Make Nice with the Software Engineers Guild?
MOST GAME PUBLISHE RS are focused, But developers do love to play games.
much like Detonation Media, on making their Games, like the people who make them, are
deadlines and getting their product out the meritocratic. They’re all about achieving mas-
door. Employees are asked to work significant tery and rising up through the game world,
amounts of overtime, often for long stretches, level by level. I’d advise SEG to structure the
as the ship date approaches. guild to feel more like a game, with a senior-
The companies tend to hire a lot of young ity system that awards points for achieving
people, rapidly consume their youth, and then goals. Since Tetsui Wakatanabe attracts doz-
turn them back out. As a result, the industry ens of friends and colleagues simply because
suffers from collective, continuous brain drain. of his celebrity, for instance, he should receive
Short term, the guild should focus on
knowledge transfer and skills.
It gains the enthusiasm and zeal of young extra benefits from SEG that reflect his in-
game developers, but it loses the process, creased seniority and stature. Likewise, the
management skills, structure, and knowledge most active guild members should profit from
that people accumulate over long careers. The their activism by earning additional benefit
system encourages sloppy development and points.
lax procedures. Not surprisingly, it’s a business What’s more, knowledge workers – and
where you don’t find many people older than gamers – care a lot about growing their pro-
40 – bad news for workers and industry alike. fi ciency. They may hold antiestablishment
Jeffrey Anderson is the For someone looking to create an effective views, but they like to follow people they
founder and CEO of Quick union for knowledge workers, the games in- trust, are loyal to, and greatly respect. So in
Hit, a developer of premium dustry would be both a great and not-so-great the short term, the guild should focus more
free-to-play online sports place to start. Programmers and developers on improving knowledge transfer and skills
games. Formerly, he was have little power individually to improve sys- development, and less on protecting jobs or
the president and CEO of temic conditions, so there’s something to be getting raises. The guild should consider mak-
Turbine, a global publisher of gained from organizing. But even if workers ing membership feel more exclusive as a way
massively multiplayer online were united, the publishers can always de- to enhance perceived value. Why not require
role-play games, includ- pend on a steady supply of younger talent prospective members to be recommended
ing Dungeons & Dragons coming along behind the incumbent work- by a current member? The objective is to build
Online and The Lord of force. With replacements waiting in the wings, a social structure in which people are active,
the Rings Online. He can publishers don’t fear being left high and dry. network widely, and are proud to include guild
be reached at janderson@ The concern I have with the Software Engi- membership on their résumés.
quickhit.com. neers Guild is that its priorities and approach Because the meritocratic ethos among
aren’t a good fit with what the union members knowledge workers is so strong, traditional
really care about. The guild should align op- democratic union structures, where it can
erationally with the behavior, attitudes, and seem that the strong carry the weak, have
reward preferences of game developers. Per- relatively little appeal. If SEG is smart, it will
haps the biggest challenge the union faces is change the way the game is played.
that game developers, by nature, tend to be
Reprint R0907B
rugged individualists who chafe at oversight
Reprint Case only R0907X
and believe they can take care of themselves.
Reprint Commentary only R0907Z
Traditional unions like SEG run counter to their
To order, see page 158.
politics and temperament.
34 Harvard Business Review | July–August 2009 | hbr.org

Different Voice
A CONVERSATION WITH
SCIENCE FICTION WRITER
CORY DOCTOROW
Predicting the Present
EVENTS LIKE THE crash of 2008 provoke existen- 1984. Doctorow is a coeditor of the popular technology and
tial questions: How do we redefine our values in culture website Boing Boing and was previously the director
of European affairs for the Electronic Frontier Foundation, a
scarcer times? Are the lessons we learned grow- group that upholds civil liberties on the internet. For the 2006–
Joi Ito, Creative Commons Attribution 3.0
ing up enough to equip us for today’s challenges, 2007 academic year, he held the Canada–U.S. Fulbright Visit-
let alone tomorrow’s? Have the rules we live by ing Research Chair in Public Diplomacy at the University of
Southern California Annenberg Center on Public Diplomacy.
changed irrevocably?
In a two-hour telephone interview, Doctorow set out an
For insight into what our society and economy have become optimistic vision, in which technology is transformed from
and where they are headed, HBR senior editor Diane Coutu an Orwellian threat into an enabler of individual expression.
turned to science fiction writer Cory Doctorow, whose art is all Some of the features of this new world will seem familiar:
about imagining brave new worlds. Doctorow, 37, is the author Doctorow does not, for example, expect the imminent demise
of four novels, including the recent New York Times best seller of the printed word. But he does imagine a time, he says, “when
Little Brother, a futuristic novel inspired by George Orwell’s copyright law will be reformed to legalize the everyday, non-
hbr.org | July–August 2009 | Harvard Business Review 37

Different Voice Predicting the Present
commercial sharing of information on IDEA IN BRIEF cause they fear that a free internet will
the internet, which everyone is guilty of.” disrupt their ability to stay in charge.
■ Science fiction writer Cory
The media, for example, have gone out
Doctorow shares his insights
Science fiction author Frederik Pohl on how technology and the of their way to tell us that unless they
said that sci-fi writers don’t predict internet are changing society can take control of the internet, they
the automobile – they predict the and the economy in the don’t have a future. I’m not a complete
traffic jam. twenty-first century. techno triumphalist here – I believe we
That’s a really interesting position for ■ Far from dumbing down can have both a viable media industry
him to take, because I don’t think that people or giving government and a free internet. But if they’re say-
and business too much power,
science fiction writers predict the future. ing, “Here’s a gun; shoot one of us in the
technology and the internet
Science fiction has always been about are great enablers of individ- head,” I know which one I’m going to
the present, even when it’s dressed in fu- ual freedom. shoot in the head.
turistic trappings. We write stories that ■ The internet provides univer-
try to address the effect of technology sal access to human knowl- What about criticisms that the
on society and vice versa. Mary Shelley, edge. It is morally indefen- internet is dumbing us down?
the author of Frankenstein, was not pre- sible to limit that by trying I disagree completely. I was very, very
to ban free downloading
dicting that in the future we would all excited by the MacArthur Digital Youth
(copying). Instead, artists and
build men out of corpses and animate other innovators must learn Project that Mimi Ito just wrapped up
them with lightning. Her point was that how to use copying to their with her researchers from the Annen-
we might become technology’s servants advantage. berg Center at USC. She did a three-year
rather than its masters. She wasn’t re- ■ The ability to retain owner- study – one of the largest ever done on
ally being predictive. She was worrying ship and control of ideas has this topic – of how young people use
about the present. long been central to the way the internet. And she concluded that
companies operate. With that
there’s no real difference between what
control ebbing away, busi-
So what’s keeping you awake ness is going to have to start we usually think of as worthy internet
in the present? presupposing copying rather activity, like doing your homework,
I worry about the way that governments than discouraging it. and frivolous activity, like chatting on
are using technology in the so-called war MySpace. It turns out that one way you
on terror. My most recent novel, Little gain technological fluency is by social
Brother, is about hacker kids in San Fran- increase the power of the state. But I’m play. Things like gaming turn into tech-
cisco who declare war on the Depart- writing in an era in which the predomi- nical expertise, and the people you chat
ment of Homeland Security after a ter- nant use of technology is to increase the with all day are technical experts, too.
rorist attack on the city results in a total power of the individual and the group. That’s an encouraging message because
crackdown. The kids are under suspicion In today’s world, unlike Orwell’s, tech- it says to kids, “The stuff you love, what
of being terrorists because they happen nology empowers people who would compels you to play on the internet, is
to be in the wrong place at the wrong disrupt the status quo. So while Orwell worthwhile. You shouldn’t stop doing
time; as a result, they are taken into il- saw technology joining with psychology it and instead do stuff that matters to
legal custody and subjected to torture. to put policemen everywhere, even in grown-ups.”
The book illustrates, chapter by chapter, your mind, I see technology being used
what’s wrong with the technological to subvert authority. Also, 1984 is about You call yourself a copyfighter.
solutions that we’ve put in place and the alienation you feel when a totalitar- What does that mean?
shows you how easy it is to defeat them ian state crushes your individuality. Lit- Let’s go back to the media business,
yourself. The novel encourages young tle Brother is about the intense joy that because I’m a writer and that’s the
people to take control of technology to you experience when you discover that field that interests me the most. A lot
assert their freedom in the twenty-first there are millions of people out there of people in the creative arts, particu-
century. just like you, whom you can work with larly in the giant media concerns, are
to try and change society, or try and get lamenting the internet’s capacity to
In George Orwell’s 1984, Winston something done. copy things for free – people’s ability to
ends up a horribly broken man, but download whatever they want without
your w1n5t0n (Winston) ends up Then you have no fears about the paying a cent in royalties. This is not go-
triumphant. Why the difference? internet in the future? ing to change – copying is here to stay.
Orwell was writing at a time when the My greatest fear is that entrenched pow- Hard drives are going to get cheaper
predominant use of technology was to ers will take control of the internet be- and smaller, and they will be more
38 Harvard Business Review | July–August 2009 | hbr.org

capacious. In fact, if copying gets harder
from here on in, that will tell us that
something really bad has happened in
society. It will mean that we’ve lost the
power to make electricity or that we’ve
been through a nuclear war! The uni-
versal access to all human knowledge
is the realization of one of the most im-
portant dreams of humanity, and I’d ar-
gue that complaining about it is morally
indefensible.
There’s another reason to embrace
copying and to fight maximalist copy-
right, and that’s the impact on civil so-
ciety of the war on copying. Banning
copying criminalizes the majority of in-
ternet users, because we all copy all the
time. I give talks at big entertainment
companies all around the world, and
I ask, “Who in this room is not a copy-
right criminal?” No one raises a hand,
not even the copyright lawyers, because
they know that they violate copyright
a hundred times a day by downloading
things illegally from the internet. It’s
just rank hypocrisy, and it’s morally cor-
rosive, to outlaw copying.
What about the impoverished artist
who wants her compensation?
Art is an economically irrational activity.
That’s as true in the twenty-first century
as it always has been. The majority of
people who have practiced art never
earned a living doing it. But artists cre-
ate not only for economic reasons; they
also create to be heard. There’s no ques-
tion that the internet does a better job to have a roommate who was a painter, mercial use. The model works because
than any other system of allowing peo- trained in the style of Michelangelo. He for most people a free electronic book
ple to be heard. The evidence is plain. made his own gesso from skinned rab- is not a replacement for a printed book,
Look at YouTube – there are now more bits. Now, that’s quaint, but it’s not con- but rather an enticement to buy one.
people making more videos that are be- temporary. I’m a science fiction writer, I sell the hell out of printed books by
ing viewed by more people than ever in and the fiction I create is contemporary. giving away electronic ones. That may
the history of the world. It’s artistically satisfying to me to make change someday. A meteor might hit
art that’s intended to be copied. the earth, or we may lose our taste for
This raises what to my mind is Besides, doing the moral thing – not novels altogether. But for now, giving
an interesting question: What is hypocritically damning fans for the kind away my books free on the internet is
contemporary art? of copying we all do – can also make earning me an income. If that changes
I believe that from the artist’s perspec- commercial sense. I post all my books in the future, it will probably change in
Patrick H. Lauke
tive, today’s art must presuppose copy- for free on my website, and people can a way that’s easier for me to understand,
ing. If you are making art that you ex- remix them, translate them, distribute as I am already engaged with copying,
pect people not to copy, then you are them to friends; they can do anything than it is for someone who refuses to try
not making contemporary art. I used they want so long as it is for noncom- to understand it.
hbr.org | July–August 2009 | Harvard Business Review 39

So you’d agree with tech publisher not someone who’s going to cheap out
Tim O’Reilly when he argues that about spending 10 bucks on a book. The
an artist’s problem these days isn’t Kindle may come way down in price, but
piracy but obscurity? I think it’s going to do that by adding a
Absolutely. Of all the people who didn’t bunch of features that increase appeal
buy one of my books today, the majority and the volume produced. Once you
of them didn’t buy it because they never load the Kindle up with features, you
heard of me, not because someone gave have the same problem you have with
them a free copy. a computer – it becomes too distract-
It’s a rare person who treats an elec- ing. So I’m not all that bothered. Now,
tronic book as a substitute for a printed maybe I’m wrong about this, and if I am,
Banning copying criminalizes the
majority of internet users.
book, for a lot of reasons, the main one then I’ll have to figure out another way
being that computers are really, really to make money on my books. Of course,
good at distracting us. It’s very hard to spending 10 years at the coal face of elec-
consume long forms of narrative from a tronic publishing will give me the tools
screen. You often hear people say, “Oh, to find that new income model.
well, this is a screen quality issue – the
screen isn’t good enough to read from In your nonfiction writing, you seem
for a long period of time.” But the peo- to argue that originality is an idea
ple who say this tend to be the same whose time has come and gone. Is
ones who spend 18 hours a day staring this right?
at a screen. It’s just not a credible ob- I think our conception of originality
jection for people to raise, because at needs to expand. We need to acknowl-
the end of the day the quality is good edge that remix, while not wholly origi-
enough to compel us to stare at screens nal, is itself an act of original expres-
every hour that God sends. Ultimately, sion. I think it’s the totality of originality
the problem with computers is the way that counts. The idea that unless you’ve
we use them. invented the whole thing from the
When I’m sitting at the computer writ- ground up, you haven’t invented any-
ing a story, I might write a paragraph, thing – it’s nonsense. Look at the iPod.
answer an e-mail, delete spam, check an What it mostly did was take out a lot
image-sharing community, download a of stuff that earlier MP3 players put in.
YouTube clip, clear out my RSS reader, So is it original if you start with some-
and then return to my paragraph all thing where people have done X, Y, and
within 10 minutes. Now, I have a little Z, and you do just X and Y? I think it is.
bit of ADD, but other people behave I think the iPod is a very original piece
the way I do. That’s why the extremely of industrial technological design. But
small minority of people in the world it’s not original in the traditional sense,
who read books for pleasure are likely to because it’s what someone else did
buy printed books. Computers are just minus something.
too distracting.
Has the current economic crisis
What about the Kindle? Doesn’t it influenced your science fiction?
throw your model into question? My next book, Makers, is all about eco-
I don’t think so. First of all, anyone who’s nomic collapse. In it, venture capitalists
willing to spend $350 on a Kindle is break up dying Fortune 500 companies

and turn them into microcapital firms
for entrepreneurs across America. They
go around giving $10,000 and $20,000
and $40,000 investments to tiny collec-
tives of free and open source hardware
It’s not about
and software hackers who, because
they’re using all open designs, have no
capital expenses. What these guys do is
extra credit.
build new stuff that they get to sell for
six to eight weeks before everyone else
figures out how to copy it, which means
they have to recoup their total invest-
It’s about getting
ment in six to eight weeks. The problem
is that the venture capitalists can’t in-
vest $40 billion in $10,000 increments
the credit you deserve.
every couple of months. As a result, the
financial system breaks down, challeng-
ing our very notions about property and
control of ideas.
ARESTY INSTITUTE OF
EXECUTIVE EDUCATION We’re all business.®
One last question: Why did you name
your daughter Poesy Emmeline
Fibonacci Nautilus Taylor Doctorow?
Attract the attention of the C-suite and earn the credit you deserve.
All the names have individual signifi- Wharton programs are led by some of today’s top business minds and
cance. Poesy is for poetry, and also for focus on accelerating your impact as a leader.
Edgar Allan Poe, of whom I’m a great
fan. And Emmeline is for Emmeline Download our FREE article series “Wharton on Global Finance” at
Pankhurst, the famous British suffrag- executiveeducation.wharton.upenn.edu. For more information, e-mail
ette. Fibonacci was the mathematician execed@wharton.upenn.edu. Call 800.255.3932 (U.S. or Canada) or
who brought Arabic numerals to Europe, +1.215.898.1776 (worldwide), and reference HBR.
and he uncovered the Fibonacci number
sequence, which describes some of the
most graceful forms of nature. Nauti- EXECUTIVE DEVELOPMENT PROGRAM
lus is, among other things, from Jules > September 13–25, 2009 > February 7–19, 2010
Verne’s 20,000 Leagues Under the Sea.
Collectively, these names represent the THE LEADERSHIP JOURNEY: CREATING AND DEVELOPING YOUR LEADERSHIP
four major areas of human endeavor: > September 27–October 2, 2009
Poesy for the arts, Emmeline for social
science and politics, Fibonacci for math LEADING AND MANAGING PEOPLE
and pure science, and Nautilus for earth > September 28–October 1, 2009 > December 7–10, 2009
science and bioscience. I’m keenly aware
of how easily I picked up and then dis- ADVANCED MANAGEMENT PROGRAM
carded identities when I was growing up, > October 4–November 6, 2009 > June 6–July 9, 2010
and I want my daughter to have lots of
identities to choose from.
CREATING AND LEADING HIGH-PERFORMING TEAMS
Here in the twenty-first century, the
> October 12–16, 2009
only certainty is change. My kid’s got a
FINANCE AND ACCOUNTING FOR THE NON-FINANCIAL MANAGER
lot of changes ahead of her, and she’ll
> October 19–23, 2009
have lots of names to choose from, come
what may.
Reprint R0907C
To order, see page 158.

FINANCE in the
SPECIAL ISSUE
NEW WORLD
THE
DESCENT
OF FINANCE
Getty Images
Art Credit
44 Harvard Business Review | July–August 2009 | hbr.org

When today’s great crisis ends,
the U.S. financial system will be
a shadow of its former self, but
America will be stronger than ever.
History shows that money and
power don’t always go hand in hand.
| by Niall Ferguson
I IF THE ASCENT OF MODERN FINANCE be-
gan in the 1980s, with “liar’s poker” on Wall
Street and the City of London’s Big Bang,
it ended on September 15, 2008 – the day
Lehman Brothers Holdings went bankrupt.
Seven years on, 9/15 supplanted 9/11 as the
costliest day in Wall Street’s history.
Lehman Brothers’ demise was one of
seven events that, in the space of just 19
days, signaled the end of an epoch. The first,
on September 7, was the nationalization of
the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac). On
September 14 Bank of America announced
that it would buy Merrill Lynch. On Septem-
ber 16 a money market fund, Reserve Pri-
mary, broke the buck – that is, its net asset
value dropped below $1 per share – because
of losses on the unsecured commercial pa-
per it had bought from Lehman. That same
day the Federal Reserve agreed to give AIG
$85 billion to avoid a lethal chain reaction
if the insurance giant couldn’t meet its ob-
ligations on the credit default swaps it had
sold to banks. Nationalization in this case
took the form of a warrant to the Federal Re-
serve for 79.9% of the company’s equity. On
September 22 the investment bank became
an extinct species when Goldman Sachs and
Morgan Stanley converted themselves into
bank holding companies. Finally, on Septem-
ber 25, Washington Mutual Bank was seized
by the Office of Thrift Supervision and
placed into the receivership of the Federal
Deposit Insurance Corporation – marking
the biggest bank failure in America’s history.
hbr.org | July–August 2009 | Harvard Business Review 45

FINANCE in the NEW WORLD.
Although the crisis began nearly two years ago, real GDP having grown by barely 1% per annum
September 2008 was the month American finance since 2010.
fell off a cliff. What will be the long-term impact on We started out calling it the Subprime Crisis. It
the U.S. economy and the global financial system? quickly became the Credit Crunch and then the
Global Financial Crisis. By 2013 a new name has
From Crisis to Breakdown stuck: the Breakdown.
I
magine the worst-case scenario: The current The breakdown of the American colossus has
recession turns out to be another great de- fundamentally altered the international economic
pression. The one that began in August 1929 order. China’s GDP in 2013 is half that of the United
lasted 43 months, according to the U.S. Na- States; in 2006 it was only one-fifth as big. The U.S.
tional Bureau of Economic Research. How- dollar has halved in value against the Chinese yuan
ever, the first great depression, which only histori- following a Russo-Chinese initiative to replace the
ans now remember, began with the Panic of 1873 greenback as the international reserve currency
and lingered for 65 months. If the U.S. economy with the International Monetary Fund’s Special
keeps shrinking that long, there won’t be a sus- Drawing Rights (SDRs, pronounced “sadders”). Oil,
tained recovery until after May 2013. for instance, is priced in SDRs.
Fast-forward to 2013. The government-owned For the newly elected U.S. president, Jeb Bush,
Citibank of America, formed by the forced merger who defeated Sarah Palin for the Republican nomi-
and nationalization of the United States’ two big- nation in 2012, the time has finally come to Put
gest banks, now dominates retail banking. The America First. Treasury Secretary John Paulson
number of U.S. banks has fallen by half, from 8,534 says he is optimistic about his negotiations with
in 2007. There are just 3,000 hedge funds all over the IMF to repay the 150 billion SDR loan negoti-
the world – less than a third of ated by his predecessor. An investor in gold mines
the precrisis total. The regulatory all over the world, Paulson is enthusiastic about
Will this financial crisis framework that was imposed by the president’s plan to return the United States
be more like the Great Treasury Secretary Timothy Geith- to the gold standard. At the G4’s latest meeting,
ner in the previous four years has the Brazilian, Russian, Indian, and Chinese foreign
Depression that began
completely changed the financial ministers unite to condemn Commerce Secretary
in 1929 and lasted 43 landscape. With new restrictions on Lou Dobbs’s latest round of tariffs on imported
months, or the one that executive compensation, bank capi- apparel and automobiles.
began in 1873? talization, and derivatives trading, Meanwhile, Defense Secretary Max Boot con-
retail banking has become firms that U.S. “R” (for robot) forces will continue to
10% GDP Growth Rate more like a public utility. be deployed in the radioactive zone around Bushehr
Even nonbank entities like as part of Operation Iranian Freedom, launched by
5% 1873–78
5.10% hedge funds and insurance the new Bush administration to support Israel’s re-
0%
companies have to operate cent strikes on Iran’s nuclear facilities. With unem-
1929–33
–1.4% under the unsleeping eye of ployment stuck at 12%, many Americans are excited
–5.% 2007… the new Financial Authority by the military successes in Iran; the Islamic Re-
–2.6%
for the Regulation of Sys- public inflicted several humiliations on President
–10%
temic Institutions (FARSI). Obama’s administration after his disastrous visit to
–15%
Despite FARSI’s exten- Tehran in 2010. However, people are more nervous
1 2 3 4 5 6
Years sive powers, the U.S. govern- about the naval clashes between American and Chi-
ment is still grappling with nese forces in the South China Sea.
The depression of the 1870s the fiscal legacy of the cri- If this scenario strikes you as too pessimistic,
lasted 65 months, but it was sis. The federal debt is now think again. From 1929 to 1933 the stock market
less painful. around $20 trillion – $3 tril- rallied several times on the long way down to the
lion higher than the Obama bottom. In fact, the Dow Jones Industrial Average
administration forecast in moved up by at least 2% on 15% of the trading days
its 2009 budget. The top income tax rate is 45%. between October 1929 and December 1932; on 34
The S&P 500 is down to 418, where it was in De- trading days it rose by more than 5%. True, post–
cember 1991 – a decline comparable to that be- World War II recessions, on average, have lasted
tween 1929 and 1934. The United States, it appears, only 10 months from peak to trough, but the pres-
is stuck in the middle of its own lost decade, with ent crisis is no average recession.
46 Harvard Business Review | July–August 2009 | hbr.org

From 1929 to 1933
the stock market
rallied several
times on the long
way down to the
bottom. In fact,
on 34 trading days
the Dow Jones
Industrial Average
rose by more
than 5%.
Back to the 1870s One, grain production in the Midwest and steel pro-
O
ne hopeful possibility is that this duction in the Northeast were both soaring. More-
recession will be no worse than the over, continued growth in the number of banks en-
two worst recessions since 1945: sured that money supply didn’t contract. Two, the
those of 1973–1975 and 1981–1982. crisis didn’t lead to the breakdown of globalization.
If that’s the case, a recovery should Many countries raised tariffs in the late 1870s, but
be under way by the time this article is published. they didn’t impose restrictions on capital flows or
But consider another scenario: Suppose this reces- migration. Trade wasn’t significantly impeded; in-
sion resembles neither the Great Depression of deed, it received a boost as railroad lines were fur-
1929–1933 nor the big recession of 1973–1975 but is ther extended and oceangoing steamships became
more like the Long Deflation of the late nineteenth more efficient. Nor did foreign investors lose their
century. That one began after the financial panic appetite for U.S. bonds and stocks.
of October 1873 and dragged on until March 1879. A long deflation like that of the 1870s? A great
Although it was more protracted than the 1930s de- depression like that of the 1930s? Or a big reces-
pression, the 1870s slump was less painful. In 1873, as sion like that of the 1970s? It all depends on what
in 2008, the trouble began with a monetary policy matters more: the burden of debt and falling asset
misstep. The government demonetized silver, say- values, or easy-money policies and fiscal stimuli.
ing that only gold could be used to back banknotes.
The deflationary effects proved unpopular, particu- Who Will Buy the Bonds?
A
larly with indebted farmers. A technological and t the heart of this crisis are overlever-
construction boom in the form of railroads was aged bank balance sheets – to be pre-
coming to an end. A major bank failure signaled cise, excessively high ratios of liabili-
the beginning of the panic: Philadelphia-based Jay ties or assets to bank capital. For most
Cooke & Company blew up. There was a sell-off of the eighteenth and nineteenth cen-
on Wall Street, though it was a steady slide rather turies and well into the twentieth, bank lending
than a nosedive. From the peak in May 1872 to the was held in check by rules about deposit volumes,
trough in June 1877, stocks slowly declined by 47%. minimum reserve requirements, and the risk of
Then as now, the crisis was global, with the Ameri- a run. Since the late twentieth century, however,
can crash coming just five months after collapses banks have expanded their balance sheets by bor-
AP/Wide World Photos
in Berlin and Vienna. rowing from one another or from the commercial
The contraction in output was smaller in the paper market.
1870s than in the 1930s. In fact, 1874 was the only A hundred years ago a typical European bank’s
year during that depression in which U.S. real GDP assets-to-capital ratio was 4:1; by the 1970s bankers
declined. By 1877 production was 12% higher than it regarded a 10:1 or 12:1 ratio as prudent. But over the
had been in 1872. There were two reasons for this: past two decades such ratios have risen. Take the
hbr.org | July–August 2009 | Harvard Business Review 47

FINANCE in the NEW WORLD.
U.S. investment banks. From 1993 to 2002 the aver- ery? The Federal Reserve has effectively cut its
age leverage ratio – assets divided by equity capi- minimum lending rate to zero. In conjunction with
tal – was 21 for Morgan Stanley, 24 for Goldman the Treasury Department and the overstretched
Sachs, 27 for Merrill Lynch, and 32 for Bear Stearns, FDIC, it has provided financial institutions with
according to Robert Lockner, of Chapman and Cut- about $10 trillion worth of loans, capital injections,
ler LLP. By 2006 those figures had risen to as high and guarantees. The Federal Reserve’s Term Asset-
as 33 for Morgan Stanley, 26 for Goldman Sachs, 32 Backed Securities Loan Facility has committed up
for Merrill Lynch, and 34 for Bear Stearns. Thus in to $1 trillion to revive the loan securitization pro-
four years these four investment banks went from cess and to help finance the purchase of mortgage-
having assets that were, on average, 26 times their backed securities. And the Public-Private Invest-
capital to assets that were 31 times their capital. ment Program is supposed to create a market for
They weren’t the only financial institutions gearing old mortgages and mortgage-backed securities.
up: Debt exploded in the U.S. financial sector from (After the auction of a bundle of mortgages has
16% of GDP in 1976 to 116% of GDP in 2007. established the buyer and the price, the Treasury
Common sense tells us that borrowing on such a will invest a dollar of taxpayers’ money for every
scale is risky. When a bank has an assets-to-capital dollar of private capital. In addition, the FDIC will
ratio of 25:1, a relatively small decline in asset val- lend up to $12 for every dollar of private capital.)
ues – say, 4% – can wipe out its equity. However, so- Compared with these measures, the Obama ad-
phisticated measures such as risk-weighted assets ministration’s $787 billion fiscal stimulus seems
divided by tier one capital, or value at risk like small beer, especially since the spending is
A hundred years ago relative to equity, concealed the banks’ spread over three years. Even less significant is the
vulnerability by their very intricacy. The paltry $75 billion set aside under the Homeowner
the typical European banks also massaged their ratios by us- Affordability and Stability Plan to reduce some
bank had a leverage ing off-balance-sheet vehicles (see the UK households’ interest payments on mortgages.
ratio of 4:1. By the Financial Services Authority’s report The Whatever their economic impact, one conse-
1970s, 10:1 was Turner Review: A Regulatory Response to quence of these new expenditures will be a huge
the Global Banking Crisis, March 2009). increase in the federal government’s budget deficit,
regarded as prudent. The crisis exposed all those accounting which at the time of the writing of this article was
tricks. For instance, in September 2008 expected to exceed 12% of GDP in 2009 or 44% of
4:1
Bank of America’s leverage ratio was 73.7:1; in total outlays. Not since World War II has the gap
10:1
01 other words, its capital was just 1.4% of its assets. between government expenditures and revenues
If the bank’s off-balance-sheet commitments were been so wide. Despite its exceedingly optimistic
Bank Leverage included, its leverage ratio was a staggering 134:1, GDP growth forecasts – 1.5% in 2010, 4.2% in 2011,
73.7:1 according to Bridgewater Financial Group.
The global banking regulatory framework
4.4% in 2012, and 4.1% in 2013 – the Obama admin-
istration projects that the federal debt will rise
known as Basel II – published in 2004 but not from $10 trillion (89% of GDP) in 2009 to $23 tril-
universally adopted when the financial crisis lion (101% of GDP) by 2019. If those expectations
In September struck – draws distinctions between credit risk, are belied, and the U.S. economy grows at an av-
operational risk, and market risk. Ironically, those erage of only 1% a year over the next decade, the
2008 Bank norms combine liquidity risk with other kinds un- federal debt will soar to 146% of GDP by 2019.
of America’s der the heading of residual risk. However, with The mystery is who will buy $1.75 trillion
leverage ratio banks so highly leveraged, the risk of a liquid- worth of freshly printed U.S. government bonds
was 73.7:1. ity crisis turned out to be anything but residual. in 2009 – to say nothing of the trillions of dollars’
When interbank lending choked up in August worth to come in future years. Non-Americans
2007, the effects were disastrous. Sources of short- own about 60% of the outstanding Treasury debt,
term finance, including commercial paper, dried having bought 75% of new bond issues over the
up; securitization all but ceased; and a range of past five years. But foreign demand for Treasur-
assets secured on subprime mortgages plummeted ies is falling as other nations’ current account sur-
in value. In weeks the liquidity crisis became a pluses shrink. According to Deutsche Bank, China
solvency crisis, claiming Bear Stearns as its first will increase its reserves by no more than $100 bil-
Getty Images
victim. lion this year, less than a quarter of last year’s to-
Will the measures taken by the U.S. government tal, and only a fraction of that will be invested in
restart credit creation or end up impeding a recov- dollar-denominated bonds.
48 Harvard Business Review | July–August 2009 | hbr.org

A dramatic rise in the U.S. personal savings interest rates, the Federal Reserve will have no op-
rate could create a domestic appetite for bonds. tion but to increase purchases of Treasuries. In the
Although the savings rate fell below zero in 2005, process, it could overdo monetary expansion and
it averaged 7% of GDP in the 1980s. However, a re- thereby arouse fears of future inflation, increasing
version to traditional American thrift would cause the upward pressure on interest rates.
other headaches for policy makers desperate to
rekindle consumption. A more likely scenario is The Future of the Greenback
A
that the Federal Reserve will absorb a substantial number of politicians have claimed
proportion of the new bonds. Indeed, the March that today’s financial crisis signals the
2009 announcement that the central bank would end of U.S. power. “One thing seems
buy $300 billion worth of longer-term Treasury probable to me,” declared Germany’s
securities over the next six months confirmed that finance minister, Peer Steinbrück, last
another consequence of current fiscal policy would year. “The U.S. will lose its status as the superpower
be the printing of dollars by the Federal Reserve. of the global financial system.” Russia’s prime min-
The administration is betting that the combina- ister, Vladimir Putin, spoke in January 2009 of
tion of the Federal Reserve’s “quantitative easing” “a serious malfunction in the very system of global
of monetary policy and the Treasury’s fiscal stimu- economic growth – namely, when one regional
lus will bring about a recovery by 2010. But we live center endlessly prints money and reaps the ben-
in a globalized world, where governments’ vary- efits.” Though more muted in his criticism, China’s
ing monetary and fiscal stimuli are more likely to premier, Wen Jiabao, delivered a similar message
generate bond market volatility and exchange rate when he declared, “The crisis has fully exposed the
fluctuations than to guarantee a return to growth. existing international financial system and gover-
It seems doubtful that the only solution to a crisis nance structure defects.”
caused by excessive private leverage is the creation Central to globalization as it has evolved over
of more public debt. Moreover – as became appar- the past decade has been Chimerica – the symbi- Goldman
ent in Britain in March 2009, when the governor otic relationship between China and the United Sachs recently
of the Bank of England essentially vetoed further States. For a time, this seemed to be a marriage predicted that
fiscal stimulus by the government – monetary pol- made in heaven. The Chinese did the exporting,
icy and fiscal measures can be in conflict. If large the Americans the importing. The Chinese did the
China’s GDP
deficits push down bond prices, raising long-term saving, the Americans the spending. The Chinese might equal that
of the United
States by 2027.
U.S. GDP growth
China’s GDP growth
2006 2020 2030 2040 2050
But if China’s
growth falls to
6% and America’s
to 1%, that won’t
happen until
2040.
hbr.org | July–August 2009 | Harvard Business Review 49

FINANCE in the NEW WORLD.
ran a trade surplus, the Americans a current ac- in a divorce. The balance of global power would
count deficit. The Chinese intervened to keep the shift. No longer committed to the friendship with
renminbi from appreciating; the Americans sold America that was established in 1972, China would
them around a trillion dollars’ worth of dollar- be free to create other spheres of global influence,
denominated bonds. from the Shanghai Cooperation Organisation, of
The crisis has called this economic marriage which Russia is also a member, to its nascent em-
into question. In March 2009 Wen Jiabao made pire in commodity-rich Africa.
his concerns explicit. “We have lent a huge amount Yet there are reasons to question the notion that
of money to the United States,” he observed. “Of the crisis will undermine U.S. global economic
course we are concerned about the safety of our power. For a currency whose demise economists
assets….I request the U.S. to maintain its good have been predicting for the better part of a decade,
credit, to honor its promises, and to guarantee the the dollar is in remarkably rude health. After a pe-
safety of China’s assets.” Ten days later the governor riod of weakening from February 2002 to March
of the People’s Bank of China, Zhou Xiaochuan, 2008, when the real trade-weighted exchange in-
suggested that the IMF’s SDR replace the U.S. dol- dex declined by 25%, the dollar rallied as the crisis
lar as the world’s reserve currency. The aim, he turned into a panic. Admittedly, this was the result
said, would be to create a reserve currency that is of more than a flight to safety by global investors.
“disconnected from individual nations and is able to Many, especially the Chinese, had been borrow-
remain stable in the long run, thus removing the ing in dollars, expecting the currency to depreciate.
inherent deficiencies caused by using credit-based The crisis sparked a scramble for dollar liquidity as
national currencies.” lenders declined to roll over debt, and borrowers
Has Chimerica turned out, as the term has always reacted by buying dollars to repay the debt before
implied, to be a chimera? It’s tempting to think so. its value rose. The Chinese authorities’ decision in
After all, the British pound lost its primacy among late 2008 to restore the renminbi-dollar peg also
the world’s currencies after played a role in pushing up the dollar.
World War II because of exces- Nevertheless, the financial crisis has reaffirmed
The financial crisis has sive debt and slow growth. With the dollar’s centrality to the global system. It’s
reaffirmed that the America’s debt spiraling upward possible that we will see some weakening of the
and its long-term growth rate currency this year. But it’s far from certain that a
U.S. dollar is central to
falling, the dollar could follow dollar rout will materialize. After all, there is no
the global system. It may the pound into the category of clear alternative to the dollar. There are practical
weaken, but it’s far from former reserve currencies. The obstacles to switching to SDRs, which exist as an
certain that a rout will U.S. would then lose the conve- accounting device used by only a few international
materialize. nient ability – exploited since institutions. So any weakening of the dollar will be
the 1960s – to borrow from for- more obvious against commodities than against
eigners in its own currency. other currencies.
There is no clear
In addition, if over the next Moreover, because the present crisis will reduce
alternative to the dollar. four years China maintains an China’s rate of growth more than America’s, it may
average growth rate of more delay the moment at which China’s economy be-
than 6% and the United States comes bigger than the U.S. economy. If the IMF is
suffers low to zero growth, the correct, by the end of 2009 the U.S. growth rate will
moment when the Chinese econ- be 4.6 percentage points lower than the growth
omy overtakes America’s might rate in 2007, while China’s growth rate will have
come sooner than expected. declined by 6.3 percentage points. If, say, the long-
Goldman Sachs, which predicted run growth rate of the U.S. economy falls to 1% and
in 2001 that China’s GDP might that of the Chinese economy declines to 6%, China
equal that of the United States by won’t overtake the United States until 2040.
2040, recently brought that date The most important point to grasp about to-
forward to 2027. With China rely- day’s financial crisis is that it is a global crisis – and,
ing less on exports to the United indeed, a crisis of globalization. There hasn’t been
Getty Images
States and caring less about peg- such a dramatic decline in worldwide industrial
ging the renminbi to the dollar, production since 1973–1974; if the present trend
Chimerica could quickly end persists, the contraction will be even greater. Strik-
50 Harvard Business Review | July–August 2009 | hbr.org

ingly, world trade has collapsed by more than 25% but European write-downs have been far less than
in less than a quarter, which bears comparison that figure implies.
with the early 1930s. Yet the global economy’s Europe’s biggest problem is that its banks have
breakdown hurts other nations more than the greater exposure to the world’s most vulnerable
United States. For that reason, the dollar has a regions – East Asia and Eastern Europe – than
good chance of retaining its stature despite the U.S. banks do. Western European banks are owed
U.S. government’s prodigious monetary and fiscal roughly 54% of the total of foreign bank loans to
laxity. America’s reputation as a safe haven makes emerging economies in Asia and no less than 70% of
The government
it possible for it to run bigger deficits and to print the $1.8 trillion of foreign loans to Eastern Europe.
more money at lower cost than any other country Austrian banks alone have lent about $300 billion has projected
on the planet. to Eastern Europe – the equivalent of 68% of Aus- that federal debt
It’s unfair that a crisis so obviously American in tria’s GDP. Some countries, including Hungary, have will rise to 101%
origin has a more severe impact on the rest of the seen their currencies plummet, while in others, such of GDP by 2019,
world than it has on the United States itself. But as Ukraine, the default risk pre-
that’s the world in which we live – and will continue mium on bonds has soared. The
to live. situation increasingly resembles Debt as % of GDP 2008–2019 146%
a 1980s Latin American debt cri- 1% GDP Growth
The World in Crisis sis, only this time Western Europe,
C
101%
onfounding the claim that emerging not the United States, must deal
markets had decoupled themselves with it. Budget projections
from the United States, the collapse Governments have recently
of U.S. consumer confidence has fallen in Latvia, Hungary, and the 70%
combined with a financial crisis in Czech Republic, but Western Eu- but if the
Western Europe to cause the worst global reces- ropean leaders are divided about economy grows
sion since World War II. In 2009 world output may how to respond. The Germans, in particular, cling to
contract for the first time in 60 years, according to the notion that they are more fiscally virtuous than
at just 1% a year,
the IMF, by 0.5% to 1%. The United States may suf- the Americans, and have no desire to commit their debt will soar to
fer a 2.6% decline in output in 2009, but the euro taxpayers’ money to a general Eastern European 146% of GDP.
zone’s GDP could shrink by 3.2% and Japan’s by as bailout. It’s hard to imagine, however, that they will
much as 5.8%. Even China may see its growth rate idly watch while a European Union member goes That will arouse
cut in half. into default. fears of inflation
The crisis has affected Japan and newly industri- Because the crisis has affected some EU mem-
alized Asia the most because their economies rely bers more than others, Europe is suffering a crisis
and push interest
so heavily on exports, which have declined sharply. of divergence. Britain, Belgium, and Ireland have rates up.
Japan’s exports fell by a staggering 49% in the 12 major banking problems, but others don’t. Greece,
months leading up to February 2009; its industrial Portugal, and Spain have been running large cur-
production declined by 31%. Taiwan’s exports de- rent account deficits, but Austria, Germany, and
clined by 42%, and its GDP by 32%; South Korea’s the Netherlands are running surpluses. Monetary
exports and GDP fell by 33% and 21% respectively, policy may be uniform throughout the euro zone,
and Singapore’s by 21% and 17%. China’s official but there isn’t a European treasury that can coor-
growth figures probably overstate the extent to dinate a fiscal stimulus. The extent of fiscal diver-
which it is coping with the slowdown. Its exports gence is striking. For instance, Italy, Greece, and
were down by 26% in the year to February 2009, Belgium are saddled with debt-to-GDP ratios of
and the fact that imports were down almost as 80% to 100%, which greatly limit their room for
much suggests a steep decline in industrial output. maneuver. These centrifugal forces are manifest-
Meanwhile, the problem of bank leverage is ing themselves in widening bond yield spreads and
smaller in the United States than in Europe. At credit default swap spreads. It’s highly unlikely that
12:1, the average leverage ratio of U.S. banks in the euro zone will break up (the costs of leaving
2008 compared favorably with the average ratios are prohibitively high), but friction will increase
of 24:1 in Britain, 28:1 in France and Denmark, 29:1 within Europe, especially between euro-zone
in Switzerland, and 52:1 in Germany. The IMF says members and nonmembers.
that European banks have about 75% as much ex- One unnerving aspect of this crisis is that it’s
posure to toxic American assets as U.S. banks do, hurting America’s allies more than its rivals. Think
hbr.org | July–August 2009 | Harvard Business Review 51

FINANCE in the NEW WORLD.
of the hardest-hit countries: East Asian export- America the Safe Haven
W
ers and Eastern Europe’s new democracies. And ill this financial crisis make the
remember what Vladimir Putin said in January world more dangerous as well
2009: “Let us be frank: Provoking military-political as poorer? The answer is almost
instability and other regional conflicts is also a certainly yes. Apart from the
convenient way of deflecting people’s attention usual trouble spots – Afghanistan,
from mounting social and economic problems. Congo, Gaza, Iraq, Lebanon, Pakistan, Somalia,
Regrettably, further attempts of this kind cannot and Sudan – expect new outbreaks of instability in
be ruled out.” Having invaded Georgia last year, countries we thought had made it to democracy. In
Russia has signaled its intention to test the Obama Asia, Thailand may be the most vulnerable. At the
administration with several aggressive moves. It is end of 2007 it reverted to democracy after a spell
planning to set up Black Sea bases in breakaway of military rule that was supposed to crack down
Abkhazia; it has signed an air defense treaty with on corruption. Within a year’s time the country
Belarus; and it paid Kyrgyzstan to oust the United was in chaos, with protesters blocking Bangkok’s
States from its Manas air base. This saber rattling streets and the state banning the People’s Power
is likely to continue. Party. In April 2009 the capital descended into an-
archy as rival yellow-shirted and red-shirted politi-
cal factions battled with the military.
Expect similar scenes in other emerging markets.
2013 Trouble has already begun in Georgia and Mol-
dova. Then there’s Ukraine, where economic col-
lapse threatens to trigger political disintegration.
Two Scenarios While President Viktor Yushchenko leans toward
Europe, his ally-turned-rival Prime Minister Yulia
If the current crisis turns out to be another great depression,
Tymoshenko favors a Russian orientation. Their
the left-hand scenario may come to pass. If not, the picture
differences reflect a widening gap between the
may look somewhat more familiar.
country’s predominantly Ukrainian west and pre-
U. S . PR E S I DE N T dominantly Russian east. Meanwhile, in Moscow,
Putin talks menacingly of “ridding the Ukrainian
people of all sorts of swindlers and bribe-takers.”
The Crimean peninsula, with its ethnic Russian
majority, is the part of the “Near Abroad” (the for-
mer Soviet Union) that Putin most covets. Janu-
Jeb Bush Barack Obama ary’s wrangle over gas supplies to Western Europe
U. S . E C ONOM Y may have been the first phase of a Russian bid to
The recession is only a
destabilize, if not to break up, Ukraine.
The recession
continues. painful memory. The world’s increasing instability makes the
United States seem more attractive not only as
U. S . B A N K S a safe haven but also as a global policeman. Many
The number of banks Many new banks have people spent the years from 2001 to 2008 com-
has halved. appeared. plaining about U.S. interventions overseas. But if
the financial crisis turns up the heat in old hot
T OP I NC OM E TA X R AT E spots and creates new ones at either end of Eurasia,
the world may spend the next eight years wishing
45% 35%
AP/Wide World Photos, Getty Images
for more, not fewer, U.S. interventions.
•••
S & P 500 H IGH
Perhaps we should revisit 2013 against this back-
418 976 ground. The outlook for the United States appears
less apocalyptic than we first feared. In this asym-
U. S . F E DE R A L DE B T metric world, where everywhere else seems more
dangerous and unpredictable than America, the
$20 trillion $17 trillion consequences of the crisis are less terrible than
those of the Great Depression. In this better-case
52 Harvard Business Review | July–August 2009 | hbr.org

In a better-case
2013, a number of
new banks have
appeared and
many hedge funds
have morphed
into institutions
very like the old
investment banks.
2013, the recession of 2007–2009 is a receding if As predicted in the 2009 government budget, the
still painful memory. We are over the Breakdown. gross federal debt has risen to 98% of GDP in 2013.
Those who feared that Federal Reserve Chair- But the relatively strong growth of the previous
man Ben Bernanke’s policy of quantitative easing four years has reassured investors that the United
would lead to inflation have been proved wrong: States hasn’t gone the way of the Latin American
Prices have barely changed since 2009, despite the economies. The top income tax rate is 35%. The
central bank’s best efforts. Thankfully, there hasn’t S&P 500 is at 976, as stocks slowly claw their way
been severe deflation either. back from the nadir of October 2009. The dollar is
Following the Obama administration’s reluctant stable at 6.8 yuan.
decision to take Bank of America and Citigroup Following the recovery of Asian exports to the
into “conservatorship,” the banks’ balance-sheet United States, talk of replacing the dollar with the
problems have finally been resolved. The govern- SDR has fizzled out. As Luo Ping, a director-general
ment has sold off toxic assets at realistic prices, and at the China Banking Regulatory Commission, said
bondholders, bowing to the inevitable, have ac- back in February 2009: “Except for U.S. Treasuries,
cepted equity in the new entities created when the what can you hold? Gold? You don’t hold Japanese
ailing financial giants were broken up and priva- government bonds or UK bonds. U.S. Treasuries
tized. A remarkable number of new banks have ap- are the safe haven…We hate you guys…but there
peared, offering financial services on an altogether is nothing much we can do.”
different basis: minimum leverage and maximum In 1886, in the middle of the Long Deflation that
attention to client relationships. The return to the followed the 1873 crash, Germany’s Iron Chancel-
fore of long-established names like Rothschild and lor, Otto von Bismarck, famously remarked, “God
Lazard confirms the enduring strength of that tried- has a special providence for fools, drunks, and the
and-true formula. Meanwhile, a number of the United States of America.” With just a bit of luck,
hedge funds that survived the crisis have morphed that may turn out to be still true.
into institutions very like the old investment banks.
Bridgewater, Paulson, Renaissance, and Shaw are Niall Ferguson (nferguson@hbs.edu) is the
the new bulge bracket names on Wall Street. Laurence A. Tisch Professor of History at Harvard
The regulatory framework proposed by Trea- University and the William Ziegler Professor of
sury Secretary Timothy Geithner in 2009 has Business Administration at Harvard Business School.
proved surprisingly successful. Rather than focus- He is the author of eight books, the most recent
ing on executive compensation, he told the banks being The Ascent of Money: A Financial History
to abide by a new rule: Assets should never exceed of the World (Penguin, 2008).
capital by more than a factor of 20, and during
Reprint R0907D To order, see page 158.
good times the target ratio should be closer to 15:1.
hbr.org | July–August 2009 | Harvard Business Review 53

STRATEGY in the
SPECIAL ISSUE
NEW WORLD
The
10 Trends You Have to Watch
| by Eric Beinhocker, Ian Davis, and Lenny Mendonca
AFTER A FULL YEAR in heads-down crisis mode, to the evolving role of business in society. Here we
business executives are looking again to the future. discuss how the crisis may affect their trajectories,
As they reengage in strategic thinking, many are and we address the implications for strategy.
struck by a sense that the world has changed: Some trends, we argue, remain firmly on track,
The turmoil was not merely another turn of the but uncertainties are cropping up around others.
business cycle but a restructuring of the economic We also see signs of new forces emerging, which
order. Is that impression accurate? we will be exploring in more
hbr.org
To answer this question, it is necessary to detail in the months ahead.
Are these the right
examine the underlying forces that shape the busi- The overall picture is of an trends to watch?
ness environment and to look for discontinuities. altered business landscape. It Share your thoughts
with the authors at
McKinsey & Company tracks the most important of does seem there will be no go-
landscape.hbr.org.
these forces, from the growth of emerging markets ing back to the precrisis world.
Lorenzo Petrantoni
Eric Beinhocker is a senior fellow at the McKinsey Global Institute, McKinsey & Company’s economics
research arm, where he leads research on economic, management, and public policy issues; he is based in
London. Ian Davis, also based in London, is McKinsey’s 10th managing director. Lenny Mendonca is the
chair of the McKinsey Global Institute and a director in the firm’s San Francisco office.
hbr.org | July–August 2009 | Harvard Business Review 55

STRATEGY in the NEW WORLD.
Resources feeling
the strain Globalization under fire
Just prior to the financial crisis, OF ALL THE TRENDS we followed before distribution of knowledge work. Overall,
rising demand for commodities rang- the crisis, globalization seemed the most we remain confident that the global mar-
ing from energy to foods caused a secure. Today, however, big and important ket for managerial and technical talent
sharp spike in prices. The downturn question marks hang over some aspects of will continue to grow.
changed that. Crude oil, for example, global economic integration. Financial globalization is more vulner-
dropped from roughly $140 to able. Observers have legitimately argued
$40 per barrel in six months. Yet that increased linkage among the world’s
fundamental supply-side constraints markets allowed problems to cascade
remain and may worsen if invest- uncontrollably. We could see, as a worst-
ment in production capacity is case response, a return of capital controls
delayed by the crisis. Depending on (which prevent the allocation of resources
the depth and length of the reces- to their most productive uses), an increase
sion, spare capacity in the oil market in inconsistent regulatory regimes, insu-
could return to the low levels seen lar financial policies, and a regulatory
in 2007 (when crude oil prices were environment that stifles innovation. Best
skyrocketing) somewhere between case would be more transparency in the
2010 and 2013. Meanwhile, water global financial system, greater regula-
resources are under increasing tory and central bank coordination, and
strain from population growth, improved international approaches to risk
industrialization, and climate change. management.
By 2030, 40% of global GDP and For now, strategists should stress-test
85% of the world’s population will Although growth in the globalization of their business models under different
be in regions where water demand goods and services may stall for a period globalization scenarios – such as free and
exceeds supply. because international trade has declined fair movement of goods and services, capi-
Against this background, strate- along with demand, it is unlikely to re- tal, and talent across borders; movement
gists should plan for a future of verse. There is little political appetite for subject to uneven cross-border regulatory
resource price increases, volatility, further trade liberalization – for example, and tariff regimes; and the wild card of a
and even shortages. Google, for in- by completing the Doha round of negotia- return to widespread protectionism. The
stance, has procured land for server tions – but a full frontal attack on liberal goal of such analysis is to uncover the cir-
farms near hydroelectric power trade would threaten large numbers of cumstances under which the desirability
sources in the Pacific Northwest. jobs, raise prices for consumers, and en- of certain production locations might “flip”
We believe that, in the years to danger prospects for economic recovery. because of tariffs, the value of overseas
come, “resource productivity” (the While a populist backlash cannot be ruled business units might fall given capital con-
output achieved from every unit of out, the more likely outcome is increased straints, or the ability to carry out core ac-
oil, power, water, or other resource protectionism on the margins and recov- tivities – either at home or abroad – might
input) will become central to com- ery of the global trading system as growth diminish as a result of restrictions on the
pany competitiveness. returns. movement of people.
As for the globalization of talent, immi-
Global industrial waste of water gration will slow if governments tighten Protectionist measures taken
by G-20 nations Oct. 2008–Feb. 2009
restrictions in response to popular con-
47
cerns about job losses. Yet aging popula-
Extraction tions mean that many Western countries
Consumption
will eventually find themselves short of
Difference between 17
water extracted workers, and emerging markets will keep 12
and water consumed
producing a growing share of the world’s 2
college graduates. Additionally, the relent- Proposed Implemented Rejected Liberalizing
without
1900 1925 1950 1975 2000 2025 less march of information and communi- decision
FORECAST
Source: UNEP/GRID-Arendal cations technology will enable the global Source: World Bank
56 Harvard Business Review | July–August 2009 | hbr.org

A bigger role for
Trust in business running out government
Increased government involvement
THE RELATIONSHIP between business and they understand popular and political con- in business is one of the most
civil society was showing signs of strain cerns related to executive compensation, striking features of the crisis. Policy
even before the crisis. Since the recession risk management, board oversight, and makers have enacted massive
began, there has been a precipitous de- the treatment of employees facing layoffs. stimulus packages, propped up
cline in trust. The Edelman Trust Barom- faltering companies, and pledged
eter found that 62% of adults in 20 coun- How much Americans trust... regulatory reforms. They are taking
tries trusted corporations less in December Brokers
Dec. 2008 part in decisions that were once the
Mar. 2009
2008 than they had a year earlier. province of managers and boards.
Large
Why should this concern strategists? corporations Previous crises have resulted in
Because a low-trust environment makes Government
permanent changes in government’s
everything about doing business more role, and this one is likely to do the
difficult. For an individual company, loss Banks same. Managers should revisit their
of trust leads to higher transaction costs, Insurance strategies on two fronts: First, help
companies
lower brand value, and greater difficulty 0 1 2 3 4 5 shape – and prepare to compete
Average responses, scale of one to five
attracting, retaining, and managing talent. under – new regulatory regimes.
Source: Chicago Booth/Kellogg School Financial Trust Index
Ultimately, it can mean boycotts, negative Second, recognize that the public
publicity, and unwanted regulation. For Regaining trust also means dispensing sector will grow in importance as a
business in general, loss of confidence in with the view that the only objective of major customer for many indus-
judgment-based systems of corporate gov- management is to increase shareholder tries because of rapid increases in
ernance could result in the imposition of value. Broadening the list of key stake- spending.
rules-based systems, potentially increasing holders to include employees, customers, Beyond the current crisis, how-
compliance costs and reducing flexibility suppliers, communities, the press, unions, ever, rising deficits and aging popu-
(as happened when Sarbanes-Oxley regu- government, and civil society will help lations point to a future fiscal crunch
lations were put in place after the scandals companies rebuild credibility. for many countries. Governments
in the 2000 downturn). In continental Europe and Asia, this will find themselves under intense
The strategic imperative for most com- multistakeholder approach is already pressure to deliver social services
panies is to do what they can to regain ingrained. But it will be a challenge for at lower cost. Creative partnership
the trust of stakeholders and to more ef- U.S. and UK companies, which have his- between the public and private
fectively manage relationships with them. torically been more shareholder-centric sectors will be important in meeting
This starts at the top. Corporate leaders in their decision making, compensation this challenge.
need to demonstrate to civil society that practices, and performance management.
U.S. government spending
as a percentage of GDP
41.3%
FY2010
budget
6.8%
FY1903
1920 1940 1960 1980 2000
Source: usgovernmentspending.com
KEY
Accelerating trends
Steady trends
Decelerating trends
hbr.org | July–August 2009 | Harvard Business Review 57

STRATEGY in the NEW WORLD.
Management
as a science Shifting consumption patterns
Data, computing power, and
mathematical models have been (behind Japan), then three of the five larg-
transforming many realms of man- est consumer economies will be Asian.
agement from art to science. But Alternatively, the map of consumption
the crisis exposed the limitations could become multipolar. Suppose growth
of certain tools. In particular, the continues in China, India, and other
world saw the folly of the reliance emerging markets, but government poli-
by banks, insurance companies, and cies and long-ingrained behaviors keep
others on financial models that as- savings rates high and consumer spend-
sumed economic rationality, linearity, ing low. The EU, the U.S., and Japan might
equilibrium, and bell-curve distribu- then retain their positions as the top three
tions. As the recession unfolded, consumer markets, but with lower rates of
it became clear that the models had consumption growth. In this case, global
failed badly. consumer-spending growth could stay
It would be wrong to conclude below precrisis levels for years or even
that managers should go back to decades.
making decisions only on the basis CRISIS OR NOT, it was inevitable that U.S. Strategies will hinge on which scenario
of gut instinct. The real lessons are consumer-spending growth would slow materializes, but for the moment compa-
that the tools need to incorporate from the 3.4% real annual rate enjoyed nies should:
more-realistic visions of human since 1985. The 1980s and 1990s were peak Prepare for slower long-term growth
behavior – most likely by drawing consumption years for the now-retiring in global consumption. Companies
on behavioral economics, becom- baby boomers, whose spending spree was that have relied on fundamental market
ing more dynamic, and integrating financed by a mountain of debt. Thanks growth, especially for mature products,
real-world feedback – and that to the recession, what would have been a now need to fight for market share or
business executives need to get gentle decline has become an abrupt fall. compete in new categories.
better at using them. Companies While consumption growth will return Shift investment to Asia. Consump-
will, rightly, continue to seek ways with economic growth, an aging popula- tion is clearly growing faster in China and
to exploit the increasing amounts tion and depleted household savings mean India than in developed markets.
of data and computing power. As that U.S. consumption is likely to expand Focus on older consumers. Within
they do so, decision makers in every less rapidly than it did precrisis. five years, more than half of all consumer
industry must take responsibility For strategists, the question implied is spending in the U.S. will be by consumers
for looking inside the black boxes this: If the U.S. is no longer the world’s over 50, and the proportion of older house-
that advanced quantitative tools consumption engine, will another country holds is rising in Europe and Japan as well.
often represent and understanding or region assume that role? Here are two Find ways to offer luxuries on a bud-
their functioning, assumptions, and possible scenarios: get. Tighter household budgets don’t
limitations. Asia could become the new center of mean lower aspirations. Our research
gravity. China and India together have shows that stretched consumers in slow-
more than a billion people whose incomes growing economies will still want to feel
Reconsidering investments
in decision tools are just below a middle-class level. When that they are living the good life.
Warehouse
Currently use growth returns to that part of the world
management 55% Personal consumption
system
31% and those households achieve more than
Plan to purchase as a percentage of GDP 71%
Transportation
36%
upgrade $20,000 per year in disposable income 2008
management
29%
system (adjusted for purchasing power parity),
Enterprise
44% expect a boom in discretionary consump-
resource
18%
planning tion. If, as some forecasts indicate, China
62%
Supply chain
planning
34% becomes the world’s third-largest con- 1970
23%
sumer economy (behind the EU and the 1975 1980 1985 1990 1995 2000
Source: Logistics Management survey
U.S.) by 2020, and India the fifth-largest Source: Sitar-Rutgers Regional Report
58 Harvard Business Review | July–August 2009 | hbr.org

Industries taking
Asia rising new shape
FOR A WHILE it looked as if Asian coun- strategies, operations, and supply chains Roughly one in three industry lead-
tries would coast through the crisis rela- to local markets. Many companies are be- ers was toppled during the previous
tively unscathed – but late last year invest- ginning to saturate the major urban areas; recession as attackers used the
ment flows dried up, exports collapsed, the next frontier of growth will be smaller downturn to their advantage. Recent
and stock markets and consumer confi- cities and even rural markets, which cre- big acquisitions in sectors such as
dence plummeted. So why are we predict- ate distribution and service challenges. pharmaceuticals and information
ing continued economic growth in Asia? technology suggest that the current
Changing shares of global GDP
It would be difficult to overstate the slump will be no different.
power of the fundamental drivers of Asian 29.7%
Europe Our research shows that while
growth. First, Asian economies have been 22.8%
all companies in an industry typi-
22.5%
enjoying a remarkable period of “produc- 21.4% cally suffer during a recession, the
U.S. Developing
tivity catch-up,” adopting modern tech- 19.7% performance gap between strong
Asia
nologies, industrial practices, and ways of and weak rivals tends to widen. This
organizing – in some cases leapfrogging 7 %
.1 gives strong players more oppor-
1980 1990 2000 2010
Western competitors. Even in the depths tunities to reshape their competi-
of the crisis, Chinese labor-productivity Source: IMF World Economic Outlook Database tive environment. The manner of
growth is projected to rise from 7.7% in reshaping will differ by industry. In
2008 to 9.1% in 2009. Second, high sav- Organizations are also starting to shift consumer electronics, for example,
ings rates have fueled capital formation, R&D, innovation, and design activities to we may see small players using
enabling businesses and governments the region. network-based business models
to invest in expanding production. The The trend, of course, contains a threat to further disaggregate the value
combination of more productive labor for Western companies. Asian power- chain and compete successfully
and more capital has ramped up GDP. houses like Haier, Chery, and Tata have with industry giants. In automobiles,
The crisis has slowed this growth but not significant experience providing high- the trend is leaning strongly toward
stopped it. value products at very low cost to choosy consolidation.
Strategists therefore should keep invest- middle-class Asian customers. As West- It is important to remember that
ing in Asia, working with carefully chosen ern consumers tighten their belts, expect few industry structures will remain
local partners, fostering strong relation- these and other, less-known players to untouched by the crisis. Manag-
ships with governments, and adapting bring their value-oriented propositions to ers must be ready to play at two
products, value propositions, marketing global markets. speeds – seizing immediate opportu-
nities presented by the recession,
particularly in M&A, while also
examining how they can shape the
evolution of their industry’s struc-
ture over the long term.
Change in market share of
top eight U.S. firms
1997
Commercial banking
2002
Industrial design
Software publishing
CPA services
0% 25% 50%
Source: U.S. Economic Census
hbr.org | July–August 2009 | Harvard Business Review 59

STRATEGY in the NEW WORLD.
Innovation
marching on Price stability in question
Commercial investment in R&D and
new ventures has slowed, but the
downturn does not alter the “head-
room” for innovation in fields such
as information technology, biotech-
nology, nanotechnology, materials
science, and clean energy. Progress
will continue, even if the full com-
mercialization of discoveries lags for
some time.
The implication for executives is
clear: In spite of scarce resources,
do what you can to protect R&D
spending. Don’t hesitate to improve
efficiency – by consolidating re-
OVER THE past three decades, compa- should focus on how they might manage
search facilities, rationalizing project
nies became accustomed to a generally price instability. This is a good time to re-
portfolios, reevaluating licensing
stable price environment, at least in the view supplier contracts, wage agreements,
agreements – but use the freed-up
developed world. But recently managers pricing policies, and hedging strategies to
cash to double down on promising
have been forced to question this basic determine where the dangers may lie.
investments for a postcrisis world.
assumption. For many, the immediate The key is to maintain flexibility, to re-
Research shows that companies
threat is deflation, with excess capacity main cautious in long-term commitments
investing countercyclically in R&D
putting significant downward pressure on on both the buy and the sell side, and
during downturns tend to outpace
prices of everything from fresh produce
their competitors on the upswing.
to building materials. Yet government
Note, for example, that Apple’s As money supply changes,
efforts to rein in the crisis and bolster so goes inflation
resurgence as a force in consumer
economic growth have raised the possi- M2 money supply
technology was fueled by R&D con-
bility that inflation could rear its head. In
ducted from 2001 to 2003 despite a
the words of the former Federal Reserve 7 %
.5
sharp decline in sales and margins. 6%
vice chairman Alan Blinder: “At some
This bet paid off handsomely, put- 3%
point, and without knowing the timing, 2.0%
ting the iPod in the pantheon of CPI-U
the Fed is going to have to destroy all
game-changing innovations born of
of the money it is creating.” The prices 1910 1940 1970 2000 2010
hard times, alongside Depression-
of inflation-linked bonds prove that in- Sources: BLS, Federal Reserve, nowandfutures.com
era breakthroughs such as nylon and
vestors are certainly aware of the risk.
the jet engine.
When economic growth returns, central (when possible) to create links between
banks will need to contain inflationary input costs and sales prices. In an inflation-
U.S. patent applications forces while not choking off recovery – a ary environment, it does not pay to get
1950 to present 456,321 delicate balancing act that will be all the caught between rising short-term prices
more difficult against a backdrop of rising for inputs and long-term customer con-
commodity prices. tracts with fixed prices. In a deflationary
Utility patent applications Although the risk of inflation has environment, the reverse is true. Either
clearly increased, it is too early to call that way, the purchasing function assumes
a trend. Unlike labor markets in the 1970s, strategic importance. Companies that
when double-digit inflation was fueled by have failed to refine their purchasing prac-
67,264 a wage-price spiral, those in most coun- tices will find doing so a priority now.
Design patent applications 27,782
6,739 tries today are flexible. Rather than try-
Reprint R0907E
Source: U.S. Patent and Trademark Office ing to accurately forecast inflation or de-
To order, see page 158.
flation – an impossible task – companies
60 Harvard Business Review | July–August 2009 | hbr.org

LEADERSHIP in the
SPECIAL ISSUE
NEW WORLD
Leadership
in a
(Permanent)
Crisis
When the economy recovers, things won’t return to normal –
and a different mode of leadership will be required.
| by Ronald Heifetz, Alexander Grashow, and Marty Linsky
IT WOULD BE PROFOUNDLY REASSURING to view the current
economic crisis as simply another rough spell that we need
to get through. Unfortunately, though, today’s mix of urgency,
high stakes, and uncertainty will continue as the norm even
after the recession ends. Economies cannot erect a firewall
against intensifying global competition, energy constraints,
climate change, and political instability. The immediate cri-
sis – which we will get through, with the help of policy makers’
expert technical adjustments – merely sets the stage for a
sustained or even permanent crisis of serious and unfamiliar
challenges.
Dave Wheeler
Consider the heart attack that strikes in the middle of the
night. EMTs rush the victim to the hospital, where expert
trauma and surgical teams -- executing established procedures
62 Harvard Business Review | July–August 2009 | hbr.org

hbr.org | July–August 2009 | Harvard Business Review 63

LEADERSHIP in the NEW WORLD.
because there is little time for creative improvisa- ternal threats so that everyone can quickly return
tion -- stabilize the patient and then provide new to business as usual. But in these times, even the
vessels for the heart. The emergency has passed, most competent authority will be unable to offer
but a high-stakes, if somewhat less urgent, set of this protection. The organizational adaptability re-
challenges remains. Having recovered from the quired to meet a relentless succession of challenges
surgery, how does the patient prevent another at- is beyond anyone’s current expertise. No one in a
tack? Having survived, how does position of authority – none of us, in fact – has been
he adapt to the uncertainties of here before. (The expertise we relied on in the past
a new reality in order to thrive? got us to this point, after all.) An organization that
IDEA The crisis is far from over. depends solely on its senior managers to deal with
IN BRIEF
The task of leading during a the challenges risks failure.
» Are you waiting for things to sustained crisis – whether you are That risk increases if we draw the wrong conclu-
return to normal in your organiza- the CEO of a major corporation sions from our likely recovery from the current
tion? Sorry. Leadership will require or a manager heading up an im- economic downturn. Many people survive heart
new skills tailored to an environ- promptu company initiative – is attacks, but most cardiac surgery patients soon re-
ment of urgency, high stakes, and treacherous. Crisis leadership has sume their old ways: Only about 20% give up smok-
uncertainty – even after the cur- two distinct phases. First is that ing, change their diet, or get more exercise. In fact,
rent economic crisis is over.
emergency phase, when your task by reducing the sense of urgency, the very success
» You’ll have to: is to stabilize the situation and of the initial treatment creates the illusion of a
Foster adaptation, helping buy time. Second is the adaptive return to normalcy. The medical experts’ technical
people develop the “next phase, when you tackle the un- prowess, which solves the immediate problem of
practices” that will enable the derlying causes of the crisis and survival, inadvertently lets patients off the hook
organization to thrive in a new build the capacity to thrive in a for changing their lives to thrive in the long term.
world, even as they continue new reality. The adaptive phase High stakes and uncertainty remain, but the dimin-
with the best practices neces- is especially tricky: People put ished sense of urgency keeps most patients from
sary for current success. enormous pressure on you to focusing on the need for adaptation.
Embrace disequilibrium, keeping
respond to their anxieties with People who practice what we call adaptive lead-
people in a state that creates
authoritative certainty, even if ership do not make this mistake. Instead of hunker-
enough discomfort to induce
doing so means overselling what ing down, they seize the opportunity of moments
change but not so much that
they fight, flee, or freeze. you know and discounting what like the current one to hit the organization’s reset
Generate leadership, giving you don’t. As you ask them to button. They use the turbulence of the present to
people at all levels of the orga- make necessary but uncomfort- build on and bring closure to the past. In the pro-
nization the opportunity to lead able adaptive changes in their be- cess, they change key rules of the game, reshape
experiments that will help it havior or work, they may try to parts of the organization, and redefine the work
adapt to changing times. bring you down. People clamor people do.
for direction, while you are faced We are not talking here about shaking up an
» You won’t achieve your leader- with a way forward that isn’t at organization so that nothing makes sense anymore.
ship aims if you sacrifice yourself
by neglecting your needs.
all obvious. Twists and turns are The process of adaptation is at least as much a pro-
the only certainty. cess of conservation as it is of reinvention. Targeted
Yet you still have to lead. modifications in specific strands of the organiza-
tional DNA will make the critical difference. (Con-
Hunker Down – or Press “Reset” sider that human beings share more than 90% of
The danger in the current economic situation is their DNA with chimpanzees.)
that people in positions of authority will hunker Still, people will experience loss. Some parts of
down. They will try to solve the problem with short- the organization will have to die, and some jobs
term fixes: tightened controls, across-the-board cuts, and familiar ways of working will be eliminated.
restructuring plans. They’ll default to what they As people try to develop new competencies, they’ll
know how to do in order to reduce frustration and often feel ashamed of their incompetence. Many
quell their own and others’ fears. Their primary will need to renegotiate loyalties with the mentors
mode will be drawing on familiar expertise to help and colleagues whose teachings no longer apply.
their organizations weather the storm. Your empathy will be as essential for success as
That is understandable. It’s natural for author- the strategic decisions you make about what ele-
ity figures to try to protect their people from ex- ments of the organizational DNA to discard. That
64 Harvard Business Review | July–August 2009 | hbr.org

is because you will need people’s help – not their Gilbert says that championing this approach
blind loyalty as they follow you on a path to the subjected her to some nasty criticism from manag-
future but their enthusiastic help in discovering ers who viewed Best Buy as a retailer of technology
that path. And if they are to assist you, you must products, not experiences. But focusing on the fe-
equip them with the ability to perform in an envi- male purchaser when a man and a woman walked
ronment of continuing uncertainty and uncontrol- into the store – making eye contact and greeting
lable change. her, asking about her favorite movies and demon-
strating them on the systems – often resulted in
Today’s Leadership Tasks the couple’s purchasing a higher-end product than
In this context, leadership is an improvisational they had originally considered. According to Gil-
and experimental art. The skills that enabled bert, returns and exchanges of purchases made by
most executives to reach their positions of com- couples were 60% lower than those made by men.
mand – analytical problem solving, crisp decision With the rethinking of traditional practices, Best
making, the articulation of clear direction – can get Buy’s home theater business flourished, growing
in the way of success. Although these skills will at
times still be appropriate, the adaptive phase of a
crisis requires some new leadership practices.
Foster adaptation. Executives today face two
competing demands. They must execute in order
to meet today’s challenges. And they must adapt
what and how things get done in order to thrive in
tomorrow’s world. They must develop “next prac-
tices” while excelling at today’s best practices.
Julie Gilbert is evidence that these dual tasks
can – indeed, should – be practiced by people who
do not happen to be at the very top of an orga-
nization. As a vice president and then senior VP
at retailer Best Buy from 2000 to early 2009, she
saw a looming crisis in the company’s failure to
profit from the greater involvement of women in
the male-oriented world of consumer electron-
ics. Women were becoming more influential in
purchasing decisions, directly and indirectly. But
capitalizing on this trend would require something
beyond a smart marketing plan. It would demand
a change in the company’s orientation.
Getting an organization to adapt to changes in
the environment is not easy. You need to confront
loyalty to legacy practices and understand that your from two pilot in-store boutiques in mid-2004 to
desire to change them makes you a target of at- more than 350 five years later.
tack. Gilbert believed that instead of simply sell- As you consider eliminating practices that seem
ing technology products to mostly male customers, ill suited to a changing environment, you must dis-
Best Buy needed to appeal to women by reflecting tinguish the essential from the expendable. What is so
the increasing integration of consumer electronics precious and central to an organization’s identity
into family life. So Gilbert headed up an initia- and capacity that it must be preserved? What, even
tive to establish in-store boutiques that sold home if valued by many, must be left behind in order to
theater systems along with coordinated furniture move forward?
and accessories. Stores set up living-room displays Gilbert wanted to preserve Best Buy’s strong
to showcase not just the electronics but also the culture of responding to customers’ needs. But
entertainment environment. Salespeople were the company’s almost exclusively male culture – hbr.org
Expanded coverage
trained to interact with the previously ignored fe- “guys selling to guys” – seemed to her a barrier to of Managing in
male customers who came in with men to look at success. For example, the phrase “the jets are up” the New World at
systems. meant that the top male executives were aboard landscape.hbr.org
hbr.org | July–August 2009 | Harvard Business Review 65

LEADERSHIP in the NEW WORLD.
corporate aircraft on a tour of Best Buy stores. The senior executives for direction and innovation. But,
flights gave them a chance to huddle on important as Gilbert explained to us, a definition of consumer
issues and bond with one another. Big decisions electronics retailing that included women would
were often announced following one of these trips. ultimately have to come from the bottom up. Ap-
After getting a call with a question about female pealing to female customers required empowering
customers from one such group visiting a Best Buy female employees at all levels of the company.
home theater boutique, Gilbert persuaded senior This led to the creation of “WoLF (Women’s Lead-
executives never to let the jets go up without at ership Forum) packs,” in which women, from store
least one woman on board. cashiers to corporate executives, came together to
Because you don’t know quite where you are support one another and to generate innovative
headed as you build an organization’s adaptability, projects by drawing on their collective experience.
it’s prudent to avoid grand and detailed strategic In an unorthodox attempt to neutralize the threat
to Best Buy’s traditionally male culture,
two men paired up with two women to
lead each group.
More than 30,000 employees joined
WoLF packs. The company says the ini-
tiative strengthened its pipeline of high-
potential leaders, led to a surge in the
number of female job applicants, and
improved the bottom line by reducing
turnover among female employees. Gil-
bert, who recently left Best Buy to help
other companies establish similar pro-
grams, was able to realize the dual goal
of adaptive leadership: tackling the
current challenge and building adapt-
ability. She had an immediate positive
impact on the company’s financial per-
formance while positioning the organi-
zation to deploy more of its people to
reach wider markets.
Embrace disequilibrium. Without
urgency, difficult change becomes far
less likely. But if people feel too much
distress, they will fight, flee, or freeze.
The art of leadership in today’s world
plans. Instead, run numerous experiments. Many involves orchestrating the inevitable conflict, chaos,
will fail, of course, and the way forward will be and confusion of change so that the disturbance is
characterized by constant midcourse corrections. productive rather than destructive.
But that zigzagging path will be emblematic of Health care is in some ways a microcosm of the
your company’s ability to discover better products turbulence and uncertainty facing the entire econ-
and processes. Take a page out of the technology omy. Paul Levy, the CEO of Beth Israel Deaconess
industry’s playbook: Version 2.0 is an explicit ac- Medical Center, in Boston, is trying to help his orga-
knowledgment that products coming to market are nization adapt to the industry’s constant changes.
experiments, prototypes to be improved in the next When Levy took over, in 2002, Beth Israel Dea-
iteration. coness was a dysfunctional organization in serious
Best Buy’s home theater business was one exper- financial trouble. Created several years previously
iment. A much broader one at the company grew through the hasty merger of two Harvard Medi-
out of Gilbert’s belief that in order to adapt to an cal School teaching hospitals, it had struggled to
increasingly female customer base, Best Buy would integrate their very different cultures. Now it was
need to change the role of women within the orga- bleeding red ink and faced the likelihood of being
nization. The company had traditionally looked to acquired by a for-profit company, relinquishing its
66 Harvard Business Review | July–August 2009 | hbr.org

status as a prestigious research institu-
tion. Levy quickly made changes that
put the hospital on a stronger financial
footing and eased the cultural tensions.
To rescue the medical center, Levy
had to create discomfort. He forced
Keep your hand on the thermostat. If the
people to confront the potentially disas- heat’s too low, people won’t make difficult
trous consequences of maintaining the
status quo – continued financial losses, decisions. If it’s too high, they might panic.
massive layoffs, an outright sale – stat-
ing in a memo to all employees that
“this is our last chance” to save the insti-
tution. He publicly challenged power-
ful medical factions within the hospital and made factions that have formed around it. Orchestrating
clear he’d no longer tolerate clashes between the conflicts and losses and negotiating among various
two cultures. interests are the name of the game.
But a successful turnaround was no guarantee That game requires you to create a culture of
of long-term success in an environment clouded courageous conversations. In a period of sustained
by uncertainty. In fact, the stability that resulted uncertainty, the most difficult topics must be dis-
from Levy’s initial achievements threatened the cussed. Dissenters who can provide crucial insights
hospital’s ability to adapt to the succession of chal- need to be protected from the organizational pres-
lenges that lay ahead. sure to remain silent. Executives need to listen to
Keeping an organization in a productive zone unfamiliar voices and set the tone for candor and
of disequilibrium is a delicate task; in the practice risk taking.
of leadership, you must keep your hand on the ther- Early in 2009, with Beth Israel Deaconess facing
mostat. If the heat is consistently too low, people a projected $20 million annual loss after several
won’t feel the need to ask uncomfortable questions years of profitability, Paul Levy held an employee
or make difficult decisions. If it’s consistently too meeting to discuss layoffs. He expressed concern
high, the organization risks a meltdown: People about how cutbacks would affect low-wage em-
are likely to panic and hunker down. ployees, such as house-
Levy kept the heat up after the financial emer- keepers, and somewhat
gency passed. In a move virtually unprecedented cautiously floated what
for a hospital, he released public quarterly reports seemed likely to be an Adaptive Leadership
on medical errors and set a goal of eliminating unpopular idea: protect- in Practice
those errors within four years. Although the dis- ing some of those low-
closures generated embarrassing publicity, Levy paying jobs by reducing BEST BUY | A senior vice president
believed that acknowledging and learning from the salary and benefits helped the company adapt to the reality
serious mistakes would lead to improved patient of higher-paid employ- that women increasingly make consumer
care, greater trust in the institution, and long-term ees – including many sit- electronics purchasing decisions.
viability. ting in the auditorium.
Maintaining the right level of disequilibrium re- To his surprise, the room BETH ISRAEL DEACONESS MEDICAL
quires that you depersonalize conflict, which natu- erupted in applause. CENTER | The new CEO helped a dys-
rally arises as people experiment and shift course His candid request for functional organization created through
the hasty merger of two Harvard teaching
in an environment of uncertainty and turbulence. help led to countless sug-
hospitals adapt to modern health care
The aim is to focus the disagreement on issues, in- gestions for cost savings,
challenges.
cluding some of your own perspectives, rather than including an offer by the
on the interested parties. But the issues themselves 13 medical department
EGON ZEHNDER INTERNATIONAL | The
are more than disembodied facts and analysis. Peo- heads to save 10 jobs founder fostered a leadership style that
ple’s competencies, loyalties, and direct stakes lie through personal dona- helped the executive search firm adapt to
behind them. So you need to act politically as well tions totaling $350,000. the rise of online recruiting and competi-
as analytically. In a period of turmoil, you must These efforts ultimately tors’ IPOs.
look beyond the merits of an issue to understand reduced the number of
the interests, fears, aspirations, and loyalties of the planned layoffs by 75%.
hbr.org | July–August 2009 | Harvard Business Review 67

LEADERSHIP in the NEW WORLD.
Generate leadership. Corporate adaptability tribute leadership responsibility, replacing hierarchy
usually comes not from some sweeping new ini- and formal authority with organizational band-
tiative dreamed up at headquarters but from the width, which draws on collective intelligence. Ex-
accumulation of microadaptations originating ecutives need to relax their sense of obligation to
throughout the company in response to its many be all and do all and instead become comfortable
microenvironments. Even the successful big play sharing their burden with people operating in di-
is typically a product of many experiments, one of verse functions and locations throughout the or-
which finally proves pathbreaking. ganization. By pushing responsibility for adaptive
To foster such experiments, you have to acknowl- work down into the organization, you clear space
edge the interdependence of people throughout for yourself to think, probe, and identify the next
the organization, just as companies increasingly challenge on the horizon.
acknowledge the interdependence of players – sup- To distribute leadership responsibility more
pliers, customers, even rivals – beyond their bound- broadly, you need to mobilize everyone to generate
aries. It is an illusion to expect that an executive solutions by increasing the information flow that al-
lows people across the organization
to make independent decisions and
share the lessons they learn from
innovative efforts.
To generate new leadership and
An executive team on its own can’t find the innovative ideas, you need to lever-
age diversity – which, of course, is
best solutions. But leadership can generate easier said than done. We all tend
to spend time with people who are
more leadership deep in the organization. similar to us. Listening and learning
across divides is taxing work. But if
you do not engage the widest pos-
sible range of life experiences and
views – including those of younger
team on its own will find the best way into the fu- employees – you risk operating without a nuanced
ture. So you must use leadership to generate more picture of the shifting realities facing the business
leadership deep in the organization. internally and externally.
At a worldwide partners’ meeting in June 2000, Creating this kind of environment involves giv-
Egon Zehnder, the founder of the executive search ing up some authority usually associated with lead-
firm bearing his name, announced his retirement. ership and even some ownership, whether legal
Instead of reflecting on the 36-year-old firm’s steady or psychological, in the organization. The aim, of
growth under his leadership, he issued a warning: course, is for everyone to “act like they own the
Stability “is a liability, not an asset, in today’s world,” place” and thus be motivated to come up with inno-
he said. “Each new view of the horizon is a glance vations or take the lead in creating value for their
through a different turn of the kaleidoscope” (a company from wherever they sit.
symbol of disequilibrium, if there ever was one). Zehnder did in fact convert the firm into a cor-
“The future of this firm,” Zehnder continued, “is to- poration in which every partner, including himself,
tally in the hands of the men and women here in held an equal share of equity and had an equal
this room.” vote at partners’ meetings. Everyone’s compensa-
From someone else, the statement might have tion rose or fell with the firm’s overall performance.
come across as obligatory pap. But Egon Zehnder The aim was to make all the partners “intertwined
built his firm on the conviction that changes in in substance and purpose.”
internal and external environments require a new Zehnder’s collaborative and distributed leader-
kind of leadership. He saw early on that his start- ship model informed a strategic review that the
up could not realize its full potential if he made firm undertook just after his retirement. In the
himself solely responsible for its success. short term, the partners faced a dramatic collapse
Individual executives just don’t have the per- in the executive search market; their long-term
sonal capacity to sense and make sense of all the challenge was a shifting competitive landscape, in-
change swirling around them. They need to dis- cluding the rise of online recruiting and the initial
68 Harvard Business Review | July–August 2009 | hbr.org

public offerings of several major competitors. As self? Do I fully appreciate the sacrifices I’m asking
the firm tried to figure out how to adapt and thrive people to make?”
in this environment, Zehnder’s words hung in the Third, reach out to confidants with whom you
air: “How we deal with change differentiates the can debrief your workdays and articulate your rea-
top performers from the laggards. But first we must sons for taking certain actions. Ideally, a confidant
know what should never change. We must grasp is not a current ally within your organization –
the difference between timeless principles and who may someday end up on the opposite side of
daily practices.” Again, most sustainable change is an issue – but someone external to it. The most im-
not about change at all but about discerning and portant criterion is that your confidant care more
conserving what is precious and essential. about you than about the issues at stake.
The firm took a bottom-up approach to sketch- Fourth, bring more of your emotional self to the
ing out its future, involving every partner, from workplace. Appropriate displays of emotion can
junior to senior, in the process. It chose to remain be an effective tool for change, especially when
a private partnership. Unlike rivals that were or- balanced with poise. Maintaining this balance lets
dering massive downsizing, the firm decided there people know that although the situation is fraught
would be virtually no layoffs: Preserving the social with feelings, it is containable. This is a tricky tight-
fabric of the organization, crucial to long-term suc- rope to walk, especially for women, who may worry
cess, was deemed more important than short-term about being dismissed as too emotional.
financial results. In fact, the firm opted to continue Finally, don’t lose yourself in your role. Defining
hiring and electing partners even during the down your life through a single endeavor, no matter how
market. important your work is to you and to others, makes
Rooted in its culture of interdependence, the you vulnerable when the environment shifts. It also
firm adapted to a changing environment, produc- denies you other opportunities for fulfillment.
ing excellent results, even in the short term, as it Achieving your highest and most noble aspira-
gained market share, maintained healthy margins, tions for your organization may take more than a
and sustained morale – a major source of ongoing lifetime. Your efforts may only begin this work. But
success. Adaptive work enabled the firm to take the you can accomplish something worthwhile every
best of its history into the future. day in the interactions you have with the people
at work, with your family, and with those you en-
Taking Care of Yourself counter by chance. Adaptive leadership is a daily
To keep yourself from being corralled by the forces opportunity to mobilize the resources of people to
that generated the crisis in the first place, you must thrive in a changing and challenging world.
be able to depart from the default habits of author-
itative certainty. The work of leadership demands Note: Some of the information in this article was
that you manage not only the critical adaptive re- drawn from “Paul Levy: Taking Charge of the Beth Israel
sponses within and surrounding your business but Deaconess Medical Center,” HBS case no. 9-303-008 and
also your own thinking and emotions. “Strategic Review at Egon Zehnder International,” HBS case
This will test your limits. Taking care of yourself no. 9-904-071.
both physically and emotionally will be crucial to
your success. You can achieve none of your leader- Ronald Heifetz (heifetz@cambridge-leadership.
ship aims if you sacrifice yourself to the cause. com), Alexander Grashow (agrashow@cambridge-
First, give yourself permission to be both optimis- leadership.com), and Marty Linsky (marty@
tic and realistic. This will create a healthy tension cambridge-leadership.com) are partners of Cam-
that keeps optimism from turning into denial and bridge Leadership Associates and the coauthors of
realism from devolving into cynicism. The Practice of Adaptive Leadership (Harvard
Second, find sanctuaries where you can reflect Business Press, 2009). Heifetz, the founder of the
on events and regain perspective. A sanctuary may Center for Public Leadership at Harvard University’s
be a place or an activity that allows you to step John F. Kennedy School of Government, and Linsky,
away and recalibrate your internal responses. For a member of the Kennedy School faculty, are the
example, if you tend to demand too much from coauthors of “A Survival Guide for Leaders” (HBR
your organization, you might use the time to ask June 2002).
yourself, “Am I pushing too hard? Am I at risk of
Reprint R0907F To order, see page 158.
grinding people into the ground, including my-
hbr.org | July–August 2009 | Harvard Business Review 69

LEADERSHIP in the NEW WORLD
How Gen Y &
Boomers
Will Reshape
Your Agenda
Your oldest and youngest talent
cohorts demand many of the same
things in a workplace – and have the
numbers to get their way.
| by Sylvia Ann Hewlett,
Laura Sherbin, and Karen Sumberg
RIGHT NOW, managers of people are operating in full reces-
sionary mode. They’re wrestling with whether and how much
to reduce head count, weighing alternatives like furloughs and
pay cuts, and generally trying to get by with less. Not many are
focused on what just a few years ago was described as “the war
for talent.” As the economy recovers, however, companies will
return to the challenge of winning over enough highly capa-
ble professionals to drive renewal and growth. Only then will
they realize that the rules of engagement have changed – that
the landscape of talent management has been transformed.
The combination of Generation Y eagerly advancing up the
Dave Wheeler
professional ranks and Baby Boomers often refusing to retire
has, over the course of a few short years, dramatically shifted
the composition of the workforce; each of these generations
hbr.org | July–August 2009 | Harvard Business Review 71

LEADERSHIP in the NEW WORLD.
is roughly twice the size of Generation X, ing data allowed us to unpack the work postponing their arrival for a year and
which lies between them. More impor- aspirations of high-echelon talent across devoting the interim period to com-
tant, Boomers and Gen Ys are together age groups and sectors. We augmented munity service or the acquisition of
redefining what constitutes a great place the survey results with qualitative input new skills. For pursuits UBS considered
to work. As we will show, they tend to from 30 focus groups and 40 interviews. worthy, it was offering to pay half the
share many attitudes and behaviors that Stated at the highest level, our finding base salary associated with the accepted
is that people, especially Gen Ys and position, plus a stipend for health insur-
Boomers, are looking for what we call a ance – while holding the promised job
“remixed” set of rewards: Flexible work open for the individual’s return. Aaron
IDEA arrangements and the opportunity to wound up spending that gap year in In-
IN BRIEF
give back to society trump the sheer size dia with a nonprofit organization that
» Two large surveys of college of the pay package. That was true before trains paramedics, helping a California-
graduates reveal remarkable the downturn hit and remains so even based nonprofit develop AIDS-education
similarities in workplace prefer- as its full brunt is being felt. tools for underserved populations, and
ences between Baby Boomers This rewards remix is both challeng- writing a novel. Others in the program
and Generation Y – the oldest and ing and liberating for talent managers. used the year to learn Spanish in Argen-
youngest groups in the emerging It’s challenging because it means letting tina, do economic development work in
workforce.
go of cash as the prime motivator and Vietnam, study advanced econometrics,
» Both Boomers and Gen Ys want tangling with the difficult task of rede- work on an offshore oil rig, and rebuild
to contribute to society through signing incentives. It’s liberating because houses destroyed by Hurricane Katrina.
their labor; seek flexible working if nonfinancial rewards are less expen- Meanwhile, CVS/pharmacy, the retail
arrangements; value social con- sive to fund, companies can lay out more division of CVS Caremark, was offering
nections at work and loyalty to a plentiful options. Perhaps that explains an option that many employees at the
company; and prize other rewards why we found managers experimenting opposite end of their careers considered
of employment over monetary with a whole range of such rewards – fig- heaven-sent. As one of America’s largest
compensation. uring out how to use time, for example, pharmacy chains, CVS has stores in ev-
» Given the large size of these as currency, or a green workplace as a ery region of the country – and in every
generational cohorts – relative to retention tool. In a period when many regional climate. So in 2004 CVS cre-
Generation X, which lies between were not able to offer raises or bonuses, ated its Snowbird Program to let experi-
them – their workplace demands some realized it was the right time to enced store employees move seamlessly
have significant practical implica- respond to the attitudinal changes they among CVS locations according to their
tions for how employers should were already sensing in the air. Because seasonal preferences. As the program’s
design work environments to some of their initiatives deftly address name implies, many of the participants
attract and keep talent. the demands of the 800-pound-gorilla are mature workers who enjoy winter-
cohorts, Gen Ys and Boomers, we be- ing in southern states and summering
lieve they show the way to tomorrow’s in northern ones. Since the program
set them apart from other generations. best practice. started, over 1,000 employees, ranging
These shared preferences constitute from retail clerks to pharmacists and
a new center of gravity for human re- It’s All About a Wider Purpose managers, have enthusiastically partici-
sources management. When a young man we’ll call Aaron pated, earning CVS a high-profile award
Going forward, what will it take to Johnson received an employment offer from the American Society on Aging.
be an employer of choice? Last year, from UBS in early 2008, he readily ac- And in yet another industry, Time
the Hidden Brain Drain Task Force, a cepted it yet felt a tinge of regret. Having Warner recently developed a mentoring
group of 50 multinational companies interned at UBS between his junior and program that engages people on both
committed to global talent innovation, senior years at Stanford, he knew he’d ends of their careers. In this case, some
took up this challenge. Four of the com- enjoy the work of an analyst. But the job of the company’s senior executives were
panies – Booz Allen Hamilton, Ernst & was to start right after graduation, giv- challenged to stay at the forefront of a
Young, Time Warner, and UBS – spear- ing Aaron no break between one highly rapidly evolving new-media landscape.
headed two large-scale, nationally repre- structured situation and another. To raise their awareness of digital media,
sentative surveys: one, in June 2008, of Fortunately, in the spring of his se- Time Warner launched Digital Reverse
3,782 employed college graduates and nior year, UBS informed Aaron about Mentoring – a program in which tech-
the other, in January 2009, of 1,046 peo- its new graduate deferral program. The savvy college students mentor senior ex-
ple from the original sample. The result- initiative gave new hires the option of ecutives on emerging digital trends and
72 Harvard Business Review | July–August 2009 | hbr.org

technologies such as Facebook, Twitter, is 70 million strong – roughly double the Achieving balance with flex and re-
and other Web 2.0 applications. In addi- size of Gen X (1965 through 1978). Under mote working. Overwhelming majori-
tion to imparting technical skills, Gen Y any circumstances, that large a cohort ties of Gen Ys (89%) and Boomers (87%)
mentors provide Boomer mentees with would be a force to be reckoned with. In say that having flexible work options
a peek into the values, consumer behav- this case, its influence is compounded by is important. Similar percentages (87%
iors, and communication styles of the the fact that the huge Baby Boom gen- and 83%, respectively) say that work/life
younger generation. eration (1946 through 1964), unlike any balance matters to them, so it’s not sur-
What’s the thread running through previous cohort at its age, remains very prising that roughly two-thirds of both
these three HR initiatives? A certain type present in the workplace – and these two groups also wish for opportunities to
of hard-nosed manager might say they oversize “bookend” generations have an work remotely. Having the freedom to
all smack of indulgence: paying people extraordinary amount in common. To choose when and where to work is very
to find themselves, sun themselves, and be sure, they are not indistinguishable, powerful, particularly for young employ-
surf the net. On that score, it’s worth not- but emerging from our survey data were ees: 83% of Ys say this freedom motivates
ing that these programs earn their keep several common themes. them to give 110% effort. (That’s also
by even the most shortsighted account- Odyssey. Both Boomers and Gen Ys, true for Gen Xers, although to a lesser
ing. UBS trims payroll costs in the near we found, are drawn to opportunities degree.) But the desire to work remotely
term while keeping hold of talent that that allow time out to explore passions, is tempered by Ys’ and Boomers’ love of
it invested in recruiting and that it will hobbies, and good works. For example, teamwork and community. While some
need when the economy improves. CVS 47% of Ys say it’s important that the (27% and 16%, respectively) would even
mobilizes employees to match the sea- company they work for offer sabbatical give up a personal workspace to be able
sonal migration of its customers. Time leaves – that such perks boost commit- to work remotely, most who want a re-
Warner enjoys the immeasurable ben- ment and performance. It’s a preference mote option would prefer working from
efit of a more market-attuned leader- that also resonates with Boomers, 29% home just one day a week.
ship team. In a broader sense, however, of whom report having taken time out. Mentoring and generation-jumping.
Gen Ys are usually the offspring of
Boomers – and a famously doted-upon
set of children. Perhaps that’s why these
two generations seek each other out in
the workplace. Boomers delight in tak-
Flexible work arrangements and the ing Ys under their wing: 65% say that
members of the younger cohort look to
opportunity to give back to society them for advice and guidance. Genera-
tion Y’s motto, meanwhile, seems to be
trump the sheer size of the pay package. “Trust those over 50.” Most Ys (58%) say
they look to Boomers, rather than Xers,
for professional advice, and over three-
quarters say they enjoy working with
Boomers. The fact that 42% of Ys go to
programs like these pay off by proving Both groups see such breaks as oppor- Boomers for mentoring is also remark-
that a company is part of a new breed of tunities for personal fulfillment: 53% of able, given the layers that typically sepa-
employer – one that respects educated Gen Ys and 49% of Boomers who tempo- rate them in a corporate hierarchy.
workers’ increasing desires for flexibil- rarily step away from work use the time “Kippers” and Velcro relationships.
ity, personal growth, connectivity, and a to explore passions or volunteer. The parent-child bond that creates such
chance to give back. Shared vision and values. Gen Ys close connections between Gen Ys and
and Boomers also share a heightened Boomers also involves demands on time
Like Boomer, Like Y sense of obligation to make a positive and resources. A large proportion of Ys
It isn’t that the same employees who contribution to society and to the health (42% of women and 30% of men) report
in the past wanted one thing have now of the planet. Respectively, 86% and 85% that they talk to their parents every day.
changed their spots and want some- say it’s important that their work in- The fact that many of their generation
thing different. The shift we are seeing in volve “giving back.” That’s not as true for are still financially dependent on their
workplace preferences has everything to Gen X: People in their thirties and early parents has given rise to a new acro-
do with a new mix of people. Specifically, forties are 10% less likely than twenty- nym: Kippers (for Kids in Parents’ Pock-
Generation Y (born 1979 through 1994) somethings to find this important. ets Eroding Retirement Savings). We
hbr.org | July–August 2009 | Harvard Business Review 73

LEADERSHIP in the NEW WORLD.
Portrait of Gen Y found that Boomers who provide
financial support give their adult chil-
dren, on average, $471 a month in direct
To satisfy your Gen Y employees as
assistance.
they become a large proportion of
Rewards remix. Finally, Gen Ys and
the labor pool, you’ll need to address
Boomers share a sense that financial
what makes them tick. Here are five
gain is not the right reason to join or
facets of their inner workings.
stick with an employer. Both genera-
tions rate four other forms of pay as
Ambition at least as important as money: a great
These are go-getters: About as many 84% team, challenging assignments, a range
Gen Ys who call themselves very profess to be of new experiences, and explicit per-
ambitious say they are willing to go very ambitious formance evaluation and recognition.
the extra mile for their company’s (Women, in particular, of both genera-
success. tions place high importance on receiv-
ing recognition for a job well done.)
We must note that we don’t know why
Loyalty vs. Quest
45% these markers of a shifting value propo-
Gen Y employees fully hope to
expect to work sition show up in the bookend genera-
remain faithful to a workplace, but
for their current tions more than in Gen X. If a 38-year-old
the clear majority say they also want
employer for their man is less likely to crave an odyssey or
work to bring a range of new experi-
entire career opt for a rewards remix, is that because
ences and challenges. They may be
he is more likely to have a hefty mort-
more susceptible to wanderlust than
gage and school-age children? In other
they realize.
words, is it a matter of life circumstances
rather than underlying values? (Interest-
Multicultural Ease ingly, Gen X’s conventional value propo-
Gen Ys are clearly at ease with diver- 78% sition gets more complicated when we
sity, whereas only 27% of Boomers are comfortable unpack our survey data by gender: Gen X
have such a comfort level. Even when working with women are 19% more likely than Gen X
it comes to networking, Gen Ys excel people from men to rate flexibility as very important.)
at diversity: More than a quarter different ethnicities How the trend will unfold is unclear, but
network primarily with people of a and cultures the fact that differences exist today is
different ethnicity. incontrovertible. A Gen X worker is 9%
less likely than a Gen Y worker to want
an odyssey, and 23% more likely than a
Healing the Planet
86% Boomer to rate high compensation as
Gen Y workers want an employer
say it’s important very important.
who shares their eco-awareness and
social consciousness, even down that their work
to the details of office energy use. make a positive The New Workplace Imperatives
impact on the Few companies in today’s knowledge-
Nearly one quarter say it’s very im-
world intensive economy would deny that they
portant to work in a green, environ-
compete on the caliber of their people.
mentally conscious workplace.
With this richer understanding of the
two generations that now dominate
Networking by Nature the workforce, the challenge becomes
Working in teams is a top motiva- 48% clear. Companies whose employment
tor for Gen Y employees. They love say having a offers align best with the shared values
to connect with others and enjoy network of friends of Boomers and Gen Ys will enjoy a ma-
working in offices that are open and at work is very jor talent advantage. If we were design-
conducive to socializing. They want important ing a workplace from scratch today, or
people, even bosses, to be readily consulting to a big employer, we would
accessible. insist on five crucial elements.
74 Harvard Business Review | July–August 2009 | hbr.org

1. Modularity. By this, we mean the
kind of “chunking” of work that allows Portrait of Baby Boomers
Boomers to scale back their hours and To keep your Baby Boomers happy
breadth of control but still tackle the as they age, you’ll need to address
sophisticated tasks that their years of ex- these five dimensions of their work
perience equip them to handle. It’s what expectations and ethos.
we’ve seen at American Express, whose
“phased retirement” approach keeps
workers in their sixties contributing Staying in Harness
meaningfully on an individual-project Fourteen percent of Boomers now 42%
basis; and at Novartis, where a program say they don't think they will ever project they will
called PrimeForce invites retired manag- retire. Although insuffi cient savings continue working
ers to return for short-term assignments. and children’s college bills are the after age 65
In some organizations, like Harvard Uni- deciding factors in some cases, many
versity, it means specific training for the say that they enjoy their jobs and
“second act” that retirees tend to choose: that their identities are intertwined
social entrepreneurship and leadership with their work.
of nonprofit organizations.
2. Flexibility. This can – and should – Long Runways
come in many forms. Financial services There's not much risk of a Boomer- 47%
companies, for all their recent troubles, instigated mass knowledge exodus. see themselves
have been hotbeds of innovation in this Indeed, the current global recession as being in the
regard. Citigroup’s Alternative Work is further delaying retirement. In middle of their
Solutions program, to name one, has our January 2009 survey, Boomers careers
successfully maintained productivity reported needing to stay in the work-
while allowing people to work where force four years longer than they had
and how they want. At the heart of such expected just six months earlier.
programs is the kind of trust and clear
goal-setting that electronics retailer Best
Buy built into its Results-Only Work En- From “Me” to “We”
vironment, an initiative for headquar- The idealism of the 1960s is alive 55%
ters staff launched in 2006. As the name and well: 58% of Boomer women and are members of
suggests, people are held accountable 52% of Boomer men volunteer their external volunteer
for results, not the particular hours they time to advance environmental, cul- networks
keep at the office. Or, as one of the pro- tural, educational, or other causes.
gram’s founders told BusinessWeek, it’s
“like TiVo for your work.” Yearning for Flexibility
3. Opportunities to give back. UBS’s Because they are eager to pursue 87%
gap year program, described earlier, is a other passions while keeping a say being able
great example. So is Ernst & Young’s Cor- hand in at work, Boomers prize to work flexibly
porate Responsibility Fellows Program, flexibility and autonomy in their is important
which allows employees to use their ac- jobs. Not surprisingly, more women
counting and managerial skills to help en- than men call flexibility important:
trepreneurs in parts of the world where 89% versus 85%.
management capabilities are scarce. By
helping these small businesses, typically
by providing services that they couldn’t Familial Obligations
otherwise afford, Ernst & Young hopes Needy family members are pressing 71%
to jump-start growth in emerging mar- in from both sides: Beyond having report having
kets while cultivating the talents of its elderly parents to attend to, many elder care
high-potential employees and increas- Boomers (41%) contribute financial responsibilities
ing their attachment to the firm. Many support to their adult children.
companies support their people’s fa-
hbr.org | July–August 2009 | Harvard Business Review 75

LEADERSHIP in the NEW WORLD.
vorite causes, whether with release time Open Season
The Best for volunteering or with matching funds
for contributions. But it’s hard to top the
More important than any program or
set of imperatives is the insight that ev-
Way to Pay sense of satisfaction you get from using
your vocational strengths to make a dif-
ery new generation of workers brings
with it particular values that reflect not
GENERATION Y rates ference to a worthy cause. its members’ youth but, rather, their
six types of rewards as 4. Progressive policies. As people fundamental makeup. Sometimes, lack-
at least as important as become more concerned about global ing sufficient heft and arriving in sub-
compensation. In order, climate change, many companies have ordinate roles, they – and their prefer-
they are: discovered that a progressive work en- ences – hold little sway. In other eras,
vironment is deeply appreciated. Gen- like this one, they get what they want.
1 High-quality
colleagues zyme’s eco-friendly building bespeaks That’s why large organizations will
a commitment to the planet’s health find themselves in a curious position
2 Flexible work
arrangements that its people can point to with pride.
Bloomberg’s office environment is pro-
over the next several years. As Baby
Boomers slowly step out of full-time
3 Prospects for
advancement
gressive in other ways, having been
designed to foster collaboration and
posts, Gen X will take on the highest ex-
ecutive roles – and will have not only a
4 Recognition from
one’s company or
boss
innovation. Its many open spaces keep
people circulating so that they can have
very dissimilar cohort to oversee in its
juniors but also the unprecedented chal-
the informal chance encounters that of- lenge of caring for its lingering elders.
5 A steady rate of
advancement and
promotion
ten spark ideas. Add to that a profusion
of art and you have a refreshing change
Thus, the generation in charge will need
to manage a workforce it is fundamen-
from the acres of cubicles that dominate tally out of step with. Just as marketers
6 Access to new
experiences and
challenges
much corporate real estate.
5. Intergenerational mentoring. The
in training are constantly reminded
“You are not the customer,” these execu-
best examples we’ve seen are at Time tives will have to come to terms with the
Warner (discussed earlier), Cisco, and fact that they are not the talent.
Booz Allen. At Cisco, the effort is an out- Managers with open minds and
BOOMERS rate seven growth of the company’s long-standing newly energized growth plans will find
types of rewards as at facilitation of internal employee net- ways to satisfy the workplace demands
least as important as working. One active network known as of the talent they seek. And they will
compensation. In order, the Legacy Leaders Network, for Boomer- continue to monitor the changing at-
they are: aged executives, has partnered with titudes of workers. The transformation
another called the New Hire Network. of the workforce they are now experi-
1 High-quality
colleagues Both groups are learning from the cross- encing is a particularly dramatic one,
pollination. At Booz Allen, an innova- but hardly the last. The organizations
2 An intellectually
stimulating work-
place
tive information and social networking
site called Hello.bah.com drew in 36% of
that thrive will be those that recognize
their people’s shifting values and prefer-
employees within a few months. Using ences – and that find ways to make the
3 Autonomy regard-
ing work tasks blogs and wikis, it connects a workforce
that spends a lot of time away from com-
work meaningful on those terms.
4 Flexible work
arrangements
pany offices – on the road, at client sites,
and working from home. Internal spon-
Sylvia Ann Hewlett is an economist and
the founding president of the Center for
5 Access to new
experiences and
challenges
sors told us that Hello.bah.com is not
only improving information flows but
Work-Life Policy in New York. Her forth-
coming book is titled Top Talent: Keep-
also forging intergenerational relation- ing Performance Up When Business Is
6 Giving back to the
world through
work
ships. Gen Ys are encouraging Boomers
to join the site and teaching them how
Down (Harvard Business Press, 2009).
Laura Sherbin and Karen Sumberg are
to utilize it effectively. Boomers are vice presidents at the Center for Work-
7 Recognition from
one’s company or
boss
welcoming the chance to share know-
how and business contacts with much
Life Policy.
Reprint R0907G
younger colleagues. Informal mentoring
To order, see page 158.
is running both ways.
76 Harvard Business Review | July–August 2009 | hbr.org

THE NEW
ECONOMICS in the
SPECIAL ISSUE
NEW WORLD
The End of
Rational
Economics Your company has been operating on the
premise that people – customers, employees,
managers – make logical decisions. It’s time
to abandon that assumption. | by Dan Ariely
IN 2008, a massive earthquake reduced the financial world
to rubble. Standing in the smoke and ash, Alan Greenspan,
the former chairman of the U.S. Federal Reserve once hailed
as “the greatest banker who ever lived,” confessed to Congress
that he was “shocked” that the markets did not operate accord-
Jacob Thomas
ing to his lifelong expectations. He had “made a mistake in
presuming that the self-interest of organizations, specifically
banks and others, was such that they were best capable of
protecting their own shareholders.”
78 Harvard Business Review | July–August 2009 | hbr.org

hbr.org | July–August 2009 | Harvard Business Review 79

THE NEW ECONOMICS in the NEW WORLD.
We are now paying a terrible price for our un- Simpson than to Superman.) Behavioral econom-
blinking faith in the power of the invisible hand. ics eschews the broad tenets of standard econom-
We’re painfully blinking awake to the falsity of ics, long taught as guiding principles in business
standard economic theory – that human beings schools, and examines the real decisions people
are capable of always making rational decisions make – how much to spend on a cup of coffee,
and that markets and institutions, in the aggregate, whether or not to save for retirement, deciding
are healthily self-regulating. If as- whether to cheat and by how much, whether to
sumptions about the way things make healthy choices in diet or sex, and so on. For
are supposed to work have failed example, in one study where people were offered
IDEA us in the hyperrational world of a choice of a fancy Lindt truffle for 15 cents and a
IN BRIEF
Wall Street, what damage have Hershey’s kiss for a penny, a large majority (73%)
» The global economic crisis has they done in other institutions chose the truffle. But when we offered the same
shattered two articles of faith and organizations that are also chocolates for one penny less each – the truffle
in standard economic theory: made up of fallible, less-than- for 14 cents and the kiss for nothing – only 31%
that human beings usually make logical people? And where do of participants selected it. The word “free,” we dis-
rational decisions and that the corporate managers, schooled covered, is an immensely strong lure, one that can
market’s invisible hand serves as in rational assumptions but who even turn us away from a better deal and toward
a trustworthy corrective to imbal-
run messy, often unpredictable the “free” one.
ance. We need to replace these
businesses, go from here? For the past few decades, behavioral economics
and other assumptions and adopt
We are finally beginning to un- has been largely considered a fringe discipline – a
a new approach.
derstand that irrationality is the somewhat estranged little cousin of standard eco-
» Behavioral economics is real invisible hand that drives hu- nomics. Though practitioners of traditional econom-
founded on the premise that man decision making. It’s been a ics reluctantly admitted that people may behave ir-
human beings are fundamen- painful lesson, but the silver lin- rationally from time to time, they have tended to
tally irrational and motivated by ing may be that companies now stick to their theoretical guns. They have argued
unconscious cognitive biases. see how important it is to safe- that experiments conducted by behavioral econo-
This emerging discipline offers a
guard against bad assumptions. mists and psychologists, albeit interesting, do not
radically different view about the
Armed with the knowledge that undercut rational models because they are carried
ways people and organizations
human beings are motivated by out under controlled conditions and without the
really operate.
cognitive biases of which they are most important regulator of rational behavior:
» By adopting an experimental largely unaware (a true invisible the large, competitive environment of the market.
approach, firms can discover the hand if there ever was one), busi- Then, in October 2008, Greenspan made his confes-
truth underlying their assump- nesses can start to better defend sion. Belief in the ultimate rationality of humans,
tions about customers, employees, against foolishness and waste. organizations, and markets crumbled, and the at-
operations, and policies. The emerging field of behav- tendant dangers to business and public policy were
ioral economics offers a radically fully exposed.
different view of how people and Unlike the FDA, for example, which forces medi-
organizations operate. In this ar- cal practitioners and pharmaceutical companies to
ticle I will examine a small set of long-held business test their assumptions before sending treatments
assumptions through a behavioral economics lens. into the marketplace, no entity requires business
In doing so I hope to show not only that companies (and also the public sector) to get at the truth of
can do a better job of making their products and things. Accordingly, it’s up to firms to begin inves-
services more effective, their customers happier, tigating basic beliefs about customers, employees,
and their employees more productive but that they operations, and policies. When organizations ac-
can also avoid catastrophic mistakes. knowledge and anticipate irrational behavior, they
can learn to offset it and avoid damaging results.
Behavioral Economics 101 Let’s take a closer look at a few examples.
Drawing on aspects of both psychology and eco-
nomics, the operating assumption of behavioral The Dark Side of Teamwork
economics is that cognitive biases often prevent A few years ago, my colleagues and I found that
people from making rational decisions, despite most individuals, operating on their own and given
their best efforts. (If humans were comic book the opportunity, will cheat – but just a little bit, all
characters, we’d be more closely related to Homer the while indulging in rationalization that allows
80 Harvard Business Review | July–August 2009 | hbr.org

them to live with themselves. (See “How Hon-
est People Cheat,” HBR, February 2008.) We
also found that the simple act of asking people
to think of their ethical foundations – say, the
Ten Commandments – or their own moral code
before they had the opportunity to cheat elimi-
nated the dishonesty.
But what happens when peo-
ple collaborate? Do autono-
mous teams make better, more
ethical decisions? We decided
to find out. In a series of three
experiments, we gave partici-
pants 20 math problems to solve in five min-
utes and paid them 50 cents for each correct
answer. In our first treatment (the control con-
dition), individual participants were asked to
write the number of problems they answered
correctly on collection slips and give them to an
experimenter, who checked the totals against
the problem sheets. In a second treatment, par-
ticipants shredded their answer sheets without
verification and simply submitted their col-
lection slips to the experimenter. Perhaps not
surprisingly, we found these participants lied,
saying that they’d correctly answered two more
questions, on average, than those in the
control treatment.
Things got more interesting in the
third treatment, where participants
worked in pairs and shared the spoils.
The results showed that when a person Most individuals, operating on their
realizes that his or her fudging would
benefit other team members by increas- own and given the opportunity, will
ing the payout, dishonesty further in-
creased by 25%. cheat – but just a little bit.
In another setup, we tried to discover
whether monitoring and supervision
would counteract team cheating. In fact,
it did not. Though cheating decreased
somewhat, it didn’t disappear. More disturbingly, functional advantages, they may also be more vul-
as the members of our experimental group be- nerable to unethical conduct.
came better acquainted, the tendency to cheat for
the sake of the team increased even more. Other The Revenge Motive:
experiments revealed that if one person is clearly When Customers Are Unhappy
seen to be cheating, team members – particularly Now let’s look at customer behavior, an area that
those who feel connected to the cheater – are is particularly fraught with irrationality. It’s a
likely to depart from their own moral compasses rare company that consistently makes its custom-
and increase their cheating. It seems that cheating ers happy, though many nobly try. And well they
is infectious. should; too many firms fail to understand the price
These findings have serious implications for of customer unhappiness. Indeed, given the right
unsupervised collaborative work in organizations. circumstances, most of us are more than happy to
Although work groups can have many social and seek revenge.
hbr.org | July–August 2009 | Harvard Business Review 81

THE NEW ECONOMICS in the NEW WORLD.
hbr.org
Ayalet Gneezy of the University of the need to take revenge, they don’t
Find more on Managing
San Diego and I set out to discover if in the New World at
differentiate between the two.
even low levels of annoyance would landscape.hbr.org. This is bad news for employers. If
cause people to seek retribution. If so, someone who works for you upsets a
we could assume that vengeful behav- customer – even in ways unrelated to
ior in the real world of dropped calls, flight cancel- the job – you will very likely pay the price. Even the
lations, and credit card penalties would be even smallest transgression on the part of an employee
greater. can ignite the instinct for strong revenge against
Daniel, an actor who was our hired “agent,” gave the employer, regardless of who is at fault.
participants in a coffee shop several sheets of paper What can company representatives or individu-
covered with letters and asked them to find match- als do to soothe the instinct for revenge in business
ing pairs. Participants were promised $5 each for or personal exchanges? Apologies work, at least
completing the task. On doing so, each signed a temporarily. In yet another version of our experi-
receipt and received a stack of $1 bills. Daniel “mis- ment, Daniel apologized for the phone call inter-
takenly” overpaid some of them by two, three, or ruption. We were surprised to find that the show
four dollars. of regret was a perfect remedy. The percentage of
In the “no annoyance” condition, Daniel ex- people who returned the extra cash was the same
plained the task and set the participants to it. In in the “apology condition” as in the “no annoyance”
the “annoyance” condition, he pretended to answer condition. As it turns out the word “sorry” com-
his cell phone in the midst of giving instructions, pletely counteracted the annoyance. (Of course,
talked for 15 seconds with a friend about pizza, the effectiveness of an apology is likely to diminish
hung up the phone, and then continued with the in- with the frequency of the annoyance.)
Revenge and cheating are only two
of the irrational behaviors that com-
panies will find underlying their em-
ployees’ and customers’ decisions and
Revenge and cheating are only two of actions. Recognizing that, what is the
way forward?
the irrational behaviors that underlie
Experimenting with Behavior
employees’ and customers’ decisions. Behavioral economics experiments that
get to the bottom of people’s decisions
and actions are very different from the
kinds of tests companies traditionally
use to try out new product ideas and
structions without acknowledging or apologizing marketing concepts or to discover opportunities.
for taking the call. We wanted to discover whether The difference is not in the research methodology
the “annoyed” participants would exact revenge by itself but in the process of selecting ideas to be
keeping the extra money he gave them. tested.
A mere 14% of those subjected to Daniel’s rude The standard business approach to experiments
treatment returned the additional money, com- is similar to an engineering project. It makes strong
pared with 45% of those in the other group. The assumptions about the laws that govern the behav-
fact that only 45% returned the extra cash was ior of the different actors; the only question is how
depressing enough, but it was striking that a 15- to combine them in a way that makes sense for
second phone call vastly decreased the likelihood a particular application. (Companies that gather
that the participants would return the cash. large amounts of transaction data are well ahead
In another version of the experiment, we in this area. The casino giant Harrahs, for example,
wanted to find out more about the impulse to pun- is famous for running experiments using customer
ish. Would it make a difference whether Daniel data to develop a set of tailored services and of-
claimed that he was working for someone else? fers.) A behavioral economics approach, in contrast,
Would participants punish the principal (the re- is more like a science project: We search simulta-
searchers behind the study) for the agent’s misbe- neously for the governing principles and how to
havior? Our results suggested that if people feel implement them. Consider, for example:
82 Harvard Business Review | July–August 2009 | hbr.org

Pricing. I don’t know whether Apple’s execu-
tives were conducting a behavioral economics ex-
periment when they introduced the iPhone at a
price of $600 and then quickly discounted it to
$400, but that move revealed something important
about human behavior. By imprinting the price of
$600 in people’s minds, Apple was able to make
consumers think that $400 was a real bargain. In a
standard approach to price setting, the people run-
ning Apple’s pricing group might have asked focus
groups about various price points for the phone,
The Trust Game
and based on participants’ feedback, picked the A GROUP OF SWISS RESEARCHERS led by Ernst Fehr
price they thought would maximize profits ($400). conducted an experiment now known as “the trust game with re-
But if Apple had set the initial price at $400, con- venge” that reveals a lot about the motivation for vengeance. It goes
sumers would have had no basis for comparison, something like this: You and an anonymous partner are each given
since they’d never seen such a product before. $10, and you get to make the first move. You must decide whether to
Adopting a behavioral economics perspective, send your money over to your partner or keep it for yourself. If you
Apple might have started by questioning the as- keep it, each of you gets your $10 and the game is over. If you send
sumption that people would know how to value it, the experimenters quadruple the amount to $40 – so now your
the pathbreaking product and so set up various partner has $50.
pricing experiments. In this type of test, the goal The obvious question is: Why would you give away your $10 in the
is not simply to find out the optimal price but also first place? The answer is that you hope you can trust your partner
to discover how people arrive at a decision to buy when he makes the next move. He can choose either to keep the
at that price. Companies also need to consider how $50 – leaving you with nothing – or send $25 back to you, so that you
the introductory price could influence the percep- share equally in the spoils.
tion of value for a long time. If your partner is acting rationally and in his own best interest, he
Product launches. Behavioral economists might would never send you the $25. Knowing this, and acting equally ratio-
also look at the roles of habit and trust in consumer nally, you would never send him the money to start with. Ergo, you
choice. Take a manufacturer who is planning to will do nothing and go home. The good news is that people are more
sell a triple-concentrated detergent, on the theory trusting and reciprocating than standard economic theory would
that environmentally conscious consumers would have us believe. In the experiment, many people gave away their $10,
prefer to eliminate waste. Given shoppers’ almost and many partners reciprocated by sending $25 back.
automatic impulse to reach for the same detergent, But the Swiss game didn’t end there. If your partner chose to keep
should the manufacturer package the concentrate the $50, the experimenter would give you an opportunity in the next
in the standard-size bottle and charge more for it? phase of the game to use some of your own money to punish him.
Or should the manufacturer try to break consum- For every dollar you spend, your greedy partner loses $2. So if you
ers’ force of habit and package the concentrate in a decided to spend $25, your partner would lose all his winnings. You
bottle one-third the size of the original? And what might think that people who had just lost some money would be
about trust? If consumers don’t trust the manu- unwilling to lose even more just to “get their own back.” Seated com-
facturer to deliver a more concentrated product, fortably right now, you might not be able to appreciate these feelings,
given that the product smells and looks the same but most of the people who were given the opportunity exacted
as before, will they be willing to pay for it? How can severe revenge on their greedy partners.
the manufacturer overcome this hurdle? This finding was not the most interesting part of the study, how-
Customers. A variety of companies now use a ever. While the participants were making their decisions, their brains
behavioral economics approach to more closely were being scanned by positron emission tomography (PET). The
examine customer and employee behavior. For experimenters saw activity in the striatum, the part of the brain
example, one automobile insurer discovered that associated with experiencing reward. In other words, the decision
most people, when filling out forms that ask how to punish the greedy partners appeared to be related to a feeling of
many miles they’ve driven in a year, claimed that pleasure. What’s more, those who had a high level of striatum activa-
they drove less than they actually had. Building tion punished their partners to a greater degree. This suggests that
on the discovery that people are less inclined to the desire for revenge, even when it costs us something and is fully ir-
cheat after being reminded of their own ethical rational (you have no idea who this other person is, and you will never
standards, the company moved the signature line meet him again), has biological underpinnings.
hbr.org | July–August 2009 | Harvard Business Review 83

THE NEW ECONOMICS in the NEW WORLD.
to the top of the form. Applicants who signed the set out to learn something about their customers’
form at the top reported driving an average of habits only to find that the way they devised their
2,700 more miles a year than those who signed research was invalid and the conclusions incorrect.
at the end. Smart organizations will develop a behavioral eco-
In another example, the cable giant Comcast be- nomics capability by hiring qualified experiment-
gan addressing the customer-revenge problem by ers and conducting small trials that build on each
using Twitter to respond to problems proactively. other.
The director of digital care, Frank Eliason, discov- Once the understanding of irrationality is em-
ered that by searching for the word “Comcast” (or, bedded in the fabric of the organization, a be-
sometimes, “Comcrap”), he could locate unhappy havioral economics approach can be applied to
customers who were simply venting to themselves virtually every area of the business, from gover-
and to their friends, and respond to their problems nance and employee relations to marketing and
before they became formal complaints. (Other customer service. It is probably most useful in
companies, including JetBlue, General Motors, the areas that we know the least about – such as
Kodak, Dell, and Whole Foods Market are now also the relationships between compensation and per-
tracking customers’ comments on Twitter.) formance, risk and reward, loyalty and consumer
habits, and pricing and purchasing behavior. As
Building a Behavioral Economics companies become more willing to question their
Capability assumptions, discover something about their
Behavioral economics can be seen as depressing; stakeholders’ predilections, and share the results
after all, many of our experiments show human of their learning, they will no doubt become a
beings as incapable of making good decisions. Mul- good deal wiser.
tiple findings demonstrate that we are emotional,
myopic, and easily confused and distracted. Nev- Dan Ariely (dandan@duke.edu) is the James B.
ertheless, companies that make an investment in Duke Professor of Behavioral Economics at Duke
behavioral experimentation can radically improve University, in Durham, North Carolina, and the au-
decision making and lessen risk. thor of Predictably Irrational: The Hidden Forces
Firms interested in experimenting with behav- That Shape Our Decisions (HarperCollins, 2008).
ior should understand that the process is time-
Reprint R0907H To order, see page 158.
consuming and delicate. All too often, companies
Leo Cullum
“I thought they were grooming me for something big
but, apparently, they were just grooming me.”
84 Harvard Business Review | July–August 2009 | hbr.org

THE NEW ECONOMICS in the NEW WORLD.
The Big Shift
Measuring the
Forces of Change
| by John Hagel III, John Seely Brown,
and Lang Davison
DURING A STEEP RECESSION, managers obsess over short-
term performance goals such as cost cutting, sales, and market
share growth. Meanwhile, economists chart data like GDP
growth, unemployment levels, and balance-of-trade shifts to
gauge the health of the overall business environment. The
problem is, focusing only on traditional metrics often masks
long-term forces of change that undercut normal sources of
economic value. “Normal” may in fact be a thing of the past:
Even when the economy heats up again, companies’ returns
will remain under pressure.
One reason traditional measures alone don’t capture the
challenges and opportunities for U.S. companies and the na-
tional economy is that the digital infrastructure supporting the
lion’s share of industries has sustained rapid performance im-
provements – especially in computing power, bandwidth, and
storage. Previous infrastructures experienced sharp bursts of
innovation in underlying technologies, such as the telephone
and the internal combustion engine, and then quickly stabi-
Jacob Thomas
lized. Today, we do not yet see any signs of stabilization, which
suggests not only that competitive intensity (which has more
than doubled in the past 40 years) will continue to build but
also that the digital infrastructure will keep boosting the po-
86 Harvard Business Review | July–August 2009 | hbr.org

hbr.org
tential – and necessity – for novations fuel performance The good news is that strong foun-
For more about the
business innovation. Big Shift framework gains without introducing dational technology is enabling much
To help managers in this and the Shift Index, too much complexity. richer and more diverse knowledge
go to blogs.harvard
decidedly challenging time, The second wave involves flows. The bad news is that mind-sets
business.org/
we present a framework for bigshift. the increasing movement of and practices tend to hamper the gen-
understanding three waves knowledge, talent, and capi- eration of and participation in those
of transformation in the tal. Knowledge flows – which flows. That is why we give such promi-
competitive landscape: foundations for occur in any social, fluid environment nence to them in the second wave of
major change; flows of resources, such where learning and collaboration can the Big Shift. The number and quality
as knowledge, that allow firms to en- take place – are quickly becoming one of knowledge flows at a firm – partly
hance productivity; and the impacts of of the most crucial sources of value cre- determined by its adoption of openness,
the foundations and flows on compa- ation. Facebook, Twitter, LinkedIn, and cross-enterprise teams, and informa-
nies and the economy. Combined, those other social media foster them. Virtual tion sharing – will be key indicators of
factors reflect what we call the Big Shift communities and online discussion fo- its ability to master the Big Shift and
in the global business environment. rums do, too. So do companies situated turn performance challenges into op-
Additionally, we have developed near one another, working on similar portunities. The ultimate differentiator
an index to measure the changes that problems. Twentieth-century institu- among companies, though, may be a
have had the biggest effect on busi- tions built and protected knowledge
ness over the past four decades (see stocks – proprietary resources that no
the exhibit “The Shift Index”). That set one else could access. The more the
of metrics reveals a dramatic increase business environment changes, how- If U.S. workers’
in performance pressure on U.S. com- ever, the faster the value of what you productivity has
panies. Their average return on assets know at any point in time diminishes. grown… Competitive intensity
(ROA) has steadily fallen to almost one In this world, success hinges on the
Labor productivity
quarter of what it was in 1965, despite ability to participate in a growing array
Topple rate
the fact that labor productivity has of knowledge flows in order to rapidly 1965
improved. Worse yet, even the highest- refresh your knowledge stocks. For in- Return on assets
performing companies are struggling stance, when an organization tries to Present
to maintain their ROA levels and los- improve cycle times in a manufactur- …why has ROA
ing their leadership positions at an ing process, it finds far more value in dropped?
ever-faster rate. The paradox of falling problem solving shaped by the diverse
ROA alongside growing productivity experiences, perspectives, and learning
is explained at least in part by the ris- of a tightly knit team (shared through
ing total compensation of knowledge knowledge flows) than in a training competency for creating and sharing
workers and other talented employees, manual (knowledge stocks) alone. knowledge across enterprises. Growth
and by consumers’ growing power over Knowledge flows can help companies in intercompany knowledge flows will
vendors that end up “competing away” gain competitive advantage in an age of be a particularly important sign that
their cost savings. An even closer look near-constant disruption. The software firms are adopting the new institu-
at the situation shows a fundamental company SAP, for instance, routinely tional architectures, governance struc-
mismatch between the mind-set of to- taps the more than 1.5 million partici- tures, and operational practices neces-
day’s companies and the environment pants in its Developer Network, which sary to take full advantage of the digital
in which they compete. extends well beyond the boundaries infrastructure.
of the firm. Those who post questions The initial findings from our research
Elements of the Big Shift for the network community to address indicate a correlation between the rap-
The first, foundational wave in the will receive a response in 17 minutes, on idly growing use of social media and the
Big Shift consists of the extraordinary average, and 85% of all the questions increasing knowledge flows between
changes in digital infrastructure that posted to date have been rated as “re- organizations. Worker passion also
enable vastly greater productivity, solved.” By providing a virtual platform appears to be an important amplifier:
transparency, and connectivity. Con- for customers, developers, system inte- When people are engaged with their
sider how companies can use digital grators, and service vendors to create work and pushing the performance en-
technology to create ecosystems of di- and exchange knowledge, SAP has sig- velope, they seek ways to connect with
verse, far-flung users, designers, and sup- nificantly increased the productivity of others who share their passion and
pliers in which product and process in- all the participants in its ecosystem. who can help them get better faster.
hbr.org | July–August 2009 | Harvard Business Review 87

THE NEW ECONOMICS in the NEW WORLD.
Self-employed people are more than
twice as likely to be passionate about
the gap between their potential
and their realized opportunities The Shift Index
their work as those who work for firms, will grow wider. That’s because Executives can use the metrics here to gauge
according to a survey we conducted. the benefits from the modest the long-term forces shaping the business
This suggests a potential red flag for in- productivity improvements environment and improve their firms’ overall
stitutional leaders – companies appear that companies have achieved performance. They should:
to have difficulty holding on to passion- increasingly accrue not to the ■ monitor foundational changes in digital technol-
ate workers. firm or its shareholders but to ogy and public policy that could alter competitive
The final wave reflects how well com- creative talent and customers, dynamics;
panies are exploiting foundational im- who are gaining market power
■ assess how well their companies participate in
provements in the digital infrastructure as competition intensifies. flows (that is, the movement of knowledge, talent,
by creating and sharing knowledge – Until now, companies were and capital), focusing especially on knowledge
and what impacts those changes are designed to get more efficient by creation and sharing; and
having on markets, firms, and individu- growing ever larger, and that’s
■ note the impacts of those foundational changes
als. For now, institutional performance how they created considerable and flows on markets, firms, and people.
is almost universally suffering in the economic value. The rapidly
face of intensifying competition. But changing digital infrastructure
over time, as firms learn how to har- has altered the equation, however: As Companies must therefore design and
ness the digital infrastructure and par- stability gives way to change and un- then track operational metrics showing
ticipate more effectively in knowledge certainty, institutions must increase not how well they participate in knowledge
flows, their performance will improve. just efficiency but also the rate at which flows. For example, they might want to
Differences in approach between top- they learn and innovate, which in turn identify relevant geographic clusters of
performing and underperforming com- will boost their rate of performance talent around the world and assess their
panies are telling. As some organizations improvement. “Scalable efficiency,” in access to that talent. In addition, they
participate more in knowledge flows, other words, must be replaced by “scal- might want to track the number of in-
we should see them break ahead of the able learning.” The mismatch between stitutions with which they collaborate
pack and significantly improve overall the way companies are operated and to improve performance.
performance in the long term. Others, governed on the one hand and how the In contrast to the twentieth cen-
still wedded to the old ways of operating, business landscape is changing on the tury – when senior management decided
are likely to deteriorate quickly. other helps explain why returns are de- what shape a company should take in
teriorating while talent and customers terms of culture, values, processes, and
Closing the Performance Gap reap the rewards of productivity. organizational structure – now we’ll
Our research findings highlight the So, how can companies narrow see institutional innovations largely
stark performance challenges for com- the growing gap between the perfor- propelled by individuals, especially the
panies. What’s more, the data suggest mance promised by digital technology younger workers, who put digital tech-
that unless firms take radical action, and their actual financial results? Just nologies such as social media to their
as twentieth-century firms discovered most effective use. But management
how to harness then-new energy, trans- can play an important supporting role:
Our Research portation, and communication infra- Recognize that passionate employees
We pulled together four decades’
structures to become bigger and more are often talented and motivated but
worth of data from more than a efficient, today’s firms must make the also tend to be unhappy, because they
dozen sources, designed and con- most of the digital infrastructure. This see a lot of potential for themselves
ducted four surveys, and created requires innovations at the institutional and for their companies but can feel
five proprietary methodologies level that better position organizations blocked in their efforts to achieve it.
to compile 25 metrics into three to succeed both during the current re- Identify those who are adept partici-
indexes representing 15 indus- cession and after the economy recov- pants in knowledge flows, provide them
tries. Architects of current “gold ers. By developing diverse relationships with platforms and tools to pursue their
standard” indexes were consulted
across enterprises, firms can accelerate passions, and then celebrate their suc-
throughout the development pro-
performance improvement as they cesses to inspire others.
cess. For a close look at our meth-
add participants to their ecosystems, •••
odologies and data – as well as a
full discussion of our findings – go
expanding their learning and innova- Performance pressures will continue to
to www.deloitte.com/us/bigshift. tion – much as SAP has done with its increase well past the current downturn.
Developer Network. As a result, leaders must move beyond
88 Harvard Business Review | July–August 2009 | hbr.org

the marginal expense cuts they might
Foundation Index be focusing on now in order to weather
Technology Infrastructure the recession. They need instead to be
Performance Penetration Public Policy ruthless about deciding which assets,
Computing Internet Users Economic Freedom
metrics, operations, and practices have
Gigahertz of computing Percentage of people in The Heritage Foundation’s the greatest potential to generate long-
power per unit of cost the U.S. actively using the Index of Economic Freedom, term profitable growth and shedding
internet which measures 10 types of those that do not. They must keep com-
Digital Storage
freedom in 183 countries
Gigabytes of digital storage Wireless Subscriptions ing back to the most basic question of
capacity per unit of cost Number of active wireless all: What business are we really in?
subscriptions in the U.S.
Bandwidth It’s not just about being lean; it’s also
Megabits per second of about making smart investments in
bandwidth per unit of cost
the future. One of the easiest but most
powerful ways firms can achieve the per-
Flow Index formance improvements promised by
technology is to jettison management’s
Physical Flows Virtual Flows Flow Amplifiers
distinction between “creative talent” and
Migration of People to Knowledge Sharing Worker Passion the rest of the organization. All workers
Creative Cities Across Companies National worker survey can continually improve their perfor-
Increase in migration to National worker survey gauging excitement about
mance by engaging in creative problem
most-creative cities com- measuring participation in work, fulfillment from it, and
pared with least-creative knowledge flows across willingness to put in extra solving, often by connecting with peers
cities (as defined by Richard firms hours inside and outside the firm. Japanese
Florida)
Wireless Activity Social Media Activity automakers used elements of this ap-
Travel Volume Total annual volume of Percentage of total internet proach with dramatic effects on the bot-
Total volume of transporta- mobile minutes used and time spent on social media tom line, turning assembly-line employ-
tion by local commuters and SMS messages sent ees from manual laborers into problem
airplane passengers
Internet Activity solvers.
Movement of Capital Internet traffic in the 20 U.S. At the end of the day, the Big Shift
Foreign direct investments cities with the most domes-
framework puts a number of key ques-
in and by U.S. companies tic bandwidth
tions on the leadership agenda: Are
companies organized to effectively gen-
Impact Index erate and participate in a broader range
Markets Firms People
of knowledge flows, especially those
that go beyond the boundaries of the
Competitive Intensity Asset Profitability Consumer Power firm? How can they best create and cap-
Herfindahl-Hirschman Total return on assets (ROA) Consumer survey gauging
ture value from such flows? And, most
Index, which measures for all U.S. firms behaviors and attitudes
market concentration regarding product choice,
important, how do they measure their
ROA Performance Gap
access to information progress navigating the Big Shift in the
Labor Productivity The gap between top- and
U.S. Bureau of Labor bottom-quartile firms’ ROA
about vendors, and other business landscape? We hope that the
indicators Shift Index will help executives answer
Statistics data
Firm Topple Rate
Stock Price Volatility Annual rank shuffling among
Brand Disloyalty those questions – in these difficult times
Consumer survey measur- and beyond.
Average standard deviation U.S. firms
ing willingness to switch
of daily stock price returns
Shareholder Value Gap brands, tendency to com-
over one year John Hagel III (jhagel@deloitte.com)
The gap between top- and pare prices, consultations
bottom-quartile firms’ total with friends about brand and John Seely Brown (jsb@johnseely
shareholder returns use, and other indicators brown.com) are, respectively, the cochair-
Returns on Talent man and the independent cochairman of
Compensation gap between Deloitte’s Center for the Edge, in Silicon
more and less creative Valley. Lang Davison (langdavison@
occupational groups
deloitte.com) is the executive director.
Executive Turnover
Number of top managers Reprint R0907Q
leaving U.S. companies To order, see page 158.
hbr.org | July–August 2009 | Harvard Business Review 89

THE NEW ECONOMICS in the NEW WORLD.
Shareholders
First?
Not So Fast…
CEOs are rediscovering “stakeholder
capitalism”– respecting the needs
not just of investors but also
of customers, employees, and
suppliers. | by Jeffrey Pfeffer
IT’S CLEAR that the limits of shareholder capitalism are show-
ing themselves like so many cracks in the ages-old foundation
of a house. The question is, Do the current repair efforts by
senior executives and policy makers signal a lasting return to
stakeholder capitalism – where CEOs feel responsible to all
constituencies and not just investors?
We’ve been there before, after all: In the 1950s and 1960s,
the stakeholder was king. CEOs saw their role as one of bal-
ancing the interests of the various groups that touched their
companies – customers, employees, suppliers, shareholders,
and the community at large. This reflected the executives’ so-
phisticated understanding not only of their role as stewards of
the valuable resources entrusted to them but also of their own
enlightened self-interest: Each of these groups was essential
for organizational success. What was true then is even more
so today, in an age of knowledge work, outsourcing, global
supply chains, and activist interest groups.
The idea that shareholders should be preeminent took hold
Jacob Thomas
in the 1970s, for many reasons. Among them was a widespread
belief in the efficiency and intelligence of markets. As the
University of Michigan’s Gerald Davis describes in Managed
by the Markets, society has over the past 30 years organized

itself through financial markets to a
far greater extent than at any point in
Why should past labor (capital) receive
the past. Everything is now a financial so much preference over current labor
instrument: Homes aren’t buildings in
which you and your family live; they are (employees)?
options on future real estate prices. Child
care, previously a personal situation for
parents to wrangle with, is now a busi- A broad collection of balanced score- the industry shutdown after the terror-
ness to be traded on the stock exchange. card and other assessment tools also ist attacks on September 11, 2001, the
Markets can and do allocate resources helps to refute the idea that financial company never had layoffs. Similarly,
efficiently, of course. But only under ap- measures of performance should be shareholder interests bring up the rear
propriate conditions – when there is the primary (or only) ones employed. at Men’s Wearhouse, which now sells al-
lots of competition and information, for Furthermore, there’s no legal basis for most a quarter of all men’s suits in the
instance, and when people can make giving shareholders exclusive priority. United States. The company aids em-
individually rational choices. Many As Yale professor Constance Bagley and ployees in financial distress and invests
market-solutions-for-everything advo- coauthor Karen L. Page made clear in heavily in worker training. It competes
cates seem to have overlooked the point their 1999 San Diego Law Review article, not on price but on the quality shopping
that such conditions don’t always exist. “The Devil Made Me Do It,” managers experiences it offers its customers.
Take health care: My employer chooses can justify practically any course of ac- Shareholder capitalism is no longer
the options I have for health insur- tion by declaring it to be in the name something that resonates inside organi-
ance. The health insurer, in turn, deter- of shareholders, even if it imposes great zations. It doesn’t motivate or engage the
mines the set of doctors from which I costs on others. But no laws require workforce in a way that engenders high
can select, using information that is far them to do so. performance; maximizing shareholder
from perfectly available or even very Even in terms of sheer logic, share- value is scarcely the kind of big, hairy,
comprehensive. holder preeminence fails the test. As audacious goal Good to Great author Jim
Dennis Bakke, the cofounder of the en- Collins has described as being so useful
The Pendulum Swings ergy corporation AES, has asked: “Why for getting people on board with your
Now opinions on deregulation, finance, should past labor (capital) receive so ideas. Customers, for their part, care
time horizons, and the wisdom of cor- much preference over current labor about the quality of the goods and ser-
porate leaders are all shifting, and the (employees)?” The idea that stock mar- vices they’re getting and how they’re be-
logic for putting the creation of share- kets are invariably efficient and provide ing treated – not about stock price. And
holder wealth ahead of the creation of accurate estimates of value has been suppliers seek partnerships based on
stakeholder value is rightfully under fire. shot down time and time again: Witness trust and mutual commitment for the
Given the political realignment occur- the rise over the past few years in the long term, not share appreciation.
ring in many countries, and the residue number of earnings restatements filed In the end, shareholder returns are
of the worst economic meltdown and and the number of companies that have just an outcome of management prac-
destruction of wealth since the Great gone from being “most admired” to tices that respect all constituencies.
Depression, the chances are pretty good “most reviled” almost overnight. Maybe this time CEOs will get it. If they
that stakeholder interests will remain at don’t, we’ll be traveling back to the fu-
the top of the list a bit longer this time. The Proof Is in the Companies ture once more, with yet more rounds of
Consider that there are literally scores If all that evidence isn’t compelling scandal and recession.
of recent studies showing the gains in enough, a dose of competitive analysis
profitability and productivity that com- might do the trick. Even in an era fo- Jeffrey Pfeffer (pfeffer_jeffrey@gsb.
panies have made – not by putting inves- cused on shareholder wealth, the out- stanford.edu) is the Thomas D. Dee II
tors’ interests first but by implementing performing companies have been those Professor of Organizational Behavior
high-commitment work practices. These that have gone against the grain and at Stanford University’s Graduate
include investing in training, decentral- embraced stakeholders. Look at South- School of Business in California. His
izing decision making, and having pay west Airlines, which had at one point a latest book, Power: An Organizational
be contingent on organizational, not just market capitalization equal to that of Survival Guide, is forthcoming from
individual, performance. Other sources the rest of the U.S. airline industry com- HarperCollins.
show the benefits companies reap from bined. From the very beginning it has
Reprint R0907K
customer loyalty and high levels of cus- put employees first, customers second,
To order, see page 158.
tomer satisfaction. and shareholders last. Even following
hbr.org | July–August 2009 | Harvard Business Review 91

THE NEW ECONOMICS in the NEW WORLD.
HBR READERS’ VIEW
How Bleak
Is the Landscape?
When do you think the U.S. will emerge Which global economy will emerge the
from the current downturn? strongest in recovery?
The 2011 or later Late 2009 China
37%
Economy
19% 10% U.S. 32%
A survey of more than
a thousand HBR readers
showed people and 21% Early India 12%
2010
businesses bracing
themselves for the
EU 12%
worst for at least
24%
another year.
Japan 2%
26% UK 1%
Late 2010 Mid-2010
0 5 10 15 20 25 30 35 40
What is your company doing as a Which of these opportunities, if any,
direct result of the current economy? is your company seizing as a result of
the economy?
The Using the economy
Organization
as an excuse to
restructure
23%
Creating new
Reducing spending products or services 35%
Asked to describe the
on R&D 23%
effects of the economy Improving current
Streamlining
on their companies and
product or service 27% products, services, 37%
their professional lives, offerings or customer support
readers painted a fairly Changing terms
grim picture, though with suppliers 29% Negotiating better
terms with suppliers 38%
they also reported
Reengineering
several opportunities processes 34% Encouraging
to improve how they employees to think 46%
Deferring start entrepreneurially
innovate and operate. dates of new hires 41% Targeting new
customer segments 47%
Laying off staff 43% or groups
Restructuring to
Limiting travel
expenses 64% create a more 47%
efficient organization
Our survey was conducted online March 26–April 10, 2009; 1,213 members of the HBR Advisory Council participated. The HBR Advisory Council is a research community of 8,200 HBR
readers. If you are interested in joining this group, you can register at hbr.satmetrix.com.
92 Harvard Business Review | July–August 2009 | hbr.org

Do Women Have
a Darker Outlook
Than Men?
Though a majority of the people surveyed took
a moderate view, women expressed less opti-
mism overall than men.
How will the U.S. economy emerge from
How does the recession factor into your business this downturn?
planning this calendar year?
It will be
The recession has not
been a factor in our
Revenues will
drop by less
stronger than
MEN
20%
the precrisis
planning. than 10%.
economy
WOMEN
12%
9% 17%
It will be 5%
the same
5%
It will be
moderately
42%
44% 30% weaker 43%
Revenues Revenues
will drop by will drop by It will be 20%
more than 15%. 10% to 15%. seriously
weakened 18%
It will never
be as strong
14%
What impact has the economy had on you personally? as it was 21%
MEN
Salary 18% Does this crisis present more problems
reduction WOMEN
26% or opportunities?
21% More
MEN
35%
Vacation deferral problems WOMEN
41%
24%
More 31%
Employment
or position
21% opportunities
22%
jeopardized 27%
Same
26%
Rethinking 26% 25%
personal time and
time with family 36%
Not sure yet
8%
12%
Required to limit
work-related travel
52%
expenditures 60% Reprint R0907J
To order, see page 158.

REGULATION in the
SPECIAL ISSUE
NEW WORLD
Government
in Your
Business
Regulation is back, but you won’t see a return to FDR-style controls. Instead,
expect a new set of tools designed to coax, not curb. | by Robert B. Reich
IF YOU FEEL AS IF GOVERNMENT OFFICIALS are breathing
down your neck, get used to it. For the foreseeable future,
governments are going to take an especially keen interest in
how you’re managing your business. Executives should look
for tighter scrutiny than we have seen for decades and new,
indirect forms of intervention. Managers in the private sector,
accustomed to ducking behind corporate- and government-
relations professionals, will need to develop a new mind-set
and skill set that will allow them to partner with government
rather than fend it off.
This is not the first era of government ascendancy. The
pendulum of public trust has swung back and forth between
business and government for more than a century. Confidence
in one drops, leading the other to take prominence – until
Brian Stauffer
prominence leads to excesses that erode confidence and push
the pendulum back. In the United States, business was ascen-
dant between the end of World War I and the start of the Great
94 Harvard Business Review | July–August 2009 | hbr.org

hbr.org | July–August 2009 | Harvard Business Review 95

REGULATION in the NEW WORLD.
Depression, which called into question the capacity ries of scandals that have eroded public confidence.
of the private sector. Government was ascendant Over the past decade, several U.S. corporations came
between the election of Franklin D. Roosevelt in to symbolize betrayals of public trust – Enron, Adel-
1932 and the late 1970s, by which time its excesses phia, Global Crossing, Tyco, HealthSouth, Sunbeam,
had become apparent. Regulation was stifling WorldCom, Waste Management, and ImClone, to
growth, federal spending had led to double-digit in- name a few. Every major U.S. accounting firm either
flation, and taxes were deterring admitted negligence or paid substantial fines with-
innovation. And so, beginning out admitting guilt. Nearly every major investment
with the presidency of Ronald bank played a part in defrauding investors, largely
IDEA Reagan, public sentiment moved by urging them to buy stocks that the banks’ own
IN BRIEF
against government, unleashing analysts privately described as junk.
» The massive failure of world the influence of business and According to a poll taken at the end of 2008 – the
economies that began in 2008 has finance. annual Edelman Trust Barometer – just 38% of
paved the way for government ac- Now the pendulum is swinging self-described informed adults in the United States
tion on a scale not seen since the sharply in the other direction. All trust businesses, a decline of 20 percentage points
Great Depression. Managers accus- told, industries and sectors repre- from the previous year and the lowest level of trust
tomed to dodging officials will now senting more than a third of the in a decade. In another survey, conducted online by
have to collaborate with them.
U.S. economy are being reshaped Public Strategies and Politico, 61% of respondents
» The changes afoot have been on by government. In Europe and said they believe federal regulation of business
the horizon for some time, thanks Japan, the percentage is likely to should be increased.
to long-term trends such as deep- be even higher, given a greater Greater ties between the interests of business
ening public distrust of business. tradition of and tolerance for and society. Business stands at the center of many
behaviors Americans might con- of our most pressing public policy challenges – the
» New regulations will be de- sider meddling. But we won’t see need to reduce carbon emissions, for instance, and
signed to promote, not impose,
the return of government as in- (at least in the United States) the urgency of health
desired behaviors. For instance,
truder; old-style regulation would care reform. The financial crisis has also brought to
watch for government to change
how Wall Street traders get paid,
stifle the level of innovation we a head issues related to the availability of credit, the
set up guaranteed loans for small sorely need to revive industry. Ex- adequacy and safety of private pensions, and access
businesses investing in alternative ecutives should instead expect a to affordable housing, all of which involve busi-
energies, and require employers to new type of working partnership, ness enterprise. Other emerging public concerns –
either insure workers or pay into a where governments will offer in- the development of renewable energies, access to
national pool. centives for desirable business be- broadband, infrastructure repair and upgrades, and
havior, and executives will work workplace education and training – necessarily in-
more directly with administra- fluence how companies operate and how they de-
tion agencies to tap into those incentives. The par- sign goods and services for their customers.
ticulars will vary by nation, but the United States Decreasing control across national borders.
is the world’s biggest economy and at least for now National regulatory systems have proven inade-
the most influential, so events in other countries quate to the task of overseeing global enterprises.
are likely to echo the actions of U.S. officials. It’s easy to circumvent tough banking regulations
at home when you can find more-lenient rules else-
The Economic Meltdown, and More where. It’s just as easy for corporations in higher-
Many of the current government initiatives were tax jurisdictions to park profits in lower-tax nations.
triggered by the worldwide economic meltdown Stringent health and safety regulations become
that commenced in 2008. When the economy re- irrelevant when companies can source from any-
covers, some will cease to exist; stimulus packages where around the globe. And so on.
and industry bailouts are temporary measures by
design. But in the United States as well as Europe Less Regulating, More Coaxing
and Japan, government oversight will not return to The heavy-handed, command-and-control regula-
what it was before the recession. Change has been tory systems that dominated U.S. corporations dur-
on the horizon for years; it will be the culmination ing the middle decades of the twentieth century
of several long-term trends. These include: were appropriate to an industrial structure popu-
Deepening distrust of business. The recent mal- lated by large oligopolies, each itself an organiza-
feasance in financial services is only the latest in a se- tion that commanded and controlled a large em-
96 Harvard Business Review | July–August 2009 | hbr.org

ployee base. Top-down management worked well
when production was relatively stable and predict-
able, and companies didn’t rely on ongoing inno-
vation to survive. But today, regulations that seek
to dictate behavior run the risk of either blocking
innovation or shifting it into the shadows.
Current systems in other parts of the world
won’t set the course, either. Europe and Japan have
something of a tradition of negotiation between
business and government over regulations, but the
process is often opaque. In developing economies,
where government and business are even more in-
tertwined, regulations are sometimes inconsistent,
depending on which companies are favored.
Over time, economies worldwide will settle on
versions of the system that’s beginning to emerge
in the United States, relying less on regulations
that limit or replace free-market transactions and
more on incentives that push markets to address
public needs. That is, government will be less in- Governments will also give companies more
terested in barring corporate actions that might choices for how to achieve desired outcomes.
possibly harm the public and more inclined to re- Rather than mandate that businesses provide spe-
ward actions that will almost certainly help. Call cific employee benefits in particular ways – health
it coaxing rather than regulating. It will involve a care and pensions, for example – they will allow
close working relationship between government businesses over a certain size to pay a minimum
and business, but one sufficiently consistent and amount per employee into a common fund acces-
transparent to maintain public trust while address- sible to people who do not receive such benefits.
ing the challenges at hand. We can also anticipate that governments will take
How to revive the auto industry, for instance, a more active role in coordinating public and pri-
while giving small businesses a shot in the arm and vate interests through rules on how businesses and
helping students get a college education? The U.S. individuals are compensated. For example, credit
Federal Reserve is providing subsidized loans to rating agencies have long been paid by the issuers
investors who acquire new securities backed by auto of the very securities they rate rather than by those
loans, student loans, and small-business loans. How who use the ratings. Wall Street traders have been
to get renewable-energy projects off the ground paid according to the size of the bets they place
while encouraging innovation? The U.S. Depart- rather than the long-term outcomes of those bets.
ment of Energy is guaranteeing loans to small busi- Expect governments to mandate changes to such
nesses that want to implement alternative-energy payment systems – not just in the United States but
projects but would otherwise have trouble financ- in major financial centers around the world. By bet- Regulations that
ing them; their lenders will be repaid even if the ter aligning the incentives of executives and traders dictate behavior
projects go belly-up, as some inevitably will. with the needs and goals of investors, we’ll avoid
Governments will make use of taxes and tax rigid regulations that tie the hands of executives
run the risk of
credits to promote wanted behavior, such as in- with regard to all sorts of more specific decisions. blocking innovation
vesting in renewable energy or hiring veterans, and Finally, governments will move to harmonize or shifting it into
to discourage unwanted behavior, like emitting ex- their coaxing mechanisms across borders. The global the shadows.
cess carbon. Through a cap-and-trade system, gov- meltdown has starkly illustrated the interconnect-
ernments are starting to allow would-be polluters edness of global capital and unleashed demands for
to bid for rights to emit carbon dioxide up to a more uniform and rigorous international standards
certain level, and then permit them to trade such for financial reporting and auditing, and for cor-
rights with one another. Rights to pollute thereby porate taxes. The additional necessities of address-
become a form of property available to firms that ing climate change and ensuring the safety of food,
need it most, and every company has an incentive drugs, and other products moving in international
to devise ways to avoid carbon pollution. commerce will spur further efforts toward uniform
hbr.org | July–August 2009 | Harvard Business Review 97

REGULATION in the NEW WORLD.
rules. The United States, Europe, Japan, and China been to keep regulators at bay, gain favorable treat-
are likely to lead the way with agreements and trea- ment relative to competitors, or attract government
ties, backed by systems for getting accurate informa- contracts. So the typical CEO has been encircled by
tion from businesses operating worldwide. people whose primary goal is to insulate the busi-
ness from government intrusion. Precise labels vary
Managing in a New World from company to company, but people with the
No one should anticipate a return to the industrial word “relations” or “affairs” in their job title have
statesman of the 1950s and 1960s, the CEO whose understood implicitly that their real job is to ward
job was to “maintain an equitable and workable off costly interventions and keep executives from
balance among the claims of…stockholders, em- being impeded by outside demands.
ployees, customers, and the public at large,” in the But today, the imperative is engage, not shield.
words of Frank Abrams, former chair of Standard Managers must understand government concerns,
Oil, in his 1951 HBR article, “Management’s Respon- and leaders in major companies should expect to
sibilities in a Complex World.” Maximizing share- help resolve them. For example, it is no longer sen-
holder returns will continue to be the primary re- sible for executives in the health care industry to
sponsibility of managers, but to achieve that goal, dedicate vast amounts of time, money, and energy
they will work with government more directly than to blocking government efforts at reform. It’s far
we have witnessed at any time since World War II. more productive to help make the system more effi-
Lately, most managers have regarded govern- cient and affordable – which will greatly benefit not
ment officials as intruders who lie outside the pe- only millions of families but also most businesses.
rimeters of their businesses. To the extent that CEOs Managers will also need to devote more atten-
have thought about government at all, it’s mostly tion to public concerns about business practices
An Era of Government Activism
Government’s role in business is still INSURANCE With its controversial ments are also modernizing systems for
emerging, but it’s clear that companies bailout of ailing insurance giant AIG, the transmitting electricity.
worldwide can no longer operate inde- U.S. government has become a major HEALTH CARE This sector has long
pendent of regulatory concerns. Consider investor and participant in insurance been nationalized in various countries
the following industries: markets. In addition, it is planning to and highly regulated in the United
FINANCIAL SERVICES Govern- subsidize lower-income individuals and States. The U.S. is developing a plan that
ments in the United States, Europe, and families to help them afford private will require all companies over a certain
Japan have become major lenders and health insurance and will be offering its size to either insure their employees
equity holders in banks. In some cases, own health insurance plan. or pay into a national health care pool
they have taken ownership stakes. New AUTOMOBILES The United States, from which individuals and families will
regulations will reshape lending and Canada, Germany, Sweden, and Japan draw. Uninsured people will probably be
bank investing to better align financial are providing their automakers with tens required to obtain coverage, with extra
institutions’ interests with the public’s. of billions of dollars in loans and equity subsidies over and above the health
Look for higher minimum capital require- infusions. The U.S. is also supplying care pool available to those with lower
ments, more disclosures of risk, and funds for the development of fuel- incomes.
sharper restrictions on off-balance-sheet efficient cars. Watch out for beggar-thy- PHARMACEUTICALS U.S.
derivatives. neighbor policies that favor domestic legislation is being written to allow the
HOUSING The U.S. government is automakers over foreign ones. government to use its leverage as the
now underwriting, guaranteeing, or tak- ENERGY The United States, Europe, largest purchaser of pharmaceuticals to
ing over a large percentage of outstand- and Japan are subsidizing the develop- negotiate lower prices.
ing mortgage loans. It is also providing ment of non-carbon-based energies. The TELECOM AND IT The U.S. govern-
incentives for mortgage lenders and U.S. has committed $40 billion over 2009 ment is subsidizing greater broadband
borrowers to refinance their loans at and 2010. The Obama administration has coverage, especially for rural areas.
subsidized rates. Expect more oversight pledged to double within three years Government will also influence intellec-
of lenders, especially when long-term the country’s capacity to generate wind, tual property, privacy, and intelligence
interest rates fall below a certain level. solar, and geothermal power. Govern- gathering in the industry.
98 Harvard Business Review | July–August 2009 | hbr.org

and try to advance solutions even before those con- When it comes to international coaxing arrange-
cerns crystallize into political action. For example, ments, governments will be tempted to give prefer-
it’s less important now for energy firms to convince ential treatment to homegrown firms, even though
the public that they are model citizens – born- that could lead to beggar-thy-neighbor strategies
again as “green” companies – than it is for them that harm the global economy. Tax credits or loan
to help citizens reduce reliance on expensive and guarantees that favor businesses headquartered
environmentally hazardous fossil fuels. Working in in the country that dispenses them invite recrimi-
tandem with government, energy companies will nation by other nations. Moreover, the long-term
become energy-conserving companies. interests of governments and businesses lie in gain-
Managers will be called on to ensure that the ing and keeping the trust of global consumers and
business is responding appropriately to government investors. Societies will pay a price when unsafe
coaxing – that is, making the most of federal loans, food and drugs make their way into international
subsidies, tax breaks, liability protections, “play or commerce or when businesses and governments
pay” requirements, new property rights, and other play fast and loose with tax rules.
mechanisms. Managerial responsibilities will entail There is no simple way to guard against these Managers will work
working with government auditors, investigators, risks; it will take continued vigilance on the part with government
and lawyers to track taxpayer money and assess the of public policy makers, businesses, and the media.
consequences of tax incentives; developing internal One important check against business and govern-
more directly than
controls to ensure that government resources are ment becoming too cozy is transparency. To the we have witnessed
applied correctly; and training company personnel extent feasible, the business beneficiaries of coax- at any time since
to maximize the value of government incentives. ing mechanisms, along with whatever changes in World War II.
To lead effectively in this new era, managers must behavior the mechanisms are intended to induce,
pay particular attention to three issues they’ve pre- should be made public – perhaps even posted on
viously been content to delegate: public finance, the internet by government accountability offices –
the relationships between coaxing mechanisms so that parties can be held broadly accountable.
and business strategy, and how to collaborate with, Governments, in partnership with the World Trade
rather than duck, government officials. Organization, must also work hard to ensure that
countries don’t use coaxing mechanisms to impede
Dangers and Possibilities the flows of international trade and capital.
There are risks here, both for governments and The new business-government relationship also
for businesses. To begin with, as governments shift offers a rare opportunity. Current events are set-
away from regulating and toward coaxing, big busi- ting precedents and high expectations for what
nesses may capture the lion’s share of the subsi- government can and should do for at least the next
dized loans, loan guarantees, tax breaks, new prop- generation. We may witness the start of a new form
erty rights, and other incentives. These firms are of capitalism that meets public needs without con-
large enough to discover and obtain governments’ straining innovation or growth in the private sector.
largesse and to hire specialists to assure officials Events may also bring to bear the best insights of
that the money is not being wasted. the private sector on solving heretofore intractable
A second, related risk is that these twin roles – public problems. These developments could allow
government as the coaxer, business as the coaxed – us all to break out of the tired ideological debate
may invite subtle forms of corruption. Too many about whether we want more or less government
government incentives might line the pockets of and focus instead on what we need business and
intermediaries who advise both government and government to achieve together.
business or who move through a revolving door
between the two realms. Or government largesse Robert B. Reich is a professor of public policy at
might be distributed in ways that do not serve the University of California at Berkeley. He has
public interests, and without adequate public ac- served in three U.S. administrations, most recently
countability – as arguably happened with the first as Bill Clinton’s secretary of labor, and was an
tranche of money provided by the U.S. government economic adviser to President-elect Barack Obama.
under the Troubled Asset Relief Program. In that Time magazine has named him one of the 10 most
case, the criteria for funds were unclear. Citigroup successful cabinet members of the past century.
and insurer AIG got fabulous sums that dwarfed
Reprint R0907L To order, see page 158.
other deals and enraged taxpayers.
hbr.org | July–August 2009 | Harvard Business Review 99

RISK in the
SPECIAL ISSUE
NEW WORLD
The
Moral
Hazard
Economy
Appetites for risk should naturally
abate after the catastrophic losses
we’ve just seen. Will too-rich bailouts
prevent that from happening?
| by Peter L. Bernstein
THE OBAMA ADMINISTRATION and the Federal Reserve au-
thorities – along with their counterparts around the world –
are doing their utmost to thaw the terrible credit freeze that
took hold in the fall of 2008. What could be guaranteed has
been guaranteed. What trash the central banks could absorb
has been absorbed. And the U.S. government has poured bil-
lions of taxpayer dollars of new capital into the country’s larg-
est financial institutions. Other key industries are taking their
place in the queue as well.
That governments have had to take these steps is a sorry
commentary on how badly the housing and derivatives
bubbles deformed the economy and the global financial sys-
tem. Although interventions in the private sector have in
all likelihood prevented an immediate meltdown, they have
hbr.org | July–August 2009 | Harvard Business Review 101

RISK in the NEW WORLD.
profoundly transformed the economic landscape. uge of paper, and on what terms? In recent years
How disastrous the consequences will be depends the United States has depended almost exclusively
on whether our appetite for risk has been increased on foreign purchases of new Treasury debt. Liquid
by the bailouts or reduced by the meltdown. dollar assets like Treasuries continue to be popular
with foreign investors at this turbulent moment,
A Trillion Here, a Trillion There… but no one can guarantee that their appeal will per-
The first and most obvious effect of the govern- sist. Unless demand for Treasuries remains strong,
ment bailouts will be a dramatic rise in the size and yields will most likely rise and remain high as busi-
cost of government borrowing. The U.S. Treasury ness activity begins to return to more normal levels,
is on the hook to disburse at least a trillion dollars sharply increasing the cost of government borrow-
and probably more, just when the recession itself is ing. And, of course, the huge government need for
taking a heavy toll on federal revenues. We are told financing will make it expensive for businesses to
that some of the money laid out by the taxpayers borrow as consumer appetite recovers, which will
will be returned to them at a profit – and that may have serious inflationary consequences.
indeed occur in the future. But that promise won’t
pay the bills in the present. To make matters worse, From Central Bank to Bad Bank
A less obvious but just as important effect of the
government bailouts is the transformation of the
Federal Reserve System. I used to regard myself as
something of an expert in finance. I wrote a book
about it back in the 1960s, A Primer on Money, Bank-
ing, and Gold. But when I look at the Fed’s balance
sheet today, I have to admit that I find much of it
unrecognizable as a central bank’s accounts.
For a start, the Fed has been taking on whole new
classes of assets by acquiring (or lending against the
“security” of) remnants of badly injured companies.
A trillion dollars’ worth of Treasury securities has
been replaced by such loans to the private sector,
to say nothing of the creation of an exceedingly
intricate set of guarantees. About $500 billion has
been loaned to foreign central banks, and nearly
$1 trillion has been advanced to domestic banks
When I look at the Fed’s balance and securities dealers.
In effect, the United States’ central bank has
sheet today, I have to admit that been turned into some version of the “bad bank”
that many commentators have been touting as a
I find much of it unrecognizable as solution to the banking crisis. The Fed of 2009 is
a central bank’s accounts. very different from the Fed of just a year ago, and
it’s hard to imagine that it will ever again function
as it used to. In which case, will we be able to count
on it to carry out the demands of monetary policy
the extra spending is taking place just as retiring and financial regulation?
baby boomers are stepping up for their share of
Treasury largesse. Where is all the money going to More Moral Hazard, Please
come from? Bad as the increased debt and the subversion of the
Nobody expects the government to raise taxes, Fed may be, their impact on our economic well-
which means it must borrow the money by sell- being pales in comparison with what could hap-
ing Treasury paper. Less borrowing by the private pen if the bailouts lessen our aversion to risk. In
sector for the duration of the recession will make the past when governments took steps to cushion
Eva Tatcheva
it possible for the market to absorb some of that the adverse consequences of bubbles for particular
new debt, but the amount of money needed far companies or sectors of the economy, a hue and
exceeds that contribution. So who will buy this del- cry about moral hazard arose from the more con-
102 Harvard Business Review | July–August 2009 | hbr.org

servative members of the financial and economics same time, because the act of measurement
communities. changes the character of the motion. The more
Overprotectiveness on the part of government we emphasize the low risks in the environment,
officials, conservatives argued, only encouraged the more we point out and explain its features,
even more reckless risk taking. In response, public and the more we believe we understand what
officials claimed that the risk of such moral hazard is going on – unique as this environment may
was less than the risk to the economy from gov- be – the weaker our normal and rational inclina-
ernment inaction – precisely the argument made tion to risk aversion becomes and the more our
in the current crisis. On balance, I side with the actions alter the character of the environment.
government on this. If a price has to be paid for the The economist Hyman Minsky has reminded
survival of the system, so be it. us, “Each state nurtures forces that lead to
That said, I am disturbed by the almost com- its own destruction.” All of history testifies to
plete absence of a dissenting conservative view, at the truth of this observation. Greater liquidity
least since the collapse of Lehman Brothers. It’s leads firms to borrow more than before. But
worrying because the moral hazard imposed on higher levels of debt mean increasing vulnerabil-
the system in recent months is truly mind-boggling ity to adversity and negative shocks in an ever-
in scale and scope. Across the globe the banks and changing world. For these reasons, as Minsky
insurers whose errors of judgment created the put it, stability leads inevitably to instability.
bubbles have been bailed out without hesitation, Now let me offer an alternative version with the
at minimal cost to them but at significant potential emphasis and predictions in reverse: We are mov-
costs to taxpayers. ing through an environment perceived as high risk,
If the absence of dissent means that we have especially in the credit area, where banks are loath
become more tolerant of moral hazard, the conse- to lend money and where yield spreads between
quences could be catastrophic. Look into the future Treasury bonds and corporate bonds are huge. But
and imagine the next bubble – for there will be one the more we emphasize the high risks in the en-
someday. As it expands, will CEOs in finance bother vironment, the stronger our normal and rational
to calculate risk versus return in making decisions inclination to risk aversion becomes and the more
if they know that they are certain to be bailed out? our actions alter the character of the environment
The precedent set by the magnitude and frequency to reduce risk. At the same time, less liquidity leads
of the bailouts in 2008 and 2009 could well render firms to borrow less than before, reducing their
obsolete any restraint the next time around. vulnerability to adversity and negative shocks in a
volatile world. For these reasons, instability leads
Can We Avoid the Worst? inevitably to stability.
So, are we doomed to an economic future of high Will this inverse Minsky dynamic be enough
inflation, an uncontrollable financial system, and to counteract the effects of the bailout on our fi-
risk-happy corporate managers? Not necessarily. nances, institutions, and managerial incentives? If
To see why, let me take the liberty of quoting my- pressed, I would argue that this dynamic will win
self from “Can We Measure Risk with a Number?” out, in much the way the trauma of the Great De-
(Economics & Portfolio Strategy, June 15, 2007). pression in the 1930s set corporate behavior and
economic policy in a risk-averse mold that lasted
Can we sustain the low-risk character of the nearly three decades. On the other hand, much
environment when it leads many investors to about this current crisis is unprecedented, which
take high risks and to overvalue risky assets in means that history is less relevant than it has been,
search of higher returns? The great 19th-century well, historically.
philosopher Georg Wilhelm Friedrich Hegel We had best leave it at that.
taught us that quantitative changes ultimately
become qualitative changes. The more risk we Peter L. Bernstein is the president of Peter L.
take because we believe the environment is Bernstein, Inc., an economic services consultancy.
low-risk in character, the less the environment He is the author of 10 books on economics and
continues to be low-risk in character. finance, including Against the Gods: The Remark-
Similarly, the quantum physicist Werner able Story of Risk (John Wiley & Sons, 1996).
Heisenberg pointed out that you cannot measure
Reprint R0907M To order, see page 158.
something and observe its movements at the
hbr.org | July–August 2009 | Harvard Business Review 103

RISK in the NEW WORLD.
Security
Alert
When the economy’s down – and budgets
are stressed – the threat level rises.
| by George K. Campbell and Richard A. Lefler
SINCE THE RECESSION SET IN, THE INSIDER THREAT
many shifts have occurred in the enterprise As businesses resort to layoffs and
risk environment; some threats are rising, other cost-cutting measures, em-
ployee discontent rises, and the
while others are falling. Security budgets are
so-called insider threat level grows.
being cut deeply and pervasively – though not
Insider threats have historically ac-
always in ways responsive to these fluctua- counted for the majority of economic
tions. Security directors must do more with losses incurred by business. Insiders
less while helping their businesses clearly do damage primarily through theft,
understand the shifting threats and ensuring fraud, and the violation of intellec-
tual property protection policies.
that the most urgent priorities are addressed.
SOLUTION Embrace transparency, quell rumors, and com-
For that reason alone, adopting an enterprise
municate candidly to reduce levels of discontent. Engage
risk perspective as a recession coping strat- with employees; be alert to threat cues.
egy is itself an urgent priority.
The goal of enterprise risk management INFORMATION AT RISK
is to track, quantify, and analyze The ease with which employees can steal information by
downloading it onto USB flash drives puts confiden-
these shifting thresholds of risk
tial business assets at risk. When layoffs loom (or
throughout an organization. Secu-
rumors of layoffs circulate), data siphoning rises.
rity is then responsible for mitigat- SOLUTION Recommunicate policies that pro-
ing threats to employees and other hibit the misappropriation of corporate data. Some
stakeholders, facilities, and assets IT departments make it impossible to attach stor-
Eva Tatcheva
both tangible and intangible – including age devices to computers without their assistance
and either filter outgoing e-mail for large attachments or
the value of reputation and brand.
prohibit attachments outright.
104 Harvard Business Review | July–August 2009 | hbr.org

Security budget cuts for COST-SAVING OPPORTUNITIES
fiscal year 2008–2009 are Some security responsibilities scale up or
only slightly greater than down with the economy. Here are a few ways
for the previous year… to do more with less:
16.8%
15.4% $$$ Cut back on protective services, since
overseas travel is down and fewer “employees
…but the percentage of
at risk” are abroad. (But multinationals should
firms cutting is larger…
note that some countries may become more
52.5%
dangerous as economic conditions increase
19%
the chances of civil unrest.)
…and many are reporting
increases in: $$$ Conduct fewer preemployment back-
HR INTERVENTIONS ground screenings. With hiring slowed or fro-
45% zen, fewer are needed. However, downturns
PROPERTY THEFT produce more cases of embellished credentials
44% or concealed substance abuse and financial
FRAUD problems. If your recession strategy includes
43% more work with contractors and outsourcers,
you should demand background reports on
VIOLENCE
those who will service your account.
27%
IP THEFT
$$$ Automate certain tasks. For example, se-
19%
curity guards at entrances can be replaced by
BOMB THREATS electronic access technology. Capital invest-
7% ment in such projects provides tax advantages
SOURCE: SECURITY EXECUTIVE COUNCIL
and reduces long-term operating costs – and
vendors are motivated to price technology and
services to sell.
$$$ Find internal clients who are willing to
fund programs that security will then manage
for them.
ERRATIC BEHAVIOR
Businesses should be alert to indicators
of disturbance, from signs of depres- THE WEAKEST-LINK EFFECT
sion or agitation to displays of anger As the economy declines, small businesses,
and aggressiveness or even full-blown too, are under pressure to cut costs. The
workplace violence (more than 27% of Fortune 500 need to worry about a falling
respondents report increased rates of violence). standard of security among the “Fortune
SOLUTION Focus on behaviors that have been identified as 50,000” – which include your suppliers,
predictive of an escalation to violence, and intervene early. customers, or outsourcing providers.
Business ecosystems share vulnerabili-
PRODUCT PROTECTION ties virally, so your supply chain’s weakest
As consumers continue to covet products they can’t afford, links will affect you.
the market will find ways to satisfy demand. Manufacturers of SOLUTION Investigate the resilience of security
consumer goods will probably see a rise beyond your own walls.
in product diversion and counterfeiting;
retailers will face a surge in organized George K. Campbell, formerly director of corporate security
professional shoplifting. for Fidelity Investments, and Richard A. Lefler, who headed
SOLUTION Keep an eye on auction sites worldwide security at American Express, are faculty members
for a spike in “bargain” goods that may be counterfeit or of the Security Executive Council, an organization that fosters
stolen. Don’t economize on loss-prevention programs. security practice as a strategic activity. Reprint R0907N
hbr.org | July–August 2009 | Harvard Business Review 105

CUSTOMERS in the
SPECIAL ISSUE
NEW WORLD
Understanding
the Post-
Recession
Consumer A new thriftiness and desire for simplicity will
combine with pent-up demand to shape buying
behavior. | by Paul Flatters and Michael Willmott
IN MOST DEVELOPED ECONOMIES, prerecession consumer be-
havior was the product of more than 15 years of uninterrupted
prosperity. Despite the occasional slowdown, growth was an
almost permanent feature, accompanied by low and stable lev-
els of price inflation. Consumers felt the effects directly, as as-
set values and incomes grew more rapidly than inflation. From
1995 to 2005, real disposable incomes increased by a third
in the United States and the UK. Sweden and Denmark saw
them rise by a quarter, and even in economies like Japan and
Germany, which grew more slowly, they climbed about 10%.
Fredrik Broden
That economic landscape had a profound impact on consum-
ers. New appetites emerged, and markets sprang up to serve
them. Consumers could afford to be curious about gadgets and
technology, shell out for enriching (or just fun) experiences,
106 Harvard Business Review | July–August 2009 | hbr.org

hbr.org | July–August 2009 | Harvard Business Review 107

CUSTOMERS in the NEW WORLD.
and indulge themselves with premium products. of the 1930s and Japan’s lost hbr.org
They could afford to pay extra for socially con- decade. Such downturns Video, audio, and
interactive features
scious consumption – while winking at purchases shape the mind-set of whole
on Managing in
that might not be squeaky clean but that they felt cohorts of consumers and the New World at
they deserved. have a long-term impact landscape.hbr.org
The recession hasn’t so much put an end to this on buying behavior. Many
party as sobered it up, propelling people who lived through the Depression have
some consumer trends forward pinched pennies for the rest of their lives. Deep
while slowing, halting, or even recessions can also transform the regulatory land-
IDEA reversing others in ways that will scape, affecting both companies and consumption
IN BRIEF
affect their trajectory in and af- (consider, for example, the Glass-Steagall Act of
» It’s possible to predict how con- ter the recovery. Of the dozens 1933 – repealed just a decade ago – which sepa-
sumers will behave postrecession of trends we follow, we’ve iden- rated retail from investment banking in an effort
by understanding how they’ve tified eight that we believe will to control speculation).
behaved in previous recessions; be substantially affected by this The current recession may have features of both
how this compares; and how their recession. types of downturns. Most observers, including the
past experience will affect their IMF, the World Bank, the Organisation for Eco-
response this time.
The Consumer’s Journey nomic Co-operation and Development, and nearly
» Four key trends are being accel- How will consumers behave as all private forecasting agencies, agree that it will
erated by this recession: consumer we emerge from this downturn? not be as deep as the Great Depression and won’t
demand for simplicity, a call for Though recessions differ in their persist for as long as the lost decade. However, it’s
ethical business governance, a de- causes, depth, and duration, and likely to be the most severe slowdown since the
sire to economize, and a tendency whom they affect most, it’s pos- Depression and will affect most markets and con-
to flit from one offering to another. sible to anticipate consumer be- sumers in all economic strata.
havior by understanding three Let’s now look in more detail at the eight impor-
» Four other important trends things: how previous downturns tant trends for business. We categorize them on the
are slowing: green consumption,
a decline in respect for author-
have altered consumer psychol- basis of their maturity and whether they are likely
ity, ethical consumption, and ogy and activity; how this reces- to be accelerated or slowed by the recession.
extreme-experience seeking. sion compares with previous
ones; and the journey consumers
» In the postrecession recov- Dominant Trends
have taken to the present, which
ery, some trends (such as green will condition their reaction to A DEMAND FOR SIMPLICITY. Downturns are
consumption) will resume their
the recession and shape their tra- stressful and typically increase people’s desire for
prerecession course while others
jectory out of it. (For more detail, simplicity. Even prior to this recession, many con-
(such as experience seeking) will
see “Our Methodology.”) We have sumers were feeling overwhelmed by the profusion
be altered for the long term.
used this approach, based on our of choices and 24/7 connectivity and were starting
two decades of consumer trend to simplify. The U.S. publisher Time Inc. recognized
forecasting and analysis, to advise this trend early and capitalized on it by launching
global companies across sectors on the recession’s its highly successful back-to-basics magazine Real
likely impacts on long-term consumer behavior. Simple in 2000. Apple likewise was responding to
Recessions fall into two broad groups. Most are the trend when it launched the elegant and spare
relatively brief and shallow and provoke short- iPod in 2001.
term changes in consumer behavior depending on The recession is accelerating this maturing
the causes of the recession and who its principal trend. Consider the rise of edited retailing (con-
victims are. A recent International Monetary Fund sumers are offered limited collections of coordi-
analysis of 122 recessions in 21 developed coun- nated product choices), a growing demand for
tries since 1960 found that the typical recession trusted brands and value, an increasing desire for
lasted about a year and resulted in a dip in GDP of advisers – ranging from social networks to product
roughly 2%. Usually, consumption trends rebound ranking web sites – that can simplify choicemak-
fairly quickly when the recession ends, though at ing, and enthusiasm for less complicated, more
different rates in different sectors. user-friendly technologies.
In rare cases, downturns are catastrophically This trend will continue to accelerate through
deep and enduring, as were the Great Depression the recovery into the long term. Unlike consum-
108 Harvard Business Review | July–August 2009 | hbr.org

Trends and Trajectories
Mature
THE RECESSION is
Slowed Trends Dominant Trends
exerting a broad influ-
DECLINE ence on consumer trends
OF
DEFERENCE DEMAND and attitudes, propelling
FOR
SIMPLICITY some trends forward while
FOCUS slowing, halting, and even
ON THE
GREEN BOARDROOM
reversing others. Here we
CONSUMERISM
see a snapshot of the cur-
Slowed Accelerated rent impact of the reces-
sion on trends, relative to
ETHICAL one another.
CONSUMERISM MERCURIAL
CONSUMPTION
EXTREME- DISCRETIONARY
EXPERIENCE THRIFT
SEEKING
Arre ed ends
Arrested Trends New Advancing Trends
ers in previous recessions, who greeted the return fects: Government intervention will intensify, and
of financial stability with a buying spree, current the consumer backlash against companies with un-
consumers entered the recession feeling bloated. ethical or ineffective governance will worsen. The
When they regain their ability to spend, they’ll growing interest in the boardroom builds on an
continue to buy simpler offerings with the great- older instinct, the public’s well-established reflex to
est value. punish companies for unethical labor or customer
practices is potent (as Nike and Nestlé learned the
A FOCUS ON THE BOARDROOM. The financial hard way).
crisis has put a spotlight on corporate governance, This trend should accelerate through the re-
in particular the malfeasance of some executives cession but will most likely lose velocity over the
and the complicity of their companies’ boards. Mis- long term. In recessions people seek to punish the
behavior that boards might get away with in good perceived sources of their dire circumstances; in
times arouses the ire of consumers and regulators good times disciplining bad business has a lower
when the economy goes south, as the lynch-mob priority.
response to executive bonuses at AIG suggests. Ex-
cessive executive pay has long irritated the public,
but the recession has prompted ordinary Amer- Advancing Trends
icans to flood Capitol Hill with phone calls and DISCRETIONARY THRIFT. Some consumers have
e-mails and even to make death threats to some no choice but to be thrifty. Increasingly, though,
high-profile executives. many affluent consumers are economizing as well,
Like the simplicity trend, the focus on the board- even though they don’t always have to. This is a
room has been building for years, spurred by noto- relatively new trend, having emerged in the final
rious governance failures at companies like Enron three years or so of the prerecession boom. Our
and WorldCom early in the decade. The huge, tax- research among more affluent consumers has re-
payer-funded bailouts of badly managed businesses vealed mounting dissatisfaction with excessive con-
will accelerate this trend, with two important ef- sumption. Many desire a more wholesome and less
hbr.org | July–August 2009 | Harvard Business Review 109

CUSTOMERS in the NEW WORLD.
wasteful life. They’re recycling more, buying used MERCURIAL CONSUMPTION. In the prereces-
goods, and imbuing their children with traditional sion boom, consumers became agile – and fickle –
values – behaviors that dovetail with the growing shoppers. They could instantly find a profusion of
demand for simplicity and a solid, though currently brands or products to meet their needs but would
slowing, interest in green consumerism. just as quickly abandon any choices that somehow
Initially, many of these newly frugal consumers fell short. They have brought this increasingly er-
were reluctant to admit their attraction to thrifti- ratic loyalty into the recession, as Starbucks discov-
ness, concerned that others might see them as dull ered when regular customers, fatigued by $4 coffees,
and austere. But the recession has made discretion- began defecting to cheaper, good-enough competi-
ary thrift acceptable – even fashionable. Just as vic- tors like Dunkin’ Donuts. The instantaneous spread
tory gardens became trendy among the well-off of word-of-mouth through online social media has
during World War II, growing vegetables at home only accelerated the trend.
now seems to be catching on among the affluent. Technology- and social-network-enabled shop-
To take another example, the once moribund UK ping strategies will allow this trend to pick up
firm Eurocamp, which offers an upscale back-to- steam well into the recovery and beyond. Exactly
nature experience, is expanding as an economical what consumers buy may change, but their facility
alternative to high-end vacations. in navigating the options will prove durable – as
Recoveries typically unleash pent-up demand, will their readiness to shift allegiances.
and we expect that people will celebrate this one
by buying a few indulgences and replacing their
aging durables. But, as President Barack Obama Slowed Trends
observed on his way to the G-20 summit in March GREEN CONSUMERISM. Environmentalism is
2009, even the famously gluttonous United States by now deeply rooted in the consumer mind-set
is unlikely to reemerge as a “voracious consumer and public-policy arena, although consumers and
market.” Many postrecession purchases, we sus- politicians express widely varying degrees of en-
pect, will be less extravagant versions of the origi- gagement. Consumers have increasingly embraced
nals. The discretionary thrift trend should regain green products and services over the past decade;
momentum over the long term as consumers they will often pay a premium for the chance to do
continue to find personal and practical satisfac- good and, in many cases, be seen doing good. Green
tion in it. offerings may struggle in recessions as consumers
How Trends Will Drive Consumption
Influence of trends on consumer decisions before, during, and after the recession
DURING POST
RECESSION RECESSION
LONG
TERM
BEFORE
DEMAND FOR SIMPLICITY FOCUS ON THE BOARDROOM DISCRETIONARY THRIFT MERCURIAL CONSUMPTION
Consumers are seeking Outraged by corporate mal- Even those who don’t need Easy access to information
uncomplicated, user-friendly feasance, people are punish- to economize are pursuing and friction-free purchasing is
products and services that ing companies for unethical a more wholesome and less making consumers ever more
simplify their lives. governance. wasteful life. agile – and less loyal.
110 Harvard Business Review | July–August 2009 | hbr.org

bypass expensive ecoproducts or trade down to traditional sources of authority such as business-
cheaper alternatives: Toyota Priuses, once hard to people, economists, doctors, and the clergy.
get, are gathering dust on lots. Shallow recessions typically accelerate this trend
Our research suggests that green consumerism as consumers blame institutions for their woes. In
has slowed in this recession, though it hasn’t stalled. deep downturns, such as the Great Depression, the
Consumers may be cutting back on pricey displays reverse effect can occur: Though people understand
of their green credentials (known as “badging”), that business and government – through greed and
such as buying premium green products and hy- lax oversight – got them into dire straits, they also
brid cars, but they’re ramping up cheap and dis- grasp that only these institutions can get them out,
creet methods of reducing waste – switching off and they begin to look to them for rescue and guid-
lights, recycling more, and buying less. This form of ance. The U.S. government’s New Deal in the 1930s
green consumerism is reinforced by the burgeon- created regulatory bodies such as the FDIC and the
ing demand for simplicity, the growing appeal of SEC, and its Works Progress Administration put
discretionary thrift, and ever-more-potent social millions of people back to work, helping to restore
norms against extravagant consumption. public faith in authority.
We expect green consumerism to recover and In this recession, we anticipate a similar short-
accelerate postrecession in both its forms – waste- term recovery of trust in authority as governments
reduction and badging – as consumers regain con- intercede to regulate business, stabilize markets,
fidence and the disposable income to fully express create jobs, and save homes. Over the long term,
their growing concern about climate change and the decline of deference will resume its trajectory
the environment. as consumers become ever savvier information
gatherers and decision makers, and the traditional
THE DECLINE OF DEFERENCE. Public respect sources of guidance inevitably fail to meet their
for institutions and authority – particularly govern- expectations.
ment and business – has been declining for decades,
fed by consumers’ growing confidence in their own
ability to find information and tap family and social Arrested Trends
networks in order to make smart choices. The de- ETHICAL CONSUMERISM. Fair-trade products,
cline of deference is also driven by mounting skepti- locally sourced produce, and eggs laid by cage-free
cism about the quality of information provided by hens are often expensive compared with traditional
GREEN CONSUMERISM DECLINE OF DEFERENCE ETHICAL CONSUMERISM EXTREME-EXPERIENCE
Consumers are forgoing pricey Respect for institutions and Altruistic consumption and SEEKING
green products and instead authority, long in decline, spending, such as eating cage- Expensive, frivolous, or risky
are cheaply and discreetly will temporarily level off as free eggs and giving to charity, recreational experiences,
reducing waste. people look to them to fix the are falling as people focus on popular during the boom
economy. their own dire situations. preceding the recession,
have fallen out of favor.
hbr.org | July–August 2009 | Harvard Business Review 111

CUSTOMERS in the NEW WORLD.
alternatives. What’s more, ethical consumption, al- EXTREME-EXPERIENCE SEEKING. The desire
though it intersects with green consumption, is to accumulate experiences in addition to mate-
less embedded in the consumer culture and less rial possessions, especially leisure and extreme
convincingly linked with self-interest. Like most experiences, gained footing before this reces-
altruistic spending, ethical consumerism will take a sion. Some experiences – those that are relatively
backseat in this recession. Witness the double-digit cheap and connect people to nature and whole-
declines over the past year in charitable donations some thrift – will continue to flourish. However,
to organizations such as the American Red Cross. exotic experiences that are expensive, frivolous,
When people are focused on feeding their own risky, or environmentally destructive – such as
kids and keeping a roof over their heads, concern driving a race car or even excessive recreational
about children in other parts of the world, or about air travel – are suffering from a recession-driven
animal welfare, drops on the list of priorities. mood of seriousness and responsibility. Though
In the recovery, we expect this trend to rebound this trend is relatively new, we use evidence from
only slowly. As consumer confidence returns, peo- past recessions to map its trajectory. Global long-
ple will first attend to buying the things that they haul tourism arrivals, for example, fell by 9% dur-
have gone without. Only then will they return to ing the early 1990s recession, while short-haul ar-
prerecession levels of altruistic spending. rivals actually increased.
Part of the appeal of extreme experiences, our
consumer research shows, is that people feel that
the experience differentiates them. But conspicu-
Our Methodology ous consumption is now out of favor and, as the
simplicity and discretionary thrift trends suggest,
Drawing on our more than 20 years of experience in consumer trend is unlikely to rebound soon.
forecasting and analysis, we’ve projected the likely impacts of the •••
current recession on long-term consumer behavior. Our forecast- The economy is unpredictable, and consumers are
ing for this article is based on an analysis of consumer behavior fickle. Nonetheless, we are confident that the trend
and spending statistics, by sector, in previous recessions (perhaps trajectories we describe here will bear out – with
the best window on customer motives and priorities) and current plain implications for marketers. In particular, we
consumer trend data. We commission consumer surveys and con- believe that the cohort of consumers coming of age
duct secondary analysis on a range of data sets, and build formal in this recession will, like their great-grandparents
econometric models using linear regression and other statistical who lived through the Great Depression, carry the
techniques. Given our disparate data sources and the complexity of attitudes and behaviors they learn now throughout
the trends, we rely heavily on qualitative methods in making con- their lives. Some consumers may return to boom-
sumer behavior projections; these include observational research, time consumption patterns in the coming decades,
focus groups, and attitudinal studies looking at product categories but millions of people under age 35 entering this
and markets. recession may well remain simplicity-seeking,
Using all these methods, we can see how recessions accelerate or thrifty, green yet mercurial consumers who will
decelerate trends already under way, and we can predict their tra- hold businesses to very high standards. Companies
jectories. For example, in order to forecast the green consumerism would be wise to understand what these consum-
trend, we combined our focus group research on attitudes in areas ers want and be prepared to deliver it.
including green consumerism, discretionary thrift, and desire for
simplicity with quantitative studies illustrating the decline and re- Paul Flatters (paul@trajectorypartnership.com)
bound of consumer environmental concern in previous recessions. is a partner at Trajectory, a consumer trends
forecasting consultancy based in London. He is the
former head of analysis and research at BBC News.
Percentage of British respondents who say “environment/ Michael Willmott (michael@trajectorypartnership.
pollution” is an important issue for the country
com) is a partner at Trajectory and former deputy
Jan 07
19% chairman at the Henley Centre for Forecasting. His
Nov 00 most recent book, coauthored with William Nelson,
14%
is Complicated Lives: The Malaise of Modernity
Dot-com (Wiley, 2005).
bust Current
recession Reprint R0907P To order, see page 158.
Source: Ipsos-MORI
112 Harvard Business Review | July–August 2009 | hbr.org

CUSTOMERS in the NEW WORLD.
Selling to the
Debt-Averse
Consumer | by Eric Janszen
THE SUCCESSFUL consumer-oriented whenever a load of debt was “light- positively to marketing that allows
companies in coming years will be heartedly incurred by people who fore- them to feel their newfound thriftiness
those that can figure out how to make saw nothing but booms,” and he was is a lifestyle choice rather than a con-
do without the former life of the eco- right. Now that the credit and housing straint imposed by the economy. Mes-
nomic party: the monthly payer. bubbles have collapsed in the United sages that center on family, life simpli-
In his heyday, this kind of consumer States and around the globe, the era fication, and getting back to basics will
asked himself not whether he could of unbridled, debt-financed consumer appeal.
come up with the whole cost of a vaca- spending is over, and the monthly payer Will the monthly payment consumer
tion or landscaping or a car but whether is out of action. ever come back? The Federal Reserve
he could afford the resulting increase To win over newly tightfisted, debt- wants to reinflate the credit bubble
in his monthly bills. His answer was in- averse consumers, companies will and engineer a return to the old days.
variably yes. He was a creation of the need to follow the path of firms that But that isn’t possible. When a nation’s
no-money-down and low-interest incen- succeeded in previous downturns by businesses and households take on too
tives that proliferated in the FIRE (fi- promoting value and util- much debt and the economy stumbles,
nance, insurance, real estate) economy ity over luxury and brand. the cash flow needed for financing dries
over the past 25 years. Consumers won’t be able First up, defaults rise, and a vicious cycle of
In his 1939 book Business Cycles, Jo- to buy as many goods as recorded falling incomes, asset prices, and collat-
decline
seph A. Schumpeter predicted trouble before, but they’ll react eral values begins. That cycle ends only
when asset prices, debt levels, and in-
Cutting Back comes get back into balance. Misuse of
consumer credit is gone for good.
$12,000B
In good times and bad, total
U.S. household debt climbed Eric Janszen (eric@itulip.com) is the
relentlessly – until the current cofounder and president of the economic
downturn. and finance advisory firm iTulip, a
former CEO of two venture-backed com-
$6,000B
panies, a coauthor of America’s Bubble
Indicates a recession Economy (Wiley & Sons, 2006), and au-
thor of The Post-Catastrophe Economy
Fredrik Broden
(forthcoming from Portfolio).
Reprint R0907R
1960 1970 1980 1990 2000 To order, see page 158.
Source: U.S. Federal Reserve System.
hbr.org | July–August 2009 | Harvard Business Review 113

GLOBAL
COMPETITIVENESS in the
SPECIAL ISSUE
NEW WORLD
Restoring
American
Competitiveness
Decades of outsourcing manufacturing has left U.S. industry without the
means to invent the next generation of high-tech products that are key to
rebuilding its economy. | by Gary P. Pisano and Willy C. Shih
AS THE UNITED STATES STRIVES to recover from the current eco-
nomic crisis, it’s going to discover an unpleasant fact: The com-
petitiveness problem of the 1980s and early 1990s didn’t really go
away. It was just hidden during the bubble years behind a mirage
of prosperity, and all the while the country’s industrial base con-
tinued to erode.
Now, the U.S. will finally have to take the problem seriously.
Rebuilding its wealth-generating machine – that is, restoring the
ability of enterprises to develop and manufacture high-technology
products in America – is the only way the country can hope to pay
down its enormous deficits and maintain, let alone raise, its citi-
zens’ standard of living. Reversing the decline in competitiveness
Lloyd Miller
will require two drastic changes:
■ The government must alter the way it supports both basic and
applied scientific research to promote the kind of broad collabo-
114 Harvard Business Review | July–August 2009 | hbr.org

GLOBAL COMPETITIVENESS in the NEW WORLD.
ration of business, academia, and government turing capabilities that underpin innovation in a
needed to tackle society’s big problems. wide range of products have been rapidly leaving
■ Corporate management must overhaul its too. As a result, the U.S. has lost or is in the process
practices and governance structures so they no of losing the knowledge, skilled people, and sup-
longer exaggerate the payoffs and discount the plier infrastructure needed to manufacture many
dangers of outsourcing production and cutting of the cutting-edge products it invented.
investments in R&D. Among these are such critical components as
light-emitting diodes for the next generation of
The Competitiveness energy-efficient illumination; advanced displays
Problem for mobile phones and new consumer electronics
IDEA For much of the past two decades, products like Amazon’s Kindle e-reader; the batter-
IN BRIEF
the stunning growth of the U.S. ies that power electric and hybrid cars; flat-panel
» Thanks to destructive outsourc- economy was widely hailed in ac- displays for TVs, computers, and handheld devices;
ing and faltering investment in ademic, business, and government and many of the carbon fiber components for
research, the U.S. has lost or is on circles as evidence that America’s Boeing’s new 787 Dreamliner.
the verge of losing its ability to competitiveness problem was A similar trend is undermining the U.S. software
develop and manufacture a slew as obsolete as leg warmers and industry. Initially, companies outsourced only rela-
of high-tech products. Jazzercise. The data suggest oth- tively mundane code-writing projects to Indian
erwise. Beginning in 2000, the firms to lower software-development costs. Over
» To address this crisis, govern-
ment and business must work country’s trade balance in high- time, as Indian companies have developed their
together to rebuild the country’s technology products – historically own software-engineering capabilities, they have
industrial commons – the col- a bastion of U.S. strength – began been able to win more complex work, like develop-
lective R&D, engineering, and to decrease. By 2002, it turned ing architectural specifications and writing sophis-
manufacturing capabilities that negative for the first time and ticated firmware and device drivers.
sustain innovation. Both must continued to decline through Equally alarming is the U.S.’s diminished capac-
step up their funding of research 2007. (See the exhibit “A Sign of ity to create new high-tech products. For example,
and encourage collaborative R&D Trouble.”) nearly every U.S. brand of notebook computer, ex-
initiatives to tackle society’s big
Even more worrisome, average cept Apple, is now designed in Asia, and the same
problems. And companies must
real weekly wages have essentially is true for most cell phones and many other hand-
overhaul the management prac-
remained flat since 1980, meaning held electronic devices.
tices and governance structures
that have caused them to make that the U.S. economy has been We have heard managers rationalize outsourc-
destructive outsourcing decisions. unable to provide a rising stan- ing decisions by saying that they can always reverse
dard of living for the majority of course if the quality of the work isn’t good enough,
» Only by rejuvenating its high- its people. This undoubtedly is if the anticipated cost savings prove ephemeral, if
tech sector can the U.S. hope to one reason Americans have at- supply-chain complexities or risks are too great, or
return to the path of sustained tempted to borrow their way to if the work turns out to be more strategic than they
growth needed to pay down its
prosperity, a strategy that clearly originally thought. But this logic overlooks the last-
huge deficits and raise its citizens’
is no longer tenable. ing damage that outsourcing inflicts not only on
standard of living.
What, then, was actually hap- a firm’s own capabilities but also on those of other
pening when it seemed things companies that serve its industry, including suppli-
were going so well? Companies ers of advanced materials, tools, production equip-
operating in the U.S. were steadily outsourcing ment, and components. We call these collective
development and manufacturing work to special- capabilities the industrial commons.
ists abroad and cutting their spending on basic
research. In making their decisions to outsource, The World Is Not Flat
executives were heeding the advice du jour of busi- Centuries ago, “the commons” referred to the land
ness gurus and Wall Street: Focus on your core where animals belonging to people in the com-
competencies, off-load your low-value-added ac- munity would graze. As the name implies, the
tivities, and redeploy the savings to innovation, the commons did not belong to any one farmer. All
true source of your competitive advantage. But in were better off for having access to it. Industries
reality, the outsourcing has not stopped with low- also have commons. A foundation for innovation
value tasks like simple assembly or circuit-board and competitiveness, a commons can include R&D
stuffing. Sophisticated engineering and manufac- know-how, advanced process development and
116 Harvard Business Review | July–August 2009 | hbr.org

engineering skills, and manufac-
turing competencies related to a
specific technology.
Such resources may be embed-
ded in a large number of compa-
Nearly every U.S. brand of laptop and
nies and universities. Software cell phone is not only manufactured
knowledge and skills, for instance,
are vital to an extremely wide but designed in Asia.
range of industries (machine tools,
medical devices, earth-moving
equipment, automobiles, aircraft,
computers, consumer electronics, defense). Simi- is highly tacit and therefore far more effectively
larly, capabilities related to thin-film deposition transmitted face-to-face. Other studies show that
processes are crucial to sophisticated optics; to the main way knowledge spreads from company to
such electronic products as semiconductors and company is when people switch jobs. And even in
disk drives; and to industrial tools, packaging, so- America’s relatively mobile society, it turns out that
lar panels, and advanced displays. The knowledge, the vast majority of job hopping is local.
skills, and equipment related to the development This helps to explain why commons persist in
and production of advanced materials are a com- specific locations in an era when huge amounts
mons for such diverse industries as aerospace, au- of scientific data can be accessed easily from any-
tomobiles, medical devices, and consumer products. where. For example, even though virtually all the
Biotechnology is a commons not just for drugs but raw data from the Human Genome Proj-
also for agriculture and the emerging alternative- ect, the decade-plus effort to map the hu- A Sign of
fuels industry. man genome, is available electronically Trouble
More often than not, a particular industrial com- all over the world, the drug research it The U.S. trade deficit in
mons will be geographically rooted. For instance, has generated is heavily concentrated high-tech products ($ billions)
27.8
northern Italy is home to a design commons in the Boston, San Diego, and San Fran-
that feeds, and is fed by, several design-intensive cisco areas.
4.8
businesses, including automobiles, furniture, ap- Once an industrial commons has
parel, and household products. The mechanical- taken root in a region, a powerful virtu-
engineering commons in Germany is tightly cou- ous cycle feeds its growth. Experts flock −17.5
−27.4
pled to the country’s automobile and machine tool there because that’s where the jobs and
−37.0 −38.4
industries. The geographic character of industrial knowledge networks are. Firms do the −44.4
commons helps to explain why companies in cer- same to tap the talent pool, stay abreast −53.6
2000 2001 2002 2003 2004 2005 2006 2007
tain industries tend to cluster in particular regions – of advances, and be near suppliers and
a phenomenon noted by Michael Porter and other potential partners. The Swiss pharma- Note: Sectors included are:
biotechnology, life sciences,
scholars. Being geographically close to the com- ceutical giant Novartis, for instance, chose to move optoelectronics, information
mons is a source of competitive advantage. its research headquarters from Basel, Switzerland, and communications,
electronics, flexible manu-
What about the popular notion that distance to Cambridge, Massachusetts, to be close to univer- facturing, advanced materi-
als, aerospace, weapons,
and location no longer matter, or, as Thomas Fried- sities and research institutes that are global leaders nuclear technology,
man put it, “The world is flat”? While we agree in biosciences and the hundreds of biotech firms and computer software.
with the general idea that geographic boundaries already in the area. And its presence, in turn, has Source: National Science
to trade are falling and that the global economy increased the Boston area’s pull on yet more firms Board, “Science and
Engineering Indicators
is more intertwined than ever, the evidence sug- and individuals. These dynamics make it difficult 2008”
gests that when it comes to knowledge, distance for other regions that do not yet have a vibrant bio-
does matter. Detailed empirical work on knowl- technology commons to attract biotech companies,
edge flows among inventors by our HBS colleague even with generous incentives.
Lee Fleming shows that proximity is crucial. An Our research on the semiconductor, electronics,
engineer in Silicon Valley, for instance, is more pharmaceutical, and biotech industries has found
likely to exchange ideas with other engineers in that commons are even more important to coun-
Silicon Valley than with engineers in Boston. When tries’ and companies’ prosperity than is generally
you think about it, this is not surprising, given that believed. That’s because innovation in one business
much technical knowledge, even in hard sciences, can spawn whole new industries.
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GLOBAL COMPETITIVENESS in the NEW WORLD.
A historical example is the birth of the modern films of silicon onto large glass sheets – capabilities
pharmaceutical industry. It began in the late 1800s developed by their semiconductor foundries and
in Switzerland and Germany because the earliest their manufacturers of flat-panel displays. (China
drugs were based on synthetic dye chemistry and has another advantage: It is the production base for
the two countries were home to large chemical the mundane components like power semiconduc-
companies with strong research labs and deep tors, controllers, and housings that are needed to
technical expertise in synthetic dye production. produce full panels.)
A current example is the solar panel industry, Although the U.S. still produces about 14% of
which is booming in Asian countries such as India, the world’s photovoltaic cells, it no longer is a
Japan, Taiwan, Korea, and especially China. India significant player in crystalline silicon–based so-
owes its position to Moser Baer, a leading manu- lar panels, the prevailing technology. Some U.S.
facturer of optical storage media, which used its manufacturers such as Tempe, Arizona–based
capabilities in thin-film coating and manufactur- First Solar are trying to become players in thin-
ing to move into solar panels. China’s, Japan’s, Tai- film solar, the newest technology. But the decline
wan’s and Korea’s successes stem, at least in part, of the domestic infrastructure in thin-film deposi-
from their deep expertise in processing ultrapure tion and electronics manufacturing puts them at
crystalline silicon into wafers and applying thin a big disadvantage.
Going…Going…Gone
Many high-tech products can no longer be manufactured
in the United States because critical knowledge, skills,
and suppliers of advanced materials, tools, production
equipment, and components have been lost through
outsourcing. Many other products are on the verge of
the same fate.
Semiconductors Electronic Energy storage Computing and Advanced
ALREADY LOST displays and green energy communications materials
“Fabless” chips ALREADY LOST production ALREADY LOST ALREADY LOST
LCDs for monitors, TVs, ALREADY LOST Desktop, notebook, Advanced composites
AT RISK
and handheld devices Lithium-ion, lithium and netbook PCs used in sporting goods
DRAMs
like mobile phones polymer, and NiMH bat- and other consumer
Low-end servers
Flash memory chips teries for cell phones, gear
Electrophoretic
portable consumer Hard disk drives
displays for Amazon’s Advanced ceramics
electronics, laptops,
Kindle e-reader and Consumer-networking
Lighting and power tools Integrated circuit
electronic signs gear such as routers,
ALREADY LOST packaging
Advanced rechargeable access points, and
Compact fluorescent AT RISK
batteries (NiMH, Li-ion) home set-top boxes AT RISK
lighting Next-generation “elec-
for hybrid vehicles Carbon composite
tronic paper” displays AT RISK
AT RISK components for aero-
for portable devices Crystalline and poly- Blade servers,
LEDs for solid-state space and wind energy
like e-readers, retail crystalline silicon solar midrange servers
lighting, signs, indica- applications
signs, and advertising cells, inverters, and
tors, and backlights Mobile handsets
displays power semiconductors
for solar panels Optical-communication
components
AT RISK
Core network
Thin-film solar cells
equipment
(the newest solar-
power technology)
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Erosion of the Commons The standout exception is Apple, whose design
When a major player in an industry outsources an capability in the U.S. for both notebook computers
activity, cuts funding for long-term research, and and consumer electronics has been critical to its
gains a short-term cost advantage, competitive success. Although Apple has outsourced the manu-
pressure often forces rivals to follow suit. As poten- facture of its notebooks, iPod, and iPhone, it has
tial employment opportunities shrink, experienced been able to preserve a first-rate design capability
people change jobs, moving out of the region, and in the States so far by remaining deeply involved in
students shy away from entering the field. Even- the selection of components, in industrial design,
tually, the commons loses a critical mass of work, in software development, and in the articulation of
skills, and scientific knowledge and can no longer the concept of its products and how they address
support providers of upstream and downstream users’ needs. But for how long can it continue to
activities, which are, in their turn, forced to move do so? Given the perennially ruthless competition
away as well. This is what happened to the indus- Apple faces and the continuing migration of de-
trial commons serving a number of high-tech sec- sign capabilities away from the U.S. to Asia, Apple’s
tors in the United States. challenges promise to increase.
Consider the commons supporting the personal After a contractor has evolved into an ODM,
computer industry in the United States. In the late there’s little to prevent it from launching its own
1980s, original equipment manufacturers in the brand and becoming a competitor to its OEM cus-
United States initially began to outsource the as- tomers. That’s exactly what happened in consumer
sembly of printed circuit boards to specialist con- electronics, where U.S. pioneers like RCA and Sylva-
tractors in South Korea, Taiwan, and China. These nia in television manufacturing ultimately became
specialists offered significant cost savings, partly nothing more than brands that were traded like
because of their location in low-wage countries playing cards among Asian manufacturers. Most
and partly because of the economies of scale they U.S. companies in the notebook PC business now
achieved by serving lots of OEMs. The OEMs under- seem headed for the same fate.
standably didn’t see the move as strategically risky The electronics-outsourcing story exposes sev-
because they held the critical intellectual property eral pieces of conventional wisdom as myths. One
and design skills (they provided the contractors is the popular belief that an advanced economy
with detailed specifications) and because manufac- like the United States no longer needs to manufac-
turing the boards wasn’t a source of competitive ture and can thrive exclusively as a hub for high-
advantage. value-added design and innovation. In reality, there
Ferocious competition and razor-thin margins, are relatively few high-tech industries where the
however, prompted many of the contractors, par- manufacturing process is not a factor in developing
ticularly those in Taiwan, to seek higher-value- new – especially, radically new – products.
added work. They persuaded the OEMs to allow That’s because in most of these industries prod-
them to assemble a greater share of the overall uct and process innovation are intertwined. So
product, and from there they moved into complete the decline of manufacturing in a region sets off a
product assembly. Given that many of the compo- chain reaction. Once manufacturing is outsourced,
nents were also sourced from Asia, a logical next process-engineering expertise can’t be maintained,
step was to take over the management of the sup- since it depends on daily interactions with manu-
ply chain from their American customers. facturing. Without process-engineering capabilities,
Then came design. Initially, these firms took over companies find it increasingly difficult to conduct
design-engineering tasks on a contract basis. The advanced research on next-generation process tech-
OEM typically would still provide the high-level nologies. Without the ability to develop such new
conceptual design and specifications, contracting processes, they find they can no longer develop
with the Asian supplier to do the detailed engineer- new products. In the long term, then, an economy
ing. Eventually, though, the suppliers took over that lacks an infrastructure for advanced process
those activities as well for products like notebooks, engineering and manufacturing will lose its ability
which require designers to interact frequently with to innovate.
manufacturing. The result: These “original design Another myth is the prevailing view that the mi-
manufacturers,” as they describe themselves, ended gration of mature manufacturing industries away
up designing and manufacturing virtually all Win- from developed countries like the United States is
dows notebook PCs. just part of a healthy, natural process of economic
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GLOBAL COMPETITIVENESS in the NEW WORLD.
evolution that allows resources to be redeployed Restoring the Commons
to new, higher-potential businesses. We certainly During the 1980s and early 1990s, when outsourc-
agree that a dynamic global economy leads to shift- ing by U.S. firms and inroads by Japanese compa-
ing patterns of production and trade. We also agree nies last raised concerns about U.S. competitive-
that shedding certain activities that no longer pro- ness, there was heated debate about the remedies.
vide opportunities for innovation and redeploying Some called for Washington to follow the lead of
resources to others can spur economic growth and Japan’s Ministry of International Trade and Indus-
raise living standards. If that hadn’t occurred in the try and provide special support for important in-
U.S., its economy would still be largely agrarian dustries. Others exhorted American companies to
and probably quite poor. But this logic has been stop outsourcing for patriotic reasons. Neither of
taken to a dangerous extreme. these recommendations is a realistic way to pre-
It ignores the fact that new cutting-edge high- serve U.S. competitiveness and jobs.
tech products often depend in some critical way As Robert Reich astutely pointed out nearly 20
on the commons of a mature industry. Lose that years ago in his provocative article “Who Is Us?”
commons, and you lose the opportunity to be the (HBR, January–February 1990), the national iden-
home of the hot new businesses of tomorrow. We tities of large corporations have become meaning-
mentioned one example earlier: The migration of less. Given the realities of global competition and
semiconductor foundries to Asia, which caused a capital market pressures, it is too much to expect
sharp decline in silicon-processing and thin-film- executives to demonstrate an allegiance to a partic-
deposition capabilities in the U.S., greatly reducing, ular location merely because it is their company’s
if not eliminating, its chances of becoming a major nation of origin. Nor does it make sense for Wash-
player in solar panels. ington to favor multinationals that happen to be
Another example is batteries for hybrid and headquartered in the United States and discrimi-
electric vehicles like GM’s forthcoming Chevy nate against foreign-based corporations that run
Volt. The Volt’s lithium-ion battery – the highest- large operations in the country; both sets of com-
value-added component in the car – will be manu- panies are important contributors to the American
factured in South Korea. GM had no choice but economy.
to look abroad. Rechargeable-battery manufactur- That said, it is in the interests of Washington
ing left the U.S. long ago. Why? Most innovation and all companies that operate in the U.S. to work
in batteries in recent decades has been driven by together to reinvigorate the country’s industrial
the increasing demands of consumer electronics commons. Washington’s interest is obvious: to re-
products for more and more power in smaller and vitalize the all-important high-tech sector. Why
smaller packages. When U.S. companies largely should companies care? America is an important
abandoned the “mature” consumer electronics market. If a company, regardless of its nationality,
business, the locus of R&D and manufacturing – is a player there, building or sustaining local capa-
not just for the laptops, cell phones, and such but bilities is in its interest. Beyond that, a commons,
also for the batteries that power them – shifted regardless of where in the world it’s located, can be
to Asia. Yes, there are some efforts (including one a source of long-term competitive advantage for all
by General Electric–backed A123Systems) to res- its members. So whether you’re the U.S. firm IBM
urrect rechargeable-battery manufacturing in the with a major research laboratory in Switzerland
United States. But given the state of the U.S. com- or the Swiss company Novartis operating in the
mons relative to Asia’s, players like A123 face an biotech commons in the Boston area, sacrificing
uphill battle. such a commons for short-term cost benefits is a
So do U.S. automakers. Japan’s and South Ko- risky proposition.
rea’s strong battery and car industries give them We don’t claim to have an elaborate master plan
an advantage over U.S. companies in developing for repairing the U.S. commons. But especially at a
electric and hybrid cars. And, as the New York Times time when Washington’s efforts to save the banks
reported in April, China’s leaders want to make and the U.S. auto industry are reigniting the indus-
their country one of the world’s top producers of trial policy debate, we think it would be helpful to
hybrid and all-electric cars within three years. Chi- challenge some widely held perceptions about gov-
nese battery maker BYD has announced plans to ernment involvement, suggest ways to learn from
begin selling hybrid and electric cars in the United programs that worked in the past, and offer some
States and Europe in 2011. ideas on what management needs to do.
120 Harvard Business Review | July–August 2009 | hbr.org

What Government Should Do
All too often, the debate about what role Washing- Why Amazon’s Kindle 2
ton should play in supporting innovation degener-
ates into a battle between two extremes: the laissez- Can’t Be Made in the U.S.
faire camp and advocates of centralized industrial The Kindle 2 e-reader was designed by Amazon’s Lab126 unit
policy. Listening to them, you’d think there could in California. The vast majority of its components are made in
be no middle ground. China, Taiwan, and South Korea, and it is assembled in China,
History says otherwise. While the U.S. has per- a center for such work.
haps the most market-oriented economy in the
world, federal and, to a lesser extent, state govern-
ments have long played a central role in supporting
technological innovation. In the early twentieth cen- Electrophoretic display
Flex circuit MADE IN TAIWAN
tury, the agricultural experiment stations created connector REASON Its manufacture
by state governments were instrumental in spawn- MADE IN CHINA
requires expertise developed
ing innovations like hybrid corn that enormously REASON U.S. supplier
from producing flat-panel LCDs,
boosted agricultural productivity. In the 1950s and base eroded as the which migrated to Asia with
manufacture of con- semiconductor manufacturing.
1960s, the Department of Defense spurred innova-
sumer electronics and
tion in semiconductors through procurement and computers migrated
targeted research programs. In the 1960s through to Asia.
the 1980s, DOD- and NASA-sponsored research con-
tributed heavily to building American
science and engineering capabilities in
chip design, aeronautics, and satellite
communications.
Not all government programs have
been successful, of course. The super-
sonic transport program of the 1960s
and the thermal solar and synthetic fu-
els initiatives in the late 1970s and 1980s
are examples of failures. In general, gov-
ernment has been effective in its sup-
port for innovation when it has acted
as a customer seeking a solution to a Controller board
concrete, compelling need or when it MADE IN CHINA
has been a patron of basic or applied re- REASON U.S. com-
panies long ago out-
search that has the potential for broad
sourced the manufac-
application. Conversely, its support of
ture of printed circuit
innovation has generally failed when it boards to Asia, where
Wireless card
has not had a user’s stake in the out- MADE IN SOUTH KOREA there is now a huge
Highly polished
come or when it has bet on unproven REASON South Korea supplier base.
injection-
technical solutions that required exten- molded case used its infrastructure for
sive knowledge of commercial applica- MADE IN CHINA designing and manufac-
tions or market realities that it lacked. REASON U.S. supplier turing consumer electron- Lithium polymer
With this in mind, we offer three broad base eroded as the ics to become a center battery
manufacture of toys, for making mobile phone MADE IN CHINA
suggestions for what Washington should
consumer electron- components and hand- REASON Battery devel-
do to rebuild the industrial commons: sets, especially products opment and manufactur-
ics, and computers
Photo courtesy of ifixit.com
Reverse the slide in the funding of migrated to Asia. using CDMA technology, ing migrated from the
basic and applied science. Innovative which is widely used in U.S. to Asia along with
activities can be grouped into three South Korea. the development and
broad categories, whose boundaries are admittedly manufacture of con-
sumer electronics and
a bit blurry. Basic scientific research seeks to deepen
notebook computers.
our understanding of first principles, such as the ge-
netic mechanisms that regulate how cells grow and
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GLOBAL COMPETITIVENESS in the NEW WORLD.
divide. Applied research seeks to extend that knowl- Even though it then rebounded, it’s flattened in re-
edge to answer more specific questions about real- cent years and is still way behind funding for basic
world problems, like which particular genes are research (see the exhibit, “A Flagging Commitment
involved in cancer. And commercial R&D focuses to Scientific Research”).
on finding marketable solutions – for example, dis- This is troubling because government support
covering, developing, and testing a drug to treat for applied research has been just as important
a certain type of cancer. We can think of applied to U.S. industrial competitiveness as its support of
research as the bridge between basic research and basic research. Government-sponsored endeavors
commercial R&D. that have made a huge difference in the past three
Washington has long been the main decades include DARPA’s VLSI chip development
A Flagging supporter of basic research in the U.S. program and Strategic Computing Initiative; the
Commitment and a major provider of funding for DOD’s and NASA’s support of composite materials
to Scientific applied research. No country, in fact, work; the NSF’s funding of supercomputers and of
has invested more in basic research NSFNET (an important contributor to the inter-
Research since the end of World War II than the net); and the DOD’s support of the Global Position-
The federal government has United States, and three-quarters of ing System, to mention a handful.
been the dominant provider the funding has come from the federal In most instances, these programs required
of funding for basic research government. Through such agencies a long-term commitment. Consider the internet,
in the United States and a
as the National Science Foundation which sprang from a decades-long applied research
major underwriter of applied
and the National Institutes of Health, effort that began in the late 1960s, when the federal
research. But in recent years,
Washington has spent an inflation- government’s Advanced Research Projects Agency,
the gap between the two
has widened. This disparity
adjusted total of $1.2 trillion since or ARPA (later renamed DARPA when it became
could undermine the com- 1953. By funding knowledge, support- part of the Department of Defense), issued its first
petitiveness of the country’s ing skilled scientists and technical request for proposals to build a four-site computer
high-tech sector over the personnel, and underwriting vibrant network. Creating the internet involved little or
long term. research universities that have acted no new basic science. It did, however, require sig-
as magnets for the labo- nificant investments in applied research on packet
ratories of private enter- switching, communications protocols, and network-
$31.2B
prises, this support has ing infrastructure – investments that the private
U.S. federal government funding 2006 been a vital stimulus for sector probably would never have made because
for research (in constant 2000 commercial innovation the time horizons were too long and the payoffs
dollars)
$21.4B in the United States. (We too difficult for any one company to capture. The
Basic 2006 can’t emphasize enough way the project spurred collaboration among re-
the importance of world- searchers in an array of companies and universities
$11.5B class universities in catalyzed the growth of basic networking-related
1980
Applied building a commons. Sil- capabilities, led to innovations such as the multi-
$11.4B 1986 1990 1994 1998 2002
icon Valley would never protocol router, and resulted in the creation of
Source: National Science Board, “Science and
have become what it is a number of companies, including Cisco Systems,
Engineering Indicators 2008” without the presence of Juniper Networks, and Extreme Networks.
universities like Stanford The U.S. cannot afford to be complacent. Gov-
and Berkeley.) ernments in other countries like Singapore, China,
But while U.S. government funding for basic sci- Korea, and the United Arab Emirates are intent on
entific research, adjusted for inflation, grew at a fostering growth or building new world-class re-
healthy pace through the 1990s, it began to drop search universities. They are also investing heavily
in 2003 and has been flat or declining slightly since in applied science, hoping to replicate the success
then. That’s a worrisome trend. of Taiwan, whose Industrial Technology Research
Government funding for applied research has Institute built the foundations for that country’s
declined even more sharply. Historically, federal highly successful semiconductor industry.
funding was split relatively evenly between basic Focus resources on solving “grand challenge
and applied research, reflecting their equal im- problems.” Climate change, a dependence on
portance. However, since around 1990, that has expensive dirty hydrocarbons, a lack of potable
no longer been the case: Government funding for water, the ravages of diseases – these are some of
applied research declined 40% from 1990 to 1998. the grand problems plaguing the world that will
122 Harvard Business Review | July–August 2009 | hbr.org

require fundamental advances in knowledge to the interconnected financial system). Auto com-
solve. Governments are often uniquely positioned panies don’t fall into either category.
to mobilize and coordinate the efforts of the nu- Advocates of aid to the auto companies have
merous organizations needed to confront these argued that, in addition to preserving the huge
huge challenges. At its peak, for instance, the ARPA number of jobs at those enterprises, a key reason
networking initiative involved dozens of private to continue to prop them up is to preserve the sup-
companies and universities. Under the purview of plier base. Lose these giants, they say, and you will
the Department of Energy and the NIH, the Hu- lose feeder industries (machine tools, advanced
man Genome Project involved a similar
number of laboratories from around
the world.
Such government-sponsored collab-
orative efforts have two benefits. First,
they leverage resources: A dollar spent
Companies that are failing due to
on research goes much further when poor management or misguided strategy
the fruits of that spending are shared
broadly. Second, they help to create net- suck the vitality out of the commons.
works of collaborators that cut across
academia and industry, which can
provide a foundation for an industrial
commons.
Unfortunately, the granting process for much metal fabrication, molding, and so on) crucial to
of the scientific funding in the U.S. is biased to- the country’s industrial base. We disagree and for
ward lower-risk, incremental projects (“normal two reasons believe that the potential impact on
science”) that fit neatly into established academic the U.S. commons has been exaggerated.
fields and is weighted against higher-risk, high- First, companies that are failing as a result of
return research that spans disciplines. To address poor management or misguided strategy often
this bias, the peer review process that such agen- suck the vitality out of the commons in which they
cies as the NSF and NIH employ to award grants participate, and government bailouts almost never
must be reformed. Currently, panels of academic succeed in restoring such companies to full health.
scientists, each often composed of individuals from Indeed, one cause of the U.S. automakers’ current
within a single discipline, make these decisions. predicament is their failure to nurture a strong
Instead, groups comprising experts in a range industrial commons. Several studies have docu-
of disciplines from the academic, business, and mented a marked difference between the ways U.S.
policy-making communities should be choosing and Japanese companies have managed their sup-
the problems and deciding how best to structure plier bases, for instance. Toyota has always under-
basic and applied research programs to seek solu- stood the concept of industrial commons. It treats
tions. It is especially important for government key suppliers as long-term partners, shares develop-
policy makers involved in these decisions to have ment work with them, and sticks with them over
strong scientific backgrounds (as they do in Tai- the long term. When a Toyota supplier is strug-
wan and Singapore). gling, Toyota sends in its own people to help. In
Let ailing giants die. Throughout the world, sharp contrast, U.S. auto companies have generally
governments have provided significant financial treated their suppliers as adversaries. They keep
support to industrial companies struck by the them on a tight leash. They offer them only short
economic crisis. As we were writing this article, contracts. They all too often base their purchasing
Congress and the Obama administration were decisions largely on price. When a supplier has a
considering whether to give teetering GM more problem, the U.S. auto company’s typical response
aid or let it go into bankruptcy proceedings. We has been to terminate the contract.
oppose more support. There are rare instances Second, the bailout debate (in both the United
when companies cannot be allowed to fail be- States and Europe) completely ignores the global
cause of vital national interests (national security) nature of the auto business and the contribution
or systemic effects (the impact that the failure of foreign-based companies make to the U.S. indus-
a big player like AIG or Citigroup would have on trial commons. Not every player in the U.S. auto-
hbr.org | July–August 2009 | Harvard Business Review 123

GLOBAL COMPETITIVENESS in the NEW WORLD.
manufacturing sector is a basket case. There are vation advantage over the long term, and the only
plenty of healthy factories. Most of them are owned way they can do that is if they invest in new, differ-
and operated by foreign-based corporations like entiated capabilities.
Toyota, Honda, Nissan, and BMW. These companies Stop blaming Wall Street for short-term be-
are contributing to the U.S. industrial commons. havior. We’ve heard it over and over again from
If anything, Washington should encourage even executives: “We’d love to build capabilities over
more participation in the commons by foreign the long term, but Wall Street, with its relentless
companies. An immediate case in point: the Fiat- pressure to produce ever-higher quarterly earnings,
Chrysler deal to save Chrysler. The Italian company won’t let us. We have no choice. We have to out-
has agreed to transfer its technology for produc- source.” This devil-made-me-do-it defense does not
ing highly efficient diesel engines to Chrysler in hold up.
exchange for a substantial minority stake – contrib- When companies promise to increase returns
uting precisely the kind of clean technology that quarter after quarter, that’s what Wall Street ex-
the Obama administration wants the U.S. to pursue. pects. But when they articulate a credible long-
term strategy and demonstrate a capac-
ity to execute that strategy, the capital
markets have given them the necessary
room to achieve it. In his first letter to
Companies need to stop blaming the shareholders in the 1997 annual re-
Wall Street for their short-term focus. port, Amazon CEO and founder Jeff Be-
zos explained that his company would
This devil-made-me-do-it defense take a long-term perspective in its strat-
egy and operating decisions. This mes-
does not hold up. sage has been consistently reinforced in
every subsequent letter. So short-term
investors know Amazon is not the com-
pany for them. Sure, Amazon’s stock has
Ironically, some in Congress opposed the deal be- taken some hits now and then when the company
cause they didn’t want to use taxpayer money to has suffered a setback. But Bezos and his team have
benefit a “foreign” company. They just don’t get it. understood that the stock will rebound, and they
have stayed the course.
What Businesses Must Do Recognize the limits of financial tools. Most
Government support of basic and applied research companies are wedded to highly analytical meth-
can fertilize the soil, but it takes private compa- ods for evaluating investment opportunities. Still, it
nies willing to make long-term investments in risky remains enormously hard to assess long-term R&D
R&D to build a commons. The management chal- programs with quantitative techniques – even so-
lenge is a familiar one of balancing long-term and phisticated ones like real-options valuation and
short-term performance. Here are six suggestions Monte Carlo simulations. Usually, the data, or
for striking that balance: even reasonable estimates, are simply not avail-
Make capabilities the main pillar of your able. Nonetheless, all too often these tools become
strategy. Companies pour enormous amounts of the ultimate arbiter of what gets funded and what
resources into marketing to build brands. But with does not. So short-term projects with more predict-
the exception of a few industries like soft drinks, able outcomes beat out the long-term investments
brands are only as good as the distinctive products needed to replenish technical and operating ca-
they represent. Creating and making distinctive pabilities. Managers would serve their companies
products requires an array of strong technical, de- more wisely by recognizing that informed judg-
sign, and operational capabilities. Given how de- ment is a better guide to making such decisions
manding and sophisticated customers throughout than an analytical model loaded with arbitrary as-
the world have become, marketing cannot cover sumptions. There is no way to take the guesswork
up weak innovation for long. Apple, Intel, Corning, out of the process.
Amazon, and Applied Materials are companies that Reinvigorate basic and applied research. In
understand this. They realize that the only way to the 1980s and 1990s, corporate research laborato-
stay ahead of competition is to maintain an inno- ries fell out of favor. They were deemed wasteful
124 Harvard Business Review | July–August 2009 | hbr.org

because many of their efforts could not be linked cluding those of many American high-tech cor-
to the immediate business needs of their compa- porations – are populated with plenty of lawyers,
nies. Several – including Bell Labs and Xerox PARC, finance and accounting experts, and CEOs from
the birthplaces of many critical technologies that other companies. Scientists are a very small minor-
underpin important industrial commons – with- ity. And while many corporations have scientific
ered, disappeared, or were jettisoned by their cor- advisory groups, we have not yet come across one
porate parents. Their resources were redeployed to whose board has a science or technology committee.
business units. Regulations and good corporate governance call
It’s true that laboratories like PARC generated for audit, compensation, nominating, governance,
many inventions that didn’t serve the needs of their finance, and executive committees. Shouldn’t the
owners’ core businesses. (It’s widely known that Xe- boards of companies whose competitiveness heav-
rox was content to let other companies commercial- ily depends on science or technology also have a
ize many of PARC’s inventions, like the graphical committee to ensure that all is well in this area?
user interface, Ethernet, and ball mouse.) But the •••
fact that PARC’s labs were generating inventions Alfred Chandler, the noted Harvard business his-
that Xerox’s core copier business couldn’t use should torian, described how American companies like
have told Xerox’s executives something: that there DuPont and General Motors gained prominence
were huge opportunities outside the core. Their in- in the twentieth century by developing and inte-
ability to read and react to those signals was the grating R&D, manufacturing, and marketing ca-
fault of their flawed resource-allocation processes pabilities. These enterprises did not create these
and strategies, not of PARC. capacities to be good corporate citizens. They were
Of course, focused R&D that serves customers’ pursuing competitive advantage, and they under-
needs is vitally important. But so is the capacity to stood that these capabilities were essential to that
explore. Recognizing this, a few companies, includ- goal. Today, the United States is at an analogous
ing IBM and Corning, have maintained strong cor- juncture, but the challenge is no longer to create
porate research capabilities and look to them to spur capabilities to manage the large-scale, vertically in-
the next major wave of business opportunities. tegrated enterprise of the twentieth century; it is
Collaborate. While we want large companies to build anew the technological operational capa-
to dedicate more resources to basic and applied re- bilities needed to conceive and produce high-value
search, we’re not suggesting they return to the days goods and services. We must recognize that the
when corporate labs were largely insular places. capacity to undertake advanced process engineer- hbr.org
Rather, they should follow the lead of companies ing and complex manufacturing is as important to Participate in the
discussion on
like Corning, IBM, and Novartis, which recognize continued innovation as are strong universities and Managing in the
that their scientists needn’t, and shouldn’t, go it a robust venture capital industry. New World at
landscape.hbr.org.
alone. They understand the value of the commons If major venture capital firms like Kleiner Per-
as a source of research capability. kins and Sequoia Capital announced they were
IBM’s leaders, for example, saw that the com- leaving the U.S. to go to, say, India because they saw
pany could no longer afford on its own to make the more profitable investment opportunities there, it
investments required to stay on the cutting edge of would cause an uproar. Outsourcing by high-tech
semiconductor-manufacturing processes. Accord- manufacturers should do the same. It’s unfortunate
ingly, over the past decade Big Blue has built what that the warning cries of the 1980s and early 1990s
it calls a “radical collaboration” model in which it were ignored. Much has been lost since then, but
and a set of commercial partners share research ca- it’s not too late to rebuild the industrial commons.
pabilities and a common manufacturing platform, Only by rejuvenating its innovative capabilities can
even though some of them compete downstream. America return to a path of sustainable growth.
IBM calculates the value of the benefits it receives
from this relationship to be five to 10 times the Gary P Pisano (gpisano@hbs.edu) is the Harry E.
.
amount it invests. Figgie, Jr., Professor of Business Administration, and
Create technology-savvy boards of directors. Willy C. Shih (wshih@hbs.edu) is a professor of
To effectively govern a company whose competi- management practice, at Harvard Business School
tive advantage rests on science and technology, a in Boston.
board needs to have the same feel for technology
Reprint R0907S To order, see page 158.
as it has for finance and accounting. Boards – in-
hbr.org | July–August 2009 | Harvard Business Review 125

GLOBAL COMPETITIVENESS in the NEW WORLD.
The
Threat
of Global
Gridlock
Getty Images
| by George Stalk, Jr.
AS OUR WORLDWIDE transportation
network becomes less and less able to sup-
port the demands of a global economy, we’re
heading straight into a crisis.
A crisis? How can we be facing a critical
shortage in transportation capacity when
plummeting demand and rising protection-
ism have reduced the flow of goods around
the world to a trickle? When container ships
are being laid up and the rail and trucking
industries are laying off workers? When
the United States is spending billions of
economic stimulus dollars on improving its
transportation infrastructure?
By Truck
Today’s economic meltdown masks the Increases in traffic have
threat. But if prerecession trends reappear outpaced road construction in
when the economy recovers, lack of infra- Europe and the U.S. Consider
structure capacity, in combination with rising that the capacity of the U.S.
oil prices, will constrain global trade and highway system increased only
drive up costs. The U.S. stimulus package, slightly in the years after 1990,
with its focus on “shovel-ready” projects while traffic grew by nearly half.
that quickly create jobs, will produce newly Truck traffic grew even faster,
painted bridges and newly paved roads but particularly in metropolitan
is unlikely to address the capacity problem. areas. Over the next few years,
Few executives realize the magnitude of that trend is likely to return.
the challenges that are about to hit them.
Even fewer are investing to reduce trans- U.S. vehicle 141
traffic
portation costs, improve logistics, and gain 2007
an advantage. But before companies can out- 105
smart competitors with creative responses 100 indexed to 1990 2007
1990
to the crisis, they need to understand it. Miles of U.S.
highway lanes
Source: U.S. Federal Highway Administration
126 Harvard Business Review | July–August 2009 | hbr.org

12
10
8
6
4
2
0
By Ship
Before the recession, the
increasing volume of cargo
passing through key container
and bulk ports in the U.S. and
Europe was pushing at capac-
ity limits. The three largest
European ports (Antwerp,
By Train Hamburg, and Rotterdam)
experienced significant con-
Some look to railroads to gestion in recent years, as
reduce pressure on an over-
burdened road system. In
did U.S. West Coast ports –
most of which are located
By Air
Europe, however, differences in densely developed urban Airways may become as jammed
in national gauges, electrical areas, making expansion of as roads, rail lines, and ports. No
systems, and management capacity politically difficult. new airports are planned for North
practices place constraints America or Europe, and new
on rail transport. And in the runways can take a decade to gain
U.S., the number of track Throughput, in millions approval. Major upgrades to air
of TEU (20-foot traffic control (ATC) systems are
miles fell before the downturn, equivalent units) 10.8 10.8
while the volume of freight 9.9 9.8 9.7 needed but have been repeatedly
9.3
8.9
traffic steadily rose, making 8.2
8.7
8.1
delayed. Without those improve-
Congestion
delays in shipments inland 6.5
7.0
level ments, traffic could exceed capac-
from West Coast ports more 2008 ity at nearly 20 major U.S. airports
2007 by 2015.
frequent. 2006
2005
Airports needing additional capacity
171
2007 PVD
U.S. rail freight traffic Antwerp Hamburg Rotterdam
EWR
Source: Shipping Statistics Yearbook 2008,
Lloyd’s List for 2008, BCG estimates ORD JFK
indexed to 1990 OAK LAS PHL
100 MDW LGA
1990 LGB
81 CLT
PHX IAH
Miles of U.S. 2007 SNA
railroad tracks TUS
PBI
Source: Association of American Railroads HOU
FLL
in 2007
by 2015, even with planned ATC improvements
by 2015 if planned ATC improvements are delayed
Source: U.S. Federal Aviation Administration

GLOBAL COMPETITIVENESS in the NEW WORLD.
How Companies Are Affected
MOST OF TODAY’S retail and durable- when calculating the implications of off-
goods companies put down their business shoring versus sourcing closer to markets.
footprints – their sourcing, manufactur- Few businesses, however, appreciate
ing, distribution, and retail networks – the effects of variability in supply chain
decades ago, at a time when logistics performance. For example, if the volume
costs were steadily declining. Improved and mix of components arriving at a
roads and rail service, along with the ad- factory are predictable – even if they’re
vent of container shipping and intermodal a long time in transit – the factory can
transport, made moving goods more consistently run at optimal levels.
efficient, while fuel costs remained stable But if deliveries are erratic, the
or even fell in real terms. factory will be underutilized
A company serving U.S. markets, for when parts are delayed (rais-
example, would build big, efficient manu- ing unit production costs)
facturing plants in a low-cost location and suddenly overutilized
like Iowa, far from metropolitan custom- when they arrive (resulting
ers, and ship goods from there. More in additional labor costs to
recently, business footprints expanded as get back on schedule).
companies shifted sourcing to lower-cost The same whipsaw effect can
countries like China. occur when consumer demand for
But as supply and distribution chains a particular product changes rapidly,
have become longer and more complex, as in fashion retailing. A supply and
companies have begun to realize that in- distribution chain that is slow and erratic
creased logistics costs can reduce or even will lead to overstocks (having too much
eliminate the benefits of manufacturing of products that people aren’t buying)
where labor is cheap. The congestion and
bottlenecks of a transportation system
and stock-outs (not having products that
people want to buy). The first usually
Avoiding the
strained beyond capacity compound the result in sales at marked-down prices, Hidden Costs
problem, making supply chains seem
even longer and more unpredictable.
typically reducing gross margins by half
or more. The second result in the loss of
of Delay
For retailers, a slow or unreliable
Some of the logistics costs are obvi- immediate sales – which may never be re- supply chain can have two indi-
ous. In recent years rapidly rising fuel couped, even when the items arrive at the rect costs – overstocks and stock-
prices have made it less attractive to store – and the entire gross margin from outs – that eat significantly into
source goods oceans away from their end those sales, which can range from 30% to gross margins. So it may make
consumers. Less obvious is how an over- 90% of retail prices. sense for retailers to ship goods
taxed transportation infrastructure can Many companies aren’t aware of the from the factory by air, rather
amplify the impact of higher fuel costs. If magnitude of these indirect costs. But than by sea, particularly if those
stop-and-go traffic means that it takes a once the combined expense of carrying a goods are high-margin items for
which transportation represents
truck three hours rather than one to pass lot of inventory in the supply chain, sub-
a relatively small percentage of
through the New York metropolitan area, optimal factory utilization, and overstocks
the retail price. Though airfreight
for instance, fuel costs will increase even and stock-outs is added into the equa-
costs more (four times as much in
though the distance doesn’t. tion, what appeared to be a healthy profit this hypothetical example), goods
Another cost results from the time may actually turn out to be a loss. The arrive closer to their point of sale
goods are tied up in transit. When goods infrastructure crisis, by exacerbating the and much sooner. That translates
Stockphotopro
take, say, 10 rather than five weeks to reach problems of transport time and variabil- into lower ground transport costs
their destination, that means they’re in ity, will contribute significantly to those and, crucially, fewer overstocks
a company’s inventory, tying up working indirect costs, which will increasingly and stock-outs – and ultimately
capital, for five extra weeks. Companies counteract the gains companies seek from better profits.
are increasingly taking that into account cost-cutting efforts such as layoffs.
128 Harvard Business Review | July–August 2009 | hbr.org

What Companies Can Do
A COMPANY can’t avoid the looming treatment as demand for your products a weapon against less savvy rivals. You
infrastructure crisis. But it can ensure that fluctuates. can quickly lower or raise prices to reflect
it’s affected less than its rivals are and Or you could ship more by air. Granted, changes in input costs – or simply to
even use the crisis against them. the airways have their own congestion throw competitors off balance. You can
The first step is to understand the problems, which aren’t likely to go away allow customers to change the volume
cost and time trade-offs built into your soon. And airfreight typically costs four or mix of their orders closer to the time
logistics system. Measures that slightly of sale. You can give
increase costs – such as “hot hatching,” them better terms,
in which the shipping container holding including consignment
Massive plants that make a few products for
your goods is loaded onto a vessel last pricing – requiring
and unloaded first – often can save huge worldwide distribution may no longer make them to pay only when
amounts of time, preventing overstocks economic sense. they sell the product.
and stock-outs. Other premium services That concession will be
to consider: direct-to-store shipments feasible only because
from a manufacturer, and dedicated “unit to six times as much as ocean shipments. you, unlike your competitors, won’t be
trains” that go directly to a specified But the extra expense – still less than 10% burdened with the high costs of carry-
destination (reducing the risk of goods’ of the shelf price for many items – may be ing inventory that is slowly working its
sitting on a siding while the railway tries justified for products with high margins way through a long and uncertain supply
to figure out where a missing car is). You or highly variable demand. chain. If rivals without your advantage
also could reserve manufacturing capac- You should also reassess your com- copy this tactic, they’ll drive up their
ity from your supplier to get preferred pany’s business footprint. You might costs. If they don’t, they’ll most likely lose
source closer to your end markets: business to you.
Mexico for North America, and Central The transportation infrastructure chal-
and Eastern Europe for Western Europe. lenge presents a major strategic opportu-
Although production costs in those loca- nity, one that many companies will ignore
Once retailers factor in hidden costs, tions may be higher than in Asia, lower lo- because they fail to understand the impor-
they may find it’s cheaper to ship by gistics costs may decrease the delivered tance – and the impact on profitability – of
air than by sea costs at the point of sale. Massive plants a rapid-response supply chain. Even if they
that make a few products for world- do appreciate the hidden costs associated
wide distribution may no longer make with time and variability in a supply chain,
economic sense, and you may choose few see supply chain investments as an
BY SEA BY AIR to replace them with smaller plants that outright source of competitive advantage.
Unit price make many products for regional or local A handful of forward-looking compa-
(fashion item) $10.00 $10.00
distribution. The unit production costs nies are already using one or more of the
Asian
manufacturing will be higher, but lower logistics costs techniques I have described. That early
cost (3.00) (3.00) and faster replenishment cycles may adoption has given them an important
Ocean/air more than offset the increase. edge. After all, if you simply keep pace
shipping cost (.20) (.80)
Finally, implementing best practices with competitors, you’ll all arrive at the
Landside shipping
and storage in logistics – for example, improving the same point pretty much together. While
cost (rail/truck flow of information among all parties in a your customers will benefit, you won’t.
to warehouse/
retail outlet) (1.80)
_______ (1.60)
_______ supply network – can enhance the speed George Stalk, Jr., is a senior adviser and a
Accounting and predictability of your system. BCG fellow at the Boston Consulting Group
profit $5.00 $4.60
If your company can master the in Toronto and the author of Five Future
Average reduction
techniques of squeezing time and vari- Strategies You Need Right Now (Harvard
in profit because
of overstocks ability out of its logistics system, you Business Press, 2008).
and stock-outs (3.80)
_______ (2.50)
_______ can avoid some of the degenerating
Actual profi t $1.20 $2.10 effects of transportation congestion and Reprint R0907T
bottlenecks – and use your position as To order, see page 158.
hbr.org | July–August 2009 | Harvard Business Review 129

GLOBAL COMPETITIVENESS in the NEW WORLD.
GL0BAL
The
New
Frontiers How the global slowdown
is reshaping competition
from emerging markets
| by Anand P. Raman
130 Harvard Business Review | July–August 2009 | hbr.org

ing 6.1% at which the emerging markets middle-market consumer segments.
grew collectively in 2008, but it’s remark- With multinational companies trying
able considering the IMF’s forecast that to squeeze more revenues out of de-
the developed economies will shrink by veloping countries, too, only the fittest
3.8% this year. “Emerging markets will businesses seem likely to survive the
account for a larger share of the world’s slowdown.
output when the recession ends than Smart companies in emerging mar-
when it began,” concludes Antoine van kets have started responding to the chal-
Agtmael, who heads the investment firm lenges these changes pose. In fact, a few
Emerging Markets Management. “That of them saw the downturn coming and
will make them even more attractive.” modified their strategies quickly. (See
Second, governments are reshaping the sidebar “Emerging Strategies to Beat
the contours of economic development the Slowdown.”) Companies in these
even as they stoke growth through mon- countries already have an edge because
In
IN 1893, American historian Frederick etary and fiscal policy measures. No they’re the world’s cheapest manufac-
Jackson Turner declared that a frontier government is doing that more than turers and don’t need to develop low-
isn’t just a place; it’s also the process China’s, which is using the $586 billion cost business models. But before the
of adaptation and change that shifting stimulus package it announced in No- downturn began, rising resource costs
borders force on people and institutions. vember 2008 to influence demand and and appreciating currencies had eaten
The young Wisconsin professor was de- supply in 10 industries that together away at their profit margins. Many
scribing the role that the frontier had account for 50% of the country’s GDP. businesses are using the recession as a
played for three centuries in creating For instance, in January 2009 the China pretext to do some spring cleaning and
the American nation, but the Turner Auto Stimulus Package unveiled several reduce costs. “Between 1995 and 2008,
thesis applies to modern business, too. measures – including a 50% cut in the Indian companies grew so quickly that
Over the past three decades, the borders sales tax on vehicles with an engine ca- many bad habits crept into their opera-
of the corporate world have constantly pacity of less than 1.6 liters – to boost tions,” says Nirmalya Kumar, a London
shifted as developing countries opened demand for small and fuel-efficient Business School professor. “They’re try-
their economies to foreign businesses. vehicles. Companies that don’t launch ing to eliminate them. After more than
As a consequence, multinational com- such vehicles or focus on making big- a decade of growth, they are taking a
panies have had to cope with runaway ger automobiles will find themselves at breather to restrategize.”
growth, intense competition, greater a disadvantage. “The government calls Many emerging giants are restructur-
complexity – and constant change. it a stimulus, but it’s really redesign- ing portfolios, halting iffy diversification
Even so, little they have learned has ing industries,” says David Michael, the plans, and consolidating operations.
prepared Western companies for the im- Greater China head of the consulting They’re introducing quality systems
pact of today’s great recession on global- firm BCG. “That’s why 9% GDP growth such as lean Six Sigma so that they can
ization. Not only is the worldwide slow- in China tomorrow won’t be yesterday’s manufacture better products at a lower
down hurting developed economies 9% growth. The ‘new normal’ in many cost. In China, India, and Turkey, com-
more than emerging economies, but rapidly developing economies will be panies are taking a hard look at talent
it’s affecting the latter differently and different after the recession.” Edward Tse, and firing (or not hiring) and halting bo-
substantively altering their role in the Booz & Company’s managing partner nuses and raises to freeze salary bills at
global economy. By the time the slow- for Greater China, agrees: “The China of last year’s levels.
down ends, the frontier will have shifted the next 10 years will be very different Some businesses are using the cash
again in unexpected ways. from the China of the last 10 years and they’ve freed up to develop value-for-
Today’s great crisis is forcing change so will require a very different approach money products and services, particu-
at three levels. First, the developing for companies doing business there.” larly for rural consumers and those in
countries are becoming relatively bigger Third, competition in developing the lower middle class. Several Chinese
markets. Defying the odds, they seem countries has become more intense. manufacturers are using the slackening
likely to expand by 1.6% overall in 2009, With exports shrinking, companies in of demand as an opportunity to develop
with the International Monetary Fund those countries are concentrating more advanced products of their own, so
projecting in April 2009 that China’s on growing their sales at home. The ri- that they won’t always have to serve as
Lloyd Miller
economy would grow by 6.5%, India’s valry is particularly heated in markets subcontractors. “Some costs, like talent
by 4.5%, and the Middle East’s by 2.5%. for commodities, such as steel, cement, costs, are lower today, so it’s a good time
The pace is much slower than the spank- and aluminum, and for upmarket and for companies to invest in developing
hbr.org | July–August 2009 | Harvard Business Review 131

GLOBAL COMPETITIVENESS in the NEW WORLD.
innovation capabilities,” points out Peter ademics and consultants in Argentina, vesting in infrastructure and reducing
Williamson, a professor at the University Brazil, Bulgaria, China, Egypt, Hungary, taxes, particularly on products for low-
of Cambridge’s Judge Business School. India, Mexico, Russia, and Turkey dur- income consumers. If they succeed in
In India, Tata Motors’ March 2009 ing the first four months of 2009. I also increasing consumption at home – a big
launch of the world’s most inexpensive spoke with senior executives working if during a global crisis when consumer
car, the $2,000 Nano, has made low-cost for local and multinational companies confidence is low – they will be able to
in emerging markets and reviewed re- sustain growth even when demand from
cently published research. the OECD nations falls.
Most Western companies are preoc- Don’t forget, the developing nations
IDEA cupied with the crisis in their home mar- have also discovered one another. Trade
IN BRIEF
kets, but they need to start focusing on between emerging markets accounted
» Today’s great crisis has slowed the next phase of global growth. If they for 40% of their exports and imports
down the developing countries, want to avoid being blindsided tomor- in 2007 – double the level two decades
but they continue to grow. Not row, they must track five tectonic shifts ago. In fact, half of China’s exports went
only will they become bigger that are emanating from the developing to other developing countries.
economies by the time the reces- world. The longer the recession
sion ends, but their markets will lingers in the devel-
be significantly reshaped by new SHIFT 1 oped world, curtailing
government policies.
A Growing Divide demand for natural
» Competition in the developing Many executives are con- resources and manu-
world has become more intense vinced that the manner in facturing, the more
as companies there focus on which the recession unfolded the trade between the
domestic markets rather than ex- across the globe last year un- developing countries is
ports. Emerging giants are using derscores the close connections likely to grow. For instance,
the slowdown as an opportunity between developed and developing China’s Evoc Intelligent Tech-
to squeeze out costs, invest in economies. Since the 1990s, countries nology, which makes control systems,
innovation, and go after rural and
have become tightly interlinked, pri- currently sells 80% of its products in the
low-income consumers. Conse-
marily by trade and financial flows. A developed world but finds that 80% of
quently, they’re likely to become
contraction of the developed economies new demand is coming from India, the
more formidable rivals.
will set off shock waves in emerging Middle East, Russia, and, of course, China.
» Western companies must markets and send stock markets all over The company has recently set up compa-
continue to invest in emerging the world tumbling – as has happened nies in the Middle East, Russia, and India
markets, develop local execu- in the past year. In this view, it’s unlikely to distribute its products, and because
tives who are risk takers, team that the emerging markets can continue those regions have been less affected by
up with emerging giants, launch their rise when the advanced economies the financial crisis, Evoc continues to
sustainable products, and tap the
are falling. grow. “People don’t realize it, but this re-
potential of Africa if they wish to
Yet, more and more evidence shows cession also provides an opportunity for
retain their historical edge.
that today’s recession will make decou- China to strengthen its links with Latin
pling a reality. America,” notes Guillermo D’Andrea, a
Because demand and investments professor at IAE Business School in Bue-
innovation a priority for companies and from OECD nations have fallen at an nos Aires. “Many Chinese companies are
entrepreneurs. There’s even a name for unprecedented rate, governments of already doing that.”
the trend: the Nano Effect. And in China, several developing countries – includ- Recent findings by economists M. Ay-
BYD Auto’s December 2008 launch of ing Brazil, China, India, and South Af- han Kose, Christopher Otrok, and Eswar
the world’s first mass-produced plug- rica – are trying to reduce their econo- Prasad align with these trends. Their
in electric car, the F3DM, which sells mies’ dependence on international trade. research, published by the IMF, shows
for $22,000, has created a similar BYD They can afford to do so because over the that the economies of developed coun-
Effect. years, they’ve bolstered their national tries reach a peak or a trough around
Clearly, the companies in these econ- balance sheets by accumulating foreign the same time, and that emerging mar-
omies will be much more competitive at exchange reserves. Policy makers are kets also rise and fall more or less in uni-
the end of the recession than they were concentrating on boosting domestic son. However, emerging and developed
when it began. This is the conclusion I demand, especially outside the major nations don’t experience their highs or
came to after interviewing 30 or so ac- metropolises. Their governments are in- lows at the same time anymore.
132 Harvard Business Review | July–August 2009 | hbr.org

Financial markets the world over are
intertwined, though, so when the rich
economies’ stock markets tank, they will
roil financial markets in poorer countries,
causing their stock markets to fall even
if their economies are growing. “Main
The longer the recession lingers in the
Street is getting decoupled but Wall developed world, the more trade between
Street isn’t,” says Frank-Jürgen Richter,
the president of Horasis, a Geneva-based developing countries is likely to grow.
think tank.
Emerging markets and the United
States may part ways in another fun-
damental manner after this recession.
Politicians and policy makers have nations, especially if protectionism rears bureaucrats who run state-owned com-
traditionally believed that the United its ugly head. panies can provide good leadership, par-
States boasts the best model of a market ticularly in an uncertain environment,
economy. But American-style capitalism SHIFT 2 is earning greater acceptance. According
is under fire because of the financial The Return of to a recent Economist Intelligence Unit–
crisis, and the U.S. government bailout Family-Style Leaders Barclays Wealth report, the family busi-
has changed the system so much that Out of crisis springs opportunity; out of ness model is likely to emerge stronger
it’s scarcely recognizable. As a result, pol- adversity, new leadership paradigms. In after this recession because stakehold-
icy makers in the developing world are developing nations, the new paradigm ers tend to trust entrepreneurial lead-
likely to slow down the pace of deregu- will come from family businesses and ers during crises. Adds Kelin Gersick, a
lation and consider creating European- state-owned enterprises. senior partner of Lansberg, Gersick &
style welfare states. “There’s a growing Many emerging giants are run by fam- Associates, a family-business consulting
feeling in Mexico and indeed all of Latin ilies, especially in Brazil, India, Mexico, firm that works in emerging markets:
America that the American model isn’t and Turkey; in China, the state is a sur- “From the executive’s point of view, the
the only one. This is stoking a debate rogate for the family. Succession often security and long-term strategies of fam-
about the nature of future development,” becomes an issue in such businesses, so ily businesses have never looked so invit-
points out Carlos Mota, a professor bringing in “professional” management ing, and the status of working for a fam-
turned economic commentator based has traditionally been a priority for ily company has risen tremendously.”
in Mexico City. For a long time, “capital- stakeholders. The established wisdom is In Asia and South America, the heads
ism with local characteristics” has been that families should list their companies of family-owned businesses wield a great
the buzz phrase in China; it soon may on stock exchanges, hand the reins to deal of power, which enables them to
become one in the rest of the develop- corporate executives, and have found- make decisions and modify strategies
ing world. ers play only supervisory or ceremonial quickly – just as entrepreneurs can. Their
roles. Family conflicts have bedeviled influence allows them to deal deftly
THE RESPONSE business groups, particularly in India with policy makers, cut through red tape,
Stay Focused on and Latin America, and family-managed and use social networks for their com-
Emerging Markets companies have been terrible about gov- panies’ benefit. The leaders of govern-
Western companies that keep investing ernance, as the recent Satyam ment-run enterprises are
in developing countries despite their Computer accounting scan- equally powerful. For in-
problems at home will grow businesses dal in India shows, so bring- stance, Chinese oil compa-
that will help them ride out future reces- ing in the pros has appeared nies have often won deals
sions in a decoupled world. They may to be the best practice. by promising to open the
also be better positioned to survive this However, the crisis is stir- spigots of government aid
recession if it persists. These companies ring up fresh debate about to African nations.
will gain a critical first-mover advantage leadership styles and bring- Enterprises managed by
in new market segments, such as the ru- ing a new breed of quasi- families or governments
ral segment, that are tough to break into. family, quasi-professional also find it easy to adopt
Those that set up export bases in the leader into the limelight. In a long-term perspective.
developing world will benefit from the emerging markets, the notion Driven by personal pride
low-tariff trade flows between emerging that family members and the or national interest, they
hbr.org | July–August 2009 | Harvard Business Review 133

GLOBAL COMPETITIVENESS in the NEW WORLD.
Emerging Strategies
to Beat the Slowdown
S
SMART COMPANIES in emerging markets spotted the because of the fall in share prices, is now picking up listed
downturn early and reacted quickly. Unlike the 1994 Latin companies too. In April 2008, Fosun bought a 12% stake
American crisis or the 1997 Asian crisis, this slowdown in Tongjitang Chinese Medicines, the country’s largest
started in the United States, so by the time it hit develop- producer of traditional medicines.
ing countries, many enterprises there had braced for To improve profitability during the slowdown, some
the storm. companies have chosen to go up the value chain. Russia’s
By the end of 2007, for instance, Chinese real estate Severstal-metiz, which manufactures steel wire and wire
developer China Vanke began discounting apartment products, is shifting from commodity products to value-
prices to get rid of inventory. It reduced its land purchases added products. In July 2008, it bought Italy’s Redaelli
in 2008 and offered buyers incentives to pay cash up front Tecna, a global leader, to enter the specialty wire ropes
or expedite payments. By the end of that year, it had built business. In the business-to-consumer market, Lojas Co-
up a cash reserve of RMB 20 billion. In like vein, Russian lombo, one of Brazil’s biggest retailers, is also going more
software company Spirit smelled trouble in late 2007, upscale. The company has decided to halve the number of
when many of its U.S. customers started cutting costs. It new stores it will open, focus on premium customers, and
quickly moved into South Korea and China, where it now invest in flagship stores in cities such as São Paulo and
generates about 40% of its revenues. Brasília.
Spirit also decided to focus on its home market, partly At the other end of the spectrum, several Brazilian com-
because it hoped to benefit from the Russian govern- panies are pursuing the country’s populous low-income
ment’s continued funding of megaprojects like a $3 billion class. Appliances retailer Casas Bahia opened a store in
satellite navigation system. Riding on the back of infra- Paraisópolis, one of São Paulo’s biggest shantytowns. A
structure spending is a successful strategy in developing rival, Magazine Luiza, is trying to cater to the lower middle
countries. With the Chinese government investing in class in Brazil’s secondary towns. Such customers could
railways, subways, and highways, China’s Evoc Intelligent find greater choice, lower prices, and better credit in the
Technology has seen demand for its control systems grow. cities by searching the internet, but they don’t know how.
In fact, in 2008, it had revenues of RMB 1.2 billion – and At Magazine Luiza, salespeople help customers use com-
a 101% growth rate that was down only slightly from puters to browse virtual showrooms, order products, and
2007’s 116%. finance purchases.
Several enterprises are in decent financial shape because Many companies are going both up and down the value
their home markets have been booming for years. Some chain during the current crisis. Portobello, one of Brazil’s
are using M&A to consolidate their leadership positions leading ceramic tile companies, recently spent $8 million
or snapping up assets while prices are low. In November on two Italian cutting machines to make the bigger tiles
2008, for instance, Banco Itaú acquired Uniao de Bancos that wealthy customers favor. At the same time, the
Brasileiros (also known as Unibanco) to create Brazil’s company has slashed the prices of its most inexpensive
biggest bank. The new entity will be better able to weather products by half to gain more sales volume. With export
the recession and take on rivals in Latin America. Similarly, demand trailing off, volume is the key to growth in many
Antofagasta Minerals, a Chilean mining company that often emerging markets, so companies that offer a wide range
buys mines and reserves when copper prices are down, of products have a better chance of staying ahead.
recently invested in copper mines in Pakistan and Mexico,
and will be ready to bring more supplies to market the mo- Research provided by Elena Evgrafova, chief editor, HBR
ment the recession ends. Russia; Lea De Luca, chief editor, HBR Brazil; Ricardo Zisis,
Other enterprises are doing deals that diversify their chief editor, HBR America Latina; and Jack Yan, editor, Kent
portfolios. One of China’s largest conglomerates, Fosun Ke, senior editor; Sherly Dai, senior editor; and Neo Shi,
International, used to invest only in private companies but, senior editor, HBR China.
134 Harvard Business Review | July–August 2009 | hbr.org

don’t dance to the tune of the stock mar- through leadership,” pointed out a re- few years, going from just two in 2005
ket. They pursue long-term strategies cent Accenture research report on the to 11 in 2006 to a record 25 in 2007, ac-
even when economic growth collapses, global operating models of the future. cording to the Zephyr database. In 2008,
especially because their controlling eq- Brazilian companies acquired 23 more
uity stakes insulate them from takeovers. SHIFT 3 enterprises to create pan–Latin Ameri-
CEOs like Kumar Birla of the Aditya A Reversal in M&A can leaders, or multi-Latinas. Similarly,
Birla Group, Pat Davies of Sasol, and Many emerging giants are in a rush to from 2002 to 2007, Mexico’s Mexichem
Naguib Sawiris of Orascom have stuck become global industry leaders, so the bought several companies in South and
to their ambitions during this recession, moment the liquidity crunch eases, they Central America and became the largest
reassuring stakeholders that they are in will hit the takeover trail in developed producer of plastic pipes in Latin Amer-
it for the long run. economies. With Wall Street almost ica. Indian companies think differently;
One thing that has helped such enter- halving companies’ values, those preda- they prefer to head out of the region,
prises: Before the recession, smart fami- tors will be vying to acquire commodity since their neighbors are small. They,
lies decided to groom young inheritors producers, old brands in sunset indus-
for leadership roles. Most scions of family tries, and state-of-the-art technologies in
groups studied in business schools, usu- sunrise industries.
ally abroad, and worked in multinational The next reverse M&A wave will dif-
companies before returning home. Like fer from the previous one in three ways.
Mahindra & Mahindra’s Anand Mahin- One, Indian companies set the pace for
dra, they worked their way up from the
bottom or set up new ventures where
they could cut their teeth. The process
allowed them to develop working rela-
tionships with the company’s nonfam-
ily executives, who served as mentors. The moment the liquidity crunch eases,
Over time, some scions stepped aside
to make way for nonfamily CEOs while emerging giants will hit the takeover
others grew into the best candidates
for the top job. Consider Aditya Mittal,
trail in developed economies.
the Wharton-trained CFO of Arcelor-
Mittal. He will most likely take over as
chairperson from his father, L.N. Mittal,
without a hint of controversy about the
appointment. The quest for profession- cross-border deals in 2007, but compa- like other emerging giants, are likely to
alism appears to be taking a different nies from China, Brazil, and even Russia stalk European companies rather than
path in emerging economies. will take the lead in the future. Those U.S. corporations after the recession.
companies are cash-rich and less lev- Three, companies will acquire more
THE RESPONSE eraged than Indian companies, which small and midsize businesses overseas
Change Your Leadership Criteria borrowed heavily from banks before instead of acquiring giants. Indian com-
Multinational corporations may want to the recession to complete several major panies may not have much of a choice;
rethink the kind of leaders they appoint deals – such as Tata’s purchase of Jaguar they’re busy digesting the big compa-
in emerging markets. Many have been Land Rover and Corus, and Hindalco’s nies they took over before the financial
operating in China and India for close purchase of Novelis. crisis erupted and so will focus on small
to two decades, and their businesses are Two, Chinese and Latin American and strategic acquisitions. The shift has
becoming bigger, so the temptation is companies will use M&A to internation- also become perceptible in China since
to appoint organization builders and de- alize rather than globalize. They will try global acquisitions left both TCL and
velop more systems – à la HQ. However, to buy several businesses in the same Lenovo with hangovers. TCL purchased
tough battles over consumers in emerg- country or in neighboring countries in- the TV business of France’s Thomson
ing markets lie ahead, and CEOs would stead of hankering after one company and parts of Alcatel in 2004, but after a
do better to invest in entrepreneurial with worldwide operations. The number few years of losses, it had to pull out of
local managers who are willing to take of cross-border Latin American deals Europe. Lenovo tasted some success af-
risks. “For breakthrough performance in done by Brazilian companies, for in- ter buying IBM’s PC business, but coun-
developing countries, you need break- stance, jumped significantly in the past terattacks by Apple, Dell, and HP have
hbr.org | July–August 2009 | Harvard Business Review 135

GLOBAL COMPETITIVENESS in the NEW WORLD.
SHIFT 4
eroded its margins and diminished its Stung by Western criticism, govern-
zest for large international acquisitions.
Higher Stakes in ments of some developing countries are
“Chinese companies have learned that
Sustainability tackling environmental problems and
it’s tough to operate foreign companies, Money is often colorful in emerging pressuring local companies to go green.
and now they’re also worried about markets, but it is turning green every- Take China, where automobiles are re-
the quality of assets they will get,” says where. Many enterprises recognize that sponsible for as much as one-fifth of car-
Frank-Jürgen Richter of Horasis. “They if they don’t develop eco-friendly prod- bon emissions. The Chinese government
will avoid big deals and go after small ucts, packaging, and manufacturing pro- has recently imposed tougher emission
and medium companies that will be cesses by the time the recession ends, they guidelines and created a carbon-based
easier to assimilate.” may be shut out of premium segments taxation system. Its goal is to have 10,000
Emerging giants will also experiment by multinational rivals. The drive into hybrid, electric, and fuel-cell vehicles in
with new ways to strike up partnerships nonurban markets in China and India is 10 cities by 2010. The State Grid Corpo-
overseas, particularly to secure raw ma- reinforcing the message with a twist: Sus- ration of China is setting up charging
terials in other developing countries. tainable solutions are essential to peo- stations for the cars in Beijing, Shanghai,
For instance, China’s banks have been ple who don’t have and Tianjin initially.
buying stakes in or extending loans to access to water, elec- With demand for hy-
foreign companies. China Development tricity, or clean air. For brid, electric, and fuel-
Bank recently lent $10 billion to Brazil’s these rural customers, cell vehicles in China
Petrobras in exchange for a long-term companies need to likely to reach 100,000
supply of oil. The bank also provided develop products that a year by 2012, the
$15 billion to Russia’s state-owned OAO can work with small Chinese automobile
Rosneft Oil, and $10 billion to the state quantities of water or company Chery has
pipeline monopoly Transneft, and in electricity or that use already followed in
return, China was promised 15 million alternative sources of BYD’s footsteps and
tons of oil annually for 20 years. energy such as solar launched a plug-in
power. NGOs, labor hybrid car in Febru-
THE RESPONSE organizations, and governments are ary, and its rival Geely plans to unveil its
Join Forces with Emerging Giants also compelling companies to develop plug-in hybrid later in 2009. In addition
Multinational companies, knowing that more sustainable products; their envi- to the American, European, and Japanese
emerging giants are keen to buy com- ronmental standards have become busi- majors, they’ll face competition from In-
panies in overseas markets, can benefit ness norms in export markets. dia: Tata Motors is developing an elec-
by teaming up with them. For instance, Points out University of Michigan tric version of the Nano, and Bajaj Auto
many Western companies need help professor C.K. Prahalad, “The current is working on its own cheap small car.
from local companies to go into China’s economic crisis is similar to the collapse These Chinese and Indian companies are
lucrative hinterland or Indian’s rural of the dot-com economy a decade ago willing to make such bets because small,
market. They can enter other countries in one respect. A few companies, such inexpensive, and green automobiles can
by partnering with emerging giants and as Amazon, eBay, and Google, emerged also help them make inroads in devel-
offering them knowledge and assets – a from the debris and have thrived ever oped markets.
strategy called triangulation. In 2008, for since. Similarly, companies that under-
instance, Japan’s Kawasaki Motors struck stand the opportunities engendered by THE RESPONSE
a novel deal with India’s Bajaj Auto. The sustainability will come out of this re- Go Green Globally
Indian motorbike maker plans to market cession ready to capitalize on the low- Multinational corporations have tra-
high-end Kawasaki motorbikes in India carbon and clean-energy economy of ditionally taken their best-selling lines
while Kawasaki sells Bajaj Auto’s small the future.” Many emerging giants think into emerging markets and created new
motorbikes across Asia (except in Japan). they can leapfrog rivals in developed brands for them later. That cascading
Both parties will benefit, but neither countries, which are just starting to strategy may not work in the future
has taken on the other head-on – yet. get serious about eco-friendly products. because of the speed at which govern-
Similarly, Spain’s Telefónica, one of the That creates a level playing field – for the ments and consumers in developing
world’s biggest telecommunications op- first time. For instance, BYD was able to countries are becoming environmen-
erators, is helping Huawei Technologies, launch its plug-in hybrid two years be- tally conscious. If they’re to keep up
the Chinese telecom solutions provider, fore GM, which will launch the Volt in with local rivals, Western giants will
enter the Latin American market, where 2010, and a year ahead of Toyota, whose have to kick-start the development of
Telefónica is a major player. plug-in hybrid is due in late 2009. sustainable products for emerging mar-
136 Harvard Business Review | July–August 2009 | hbr.org

kets right away and launch eco-friendly much as African nations do. Those dif- ple, and the bottom-of-the-pyramid seg-
products all around the world at the ferences haven’t prevented companies ment, Africa Three, consists of about 500
same time. there from learning to adapt to local con- million to 600 million. Both segments
ditions. African nations are tough to crack, he says. Companies
SHIFT 5 share common languages, should target Africa Two, the middle-
The Call of Africa cultures, and trade routes, class segment, which, at somewhere
Africa is bound to beckon and companies that clus- between 350 million and 500 million
when emerging giants ter them together can cre- people, is bigger than India’s middle
hunt for growth again. ate viable markets. class. “Companies that can create prod-
The developed nations Many multinational ucts targeted at middle-class consumers
will return to health companies, such as Coca- will create major businesses in Africa.
slowly, and emerging Cola, Unilever, and Novar- With aspirations outpacing income, Af-
markets are tough to tis, already do business in rica Two is already consuming products
crack, so the lure of the Africa. Several Chinese meant for Africa One,” says Mahajan.
world’s second-largest continent will and Indian companies have also found
be inescapable. The IMF forecasts that it easy to operate there; they’re accus- THE RESPONSE
Africa’s economy will grow by 2% in tomed to dealing with regional varia- Tap Africa’s Potential
2009. Although that’s below its 2008 tions and can adapt the business models It’s time multinational companies went
growth rate of 5.2%, the decrease is due they use at home. Africa’s large popula- on consumer safaris, as Unilever execu-
mostly to a fall in the prices of commodi- tion of Indian immigrants has been fa- tives call exploratory forays into Africa’s
ties that Africa exports. cilitating trade with India; India-Africa markets. Take the case of the Diageo
Africa isn’t integrated with much of trade was an estimated $20 billion in beer brand, Guinness. Although its sales
the developed world, but it does have 2006. China’s trade with Africa shot up started falling some years ago, they were
trading relationships with developing from $10 billion in 2000 to $32 billion increasing steadily in some African coun-
countries in Asia, so it will probably re- in 2006. While India had invested some tries, such as Nigeria, where Guinness
cover in tandem with those markets. In $2 billion in Africa, China had commit- has been a leader for years. In July 2007,
later years it may start catching up with ted more than $8 billion by 2008. In his CEO Paul Walsh formally announced
them: According to a Goldman Sachs recent book, Africa’s Silk Road, Harry that Diageo would move deeper into
Africa to grow the market for its Irish
stout. “The future of Guinness may lie
not in Ireland’s pubs but in Africa’s bars,”
Mahajan says.
Africa’s middle class, at somewhere •••
In recent weeks, economists have been
between 350 million and 500 million wondering what shape a recovery might
take in developing countries. Will it be
people, is bigger than India’s. a V – a sharp rebound? Will it be a U – a
gradual recovery? Or will it be a W, as
economies rise and fall before rising
again? Whichever it might prove to be,
the recovery will spell “threat” with a
report, South Africa’s per capita GDP Broadman wrote: “China’s and India’s capital T because many emerging gi-
will surpass the per capita GDPs of Bra- newfound interest in trade and invest- ants will come out of the recession lean,
zil, Russia, India, and China by 2050, ment with Africa presents a significant mean – and green.
even though the South African econ- opportunity for growth and integration
omy will be smaller than any of the four of the sub-Saharan continent into the Anand P Raman (araman@harvard
.
BRIC economies. global economy.” business.org) is a senior editor at Har-
Africa is a market of around 1 bil- According to Vijay Mahajan, a Uni- vard Business Review in Boston and
lion people, just shy of India’s 1.1 billion. versity of Texas, Austin, marketing pro- tracks trends and companies in emerging
Cynics will say it isn’t a country but a fessor who wrote the book Africa Rising markets.
continent. They’re right, but then peo- in 2008, the continent’s premium seg-
Reprint R0907U
ple say the same thing about China and ment, which he calls Africa One, consists
To order, see page 158.
about India, whose regions differ as of about 50 million to 150 million peo-
hbr.org | July–August 2009 | Harvard Business Review 137

GLOBAL COMPETITIVENESS in the NEW WORLD.
Country Assessments
by Ian Bremmer, Preston Keat,
and Ross Schaap THE RISK INDEX
I
IN WHAT SHAPE will nations emerge from the cur- GDP EXPORT
VULNERABILITY VULNERABILITY ABILITY WILLINGNESS
rent recession? To find some answers, in April 2009, RANK RANK TO ACT TO ACT
Eurasia Group analyzed three factors: countries’
vulnerability to the crisis, their governments’ ability 11 2 4 5
to respond through economic policies, and their 1 = least vulnerable 1 = low ability or
30 = most vulnerable willingness
governments’ willingness to do so. 5 = strong ability or
A country’s vulnerability to a global downturn can willingness
be measured by changes in the growth rates of GDP
and exports. Using International Monetary Fund
data, we ranked 30 of the world’s most important ARGENTINA 26 12 2 2
economies on the expected decline in their GDP The Cristina Fernandez de Kirchner government has few policy
growth rate in 2009 relative to the average they options, so the economy will continue to deteriorate. By 2010 the
attained between 2005 and 2007. We also ranked government may have to seek IMF help.
them on the year-over-year contraction in exports
BRAZIL 11 2 4 3
based on the latest available data from Bloomberg.
The Lula administration can increase spending without borrowing
A rank of 1 signifies that the country had the small-
from the IMF. Concerns about Brazil’s fiscal situation won’t emerge
est decline in GDP growth or exports. until late 2010.
A government’s ability to stabilize its economy
and its willingness to act also affect how a country BULGARIA 22 16 3 3
will emerge from the recession. Many countries will A fixed exchange rate gives the government few monetary options
want to pump money into the system, but some may while political factors constrain its ability to spend more. Credit
availability will depend on foreign banks’ actions.
lack resources. They will print money or borrow it,
piling up debt that may lead to inflation in the future.
CHILE 5 24 5 4
Others will have the resources to spend but may face
Growth will slow in 2009, but budget surpluses of past years give
political or institutional impediments to using them. the government room to pursue countercyclical policies.
In the 1990s, for instance, the Japanese government
stabilized that country’s economy but lacked the po- CHINA 8 9 5 4
litical will to immediately restructure ailing financial Through 2010, China will struggle to stabilize the economy and
institutions or force companies to clean up balance dampen social unrest. But since China has few fiscal constraints,
government spending will help offset the collapse of demand for its
sheets. That led to prolonged stagnation, giving rise
exports.
to Japan’s lost decade.
We rated countries’ ability and willingness using COLOMBIA 16 6 4 3
a five-point scale. A score of 5 shows that a govern- Declining foreign investment and widening deficits will weaken
ment has a strong ability or willingness to respond, Colombia’s fundamentals. But the government has already finalized
while a 1 indicates that it doesn’t. its 2009 external borrowing programs and can tap bond markets
Together, the vulnerability, ability, and willingness and multilateral financing in the future.
rankings provide a three-dimensional projection of
EGYPT 1 4 4 4
what the economic risk in countries will look like
Egypt has the financial resources and political capital to respond to
when the great recession ends.
the crisis. However, if the slowdown extends into 2010, the environ-
Ian Bremmer is the president, Preston Keat is a ment could become tough.
research director, and Ross Schaap is the comparative
GERMANY 20 11 5 4
analytics director of Eurasia Group, a New York–based
The government will continue to support the financial sector and
political risk consulting company. Bremmer and Keat
social spending. Its ability to issue sovereign debt at low interest
are coauthors of The Fat Tail (Oxford University Press, rates will help, but propping up other European Union economies
2009). Reprint R0907U will be a burden.
138 Harvard Business Review | July–August 2009 | hbr.org

HUNGARY 14 20 3 2 POLAND 13 17 3 4
Hungary’s minority government faces large deficits, export depen- The government knows how to tackle the crisis and has the ability
dence, and inflation. The government has outlined an agenda for to raise debt. Both domestic demand and the macroeconomic
fiscal reform to adhere to the requirements in Hungary’s IMF loan fundamentals will stay relatively strong.
package, but it appears to be ambitious.
RUSSIA 29 25 4 2
INDIA 6 10 3 2 Infrastructure spending has slowed significantly. However, if com-
India’s foreign exchange reserves will cover its external debt modity prices stabilize near current levels and the global recession
obligations, and government spending will be funded by domestic hits bottom, Russia’s economy will most likely recover by late 2010
borrowing. But a tough overseas borrowing environment implies or 2011.
a weak recovery by the corporate sector.
SAUDI ARABIA 7 N/A 5 5
INDONESIA 3 21 3 3 Saudi Arabia can maintain economic stability because the govern-
Elections will distract the country until 2010. The new govern- ment was cautious about spending money during the boom. De-
ment will find it easier to push through much-needed reforms, mand for oil will increase revenues when the global recovery begins.
but bureaucratic inefficiency will delay implementation.
SOUTH AFRICA 10 1 3 3
ISRAEL 18 18 4 2 Domestic and international financing will help South Africa muddle
Israel will increase government spending by borrowing, but a through; turning to the IMF for help will be a last resort. Heavy
systemically dysfunctional government will prevent structural infrastructure spending and the World Cup soccer tournament will
and regulatory reforms. provide a boost to the economy in 2010.
JAPAN 23 26 5 3 SPAIN 17 14 5 4
The government has the resources to inject a sizable stimulus, so it The government will provide a stimulus, but structural factors will
will stay in power. However, it has shown little appetite to rebalance limit its ability to prevent recession-induced job losses. The needed
the country’s export-dependent growth. adjustments could take several years.
KAZAKHSTAN 28 27 3 2 THAILAND 21 5 4 2
The slump in commodity prices will dramatically slow Kazakhstan’s Thailand has been hit hard by the drop in export demand as well as
growth, but it won’t trigger regime-threatening unrest. As its foreign political turmoil. Its banks are well capitalized, but the government
exchange reserves erode, Kazakhstan could turn for help to Russia, will face resource constraints if the slowdown continues into 2010.
China, or the IMF.
TURKEY 27 13 3 3
MALAYSIA 25 7 4 2 The government is likely to sign a new IMF standby agreement,
Malaysia will attempt piecemeal reforms to boost foreign invest- which will provide Turkey a line of credit of $20 billion to $25 billion.
ment and domestic demand. Its second stimulus plan won’t stave That should reduce concerns about the country’s external financing
off recession, and the government won’t provide a third in 2009. needs and speed a recovery.
MEXICO 19 19 5 3 UAE 24 N/A 5 4
The government will continue to take measures to boost the Financial stability will continue although tensions between Abu
economy and will rely on the banks to bail out some companies. Dhabi and Dubai will slow attempts to stimulate the economy. The
Although the flu outbreak may hit tourism, the economy is likely to emirates will shift from extravagant to more utilitarian spending
recover by 2010. projects.
NIGERIA 2 N/A 5 4 UKRAINE 30 22 2 2
Nigeria’s economy will recover at a smart pace, although insuffi- Ukraine faces political instability and social unrest. Its economy will
cient investment will reduce the country’s oil revenues. Fewer remain vulnerable to external shocks.
but larger banks will be left standing.
UNITED KINGDOM 15 3 4 3
PAKISTAN 4 15 3 4 A rise in domestic savings, which will reduce tax revenues, and
In addition to a $7.5 billion IMF package, Pakistan will secure sizable limited demand for the pound will curtail the government’s ability
support from the United States in 2009. However, the country’s to engage in countercyclical spending. The Brown government
political dynamics and Islamic militancy will constrain the govern- has been addressing problems in the banking sector, which should
ment’s ability to implement economic reforms. speed up a recovery.
PHILIPPINES 12 23 3 1 UNITED STATES 9 8 5 4
Large remittances from overseas and a stable agricultural sector Washington has adequate capital for countercyclical spending,
will help the government avoid a major fiscal imbalance. If the situ- but continued spending stokes fears of inflation. It isn’t clear how
ation deteriorates, the government will cut spending even though rapidly the U.S. will be able to clean up the mess in the financial
elections are scheduled for 2010. sector.
hbr.org | July–August 2009 | Harvard Business Review 139

The Last Word
BY HENRY MINTZBERG
Rebuilding
Companies as
Communities
Companies must remake themselves
into places of engagement, where
people are committed to one another
and their enterprise.
BENEATH THE CURRENT ECONOMIC CRISIS lies another
crisis of far greater proportions: the depreciation in com-
panies of community – people’s sense of belonging to and
caring for something larger than themselves. Decades of
short-term management, in the United States especially,
have inflated the importance of CEOs and reduced others
in the corporation to fungible commodities – human re-
sources to be “downsized” at the drop of a share price. The
result: mindless, reckless behavior that has brought the
global economy to its knees.
Government stimulus programs and the rescue of the
biggest and sickest corporations will not alone resolve
the problem. Companies need to reengage their people.
The practice of both management and leadership needs
to be rethought.
The subprime mortgage problem is a glaring case in
point. How could it have come about in the first place, and
how could it have spread to so many blue-chip financial
institutions? The answers seem readily apparent. Those
who promoted these mortgages were intent on driving
140 Harvard Business Review | July–August 2009 | hbr.org

up sales as quickly as possible to maxi- where talented people are loyal to one management. A community leader is
mize their own bonuses, the ultimate another and their collective work, every- personally engaged in order to engage
consequences be damned. And the fi- one feels that they are part of something others, so that anyone and everyone can
nancial institutions that bought these extraordinary, and their passion and ac- exercise initiative. If you doubt this can
mortgages were not being managed. complishments make the community a happen, take a look at how Wikipedia,
Many of their executives adopted what magnet for talented people coming out Linux, and other open-source opera-
has become a pervasive style of “leader- of schools or working at other places.” tions work.
ship” in America: They sat in their offices Young, successful companies usually So maybe it’s time to wean ourselves
and announced the goals they wanted have this sense of community. They are from the heroic leader and recognize that
others to attain, instead of getting on growing, energized, committed to their usually we need just enough leadership –
the ground and helping improve per- people, almost a family. But sustaining leadership that intervenes when appro-
formance. Executives didn’t know what it with the onset of maturity can be an- priate while encouraging people in the
was going on, and employees didn’t care other matter: Things slow down, politics organization to get on with things.
what went on. What a monumental fail- builds up, the world is no longer their That is how IBM got into e-business.
ure of management. oyster. Community is sometimes easier An enthusiastic programmer eventu-
To varying degrees, the same failure to preserve in the social sector – with ally convinced a middle manager that
has occurred throughout the private NGOs, not-for-profits, and cooperatives. the opportunity existed. The manager
and public sectors. A belief has grown The mission may be more engaging, and stitched together a team with almost no
up that leadership is somehow separate the people more engaged. budget. And when the initiative finally
from, and superior to, management. This But somehow, in our hectic, indi- found its way to Lou Gerstner, then the
view only isolates the people in leader- vidualist world, the sense of community CEO, he encouraged it. That’s all. Just
ship positions, thereby undermining a has been lost in too many companies enough leadership!
sense of community in organizations. and other organizations. In the United
States in particular, many great enter- From Top-Down to Middle-Out
Communities at Work prises, along with the country’s legend- How can we rebuild companies as com-
Individualism is a fine idea. It provides ary sense of enterprise, have been col- munities? Unfortunately, most of the
incentive, promotes leadership, and en- lapsing as a consequence. hundreds of articles and books on how
courages development – but not on its to manage large-scale change – transfor-
own. We are social animals who cannot Just Enough Leadership mation, revitalization, turnaround – fo-
function effectively without a social sys- “Communityship” is not a word in the cus on leadership. A popular example is
tem that is larger than ourselves. This English language. But it should be – to “Leading Change: Why Transformation
is what is meant by “community” – the stand between individual leadership Efforts Fail” (HBR March-April 1995), in
social glue that binds us together for on one side and collective citizenship which the author, John Kotter, outlines
the greater good. Think no further than on the other. In fact, I believe that we eight phases: First establish a sense of
the energy unleashed by the strong should never use the word “leadership” urgency. Then create a powerful guid-
sense of community in Barack Obama’s without also discussing communityship. ing coalition, in which “senior manag-
campaign. Sure, leaders can engage and involve ers always form the core.” This coalition
Community means caring about our others. But the concept remains focused should create a vision and broadcast it
work, our colleagues, and our place in on the individual – on personal initia- so that others are empowered to carry
the world, geographic and otherwise, tive. Show me a leader, and I’ll show you it out. The process moves on to plan-
and in turn being inspired by this car- a bunch of followers. ning short-term wins, consolidating im-
ing. Tellingly, some of the companies we Communityship certainly makes use provements, and institutionalizing new
admire most – Toyota, Semco (Brazil), of leadership, but not the egocentric, approaches.
Mondragon (a Basque federation of co- “heroic” kind that has become so preva- Kotter’s approach sounds sensible
operatives), Pixar, and so on – typically lent in the business world. We make a enough and has probably worked. But
have this strong sense of community. great fuss these days about the evils of how often, and for how long? What hap-
That came through loud and clear in micromanaging – managers’ meddling pens when the driving leader leaves? Per-
“How Pixar Fosters Collective Creativ- in the affairs of their subordinates. Far haps it’s time to rebuild companies not
ity,” a September 2008 article in HBR more serious is “macroleading”: the ex- from the top down or even the bottom
Robert Meganck
by Ed Catmull, the president of Pixar, in ercise of top-down authority by out-of- up but from the middle out – through
which he attributed the studio’s success touch leaders. Communityship requires groups of middle managers who bond
in creating a string of highly popular an- a more modest form of leadership that together and drive key changes in their
imated films to its “vibrant community might be called engaged and distributed organization.
hbr.org | July–August 2009 | Harvard Business Review 141

The Last Word Rebuilding Companies as Communities
Can major transformation really be- to mention the middle managers them- that have it driving transformation from
gin like this, almost spontaneously, with selves, need to recognize the power of the top. Community leaders see them-
small acts by people who are not part this dedication. selves as being in the center, reaching
of the senior leadership? Well, think of An atmosphere that promotes out rather than down. They facilitate
the American Revolution, which started trust. The way to start rebuilding com- change, recognizing that much of it must
with a tea party, or the French one, which munity is to stop the practices that be driven by others. At General Electric,
began with the storming of a prison to undermine it, such as treating human Jeff Immelt, who wants the company to
release a handful of inmates. In his re- beings as human resources; firing them become as much renowned for innova-
cent book Community: The Structure of in great numbers when the company tion and organic growth as it has been
Belonging, Peter Block, an authority on has not met performance targets (but for operational excellence, encourages
workplace learning and performance, remains profitable); tolerating obscene the teams running GE’s businesses to fig-
wrote, “Most sustainable improvements compensation packages for CEOs (es- ure out for themselves what is needed
in community occur when citizens dis- pecially ones that offer them “retention” for transformation.
cover their own power to act…when and other bonuses for doing what they
citizens stop waiting for professionals or receive a salary to do); exhibiting a gen- Developing Community
elected leadership to do something, and eral disrespect for anything in the com- How, then, to get from the company as
decide they can reclaim what they have pany’s past, including its culture; and a collection of human resources to the
delegated to others.” Imagine all manag- in general overemphasizing leadership. institution as a community of human
ers as citizens of their corporations. In other words, the organization has to beings – from heroic leadership to en-
shed much of its individualist behavior gaged management? Some programs
A Useful Foundation and many of its short-term measures in that colleagues and I created for the
In large, hierarchical organizations, cer- favor of practices that promote trust, en- development of managers and their or-
tain conditions help to facilitate a trans- gagement, and spontaneous collabora- ganizations have taught us a number of
formation to communityship: tion aimed at sustainability. lessons:
The remnants of community. It is A robust culture. To create this kind 1. Community building in an organiza-
far easier to build on what remains of of atmosphere and allow the remnants tion may best begin with small groups of
a community than to create one from of community to bloom requires a ro- committed managers. Peter Block cites
scratch. In my experience, many compa- bust, compelling culture. People must evidence that small groups are more
nies that seem to have lost their sense of know what the place is all about. Every- effective than great leadership or indi-
community in fact retain it somewhere, one at Google knows that its mission vidual training in creating strong com-
even if it is hidden from leaders who is “to organize the world’s information munities. Some companies bring groups
have failed to appreciate it. For example, and make it universally accessible and together at their own training facilities,
in pharmaceutical companies that have useful.” A company without a compel- as GE does. Others, including Lufthansa
become lumbering behemoths focused ling culture is like a person without a and LG, send their managers to public
on sales and acquisitions, clusters of sci-
entists who remain deeply dedicated to
discovering remedies for disease can al-
ways be found.
The pressures of the workplace hardly
Often, the place to look for the rem-
nants of community is among middle
encourage thoughtful action. Managers
managers. Significant numbers of these
people tend to be highly knowledgeable
need to slow down and reflect.
about the enterprise and deeply com-
mitted to its survival. After studying the personality – flesh and bones but no life programs such as the International Mas-
roles of middle managers in corporate force, no soul. Organizations function ters Program in Practicing Management
transformations, Quy Nguyen Huy, a best when committed people work in (impm.org) that we at McGill have de-
professor at Insead, wrote: “The intensity cooperative relationships based on re- veloped with partner schools.
with which [middle] managers wanted spect. Destroy this, and the whole insti- If their organization does not offer
to protect the long-term interests of the tution of business collapses – as is now such opportunities, middle managers
company and the welfare of their sub- evident in so many companies. needn’t despair; they can develop them-
ordinates surprised me again and again” Leadership at the center. A robust selves. My stepson, Phil LeNir, did this
(“In Praise of Middle Managers,” HBR community requires a form of leader- when he was a director of engineering
September 2001). Senior managers, not ship quite different from the models at a high-tech company. After the com-
142 Harvard Business Review | July–August 2009 | hbr.org

pany laid off some people in his unit its members reach out in socially active,
and shifted many of its programming responsible, and mutually beneficial
activities to contractors in Eastern Eu- ways to the broader community. Put
rope, Phil had to do something to help differently, healthy organizations take
his people – all of them first-time man- corporate social responsibility seriously
agers – settle down and figure out how and gain significant benefits in return.
to oversee the outsourced work. They Employees of a company that barely
lacked a training budget, so Phil took a functions as a community can hardly be
leaf from our experiences in the IMPM expected to care about any other com-
and began to meet informally with his munity. But members of a company that
group every week or two over lunch. has a robust sense of community realize
The managers’ perspective changed en- how much their organization depends
tirely. As Phil explained, “We stopped for sustained success on constructive
looking for others to tell us what to do. engagement with the communities
We stopped whining about how bad around it.
things were around us and began think- So perhaps the ultimate test of
ing about how we could leverage our ex- whether a company has become a true
perience to make things better.” community is whether its people see
These “management learning meet- themselves as responsible citizens of
ings,” as the group called them, went the broader community.
on for two years. Most members of the •••
group were subsequently promoted – a In Molière’s play The Bourgeois Gentle-
success they attributed in good part to man, a character has a revelation: “For
the sessions. Their experience eventu- Egyptian pyramid: From there you can more than 40 years I have been speak-
ally led to the creation of CoachingOur have no idea what’s going on inside, and ing prose without knowing it.” Perhaps
selves.com to help other managers do what’s happening on the ground is too likewise, we need to discover that we
the same thing. far away to make out. Certain manag- live in community. Surely people’s de-
2. The sense of community takes root ers within an open hierarchy, in contrast, tachment from their institutions is not
as the managers in these groups reflect may be better placed to make the key natural, any more than is the excessive
on the experiences they have shared connections between operations and promotion of leadership that encour-
in the organization. Managing is hectic, strategy. ages so much followership.
now more than ever, and the pressures This can be especially true of middle Communityship needs to be strength-
of the workplace hardly encourage managers, many of whom appreciate ened in many organizations today. This
thoughtful action. What today’s manag- best what needs to be changed. I am does not mean that we have to put it on
ers need most is to do what Phil and his constantly amazed by how just the seed a pedestal, in place of leadership. It, too,
team did: slow down and reflect. What of an idea in the hands of engaged peo- can be overdone. After all, witch hunts
did that customer really mean? Why do ple who see both the operational specif- had their roots in community. What
we have so much trouble understand- ics and the big picture can develop into we need is balance. We would do well,
ing the company’s strategy – and one a significant strategy or change in the therefore, to see both these forces as
another? organization. working together in a socially respon-
3. The insights generated by these re- 4. As these initial teams promote sible way to get past the insularity that
flections naturally trigger small initiatives change, they become examples for exists in many organizations. A healthy
that can grow into big strategies. We like other groups that spread community- society balances leadership, community-
to think of strategy as formulated de- ship throughout the organization. Com- ship, and citizenship.
liberately at the top to be implemented mitment becomes contagious when peo-
below. I have found in years of my own ple realize its immense benefits not only Henry Mintzberg (henry.mintzberg@
research that organizations learn their to the organization but to themselves. mcgill.ca) is the John Cleghorn Professor
way into interesting strategies through Of course, diffusing such groups across of Management Studies at McGill Univer-
small ventures that arise from the initia- the organization requires the support of sity in Montreal and a founding partner
tives of all sorts of people. the senior leadership. Without it, efforts of CoachingOurselves.com.
The conventional view of the organi- in communityship seldom get far.
Reprint R0907V
zation puts the chief executive atop a 5. An organization knows that com-
To order, see page 158.
pyramid. Well, picture yourself atop an munityship is firmly established when
hbr.org | July–August 2009 | Harvard Business Review 143

Letters to the Editor
The Greening of Petrobras
In his article, “The Greening of Petro- parts per million of sulfur. Petrobras’s
bras” (March 2009), José Sergio Gabrielli diesel, however, contains 500–1800
de Azevedo conveys an image of Petro- ppm – clearly not the lowest level pos-
bras that is, to say the least, incomplete. sible with current technology. As a re-
The company operates in the oil produc- sult, Petrobras contributes to the bad air
tion and refining industry, which, by its quality of big cities in Brazil as well as
very nature, inevitably has an impact to the premature deaths of thousands of
on the environment. Akatu Institute for people every year.
Conscious Consumption and Ethos Insti- In addition, Petrobras has not com-
tute for Corporate Social Responsibility plied with legislation enacted in 2002
that required the company to strongly
First Person reduce the sulfur content of its diesel
BY JOSÉ SERGIO GABRIELLI DE AZEVEDO
within seven years. The company ar-
gued that it did not do so because the
automotive industry announced that it
would not comply with the legislation
either and would therefore not produce
engines that would be compatible with
The Greening of
Petrobras reduced-sulfur diesel – as if that would
Eight years ago, energy giant Petrobras was best known for its appalling
environmental record. Today, Brazil’s biggest company is a champion for release Petrobras from its own respon-
sustainable business at home.
HOW CAN PETROBRAS, a huge multinational
whose main expertise is offshore drilling, evan-
fined more than $25 million. Environmental groups were
furious. Local fishermen protested outside our headquarters
sibilities. Ultimately, an agreement was
here in Rio and Greenpeace activists chained themselves to
gelize about protecting the environment? I know
it might seem preposterous – particularly since
Petrobras was making headlines not too long ago
for a string of environmental disasters.
railings outside the building and left oil-soaked dead birds at
its entrance. Then, just six months later we had an even big-
ger leak at a refinery near Curitiba – a million gallons of oil
poured into two rivers. We were criticized again for outdated
reached and ratified in court to postpone
leak-detection technology, as well as for inadequate staffing
the reduction in sulfur for a number of
Petrobras News Agency
In January 2000, a leak in a corroded pipeline spilled and emergency plans, and were fined $115 million. Those
350,000 gallons of crude oil into Guanabara Bay, a tourist accidents, along with others that year, generated a flood of
destination, fishing community, and wildlife habitat near Rio bad press, including the BBC’s derisive comment that Petro-
de Janeiro, which had already suffered a Petrobras spill in bras showed “an embarrassing level of incompetence.” The
1997. Because the pipe didn’t have modern sensors, oil poured incidents were environmentally devastating, alarming to our
out for two hours before the leak was detected. We were investors, harmful to our bottom line, bad for the company’s
hbr.org | March 2009 | Harvard Business Review 43
years. That formally resolved the com-
pliance issue, but Petrobras’s behavior
concerning public health remains highly
contend that, assuming the need for a controversial.
transition period to a new energy era, Petrobras also fails to get high marks
truly responsible companies in oil pro- with regard to investing in renewable
duction and refining must both ensure energy. In the oil production and refin-
that their products have the lowest pos- ing industry, a relatively high investment
sible impact on the environment, given indicates that a company is committed
today’s technology, and strongly invest to more quickly achieving a cleaner en-
in renewable energy. vironment and improved public health.
Petrobras does neither. Companies in But Petrobras’s investments in renew-
Europe and the United States produce able energy are a very small proportion
and distribute diesel that contains 10–15 of its total investment: For the period
We welcome letters from all readers wishing to comment on articles in this issue. Early re-
sponses have the best chance of being published. Please be concise and include your title,
company affiliation, location, and phone number. E-mail us at hbr_letters@harvardbusiness.
org; send faxes to 617-783-7493; or write to The Editor, Harvard Business Review, 60 Harvard
Way, Boston, MA 02163. HBR reserves the right to solicit and edit letters and to republish
letters as reprints.
148 Harvard Business Review | July–August 2009 | hbr.org

2009 to 2013, the company invested Walk-through simulations, which test challenges with the subsequent expan-
$2.8 billion in biofuels out of a total in- different assumptions about various sion and scaling of those experiments.
vestment plan of $174.4 billion. possible internal and external circum- Organizations tend to focus intensely
A final point for consideration: Since stances of a problem, are also appropri- on the success of the initial pilot, often
transparency is a major attribute of ate for intricate, squishy initiatives. They allotting it a disproportionate amount
companies that are working to be more can demonstrate, for example, how a of resources (in terms of the num-
socially and environmentally responsi- new process in a business, or different ber and quality of people as well as
ble, Gabrielli should at least have raised functions in merged businesses, would money). Because of that strong level
the problems we’ve mentioned here as operate by taking into account all the di- of support, the pilot project team can
issues to be addressed by his company. mensions of those operations. The data usually handle any problems that may
However, he did not. gained from walk-through simulations arise. However, since problems inevita-
Helio Mattar are not as precise as those of formal as- bly multiply when successful pilots are
President sessments, but they do provide valuable expanded – but the resources often do
Akatu Institute for Conscious Consumption insights. Businesses can benefit from a not – the ability to address those issues
São Paulo variety of testing approaches other than diminishes and the scale-up of an ini-
formal experiments. tially successful experiment suffers or
Ricardo Young James L. Poage fails. In my experience, it is therefore
President President critical to set up pilot projects with the
Ethos Institute for Corporate JLP Performance Consulting guiding principles of sustainability and
Social Responsibility Lexington, Massachusetts scalability to ensure ultimate success on
São Paulo a broader scale.
As Davenport demonstrates in his in- Torsten Kuenzlen
sightful article, initial experiments or pi- Director, Commercial Leadership
How to Design Smart Business lots are often highly successful. In many The Coca-Cola Company
Experiments cases, however, there are significant Bangkok
Thomas H. Davenport, in his article
“How to Design Smart Business Experi-
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LETTERS TO THE EDITOR
Davenport responds: I certainly agree more from their jobs than a paycheck, proactive management in the form of
with James L. Poage that experiments but few managers are willing to give it goal setting, performance reviews, feed-
are not feasible in all circumstances and to them. Millennials want to believe in back, encouragement, praise, and conse-
that you can’t formally test many large- what they are doing and want to know quences for poor results.
scale changes, such as acquisitions or they are being heard. Gen Yers have unrealistic expecta-
reorganizations. I also agree that simu- While coddling is certainly not the tions because we Gen Xers, as manag-
lations can provide useful knowledge answer, flexibility and accountability ers, have done a poor job of defining the
in the types of situations he describes. are. Remember, this is the generation rules and setting clear expectations. In
Anything that gets the decision maker that was force-fed group projects at ev- fact, undermanagement is at an all-time
beyond unaided intuition is usually ery level of education, from elementary high level of crisis in the workplace. This
worth trying. school through graduate programs, so is becoming increasingly problematic as
I also agree with Torsten Kuenzlen how could we expect them not to be a new generation of workers demands
that the initial rollout of an experimen- convinced that vertical collaboration is constant feedback and mentoring.
tal result can be more successful than the best way to solve a problem? Emily Sawyer-Kegerreis
later ones because of greater attention Mark Ervin MBA Director
and enthusiasm. It’s another version of Director of Creative Mississippi State University
the famous Hawthorne effect. However, o2ideas Starkville, Mississippi
Kuenzlen seems to equate pilots with ex- Birmingham, Alabama
periments. A pilot, sometimes defined as
a “trial apparatus or operation,” is often While thoughtful, the three commentar- The Business of Biomimicry
undertaken without measurement, con- ies regarding the Gen Y case study were
trol groups, or randomized assignments written by individuals who were not of The blanket statement in Janine M.
to groups. Pilots can indeed be useful, the same generation as the subject of Benyus and Gunter A.M. Pauli’s article,
but they are not always very rigorous. the article. This was very disappoint- “The Business of Biomimicry” (The HBR
ing. Who better to shed light on their List, February 2009), that batteries “be-
motivational dilemma than Millennials come highly polluting once discarded”
Gen Y in the Workforce themselves? is false and misleading. There are two
At 27, I regularly coach individuals types of consumer batteries: single use
If you take a step back and analyze the of all ages. Perhaps a reflection on how and rechargeable. Common single use
situation objectively, there seems to be other members of the latest generation batteries, such as AA and 9-volt, contain
something broken in the way compa- reconcile their impatience with the re- no toxic or hazardous materials and
nies approach Millennials (see Tamara sponsibilities of leading others – with- are classified as nonhazardous under
J. Erickson’s article “Gen Y in the Work- out the protagonist’s short attention strict U.S. federal waste-management
force,” February 2009). What typically span and bias toward action – would rules. After more than one hundred
starts out as nothing more than a lack have rounded out the notes. years of observation and study, there
of understanding often grows into an Jessica Block is absolutely no evidence that disposal
opinion that Gen Y is simply a lazy, dis- Managing Director of single use batteries in either landfills
respectful lot. FTI Consulting or solid waste incinerators has had any
Gen Xers and Baby Boomers view Washington, DC adverse effect on human health or the
their jobs the same way: You are what environment.
you do. Today’s younger workforce, A decade ago, Gen Y’s forebears – Gen Rechargeable batteries, on the other
however, has the exact opposite per- Xers – also had radical ideas about au- hand, do contain potentially toxic metals,
spective: Millennials see their jobs as an tonomy, promotion, and praise as they such as cadmium and lead. That’s why
extension of their lives, not the other entered the workforce and launched battery manufacturers in 1994 founded
way around. And since their lives are dot-coms. The reason Gen Y workers the Rechargeable Battery Recycling
fast-paced, communication-saturated, today demand the same level of engage- Corporation (RBRC), which provides a
friend-rich, and change-filled, they have ment and feedback that Gen Xers did is recycling solution for rechargeable bat-
high hopes that their jobs will mirror that the change Gen X fought for in the teries by operating tens of thousands of
that lifestyle. So why wouldn’t they be 1990s (exemplified by the internet start- drop-off locations in the United States
disenchanted when they haven’t got- up culture) was never fully absorbed by and Canada.
ten a promotion after six months on the mainstream. Essentially, Gen Y really Mark A. Kohorst
the job and when they get in trouble isn’t asking for anything more than what Senior Manager
for Facebooking at work? They expect organizations should be doing already: Environment, Health & Safety
150 Harvard Business Review | July–August 2009 | hbr.org

NEMA (National Electrical problem resolution examples, then cre- 7th Annual
Manufacturers Association) ating a clear vision of how to solve the Medical Innovation Summit
Rosslyn, Virginia problem in a new way, and finally, gain- October 5-7, 2009 I Cleveland, Ohio
ing commitment based upon proven and
Benyus and Pauli respond: We are glad quantifiable value that can be achieved.
that Mark A. Kohorst recognizes the This approach is virtually identical to
need to recycle toxic batteries. Approxi- the one recommended by Lay, Hewlin, Improving the
mately 3 billion batteries are sold an-
nually in the United States, averaging
and Moore in their article. However, it is
important to note that their comparison
Prognosis:
about 10 per person. Of the total mer- is to a generic concept of solution selling, Cancer Cures
cury and cadmium in municipal solid not specifically to Sales Performance In- through Innovation
waste streams in 1989, dry cell batteries ternational’s trademarked methodology,
accounted for about 88% and 54%, re- Solution Selling.
spectively. Efforts to reduce or eliminate Keith M. Eades
Join CEO’s Sam Palmisano of
mercury, and a greater call for battery CEO
IBM, Daniel Vasella, MD of
recycling, followed. Sales Performance International
Unfortunately, not all batteries are re- Charlotte, North Carolina
Novartis, David Brennan of
cycled. Lead-acid car batteries have the AstraZeneca, Dick Clark of
highest rate of recycling, 90%, but no Lay, Hewlin, and Moore respond: We Merck, Fred Hassan of
other battery type comes even close any- are pleased to hear that Keith M. Eades Schering-Plough, Kári
where in the world – not even in Sweden, endorses the point of view we describe Stefánsson, MD of deCode
Japan, or Germany, where recycling is in our article. Indeed, we have received genetics, and network
mandatory. overwhelmingly positive feedback from correspondent Maria
Even if 100% of batteries were recycled, people in organizations worldwide, Bartiromo as well as many
the argument remains: Thin film solar some thanking us for providing suitable
other distinguished leaders at
cells offer a new competitive source of vocabulary for an approach that they
the 7th Annual Medical
energy at a fraction of the cost at which have implemented in part, others for of-
a kilowatt hour is sold through batter- fering valuable guidance about how to
Innovation Summit. Take
ies. That is the major breakthrough in market and sell products and services in advantage of our exciting lineup
competitiveness for thin film solar cells, a hostile environment, such as the cur- of speakers, panel discussions,
over and above the increase in material rent marketplace. live surgeries and clinical
efficiency. We also agree that the reference to presentations to learn about the
solution selling in our article is to the latest trends in medical
generic approach that many compa- innovation and what they mean
In a Downturn, Provoke Your nies have implemented in recent years. to you.
Customers Furthermore, we would like to empha-
size that provocation-based selling dif-
Philip Lay, Todd Hewlin, and Geoffrey
Moore make some useful suggestions
fers from solution selling in exactly the
ways we describe in our article. Thus, Register Now
about succeeding in sales, especially in we respectfully disagree with Eades’s
uncertain economic times (“In a Down- statement that the approach marketed
turn, Provoke Your Customers,” March by his company under the name Solu-
www.Clevelandclinic.org/
CancerSummit or call
2009). Actually, I’ve agreed with this tion Selling is “virtually identical” to the 800.884.9551
point of view for more than 20 years, provocation-based selling and referrals-
as I’ve helped my clients adopt a trade- based marketing methodology that we Enter promotional code
marked Solution Selling approach to discuss in our article. In fact, clients and HARVARD and receive $125 off
winning business and serving customers. other third parties repeatedly tell us the cost of registration. Pay only
In two of my books, The New Solution that no brand of solution selling is ef- $675 before July 31, 2009.
Selling (2003) and The Solution Selling fective in helping them to achieve sales
Fieldbook (2005), I describe how top- during the current downturn or indeed
performing salespeople provoke custom- under any circumstances when there is
ers into action by first stimulating ex- no available budget for investing in a
ecutive level interest with results-based specific type of product or service.

Executive Summaries STRATEGY
in the NEW WORLD
JULY–AUGUST 2009
| STRATEGY & COMPETITION |
55 | The 10 Trends You Have to Watch
FINANCE Eric Beinhocker, Ian Davis, and Lenny Mendonca
in the NEW WORLD
Executives are beginning to look to the future
SPECIAL ISSUE
FINANCE in the
NEW WORLD
after spending a full year in crisis mode. As they
When today’s great crisis ends,
the U.S. financial system will be
reengage in strategic thinking, they will need
a shadow of its former self, but
America will be stronger than ever.
History shows that money and
power don’t always go hand in hand.
| by Niall Ferguson
THE to continually assess the changing economic
DESCENT
OF FINANCE I IF THE ASCENT OF MODERN FINANCE be-
gan in the 1980s, with “liar’s poker” on Wall
landscape – and they can effectively do that by
Street and the City of London’s Big Bang,
it ended on September 15, 2008 – the day
Lehman Brothers Holdings went bankrupt.
Seven years on, 9/15 supplanted 9/11 as the
costliest day in Wall Street’s history.
Lehman Brothers’ demise was one of
seven events that, in the space of just 19
keeping a close watch on the underlying forces
days, signaled the end of an epoch. The first,
on September 7, was the nationalization of
the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac). On
September 14 Bank of America announced
that it would buy Merrill Lynch. On Septem-
outlined in this article.
ber 16 a money market fund, Reserve Pri-
mary, broke the buck – that is, its net asset
value dropped below $1 per share – because
of losses on the unsecured commercial pa-
per it had bought from Lehman. That same
day the Federal Reserve agreed to give AIG
$85 billion to avoid a lethal chain reaction
if the insurance giant couldn’t meet its ob-
The authors, from McKinsey & Company,
ligations on the credit default swaps it had
sold to banks. Nationalization in this case
took the form of a warrant to the Federal Re-
serve for 79.9% of the company’s equity. On
September 22 the investment bank became
an extinct species when Goldman Sachs and
Morgan Stanley converted themselves into
discuss the current trajectories of 10 particularly
bank holding companies. Finally, on Septem-
ber 25, Washington Mutual Bank was seized
by the Office of Thrift Supervision and
Getty Images
placed into the receivership of the Federal
Art Credit
Deposit Insurance Corporation – marking
the biggest bank failure in America’s history.
important trends: strains on
44 Harvard Business Review | July–August 2009 | hbr.org hbr.org | July–August 2009 | Harvard Business Review 45
natural resources, a damper on SPECIAL ISSUE
STRATEGY in the
NEW WORLD
| POLITICAL ECONOMY | globalization, the loss of trust
in business, the growing role
44 | The Descent of Finance The of government, investment
10 Trends You Have to Watch
Niall Ferguson in quantitative decision tools,
| by Eric Beinhocker, Ian Davis, and Lenny Mendonca
What if the current recession turns out to be like the Great Depres- shifting patterns of global AFTER A FULL YEAR in heads-down crisis mode,
business executives are looking again to the future.
As they reengage in strategic thinking, many are
struck by a sense that the world has changed:
to the evolving role of business in society. Here we
discuss how the crisis may affect their trajectories,
and we address the implications for strategy.
Some trends, we argue, remain firmly on track,
The turmoil was not merely another turn of the but uncertainties are cropping up around others.
sion of 1929–1933? Four years from now, the United States might consumption, the economic
business cycle but a restructuring of the economic We also see signs of new forces emerging, which
order. Is that impression accurate? we will be exploring in more
hbr.org
To answer this question, it is necessary to detail in the months ahead.
Are these the right
examine the underlying forces that shape the busi- The overall picture is of an trends to watch?
ness environment and to look for discontinuities. altered business landscape. It Share your thoughts
with the authors at
McKinsey & Company tracks the most important of does seem there will be no go-
landscape.hbr.org.
these forces, from the growth of emerging markets ing back to the precrisis world.
find itself with a still-shrinking economy, half as many banks as in rise of Asia, industry structure
Lorenzo Petrantoni
Eric Beinhocker is a senior fellow at the McKinsey Global Institute, McKinsey & Company’s economics
research arm, where he leads research on economic, management, and public policy issues; he is based in
London. Ian Davis, also based in London, is McKinsey’s 10th managing director. Lenny Mendonca is the
chair of the McKinsey Global Institute and a director in the firm’s San Francisco office.
upheaval, technological innova-
hbr.org | July–August 2009 | Harvard Business Review 55
2009, a third as many hedge funds, and retail banking resembling a
public utility. The federal debt could be at $20 trillion, the top income tion, and price instability.
tax rate at 45%, and the S&P 500 at 418. Ferguson, a professor at Companies’ strategic behavior should be tied
Harvard University and Harvard Business School, imagines that to be closely to these trajectories. For instance, given
the worst-case scenario. The Breakdown, as Ferguson calls it, would recent reversals in what had seemed to be an
alter the international economic order, too, with China’s GDP rising unstoppable trend – globalization – managers
to half that of the U.S. by 2013 and the IMF’s Special Drawing Rights should reassess their business models under
replacing the dollar as the international reserve currency. different future scenarios. Would they fare as
Ferguson analyzes the roots of the crisis as well as the measures well in a more protectionist world as they would
taken by the Obama administration to tackle it. He goes on to de- in one with free and fair movement of goods,
scribe the impact on the global economy and points out that the slow- capital, and talent? Or would certain production
down is hurting other nations locations no longer make
more than the U.S., thereby sense, certain overseas
building a powerful case for Available online business units lose value,
a somewhat more sanguine or certain core activities be
view of America’s future. In a HBR ARTICLE COLLECTION harder to perform? Mean-
better-case 2013, he posits, the WHAT MAKES A DECISIVE while, as the U.S. ceases
Federal Reserve’s policies have LEADERSHIP TEAM to be the engine of global
produced neither inflation nor Product 12186 consumption, businesses
deflation. A remarkable number should increasingly set their
Does your leadership team
of new banks have appeared, sights on China and India,
suffer from decision-making
the top income tax rate is 35%, where consumer spending
ills – bad choices, endless
and the S&P 500 stands at 976. is growing faster. In mature
bickering, lost opportunities?
Because the world has become markets, they should refo-
Many teams trip over common
more dangerous as well as cus their offerings on the
obstacles while making strategic choices. For example,
poorer, everyone looks to the remaining sweet spot of
members hit an impasse because they can’t look
United States to continue act- demand: consumers over
beyond their own group’s interests to see what’s best
ing as a global policeman – and age 50.
for the organization overall. Or they don’t know how
the greenback is still the Reprint R0907E
world’s currency of choice. to work through conflicts constructively, so discussion
Reprint R0907D degenerates into personal attacks. This collection pro-
vides a playbook for avoiding decision-making traps.
harvardbusiness.org
152 Harvard Business Review | July–August hbr.org
Month 2009 |2009 | hbr.org

LEADERSHIP
in the NEW WORLD
LEADERSHIP in the NEW WORLD
LEADERSHIP in the
SPECIAL ISSUE
NEW WORLD
How Gen Y &
Leadership Boomers
in a Will Reshape
(Permanent) Your Agenda
Crisis Your oldest and youngest talent
cohorts demand many of the same
things in a workplace – and have the
When the economy recovers, things won’t return to normal –
numbers to get their way.
and a different mode of leadership will be required.
| by Sylvia Ann Hewlett,
| by Ronald Heifetz, Alexander Grashow, and Marty Linsky
Laura Sherbin, and Karen Sumberg
IT WOULD BE PROFOUNDLY REASSURING to view the current
RIGHT NOW, managers of people are operating in full reces-
economic crisis as simply another rough spell that we need
to get through. Unfortunately, though, today’s mix of urgency, sionary mode. They’re wrestling with whether and how much
high stakes, and uncertainty will continue as the norm even to reduce head count, weighing alternatives like furloughs and
after the recession ends. Economies cannot erect a firewall pay cuts, and generally trying to get by with less. Not many are
against intensifying global competition, energy constraints, focused on what just a few years ago was described as “the war
climate change, and political instability. The immediate cri- for talent.” As the economy recovers, however, companies will
sis – which we will get through, with the help of policy makers’ return to the challenge of winning over enough highly capa-
expert technical adjustments – merely sets the stage for a ble professionals to drive renewal and growth. Only then will
sustained or even permanent crisis of serious and unfamiliar they realize that the rules of engagement have changed – that
challenges. the landscape of talent management has been transformed.
Dave Wheeler
The combination of Generation Y eagerly advancing up the
Dave Wheeler
Consider the heart attack that strikes in the middle of the
night. EMTs rush the victim to the hospital, where expert professional ranks and Baby Boomers often refusing to retire
trauma and surgical teams -- executing established procedures has, over the course of a few short years, dramatically shifted
the composition of the workforce; each of these generations
62 Harvard Business Review | July–August 2009 | hbr.org hbr.org | July–August 2009 | Harvard Business Review 63
hbr.org | July–August 2009 | Harvard Business Review 71
| LEADERSHIP | | HUMAN RESOURCES |
62 | Leadership in a (Permanent) Crisis 71 | How Gen Y and Boomers
Ronald Heifetz, Alexander Grashow, and Marty Linsky Will Reshape Your Agenda
The current economic crisis is not just another rough spell. Sylvia Ann Hewlett, Laura Sherbin, and
Karen Sumberg
Today’s mix of urgency, high stakes, and uncertainty will continue
even after the recession ends. The immediate crisis – which we When it comes to workplace preferences, Gen-
will get through with policy makers’ expert technical adjust- eration Y workers closely resemble Baby Boom-
ments – sets the stage for a sustained, or even permanent, crisis, ers. Because these two huge cohorts now
a relentless series of challenges no one has encountered before. coexist in the workforce, their shared values will
Instead of hunkering down and relying on their familiar hold sway in the companies that hire them.
expertise to deal with the sustained crisis, people in positions The authors, from the Center for Work-Life
of authority – whether they are CEOs or managers heading up a Policy, conducted two large-scale surveys that
company initiative – must practice what the authors call adap- reveal those values. Gen Ys and Boomers are
tive leadership. They must, of course, tackle the underlying eager to contribute to positive social change,
causes of the crisis, but they must also simultaneously make the and they seek out workplaces where they can
changes that will allow their organizations to thrive in turbulent do that. They expect flexibility and the option to
environments. work remotely, but they also want to connect
Adaptive leadership is an improvisational and experimental art, deeply with colleagues. They believe in em-
requiring some new practices. Like Julie Gilbert, who overcame ployer loyalty but desire to embark on learning
internal resistance to reorient Best Buy toward female purchas- odysseys. Innovative firms are responding by
ers, adaptive leaders get things done to meet today’s challenges crafting reward packages that benefit both gen-
and then modify those things to thrive in tomorrow’s world. They erations of workers – and their employers.
also embrace disequilibrium, using turbulence as an opportunity Reprint R0907G
to build crucial new capacities, as Paul Levy did
to rescue Beth Israel Deaconess Medical Center Available online
from a profound financial crisis. Finally, adaptive
leaders, such as Egon Zehnder, the founder of an ONLINE COURSE
executive search firm, draw out the leadership LEADING ACROSS THE AGES
skills that reside deep in the organization, recog-
Product 2450C
nizing the interdependence of all employees and
mobilizing everyone to generate solutions. The online course Leading Across the
Reprint R0907F Ages (CD-ROM) will help you more
effectively lead a multigenerational
workforce. The course is based on
the work of Tammy Erickson. You
will learn how to attract, retain, and
engage top talent of every generation; reduce workplace
tension and frustration arising from generational differences;
leverage knowledge about generational perspectives in order
to position ideas more persuasively; improve team productiv-
ity; increase innovation capability via enhanced communica-
tion and collaboration skills; and contribute to the develop-
ment of an engaged, loyal, high-performing workforce.
harvardbusiness.org
hbr.org | July–August 2009
hbr.org | Month | Harvard Business Review 153

THE NEW ECONOMICS REGULATION
in the NEW WORLD in the NEW WORLD
THE NEW
ECONOMICS in the
| DECISION MAKING | REGULATION in the
SPECIAL ISSUE
NEW WORLD SPECIAL ISSUE
NEW WORLD
78 | The End of Rational
The End of Economics Government
Rational in Your
Economics Dan Ariely Business
Regulation is back, but you won’t see a return to FDR-style controls. Instead,
Your company has been operating on the
expect a new set of tools designed to coax, not curb. | by Robert B. Reich
Standard economic theory assumes
premise that people – customers, employees,
managers – make logical decisions. It’s time
to abandon that assumption. | by Dan Ariely IF YOU FEEL AS IF GOVERNMENT OFFICIALS are breathing
down your neck, get used to it. For the foreseeable future,
governments are going to take an especially keen interest in
how you’re managing your business. Executives should look
that human beings are capable of
for tighter scrutiny than we have seen for decades and new,
indirect forms of intervention. Managers in the private sector,
accustomed to ducking behind corporate- and government-
IN 2008, a massive earthquake reduced the financial world relations professionals, will need to develop a new mind-set
to rubble. Standing in the smoke and ash, Alan Greenspan, and skill set that will allow them to partner with government
the former chairman of the U.S. Federal Reserve once hailed rather than fend it off.
as “the greatest banker who ever lived,” confessed to Congress This is not the first era of government ascendancy. The
that he was “shocked” that the markets did not operate accord- pendulum of public trust has swung back and forth between
making rational decisions and that
Jacob Thomas
ing to his lifelong expectations. He had “made a mistake in business and government for more than a century. Confidence
presuming that the self-interest of organizations, specifically in one drops, leading the other to take prominence – until
Brian Stauffer
banks and others, was such that they were best capable of prominence leads to excesses that erode confidence and push
protecting their own shareholders.” the pendulum back. In the United States, business was ascen-
dant between the end of World War I and the start of the Great
78 Harvard Business Review | July–August 2009 | hbr.org hbr.org | July–August 2009 | Harvard Business Review 79
markets and institutions, in the aggre-
94 Harvard Business Review | July–August 2009 | hbr.org hbr.org | July–August 2009 | Harvard Business Review 95
gate, are healthily self-regulating. But
the global economic crisis, argues Ariely, has shattered these two articles of faith | POLITICAL ECONOMY |
and forced us to confront our false assumptions about the way markets, companies,
and people work. So where do corporate managers – who are schooled in rational 94 | Government in Your Business
assumptions but run messy, often unpredictable businesses – go from here? Robert B. Reich
In this lively article, the author, a professor of behavioral economics at Duke
For the foreseeable future, governments
University, shows how the emerging discipline of behavioral economics can help
will take a keen interest in how execu-
businesses better defend against foolishness and waste. Smart organizations will
tives manage. In the U.S., industries and
develop a behavioral economics capability by hiring qualified experimenters and
sectors representing more than a third of
conducting small trials that build on one another, revealing a radically different view
the nation’s economy – including financial
of how people make decisions. Revenge and cheating are only two of the irrational
services, automobiles, health care, and
behaviors that companies will find underlying their employees’ and customers’
telecom – are being reshaped. But don’t
actions.
expect a return of old-style regulation,
Once an understanding of irrationality is embedded in the fabric of an organiza-
which would stifle innovation. Govern-
tion, a behavioral economics approach can be applied to virtually every area of the
ment will coax businesses rather than
business, from governance and employee relations to marketing and customer
curb them by offering incentives for desir-
service.
able conduct. Private-sector managers
Reprint R0907H
will need to develop a new mind-set and
skill set so they can partner with govern-
ment rather than fend it off.
| STRATEGY & COMPETITION | THE NEW ECONOMICS in the NEW WORLD.
Change has actually been on the
horizon for years. It’s the culmination of
86 | The Big Shift: Measuring Shareholders
First? several long-term trends, such as a deep-
the Forces of Change Not So Fast… ening distrust of business, greater ties
CEOs are rediscovering “stakeholder
John Hagel III, John Seely Brown, between the interests of business and
capitalism”– respecting the needs
not just of investors but also
of customers, employees, and
suppliers. | by Jeffrey Pfeffer
and Lang Davison IT’S CLEAR that the limits of shareholder capitalism are show-
ing themselves like so many cracks in the ages-old foundation
of a house. The question is, Do the current repair efforts by
senior executives and policy makers signal a lasting return to
stakeholder capitalism – where CEOs feel responsible to all
society, and decreasing regulatory control
constituencies and not just investors?
We’ve been there before, after all: In the 1950s and 1960s,
across national borders.
the stakeholder was king. CEOs saw their role as one of bal-
ancing the interests of the various groups that touched their
Traditional metrics don’t capture many
companies – customers, employees, suppliers, shareholders,
and the community at large. This reflected the executives’ so-
phisticated understanding not only of their role as stewards of
the valuable resources entrusted to them but also of their own
enlightened self-interest: Each of these groups was essential
for organizational success. What was true then is even more
Over time, economies worldwide will
so today, in an age of knowledge work, outsourcing, global
supply chains, and activist interest groups.
of the challenges and opportunities
The idea that shareholders should be preeminent took hold
Jacob Thomas
in the 1970s, for many reasons. Among them was a widespread
belief in the efficiency and intelligence of markets. As the
University of Michigan’s Gerald Davis describes in Managed
by the Markets, society has over the past 30 years organized
in store for U.S. companies and the settle on versions of the system that’s
national economy. The authors, from beginning to emerge in the United States.
Deloitte, present a framework for under- | ORGANIZATION & CULTURE | Governments will make use of taxes and
standing the forces that have trans- tax credits to promote wanted behavior,
90 | Shareholders First? such as investing in renewable energy
formed business Not So Fast…
THE NEW ECONOMICS over the past 40
in the NEW WORLD.
or hiring veterans, and to discourage
Jeffrey Pfeffer unwanted behavior, like emitting excess
years – and an
The carbon. They will also take a more active
Big Shift
index for gauging When did we start measuring the
role in coordinating public and private in-
Measuring the
Forces of Change
their impact on success of a company only ac-
performance. | by John Hagel III, John Seely Brown,
and Lang Davison
cording to the increase in its share terests through rules on how businesses
and individuals are compensated.
DURING A STEEP RECESSION, managers obsess over short-
price? Stanford professor Pfeffer
term performance goals such as cost cutting, sales, and market
Reprint R0907Q
share growth. Meanwhile, economists chart data like GDP
growth, unemployment levels, and balance-of-trade shifts to
gauge the health of the overall business environment. The
problem is, focusing only on traditional metrics often masks
long-term forces of change that undercut normal sources of
economic value. “Normal” may in fact be a thing of the past:
Reprint R0907L
Even when the economy heats up again, companies’ returns
argues that it’s time for CEOs to
will remain under pressure.
One reason traditional measures alone don’t capture the
challenges and opportunities for U.S. companies and the na-
tional economy is that the digital infrastructure supporting the
lion’s share of industries has sustained rapid performance im-
provements – especially in computing power, bandwidth, and
storage. Previous infrastructures experienced sharp bursts of
innovation in underlying technologies, such as the telephone
once again balance shareholders’
and the internal combustion engine, and then quickly stabi-
Jacob Thomas
lized. Today, we do not yet see any signs of stabilization, which
suggests not only that competitive intensity (which has more
than doubled in the past 40 years) will continue to build but
also that the digital infrastructure will keep boosting the po-
86 Harvard Business Review | July–August 2009 | hbr.org
interests with those of the other
stakeholders: employees, suppli-
ers, and customers.
Reprint R0907K
154 Harvard Business Review | July–August hbr.org
Month 2009 |2009 | hbr.org

RISK CUSTOMERS
in the NEW WORLD in the NEW WORLD
RISK in the
| RISK MANAGEMENT | CUSTOMERS in the
SPECIAL ISSUE
NEW WORLD SPECIAL ISSUE
NEW WORLD
The 101 | The Moral Understanding
Moral Hazard Economy the Post-
Hazard Recession
Economy Peter L. Bernstein Consumer
Appetites for risk should naturally
abate after the catastrophic losses
we’ve just seen. Will too-rich bailouts A new thriftiness and desire for simplicity will
The Obama adminis-
prevent that from happening? combine with pent-up demand to shape buying
| by Peter L. Bernstein behavior. | by Paul Flatters and Michael Willmott
IN MOST DEVELOPED ECONOMIES, prerecession consumer be-
tration and the U.S.
THE OBAMA ADMINISTRATION and the Federal Reserve au- havior was the product of more than 15 years of uninterrupted
thorities – along with their counterparts around the world – prosperity. Despite the occasional slowdown, growth was an
are doing their utmost to thaw the terrible credit freeze that almost permanent feature, accompanied by low and stable lev-
took hold in the fall of 2008. What could be guaranteed has els of price inflation. Consumers felt the effects directly, as as-
been guaranteed. What trash the central banks could absorb set values and incomes grew more rapidly than inflation. From
has been absorbed. And the U.S. government has poured bil- 1995 to 2005, real disposable incomes increased by a third
lions of taxpayer dollars of new capital into the country’s larg- in the United States and the UK. Sweden and Denmark saw
est financial institutions. Other key industries are taking their them rise by a quarter, and even in economies like Japan and
Federal Reserve –
place in the queue as well. Germany, which grew more slowly, they climbed about 10%.
Fredrik Broden
That governments have had to take these steps is a sorry That economic landscape had a profound impact on consum-
commentary on how badly the housing and derivatives ers. New appetites emerged, and markets sprang up to serve
bubbles deformed the economy and the global financial sys- them. Consumers could afford to be curious about gadgets and
tem. Although interventions in the private sector have in technology, shell out for enriching (or just fun) experiences,
all likelihood prevented an immediate meltdown, they have
106 Harvard Business Review | | hbr.org hbr.org | | Harvard Business Review 107
along with counter-
July–August 2009 July–August 2009
hbr.org | July–August 2009 | Harvard Business Review 101
parts around the
world – are doing their utmost to thaw the credit | CUSTOMER RELATIONS |
freeze that took hold in the fall of 2008. But
these measures, says the author, serve to show 106 | Understanding the Postrecession Consumer
how badly the housing and derivatives bubbles Paul Flatters and Michael Willmott
deformed the economy and the global financial
How will consumers behave as we emerge from this downturn?
system.
Though recessions differ in their causes, depth, and duration, it’s
The first effect of the bailouts will be a
possible to anticipate the way consumers will act by understand-
dramatic rise in the size and cost of government
ing their behavior and motivation in previous recessions and
borrowing, which will have serious inflation-
analyzing current trends. Flatters and Willmott trace the paths
ary consequences. Just as important is the
of eight trends as they entered the recession and project their
transformation of the U.S. central bank into a
trajectories into the recovery.
version of the “bad bank” touted as a solution
The authors’ analysis paints a picture of chastened new con-
to the crisis. How disastrous the consequences
sumers who will seek simplicity in products and services; take
will be depends on whether our appetite for risk
companies’ boardroom ethics into account in purchase decisions;
has been increased by the bailouts or reduced
pursue “discretionary” thrift (virtuous but not essential cost cut-
by the meltdown.
ting); flit capriciously from brand to brand; make green consump-
Reprint R0907M
tion more a matter of reducing waste than purchasing premium
products; and steer away from frivolous, extreme leisure experi-
ences in favor of wholesome, authentic ones.
Like their great-grandparents, who grew up in the Great
RISK in the NEW WORLD.
Security budget cuts for COST-SAVING OPPORTUNITIES
Depression, young consumers today, the authors say, will be per-
fiscal year 2008–2009 are Some security responsibilities scale up or
Security
only slightly greater than
manently changed by coming of age during a profound economic
down with the economy. Here are a few ways
for the previous year… to do more with less:
16.8%
15.4% $$$ Cut back on protective services, since
overseas travel is down and fewer “employees
…but the percentage of
at risk” are abroad. (But multinationals should
firms cutting is larger…
Alert
note that some countries may become more
52.5%
dangerous as economic conditions increase
downturn.
19%
the chances of civil unrest.)
…and many are reporting
increases in: $$$ Conduct fewer preemployment back-
HR INTERVENTIONS ground screenings. With hiring slowed or fro-
45% zen, fewer are needed. However, downturns
PROPERTY THEFT produce more cases of embellished credentials
44% or concealed substance abuse and financial
problems. If your recession strategy includes
Reprint R0907P
FRAUD
43% more work with contractors and outsourcers,
When the economy’s down – and budgets you should demand background reports on
VIOLENCE
are stressed – the threat level rises. 27% those who will service your account.
| by George K. Campbell and Richard A. Lefler IP THEFT
$$$ Automate certain tasks. For example, se-
19%
curity guards at entrances can be replaced by
BOMB THREATS electronic access technology. Capital invest-
7% ment in such projects provides tax advantages
SOURCE: SECURITY EXECUTIVE COUNCIL
and reduces long-term operating costs – and
vendors are motivated to price technology and
SINCE THE RECESSION SET IN, THE INSIDER THREAT services to sell.
many shifts have occurred in the enterprise As businesses resort to layoffs and
risk environment; some threats are rising, other cost-cutting measures, em- $$$ Find internal clients who are willing to
ployee discontent rises, and the fund programs that security will then manage
while others are falling. Security budgets are
so-called insider threat level grows. for them.
being cut deeply and pervasively – though not
Insider threats have historically ac-
always in ways responsive to these fluctua- counted for the majority of economic ERRATIC BEHAVIOR
tions. Security directors must do more with losses incurred by business. Insiders Businesses should be alert to indicators
less while helping their businesses clearly do damage primarily through theft, of disturbance, from signs of depres- THE WEAKEST-LINK EFFECT
understand the shifting threats and ensuring fraud, and the violation of intellec- sion or agitation to displays of anger As the economy declines, small businesses,
tual property protection policies. and aggressiveness or even full-blown too, are under pressure to cut costs. The
that the most urgent priorities are addressed.
SOLUTION Embrace transparency, quell rumors, and com- workplace violence (more than 27% of Fortune 500 need to worry about a falling
For that reason alone, adopting an enterprise
municate candidly to reduce levels of discontent. Engage respondents report increased rates of violence). standard of security among the “Fortune
risk perspective as a recession coping strat- with employees; be alert to threat cues. SOLUTION Focus on behaviors that have been identified as 50,000” – which include your suppliers,
egy is itself an urgent priority. predictive of an escalation to violence, and intervene early. customers, or outsourcing providers.
The goal of enterprise risk management INFORMATION AT RISK Business ecosystems share vulnerabili-
is to track, quantify, and analyze The ease with which employees can steal information by PRODUCT PROTECTION ties virally, so your supply chain’s weakest
downloading it onto USB flash drives puts confiden- As consumers continue to covet products they can’t afford, links will affect you.
these shifting thresholds of risk
tial business assets at risk. When layoffs loom (or the market will find ways to satisfy demand. Manufacturers of SOLUTION Investigate the resilience of security
throughout an organization. Secu-
rumors of layoffs circulate), data siphoning rises. consumer goods will probably see a rise beyond your own walls.
rity is then responsible for mitigat- SOLUTION Recommunicate policies that pro- in product diversion and counterfeiting;
ing threats to employees and other hibit the misappropriation of corporate data. Some retailers will face a surge in organized George K. Campbell, formerly director of corporate security
stakeholders, facilities, and assets IT departments make it impossible to attach stor- professional shoplifting. for Fidelity Investments, and Richard A. Lefler, who headed
Eva Tatcheva
both tangible and intangible – including age devices to computers without their assistance SOLUTION Keep an eye on auction sites worldwide security at American Express, are faculty members
and either filter outgoing e-mail for large attachments or for a spike in “bargain” goods that may be counterfeit or of the Security Executive Council, an organization that fosters
the value of reputation and brand.
| CUSTOMER RELATIONS |
prohibit attachments outright. stolen. Don’t economize on loss-prevention programs. security practice as a strategic activity. Reprint R0907N
104 Harvard Business Review | July–August 2009 | hbr.org hbr.org | July–August 2009 | Harvard Business Review 105 CUSTOMERS in the NEW WORLD.
Selling to the
Debt-Averse
Consumer
113 | Selling to the Debt-Averse
| RISK MANAGEMENT| | by Eric Janszen
Consumer
104 | Security Alert THE SUCCESSFUL consumer-oriented
companies in coming years will be
those that can figure out how to make
do without the former life of the eco-
nomic party: the monthly payer.
In his heyday, this kind of consumer
asked himself not whether he could
come up with the whole cost of a vaca-
whenever a load of debt was “light-
heartedly incurred by people who fore-
saw nothing but booms,” and he was
right. Now that the credit and housing
bubbles have collapsed in the United
States and around the globe, the era
of unbridled, debt-financed consumer
spending is over, and the monthly payer
positively to marketing that allows
them to feel their newfound thriftiness
is a lifestyle choice rather than a con-
straint imposed by the economy. Mes-
sages that center on family, life simpli-
fication, and getting back to basics will
appeal.
Will the monthly payment consumer
Eric Janszen
tion or landscaping or a car but whether is out of action. ever come back? The Federal Reserve
he could afford the resulting increase To win over newly tightfisted, debt- wants to reinflate the credit bubble
George K. Campbell and Richard A. Lefler
in his monthly bills. His answer was in- averse consumers, companies will and engineer a return to the old days.
variably yes. He was a creation of the need to follow the path of firms that But that isn’t possible. When a nation’s
no-money-down and low-interest incen- succeeded in previous downturns by businesses and households take on too
The era of unbridled, debt-financed
tives that proliferated in the FIRE (fi- promoting value and util- much debt and the economy stumbles,
nance, insurance, real estate) economy ity over luxury and brand. the cash flow needed for financing dries
over the past 25 years. Consumers won’t be able First up, defaults rise, and a vicious cycle of
In his 1939 book Business Cycles, Jo- to buy as many goods as recorded falling incomes, asset prices, and collat-
decline
seph A. Schumpeter predicted trouble before, but they’ll react eral values begins. That cycle ends only
when asset prices, debt levels, and in-
Cutting Back comes get back into balance. Misuse of
Although the recession has meant a rise consumer spending is over: Today’s
consumer credit is gone for good.
$12,000B
In good times and bad, total
U.S. household debt climbed Eric Janszen (eric@itulip.com) is the
relentlessly – until the current cofounder and president of the economic
downturn. and finance advisory firm iTulip, a
former CEO of two venture-backed com-
$6,000B
panies, a coauthor of America’s Bubble
Indicates a recession Economy (Wiley & Sons, 2006), and au-
in some threats to corporate security shoppers are tightfisted. To win them
thor of The Post-Catastrophe Economy
Fredrik Broden
(forthcoming from Portfolio).
Reprint R0907R
1960 1970 1980 1990 2000 To order, see page 158.
Source: U.S. Federal Reserve System.
hbr.org | July–August 2009 | Harvard Business Review 113
and a fall in others, security directors are over, companies need to offer value and
seeing their budgets cut without regard utility and build messages that emphasize
to these shifts. Businesses must ensure getting back to basics.
that their spending addresses the most Reprint R0907R
urgent priorities.
Reprint R0907N
hbr.org | July–August 2009
hbr.org | Month | Harvard Business Review 155

GLOBAL COMPETITIVENESS
in the NEW WORLD
GLOBAL
COMPETITIVENESS in the
| POLITICAL ECONOMY | GLOBAL COMPETITIVENESS in the NEW WORLD.
NEW WORLD
The
SPECIAL ISSUE
Restoring 114 | Restoring American Threat
Competitiveness of Global
American Gridlock By Ship
Getty Images
Before the recession, the
increasing volume of cargo
Competitiveness
passing through key container
and bulk ports in the U.S. and
| by George Stalk, Jr. Europe was pushing at capac-
Gary P. Pisano and Willy C. Shih
ity limits. The three largest
European ports (Antwerp,
AS OUR WORLDWIDE transportation
network becomes less and less able to sup-
By Train Hamburg, and Rotterdam)
experienced significant con-
Some look to railroads to gestion in recent years, as
port the demands of a global economy, we’re
heading straight into a crisis.
A crisis? How can we be facing a critical
reduce pressure on an over-
burdened road system. In
did U.S. West Coast ports –
most of which are located
By Air
Europe, however, differences in densely developed urban Airways may become as jammed
shortage in transportation capacity when
in national gauges, electrical areas, making expansion of as roads, rail lines, and ports. No
plummeting demand and rising protection-
Decades of outsourcing manufacturing has left U.S. industry without the systems, and management capacity politically difficult. new airports are planned for North
ism have reduced the flow of goods around
practices place constraints America or Europe, and new
means to invent the next generation of high-tech products that are key to
For decades, U.S. companies have
the world to a trickle? When container ships
on rail transport. And in the runways can take a decade to gain
are being laid up and the rail and trucking
rebuilding its economy. | by Gary P. Pisano and Willy C. Shih industries are laying off workers? When U.S., the number of track Throughput, in millions
of TEU (20-foot
approval. Major upgrades to air
miles fell before the downturn, traffic control (ATC) systems are
the United States is spending billions of equivalent units) 10.8 10.8
needed but have been repeatedly
economic stimulus dollars on improving its
transportation infrastructure?
By Truck while the volume of freight
traffic steadily rose, making 8.2
8.7
8.1
8.9
9.9 9.8
9.3
9.7
Congestion
delayed. Without those improve-
AS THE UNITED STATES STRIVES to recover from the current eco- Increases in traffic have delays in shipments inland 7.0
level ments, traffic could exceed capac-
Today’s economic meltdown masks the 6.5
nomic crisis, it’s going to discover an unpleasant fact: The com- outpaced road construction in from West Coast ports more 2008 ity at nearly 20 major U.S. airports
threat. But if prerecession trends reappear
petitiveness problem of the 1980s and early 1990s didn’t really go Europe and the U.S. Consider frequent.
2007 by 2015.
when the economy recovers, lack of infra-
been outsourcing manufacturing in
2006
away. It was just hidden during the bubble years behind a mirage that the capacity of the U.S. 2005
structure capacity, in combination with rising
of prosperity, and all the while the country’s industrial base con- highway system increased only Airports needing additional capacity
oil prices, will constrain global trade and 171
tinued to erode. slightly in the years after 1990, 2007
drive up costs. The U.S. stimulus package, U.S. rail freight traffic Antwerp Hamburg Rotterdam
PVD
Now, the U.S. will finally have to take the problem seriously. with its focus on “shovel-ready” projects while traffic grew by nearly half. EWR
Rebuilding its wealth-generating machine – that is, restoring the that quickly create jobs, will produce newly Truck traffic grew even faster, Source: Shipping Statistics Yearbook 2008,
ORD JFK
ability of enterprises to develop and manufacture high-technology painted bridges and newly paved roads but particularly in metropolitan indexed to 1990
Lloyd’s List for 2008, BCG estimates
OAK LAS PHL
100 MDW LGA
is unlikely to address the capacity problem. areas. Over the next few years,
products in America – is the only way the country can hope to pay 1990
81
LGB
CLT
Few executives realize the magnitude of that trend is likely to return. PHX
down its enormous deficits and maintain, let alone raise, its citi- Miles of U.S. 2007 IAH
the belief that it held no competitive
SNA
the challenges that are about to hit them. railroad tracks
zens’ standard of living. Reversing the decline in competitiveness TUS
Even fewer are investing to reduce trans- U.S. vehicle PBI
Lloyd Miller
will require two drastic changes: 141
traffic Source: Association of American Railroads HOU
portation costs, improve logistics, and gain 2007
The government must alter the way it supports both basic and FLL
an advantage. But before companies can out- 105 in 2007
applied scientific research to promote the kind of broad collabo- 100
smart competitors with creative responses indexed to 1990 2007 by 2015, even with planned ATC improvements
1990
to the crisis, they need to understand it. Miles of U.S. by 2015 if planned ATC improvements are delayed
highway lanes
Source: U.S. Federal Aviation Administration
114 Harvard Business Review | July–August 2009 | hbr.org hbr.org | July–August 2009 | Harvard Business Review 115
advantage. That’s been a disaster,
Source: U.S. Federal Highway Administration
126 Harvard Business Review | July–August 2009 | hbr.org
maintain Harvard professors Pisano
and Shih, because today’s low-value manufacturing operations hold the seeds of | STRATEGY & COMPETITION |
tomorrow’s innovative new products.
What those companies have been ceding is the country’s industrial com- 126 | The Threat of Global Gridlock
mons – that is, the collective operational capabilities that underpin new product George Stalk, Jr.
and process development in the U.S. industrial sector. As a result, America has
As ports, highways, railways, and airports run
lost not only the ability to develop and manufacture high-tech products like televi-
out of room, the world faces a looming trans-
sions, memory chips, and laptops but also the expertise to produce emerging hot
portation crisis. The current meltdown masks
products like the Kindle e-reader, high-end servers, solar panels, and the batteries
the threat, but once the recovery begins, a lack
that will power the next generation of automobiles.
of infrastructure capacity, combined with rising
To rebuild the commons and restore its wealth-generating machine will require
oil prices, will constrain growth. Congestion and
government and industry in the United States to make two drastic changes:
delays will eat away business profits, forcing
■ The government must change the way it supports basic and applied scientific
companies to rethink their long, complex supply
research to promote the broad collaboration with business and academia needed
chains. Smart organizations will use unorthodox
to tackle society’s big problems.
methods to cut often-hidden transportation
■ Corporate management practices and governance structures must be over-
costs and outmaneuver rivals.
hauled so they no longer exaggerate the payoffs and discount the dangers of
Reprint R0907T
outsourcing production and cutting investments in R&D.
Restoring the ability of enterprises to develop and manufacture high-tech prod-
ucts in America is the only way the country can hope to pay down its enormous
deficits and raise its citizens’ standard of living.
Reprint R0907S
Available online
HBR ARTICLE
GLOBAL COMPETITIVENESS in the NEW WORLD.
GL0BAL
| GLOBALIZATION | COLLECTION
WINNING IN
130 | The New Frontiers THE WORLD’S
Anand P. Raman EMERGING
MARKETS
The emerging markets have cooled off
The
New lately, but they’re still growing, even as the Product 12182
Frontiersrest of the world shrinks. That’s one reason How the global slowdown
Western companies’
is reshaping competition
why developing countries – and the com-
from emerging markets
| by Anand P. Raman
expansion into
panies based there – will become more
130 Harvard Business Review | July–August 2009 | hbr.org
emerging markets is
formidable players in the future. A second reaching a fever pitch. Developing countries
is that companies on the frontiers saw the downturn coming from are also teeming with local firms that stake
developed countries and revised their strategies. They’re innovating claims in the same emerging economies.
and improving operations aggressively, while their governments Established and emerging MNCs are
implement policies that will change the game of business. meeting head-on. How can you survive the
Multinationals need to recognize that and prepare for several tec-
collision? This collection provides guidance.
tonic shifts: Developing economies will become less dependent on
For example, established MNC Otis Elevator
developed ones, evolve a different model of business leadership,
capitalized on a high-rise construction
set off countertrends in M&A, and demand unprecedented levels
boom in China by quickly building a service
of environmental sustainability. And Africa is poised to become the
network throughout the country and bested
next hot spot of growth.
local firms.
Reprint R0907U
harvardbusiness.org
156 Harvard Business Review | July–August hbr.org
Month 2009 |2009 | hbr.org

| IDEAS & TRENDS | | HEALTH CARE |
FORETHOUGHT HEALTH & WELL-BEING
16 | Heed the Calls 22 | Your Medical Information
for Transparency in the Digital Age
Sam Wilkin John D. Halamka, MD
Executives in the financial services indus- A new federal law could make it
try, which faces intense scrutiny, should possible for you to manage your own
learn from the experiences of the oil, gas, health records – and, in turn, improve
and mining industry. Reprint F0907A your treatment and save money.
Reprint R0907A
The Disappearing Data Center Leading Professional
Robert Plant | HUMAN RESOURCES | Service Firms
Replacing expensive data centers with
HBR CASE STUDY
September 20–26, 2009
outsourced computing or remote por-
table server farms allows businesses to 27 | The Knowledge
Workers’ Strike Opportunities in
rapidly change capacity and offers flexibil-
ity – an important edge. Reprint F0907B Jon Healey
Mortgage Markets
October 4–7, 2009
An employee union is threatening
Fix Utilities Before They Detonation Media with a strike. What
Need a Rescue should the company do? Commentary by Consumer Financial
Peter Fox-Penner Richard L. Trumka, Richard B. Freeman, Services
The business model of utilities is essen- and Jeffrey Anderson. October 18–23, 2009
tially broken. The solution? Start charging Reprint R0907B
customers for energy services, not Reprint Case only R0907X
energy output. Reprint F0907C Reprint Commentary only R0907Z Real Estate
Management Program
Just How Healthy Is Your October 18–22, 2009
| ORGANIZATION & CULTURE |
Global Partner?
DIFFERENT VOICE
Josh Green
Managing Negotiators
Manufacturers in emerging markets 37 | Predicting the Present and the Deal Process
are getting fewer orders from multina- A Conversation with Science Fiction
tionals – which are shocked by many
November 8–13, 2009
Writer Cory Doctorow
suppliers’ bankruptcy. Both groups must
The author, who imagines brave new
evaluate potential partners more rigor- Building and Leading
worlds for a living, sees technology not
ously. Reprint F0907D Customer-Centric
as an Orwellian threat but as an empow-
ering vehicle for individual expression. Organizations
Preferential Treatment: The New
Face of Protectionism?
Reprint R0907C November 30–
Regina M. Abrami December 4, 2009
As free trade agreements become more | ORGANIZATION & CULTURE |
popular, they present global executives THE LAST WORD Effective Strategies
with thorny strategic and operational for Media Companies
140 | Rebuilding Companies
decisions. Reprint F0907E
as Communities — California
Henry Mintzberg December 2–5, 2009
A Conversation with Architect
Ellen Dunham-Jones Decades of short-term management
The head of Georgia Tech’s architecture have inflated the importance of CEOs Global Energy Seminar
program predicts that new kinds of and reduced employees to fungible com- December 6–9, 2009
retail developments will rise from the modities. Middle managers, who see
ashes of today’s dying suburban malls. the connections between operations and
Reprint F0907F strategy, can be instrumental in rebuilding
a sense of community in businesses.
Reprint R0907V
Learn more at
www.exed.hbs.edu/pgm/hbr/

PANEL DISCUSSION | by Don Moyer
Think Again
T
HERE WAS a time not long ago when consumers kept the U.S. economy afloat in
the face of bleak economic news. People splurged, flaunted consumption, traded
up, and even shopped to escape boredom. Those days are now gone. Today’s
consumers are rethinking the scope and nature of their spending. They are more
deliberate and discriminating.
“Initially, many of these newly frugal consumers were reluctant to admit their attrac-
tion to thriftiness, concerned that others might see them as dull and austere,” say Paul
Flatters and Michael Willmott in “Understanding the Postrecession Consumer” (HBR,
this issue). But, the authors note, “the recession has made discretionary thrift accept-
able – even fashionable.”
And this is just one of the changes we’ll see as we emerge from the downturn. In fact,
Eric Beinhocker, Ian Davis, and Lenny Mendonca (“The 10 Trends You Have to Watch,”
this issue) argue that given the level of disruption that has occurred, “there will be no
going back to the precrisis world.” Time to rethink our strategies in all areas of endeavor.
Don Moyer can be reached at dmoyer@thoughtformdesign.com.
160 Harvard Business Review | July–August 2009 | hbr.org