Your SlideShare is downloading. ×
Bu 628 part 1
Upcoming SlideShare
Loading in...5

Thanks for flagging this SlideShare!

Oops! An error has occurred.


Saving this for later?

Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime - even offline.

Text the download link to your phone

Standard text messaging rates apply

Bu 628 part 1


Published on

Published in: Education

  • Be the first to comment

  • Be the first to like this

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

No notes for slide


  • 1. Wilfrid Laurier UniversityCuA~ ~ @ QJJ ~ ~ ~ WJJ &:, ~ ~ COURSE: BU 628 TERM: Spring 2010 LeadershipINSTRUCTOR: John Janetos
  • 2. Bibliography of copyrighted documents BU 628 (102)The following materials have been copied under license from the copyright holder. Resale or further copying of this material is strictly prohibited.Battilana, Julie; Delong, Thomas; Weber, James, Echoing Green, No. Sep11, Pp. 1·16, © Harvard Business School J/A.(...( (5Publishers/Case Studies, 2009. One-time permission to reproduce granted by Ivey Management Services.DiStefano, Jospeh & Ling, Sing Chee, Century Park Sheraton Singapore, Vol. Ver.A, No. 04-28, © Richard Ivey School ofBusiness, 1986. One-time permission to reproduce granted by Ivey Management Services.Gleave, Tom, Healthcare Equipment Corporation--Managing in Korea, Vol. Ver.A, No. 12-02, Pp. 1-12, © Richard Ivey School ofBusiness, 1998. One-time permission to reproduce granted by Ivey Management Services.Groysberg, Boris et ai, The Pine Street Initiative at Goldman Sachs (HBS), No. Nov 14, © Harvard Business SchoolPublishers/Case Studies, 2006. One-time permission to reproduce granted by Ivey Management Services.Hill, Linda A & Berkley Wagonfeld, Alison, Digital Chocolate, No. Oct.16, © Harvard Business School Publishers/Case Studies,2009. One-time permission to reproduce granted by Ivey Management Services.Ibarra, Herminia;Sackley, Nicole, Charlotte Beers at Ogilvy & Mather Worldwide (A), No. Jan 26, © Harvard Business SchoolPublishers/Case Studies, 1995. One-time permission to reproduce granted by Ivey Management Services.lynes, Jennifer, Scandinavian Airliens: The Green Engine Decision, Vol. Ver.A, No. 06-11, © Richard Ivey School of Business,2009. One-time permission to reproduce granted by Ivey Management Services.Nohria & Spaulding, Who is the Fairest of Them All? Choosing a leader at Deronde International, No. May28, © HarvardBusiness School Publishing, 2009. One-time permission to reproduce granted by Ivey Management Services.Seijets, Gerard & Mark, Ken, WestJet: Building a High-Engagement Culture, Vol. Ver.A, No. 08/11, Pp. 1-24, © Richard IveySchool of Business, 2009. One-time permission to reproduce granted by Ivey Management Services.Sesia , Aldo, Jr.;Rose, Clayton, What Happned at Citiqroup", No. July20, © Richard Ivey School of Business, 2009. One-timepermission to reproduce granted by Ivey Management Services.Simons, Robert & Rosenberg, Kathryn, American Cancer Society: Access to Care, No. Feb9, © Richard Ivey School of Business,2009. One-time permission to reproduce granted by Ivey Management Services.White, Rod E.; Beamish, Paul W.; Schotter, Andreas, ING Insurance Asia/Pacific, Vol. Ver.A, No. 09-14, © Richard Ivey School ofBusiness, 2006. One-time permission to reproduce granted by Ivey Management Services. Arranging copyright permission is a service provided by Custom Course Packages Service of the laurier Bookstore.
  • 3. Richard Ivey School of Business The University of Western Ontario 9B09C012WEST JET: BUILDING A HIGH-ENGAGEMENT CULTUREKen Mark wrote this case under the supervision of Professor Gerard Seijts solely to provide material for class discussion. Theauthors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguisedcertain names and other identifying information to protect confidentiality.Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction ofthis material is not covered under authorization by any reproduction rights organization. To order copies or request permission toreproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University ofWestem Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail © 2009, Ivey Management Services Version: (A) 2009-08-11INTRODUCTIONIn late April, 2009, a senior manager at WestJet Airlines (WestJet) came across two news articles - one inMacleans, a Canadian news magazine, and the other in the Globe and Mail, Canadas national newspaper- that hinted at a dilemma faced by WestJet: How to continue to build its high-engagement culture as itexperienced high rates of growth?WestJet stood out from other Canadian airlines in many ways. For example, despite a difficult year in2008, WestJet was one of only a few airlines worldwide that were profitable that year. Whereas otherairlines had cut their available seats, WestJet had continued to expand its reach. The company was able tonot only survive but to thrive in a depressed environment because of its combination of low operatingcosts, a non-union environment and, most importantly, a unique corporate culture that, among other things,encouraged employees to share suggestions for improvements openly. WestJet press releases weretypically full of good news about how the company was continuing to succeed, whereas other airlines -especially WestJets chief rival, Air Canada - were stumbling.The article in Macleans suggested that WestJet, in an attempt to capitalize on an impending bankruptcyfiling by Air Canada, was doubling its efforts to achieve market dominance in Canada by 2013. The articlealso mentioned a set of customer service standards - known as the WestJet Care-antee - that thecompany would publish, thus clearly setting itself apart from any rival, which would have little or no hopeof matching its offer (see Exhibit 1).On the other hand, the Globe and Mail article suggested that all was not well inside WestJet. Negotiationsbetween WestJet and its pilots had stalled two weeks before their three-year agreement was set to expire onApril 30, 2009. Further, the article reprinted part of a memothat WestJets chief executive officer (CEO),Sean Durfy, had written to pilots, urging them to reconsider the proposal for the purpose of " ...maintaining our wonderful corporate culture and competitive advantage." Negotiations had started in June1 http://www2.macleans.cal2009104130Iwestjet%e2%80%99s-plan-to-crush-air-canadalprintl accessed June 2, 2009 and ART1937 -9 accessed June 2, 2009.
  • 4. Page 2 9B09C0122008. Both the pilots and the senior leadership team had agreed on the introduction of interest basedbargaining; and both parties. had attended a training program together.The senior manager was aware of WestJets ambitious goals to become the dominant airline in Canada by2013 and one of the five most successful international airlines in the world by 2016. Achieving these goalswould mean continued expansion in the WestJet organization. Growth was seen as positive because itwould provide new and exciting opportunities for the employees.The senior manager wondered, however, whether the rapid growth at WestJct - which already employed6,187 full-time equivalent staff (including approximately 950 pilots and 2,000 flight attendants), as of theend of December 2008 - would come at the cost of building and maintaining a high-engagement culture.This point was important because, as the founders and senior executives of the company continued toreiterate at every opportunity, culture was everything at WestJet. It would be unfortunate if WestJetdeveloped into a big and bureaucratic organization that was unable to sustain its unorthodox culturebecause of its success in the marketplace.THE HISTORY OF WEST JET AIRLlNES2In 1994, Clive Beddoe, an entrepreneur active in the real estate sector, purchased an aircraft for his weeklybusiness travel between Calgary and Vancouver. Beddoe made the aircraft available for charter to othercost-conscious business people through Morgan Air, which was owned and operated by Tim Morgan. Theresponse to this venture caused Morgan, along with Calgary businessmen Donald Bell and Mark Hill, torealize an opportunity to satisfy the need for affordable air travel in Western Canada by starting an airline.The odds appeared stacked against Beddoe and his colleagues because the airline industry was a toughbusiness. Beddoe was aware of the dozens of failed airlines in Canada; in the recent past, these failuresincluded Greyhound Air, Roots Air, Vistajet, Royal Airlines and Canada 3000. Historical data showed thatalmost 97 per cent of start-up airlines failed within their first seven years of operations. Competition wastough, and many travelers had their misgivings against airlines because of delays, lost luggage, crankyflight attendants, inflexible schedules, onerous rules, uncomfortable seats and a host of other service-related problems. Thus, the founders realized they needed to approach the task of building a successfulairline in an unconventional manner. Said Richard Bartrem, vice-president of Culture andCommunications: " ... to not behave differently from the other airlines would lead us to fail.,,3Beddoe and his colleagues researched the market and focused on low-cost (not discount) carriers, includingSouthwest Airlines and Morris Air, both of which operated in the United States. David Neeleman,president of Morris Air, was contacted for assistance in developing a business plan. Neeleman, along withMorgan, Bell, Hill and Beddoe, became the founding team of the concept that would become WestJetAirlines. .The potent differentiator that the team agreed on was straightforward: People working at WestJet mustdemonstrate a caring attitude toward their colleagues and the passengers (or guests). A culture of care wasregarded as necessary for providing good customer service. The founders developed a strong belief: If weas a corporation take care of our people, then our people will take care of our guests, and our guests will2 This section is based in part on information presented in the case: WestJet Airlines: The culture that breeds a passion tosucceed.3 Personal communication, May 14, 2009.
  • 5. Page 3 9B09C012take care of our profits. A simple, one-line mission statement was developed: To enrich the lives ofeveryone in WestJets world by providing safe, friendly and affordable air travel.WestJet commenced operations on February 29, 1996, flying to Vancouver, Kelowna, Calgary, Edmontonand Winnipeg. The company started with approximately 200 employees. Rather than fighting for marketshare with larger carriers, WestJets initial strategy was to use low prices and unrestricted tickets to lurepeople who would otherwise drive, take the bus or train, or stay home. WestJet was started in an idealenvironment - Western Canada ---.:. here the main competitor was the financially troubled Canadian wAirlines. Although Canadian Airlines initially tried to match WestJets rock-bottom fares, it could notcompete against the upstarts low-cost structure. For example, WestJet offered no paper tickets, in-flightmeals or frequent flier programs, and passengers were offered only one class of seating. These choicesallowed WestJet to keep its fares competitive with travel by car or train. An initial public offering in July1999 offered 2.5 million common voting shares to investors.In late 1999, taking advantage of turmoil in the Canadian airline industry, WestJet expanded its serviceacross Canada, including flights to Thunder Bay, Ontario. On April 17, 2000, WestJets equity market.capitalization surpassed that of Air Canada, the countrys leading airline. Later that year, the companyreturned to the capital markets for a second round of funds, raising $52.1 million to finance the purchase ofnew aircraft and a new headquarters building. WestJet continued its expansion despite slowdowns in theindustry in 2001, due to a downturn in the economy as a result of the dot-com bust and the terrorist attacksof September 11, 2001, which dampened enthusiasm for air travel. Service was started to Eastern Canadiancities, including Hamilton, Moncton and Ottawa.WestJet was receiving 3,000 to 4,000 resumes each week. Most of the new hires were new to the airlineindustry. "We prefer it that way," stated Beddoe. "This is a new culture, a new vision. Its better to startwith a clean slate.?" In 2002, WestJet was named one of Canadas Top 100 Employers (seehttp://www.canadastopl00.comlindex.html).In 2003, WestJet captured 25 per cent of the domestic Canadian market despite a reduction in skiingtourism due to low snowfall in the West, two outbreaks of severe acute respiratory syndrome (SARS), theNorth American appearance of bovine spongiform encephalopathy (BSE, or more commonly known as"mad cow disease") and higher fuel prices. WestJet added new destinations including Montreal, Windsor,Halifax and St. Johns. In 2004, WestJet began to offer trans-border flights from Canada to several U.S.cities, including Los Angeles, San Francisco, Tampa and Orlando.Sean Durfy joined WestJet in December 2004 as executive vice-president, Marketing and Sales, and wasresponsible for the development of marketing strategies. Durfy had previously spent 10 years in theAlberta energy industry, where he had been president and CEO ofENMAX Corporation, an energy supply,distribution and service company.As a result of rapidly rising fuel prices, WestJet stepped up the retirement of its older 737-200 aircraft in2005, replacing them with the Boeing Next Generation 737s. In 2006, WestJet added its first internationalservice to Nassau, Bahamas; and other international destinations soon followed: Maui, Honolulu, MontegoBay, Mazatlan, st. Lucia, among others. That same year, Beddoe moved to become the chairman ofWestJets board of directors, and Durfy was promoted to president.4 Peter Verburg, "Prepare for Take-off," Canadian Business, 2000, p. 96.
  • 6. Page 4 9B09C012WestJet had a record-breaking year in 2007, when revenues exceeded $2 billion and earnings were $193million. When Beddoe stepped down as CEO on September 4,2007, the company promoted Durfy in hisplace.At the end of 2008, WestJet had approximately 128 million shares outstanding. Beddoe and Durfy owned,respectively, 4,416,049 and 28,266 common voting shares in their company.Revenues grew an additional 20 per cent in 2008 to $2.5 billion, and, despite tough economic conditions,WestJet earned $178 million in net income. WestJet flew to 55 destinations in Canada, the United States,Mexico and the Caribbean (see Exhibit 2). WestJet employed seven times more people in 2008 than it didin 1998. The days were long gone when Beddoe could fit all WestJetters (as the employees were called)into one room for a fire-side chat to explain how and where the business was going. WestJet managementknew that the tremendous growth at WestJet would put pressures on its unique and vibrant culture. Theleaders across the organization (e.g. front-line leaders, directors and vice-presidents) would be underpressure to communicate and to sustain the culture. This challenge led to the inevitable question: Whatskills and competencies would be required by those leaders who were now expected to drive the culture?WEST JETS PERFORMANCESince its beginnings, WestJet was consistently ranked among the most profitable airlines in the world. Thecompany had grown revenues at an average annual rate of 37.4 per cent over 11 years. During the sameperiod, net profit grew at an average annual rate of35.8 per cent. By the end of 2008, WestJet had captured36 per cent of the domestic market for air travel. For perspective, consider that Air Canada had 57 per centof the domestic market.WestJet took pride in the customer service it provided to its guests. Since the Air Travel ComplaintsCommission began tracking passenger complaints in 2000, WestJet had far fewer complaints than its maincompetitor, Air Canada (see Table 1). Thus, the airline had appeared to have executed well against thedifferentiator that the founding team had envisioned: a caring attitude. In 2008, for the third year in a row,WestJet was awarded the title of Canadas Most Admired Corporate Culture by Waterstone HumanCapital, an executive search firm (see http://www.waterstonehc.coml). Table 1 COMPLAINTS INVESTIGATED ABOUT CANADIAN AIR CARRIERS, 2005-2008 2005-2006 2006-2007 2007-2008Air Canada (including Jazz) 385 334 310Air Transat 40 26 38Zoom Airlines 20 17 18Skyservice 33 22 14WestJet 15 10 8Sunwing 0 7 17CanJet 3 9 2Other 10 7 5Total 506 432 412 ..Source: 2007-2008 Annual Report, Canadian Ttenspottetion Agency, Minister of Public Works and Government ServicesCanada, Ottawa, Ontario, 2008. (See http://www.cta-otc.gc.caldoc.php?sid=2004&lang=eng).
  • 7. Page 5 9B09C012Beddoe, who encouraged employees to address him as Clive, insisted that WestJets corporate culture wasthe primary reason for the airlines superb performance. "The entire environment is conducive to bringingout the best in people," explained Beddoe. "Its the culture that creates the passion to succeed." Durfyechoed a similar sentiment: "For us, thats the key driver to our success."Prior to launching WestJet, Beddoe and his colleagues had no experience running a scheduled airline. Asthey learned more about the airline industry, the founders realized that one of the industrys biggestproblems was dealing with a largely absentee workforce spread allover the country, working at airports, inhangars or in the air. Communication proved to be a challenge. Beddoe stated, "What occurred to me ... iswe had to overcome the inherent difficulty of trying to manage people and to hone the process into onewhere people wanted to manage themselves."?NURTURING THE WEST JET CULTUREWestJets work environment could be described as friendly, caring, fun and youthful. The average age ofthe workforce at the end of 2008 was 34; the average age of the leadership team (people at the rank ofdirector and up) was 38 to 40.Creativity and innovation were both encouraged and rewarded. In addition, WestJetters were expected totake the initiative and resolve issues on their own. Decision-making responsibility was pushed as far downto the front line as possible. The companys core values were expected to guide the decision-makingprocess. WestJetters were encouraged to ask themselves a straightforward question: Do. these actions livethe values of the company or contravene them?The following values were defined by WestJet defined as core:• Commitment to safety• Positive and passionate in everything we do• Appreciative of our people and guests• Fun, friendly and caring• Align the interests of WestJetters with the interests of the company• Honest, open and keep our commitmentsBuilding and maintaining the processes that nurtured the WestJet culture was a task that management andstaff took very seriously. To management, culture was defined by the actions of the executives. Somefocused on empowerment and trust, whereas others focused on profit sharing. The combined actions ofexecutives contributed to and formed part of the WestJet brand. When executives were seen taking actionsthat were not aligned with WestJets values, those activities, too, had an effect on the WestJet culture.Every two weeks, Durfy and Ken McKenzie, executive vice-president of Operations, held informal .meetings with a group of staff members. "What most airlines are missing is the people component,"McKenzie stated. "Its not just numbers - on-time performance, getting the aircraft away on time - itsthe relationships." Leadership teams at most airlines were "populated by incredibly smart people whoknow how to run a business," said McKenzie, but he added that most seemed to miss the significance of5 Peter Verburg, "Prepare for Take-off," Canadian Business, 2000, p. 96.6 accessed June 2,2009.7 Peter Verburg, "Prepare for Take-off," Canadian Business, 2000, p. 96.
  • 8. Page 6 9B09C012building an almost cult-like following among passengers and employees alike." WestJetters took notice ofextra steps that management took to recognize their efforts, as indicated by this post by a WestJetter on anonline forum: I just had a hellish night last week and the Director of Flight Operations just sent out an e- mail to the crew and myself, thanking us for our efforts and showing a bunch of data on how it helped the customers and company recover. Its the little stufflike a boss taking the time to do such a thing in the busiest time of the year; or the fact that the crew actually had a good time doing it because the night was just so bad we had to laugh it off. Somehow that little gesture from above rubs off and reciprocates. The culture is the people, and the people having 100% accountability with 0 excuses."Recognizing employees for their hard work was a task that management took seriously. For example,Durfy and his team were known to show up at the Calgary Airport to distribute buttercream cupcakes toWestJet employees. Traveling through the entire airport with the cupcakes stacked on luggage carts,Durfy ensured that every employee received a cupcake, from the ticket counters to the baggage-handlingoperations. 10The commitment to nurture a culture about caring extended beyond thanking flight and crew members forajob well done. WestJet had a group called CARE, or Creating A Remarkable Experience, whose purposewas to propagate the culture throughout WestJets operations. CARE helped WestJetters produce videosand plays that entertained staff. It planned more than 250 events a year, including the profit-sharing events,the twice-annual events at which WestJetters received their profit-sharing cheques face-to-face from aWestJet executive as a personal thank you. I IAccording to Don Bell, one of the founders of WestJet, one of the keys to reinforcing an "intelligent"culture was to re-label tasks and responsibilities. WestJetters were passionate about using the "right"language in treating their guests and working with their colleagues. For example, the call center wasdubbed the "Super Sales Centre"; accounting was referred to as "Beanland"; executives were called "BigShots"; passengers were "Guests"; employees were "People"; and policies were "Promises." WestJet hadno supervisors; instead, the label "Team Leaders" was used. Supervision implied that someone waswatching employees to make sure that they didnt mess up. Leadership had a more positive connotation: atWestJet, leaders were expected to help people to do their jobs better. Team-leaders were, to a great extent,coaches. However, their role as coaches did not mean-that poor performance or using the wrong languagewent unnoticed. For high performance to result, empowerment needed to be coupled with accountability.Therefore, team-leaders were expected to engage in difficult conversations with their people whenrequired.Bell added: Attitude is everything. and attitude is what you do when youre not being watched. We emphasize four things: smile, make eye contact, listen and remember names. We also have a customer service recovery plan so if we lose your luggage, we send you a real apology and a credit for $100.8 Derek Sankey, "Corporate Cultures Competitive Edge: People-focused WestJet Flying High in Industry," Calgary Herald,August 20, 2008, p. E5. . .9 http://www.avcanada.calforums2lviewtopic.php?f=36&t=38128. accessed April 25, 2009.10 Gina Teel, "WestJet Banks on its Brand," Calgary Herald, December 28, 2007, p. E1.11 http://www.thewester:nstar.comlindex.cfm?sid=29989&sc=26. accessed June 2, 2009.
  • 9. Page 7 9B09C012In another example of policies that were aligned with WestJets culture, in the Sales Super Centre,WestJetters answered the telephone instead of letting callers go through a series of voice-mail prompts.Bell explained: Making customers go through (the voice-mail prompts) means they will end up with an agent and be mad, thus setting up the agent for failure and the customer too. So we answer the phones.Executives routinely helped out the representatives in the Sales Super Centre when call volumes were high."Theres peer pressure among the employees," stated Sandy Campbell, WestJets CFO (who retired in2007). "They recognize who buys into this program and who doesnt, and peer pressure is an amazingthing.,,12Sales Super Centre representatives had the authority to override fares, to decide not to charge fees forcancellations and bookings, and to waive fees for unaccompanied minors. The representatives were trustedto look out for the interests of the company, customers and shareholders. To ensure that checks andbalances were in place, employees were trained to understand the ramifications of the decisions they made.Overrides were tracked and monitored each month. Additional training and one-on-one coaching wereprovided if patterns emerged (e.g. a particular employee consistently waiving extra baggage fees). Employees had a sense of humor and often played practical jokes on one another. For example, in the earlyyears of the airline, founder Tim Morgan, also a pilot for WestJet, would send new WestJetters to "run andget the keys for the airplane." Of course, keys are not needed to start an airplane, but the attendant wouldrush into the office, pick up the key with a huge tag that said "airplane" and rush back through the aisles to loud applause from passengers. Aboard WestJets Boeing 737s, the flight attendants commonly crackedjokes, held contests (e.g. singing contests or aisle-bowling games) with the passengers. The Elvis dress-upparties to and from Las Vegas were a favorite topic of conversation. Most passengers did not seem to mindthe jokes and, in fact, most expected it.WestJet was renowned in the travel industry for its April Fools Day pranks. In 2006, the company,straight-faced, requested that their guests help the airline save energy during takeoff by stretching outtheir arms and flapping. In 2008, the company presented a special air travel offer: For an extra $12, guestswould be accorded the "luxury" of fully flat sleeper cabins (see Exhibit 3). Where were these sleepercabins? The overhead bins, of course. A press release issued by WestJet even showed an accompanyingphoto of just such a sleeper cabin, already in use. More than 800 people called the company and requestedsuch a cabin! Such goofy and off-the-wall ideas were often the brainchild of West Jet employees."Have fun or youre fired," was one of Beddoes lighthearted sayings. For many prospective WestJetters,the first inside look at the WestJet culture came when they applied for a position at the company.The most recent employee engagement survey indicated that the sense of satisfaction with, and loyalty to,the organization was strong. For example, 97 per cent of those employees surveyed strongly agreed orsomewhat agreed with the statement "I work hard to continuously improve my productivity and quality,"and 91 per cent strongly agreed or somewhat agreed with the statement "I would recommend WestJet tofriends and family as a great place to work."12 "Wacky WestJets Winning Ways: Passengers Respond to Stunts that Include Races to -Determine Who Leaves theAirplane First, Financial Post," October 16, 2000, p. C01.
  • 10. Page 8 9B09C012TALENT SELECTIONDespite a sluggish economy, WestJet continued to hire staff regularly. In 2008, it received an average of1,200 resumes per week, from which a handful were short-listed for screening interviews. BecauseWestJets unique corporate culture was well-known, many potential candidates knew what to expect fromtheir potential future employer.The company looked for two character traits in potential employees - enthusiasm and a sense of humor.Janice Webster, vice-president of talent management and retention oversaw the hiring of flight attendantsat the airline. Webster was hired into WestJet in 2005 and offered this view: I have never been in an organization where people are more passionate about the job they do every day ... They have always had that emphasis that the people were really important ... It was always ... we are going to be different, we are going to be successful because we believe our people are unique.l .Websters outsider status was necessary to recognize that, prior to her arrival, the companys recruitmentstrategy did not match its "great place to work" reality. A disconnect existed between WestJet the Recruiterand WestJet the Employer. For example, the stem and impersonal interview approach did not allow thecandidates to display their personalities, one of WestJets key make-or-break criteria for flight staff andother client-facing employees. Under Websters leadership, the airline changed the interview sessions tobetter identify those inherently cheerful, outgoing people who were not afraid to inform and entertain alarge group of people, such as those seated together in an airplane. In place of the one-on-three panelinterviews, WestJet began to hold interviews with groups of 20 to 30 potential hires to identify those whowould thrive in the airlines culture.Front-line candidates engaged in games and in team and individual tasks and presentations in three-hourlong group interview sessions that were designed to reveal whether they would fit into WestJets culture.WestJet used the group approach not only to hire flight attendants but also to hire its Sales Super Centre,counter and turnaround crew (known in other airlines as luggage handlers). Webster concluded: People that are really attracted to WestJet usually have that crazy, fun personality ... but they also take the job seriously. If they have a phenomenal personality, we will train them for the jobs they are interested in."WestJet was an attractive employer for pilots. Traditionally, pilots with seniority earned significantly morethan pilots with little seniority. For a first officer to work through to captain took years. Because ofWestJets growth, however, the opportunity was available for first officers to make captain fairly quickly.At WestJet, pilots were considered to be "managers," and were, thus, encouraged to think with theexecutive team. For example, WestJet implemented a suggestion from pilots regarding fuel savings as aresult of taxiing with one engine instead of two. The pilots also greeted customers and packed bags on theaircraft: when necessary.13hftp:llwww.workopolis.comlwork. aspx? action= Transfer& View=ContentiCommonIArliclesDetailView&arlicleld=brent20071128File1Arlicle1&lang=EN&arlicleSource=Brent, accessed April 15, 2009. .14hftp:llwww.workopolis.comlwork. aspx? action= Transfer& View=ContentiCommonIArliclesDetailView&arlicleld=brent20071128File1Arlicle1&lang=EN&arlicleSource=Brent, accessed April 15, 2009.
  • 11. Page 9 9B09C012But WestJetters at all levels were urged to think alongside management about how to reduce costs andenhance guest satisfaction. For example, the ground crew raised an issue about the absence of externalsight gauges to read the water level of the potable water tank that supplies the aircraft with water. The crewalways filled the tank regardless of its destination. The extra water added costs. The installation of anexternal sight gauge allowed the crew to determine how much potable water was used on a specific flightor route. This procedure led to fuel savings and reduced fuel burn and emissions.TALENT ORIENTATION AND TALENT MANAGEMENTOnce hired, the process of welcoming new WestJetters into the company began immediately. WestJetterswere assigned a sponsor who acted as a mentor by teaching them about the organization, helping themwork through any issues in their jobs and ensuring they made the right contacts within the organization.For WestJetters who were identified as high-potential employees, a. more formalized mentoring programwas designed so that they could gain additional skills and knowledge to be effective in their new roles andbeyond. WestJet considered building a pool of talent, a requirement for continued growth ofthe company.Durfy commented: Some people make it at WestJet and some people dont, and usually they know it in the first six months ... Either youre in, or youre out ... Some people say, "Oh my God, Ive . got to drink the Kool Aid" and they call it the "teal Kool-Aid" ... Its because we have a certain culture and a certain set of principles we guide our lives by ... Ive got to tell you when I went there, it was like "wow, whats this all about?" But you understand it and you understand its what makes us so strong. 15WestJets founders had set out to create a company that was managed from the bottom-up. WestJet gaveemployees a high degree of latitude to perform their jobs without too much interference from team leaders.WestJet executives rarely directed. Beddoe stated: "We set some standards and expectations, but dontinterfere in how our people do their jobs.?" The flight attendants were asked to serve , customers in acaring, positive and cheerful manner; how they did that was left up to them. Resource books were providedfor them to refer to, and a team of people continually updated these books. A team of nine staff memberswrote the jokes that flight attendants were encouraged to use.To reinforce the cost-cutting ethos, the company stressed teamwork. With no unions to insist on jobdescriptions, all employees had wide discretion in their day-to-day duties. WestJets pilots often tidied thecabin between flights, and they packed bags on the aircraft when necessary. Even the CEO -Beddoe,during his tenure, and Durfy, after Beddoes departure - would help out when aboard a WestJet flight.This practice was in sharp contrast to the industry-standard union arrangement in which jobs were veryclearly defined, and employees were forbidden to perform cross-functional tasks, even if their colleaguesin the other department were short-staffed or behind schedule. The willingness of WestJetters to pitch in toclean the cabins resulted in annual savings of millions of dollars in grooming and enabled quickturnarounds, usually within a half-hour, although the record was an incredible six minutes. Quickturnarounds were important at WestJet. First, utilization of the aircraft was critical; the airline made nomoney by having the aircraft sitting on the ground. Second, a quick turnaround delivered a positive guestexperience - guests liked leaving early and arriving on or before schedule.15 http://www.thewestemstar.comlindex.cfm?sid=29989&sc=26. accessed June 2, 2009.16 Peter Verburg, "Prepare for Take-off, " Canadian Business, 2000, p. 96.
  • 12. Page 10 9B09C012The benefits of creating WestJets environment of self-management were substantial. WestJet avoided thecost of an enormous layer of supervisory people. Beddoe added: We have a philosophy of trust here. Sometimes you get burned when you trust people, but most times you dont ... Workers have pride in what they do because they are the ones making the decision about what theyre doing and how theyre doing it ... They are no longer just functionaries. They actually take ownership of their jobs. 17In November 2004, however, WestJet added two levels to its hierarchy: vice-president and executive vice-president. Reporting to five executive vice-presidents were nine vice-presidents who were hired orappointed in early 2005. These added layers were put in place so that WestJet could more effectivelymanage the operational and non-operational areas as it pursued growth. (The organizational structure as ofAugust 2009 is shown in Exhibit 4.)PACT AND COMMUNICATIONTo ensure that WestJetters, collectively, had a voice at the management level, WestJets seniormanagement created the Pro-Active Communication Team (PACT), an employee association that allowedmanagement to keep in touch with the rank and file. PACT allowed management to address concernsbefore they became a problem. PACT provided WestJet employees with the services they might want toreceive through a union - without the hassles, work rules and adversarial environment that a uniontypically engendered with PACT dues totaling $2.50 per employee per pay period. WestJetters get paidevery two weeks.PACT covered the entire company with a number of chapters representing the different work groups. Eachchapter had one or more representatives, who sat on the PACT Executive. Besides dealing with personnelissues, PACT aided and collaborated with management in setting salary scales. Said Beddoe, "It takesaway the opportunity for conflict because the employees are part ofthe solution, not the problem.?"If an employee group, such as the flight attendants, wanted to leave PACT, it required 75 per cent approvalfrom its members. Beddoe added: It ensures we have a successful relationship with our people on a long-term basis ... It took me two years to convince our people to embrace the concept of PACT because everyone here is so antiunion. But the staff voted 92% in favour of it. We have since had some extremely successful resolutions to issues that have cropped Up.19Every year, management nominated a representative from PACT to sit on WestJets board of directors. Asa testament to PACTs effectiveness, three attempts by unions to organize WestJet flight attendants - in2003, 2006, and 2008 - had failed. The main issues that WestJetters raised were the usual suspects:scheduling, wages and pensions. According to a Canadian Auto Workers union representative, however, afew employees had complained about the need to buy in to WestJets corporate culture, with some peoplefinding it "condescending." Yet the union representative was forced to concede that " ... most of the peoplewe spoke to like working at WestJet, but like anything else ... they can be better.?"17 Peter Verburg, "Prepare for Take-off," Canadian Business, 2000, p. 96.18 Peter Verburg, "Prepare for Take-off," Canadian Business, 2000, p. 97.19 Peter Verburg, "Prepare for Take-off," Canadian Business, 2000, p. 97.20 Gina Teel, "WestJet Confident Union Drive Will Fail," Calgary Herald, September 11, 2008, p. 01.
  • 13. Page 11 9B09C012To take the pulse of its employees, WestJet conducted an internal twice-annual survey called WHY (WeHear You) that measured culture and employee engagement, and encouraged feedback so leaders couldmake improvements." An online post offered this take on WestJetters attitudes at work: Well, I think our ad campaign sums it up best, "Because owners care" and all that. Its pretty simple. Everyone, and I mean everyone is a customer. Including your fellow employee. We all help each other out, which creates a culture of always helping out the guest, our bottom line. "Its not my job, or I dont know" are not acceptable. I dont know but Ill find out for you or Ill get the person who does that. An example: Many times we get guests from other airlines asking us questions about gates, boarding times, etc. It would be easy to say thats not us, that X airline. Or, go find a departure or arrival board and find the info, or take them to their gate. In short, if we keep each other happy, everyone will be happy, and customers will come back.22Executives made it a habit to connect with employees during airport visits, with what is known as theAdopt a Base program. This program is a structured program to allow executives and senior managementto connect with the business. The executive takes ownership for one or more bases and they will make apoint of visiting them on a regular basis and also attend their social gatherings such as regionalcelebrations for Christmas, etc. For example, in November 2003, Beddoe was invited to give apresentation to the Canadian Club of London (Ontario). Beddoe showed up late, a few minutes before hewas to deliver his speech because he had met with WestJet employees at the London Airport to explainthe corporate direction and some new initiatives. He also answered employees questions and wasinterested whether they had any concerns. To paraphrase Beddoe, "We had a great discussion that took abit longer than I had anticipated."THE INFRASTRUCTURE THAT SUPPORTS WEST JETS PEOPLEWestJets operations were set up in a way that enabled its people to perform at a high level. For example,WestJet strove to generate an average price across the system, aiming to sell at least 50 per cent of itstickets at the lowest fare and 8 per cent at the highest fare. This practice kept prices low enough toencourage people to travel. Using computers, WestJet analysed historical booking patterns on every flightto assess how many tickets from each fare class should be assigned to future flights on the basis of pastsales.WestJet had five different fare classes, or buckets, plus a seat-sale class to stimulate underperforming ornew routes, such as Ottawa to Moncton. More low-bucket fares were available on slow days, such asTuesdays or Wednesdays, to steer passengers to those flights. The system reserved upper-bucket seats forlast-minute travelers and for busier days, such as Fridays and Sundays, when people were anxious to flyand would pay a premium. The on-line booking system was transparent and easy to use: simple fares andfew rules.The company had grown organically and did not need to overcome hurdles in combining two differentcultures or information technology (IT) systems, as Air Canada had faced when it acquired CanadianAirlines. WestJet had enjoyed net profits in every year of operation except for fiscal year 2004. And evenin 2004, it had positive cash flow from operations of $144 million. With $820 million in cash on its books21 http://www.nationalpost.comlrelateditopicsistory.html?id=1200493, accessed April 20, 2009.22 accessed April 15, 2009.
  • 14. Page 12 9B09C012and a debt-to-equity ratio of approximately 1.1, WestJet was conservatively managed and well-positionedto take advantage of growth opportunities.The airlines main cost-cutting measures were well-publicized. It flew only the 737 model, used theInternet as much as possible to sell tickets, operated without paper tickets and provided no hot meals. Thisapproach was in contrast to Air Canada, whose 16 different planes from nine different manufacturersresulted in much higher training and maintenance costs. As WestJet expanded, it needed to attract abroader range of customers, not just those who were interested in only low fares. To appeal to thesecustomers, amenities, such as in-flight entertainment from LiveTV and lounges in selected Canadianairports (e.g. Toronto, Calgary, Vancouver and Winnipeg), were added to the WestJet offering.In addition, WestJet seemed to outgrow some of its own policies as it continued to expand. In the early2000s, WestJet management stated that it would bypass Toronto for Hamilton because of steep landingfees and a longer than expected turnaround time. Yet, within a. few years, due to growth and theopportunity to optimize the domestic and trans-border network as well as access to market, WestJetreversed this policy and began to fly into Torontos Pearson International Airport.Despite the move away from a purely low-cost, short-haul, point-to-point airlines, WestJet, whencompared to Air Canada, continued to achieve lower costs. In 2008, WestJets operating costs per availableseat mile (a typical measure of airline costs) were 26.4 per cent lower than that of Air Canadas. The sameyear, WestJets average stage length had also surpassed that of Air Canada. (See Exhibit 5 for comparativeoperational statistics for WestJet and Air Canada.)SHARING THE REWARDSTwo programs were established to ensure that contributions made to running an efficient airline could berewarded. A profit share program aimed at providing a more short-term based incentive to reward andreinforce behavior was implemented. This program allows between 10 and 20 per cent of pre-taxoperating income to be set aside for an employee bonus pool. As the profit of the airline increased sowould the employee bonus. Table 2 shows the profit-sharing pool amounts and share per employee overthe past 11 years. Table 2 PROFIT-SHARING POOL AMOUNTS AND SHARE PER EMPLOYEE, 1998-2008 2008 2007 2006 2005 2004Profit sharing pool 33,400,000 46,700,000 20,300,000 6,000,000 2,900,000Profit share per employee $ 5,398 $ 8,219 $ 4,081 $ 1,400 $ 721 2003 2002 2001 2000 1999 1998Profit sharing pool 15,000,000 15,200,000 10,300,000 13,500,000 6,600,000 1,500,000Profit share per employee $ 4,417 $ 5,609 $ 5,586 $ 10,449 $ 7,491 $ 2,256WestJet employees had access to an Employee Share Purchase Plan (ESPP) which allowed them toaccumulate an equity stake in WestJet. Contributions up to 20 per cent of an employees salary werematched dollar-by-dollar by WestJet. This program became the crux of the "We are Owners" campaign.
  • 15. Page 13 9B09C012The average WestJetter contribution was 15% of base salary; with 86 per cent of the populationparticipating.WestJet implemented these two structures because the founders felt that owners try harder than employees,both to improve the guest experience and to save costs.The average non-management salary at WestJet was $43,000 per year. with participation in the profit-sharing plan equal to an average of 18 per cent increase in pay. Therefore, for the average non-management position, total compensation was $43,000 + $7,740, or $50,740. Since the inception of theplan, WestJetters had earned more than $155 million in profit sharing. Cheques were cut twice yearly atprofit-sharing parties in May and November. Durfy, in a presentation to a business audience, pointed tophotos of smiling, happy WestJet employees showing off their cheques at one such party. He told theaudience that WestJet could, but doesnt, electronically deposit the profit-sharing cheques intoemployees bank accounts " ... because we want to shake peoples hand, we want to say thank you or givethem a high-five. We want to celebrate success.v" On only one occasion, no bonus pay-out was given.This was because the airline had two unprofitable quarters. However, a party was still organized to thankall WestJetters for their hard work. Because the company placed a premium on business literacy amongemployees of all functional backgrounds and ranks, the leadership team also used the event to help peopleunderstand why the company was unable to provide a bonus.As well as cash rewards and personal thank yous, WestJet ran a program called Kudos that recognizedemployees internally and externally for their outstanding accomplishments or deeds. Notable employeeswere rewarded with vacations.f WestJettersand their families were also invited to the annual Dirty Birdwash. Planes were brought into the hangar, and kids were given water and soap to clean the aircraft. Thisfun event was organized as a thank you to the WestJet families. In 2009, WestJet was looking forward tomany more years of success as it pursued its long-term goals.WEST JETS GOALSBy 2016, WestJet aimed to be "one of the five most successful international airlines in the world, providingour guests with a friendly and caring experience that will change air travel forever." WestJet began tobenchmark itself against other leading airlines on criteria such as on-time performance, guest satisfaction,and people- and culture-related variables. On the basis of its bottom line alone, WestJet had alreadyachieved its vision. For example, in 2008, WestJet was ranked as the fifth most profitable airline in theworld, behind Panamas Copa Airlines, Malaysias AirAsia, United Arab Emirates Air Arabia andRepublic Airways in the United States; its operating margin was 12 per cent.WestJet and its competitors domestic, transborder and international market share can be seen in Exhibit 6.WEST JETS CONCERNS - MANAGING THE GROWTHAchieving its goals would require WestJet to continue to generate high performance from its people.Beddoe offered that .Southwest Airlines, on which WestJet was based, had kept its culture alive for 25years, even as its workforce swelled to 30,000. He agreed that protecting the culture was essential. "Itsfocus No.1. Our risk, in my view, is internal, not external, and thats why we put so mueh emphasis on23 Gina Teel, "WestJet Confident Union Drive Will Fail," Calgary Herald, September 11, 2008, p. 01.24 http://www.nationalpost.comlrelatedltopicS/story.html?id=1200493, accessed April 20, 2009.
  • 16. Page 14 9B09C012it.,,25In 2009, Beddoe was the only WestJet founder left on the management team (serving as chairman ofthe board). Don Bell, who had been instrumental in helping WestJet develop and nurture its unique culture;had retired in late 2008.The senior manager reflected on WestJets developments over the past 12 years of its existence. The airlinehad come a long way since the day it had purchased three used planes from a rival that it planned tocompete against. WestJet had found a way to maintain its high rates of growth in revenues and profits evenas North American airlines fell by the wayside. (WestJets income statements and balance sheets can beseen in Exhibif7.) WestJetters continued to reject the overtures of union organizers despite the fact that theairline after which it had been modeled, Southwest Airlines, had long been under union control.But how long could these advantages last? As WestJet grew, its employees per aircraft had grown nearly50 per cent per aircraft, from 55.1 in 1999 to 81.4 in 2008. Although WestJets operating cost per availableseat mile had fallen from 14.6 cents in 2000 to 13.2 cents in 2008, its revenue per available seat mile hadfallen farther: from 17.4 cents in 2000 to 14.9 cents in 2008. For the past 10 years, WestJets stock hadexperienced significant fluctuations (see Exhibit 8).WestJet had begun to fly to international destinations; however, the employees at these destinations - atthe ticket counter and the turnaround crew - were not WestJetters. These and other jobs had beencontracted out. The people performing the essential service-related tasks, however, needed to understandhow WestJet did its business and how be successful at it."The hardest thing to create is a great culture, but its the easiest thing to lose if, as a leader, you take onewayward action or one wayward step outside of your value set," said Durfy."WestJet had achieved a lot. The airline had taken to the skies only 13 years earlier, with three airplanesflying to five destinations. Now with a market valued at more than $2 billion, the carrier had more than 70Boeing Next Generation 737s, employed 7,000 people and had played host to more than 12 million guests.The plan was to have 121 airplanes by 2013.In April 2009, in light of the companys rosy predictions of further growth and success, WestJets pilotsseemed dissatisfied with elements of the new contract offer. Durfy expressed his commitment to bargainin good faith. In a memo to the pilots, he stated: I am ... alarmed by some of the feedback I have received by what I believe to be a . selective minority ... I am committed, as I hope you are, to maintaining our wonderful corporate culture and competitive advantage.The new agreement had seen a sizeable adjustment to pilots total compensation in an effort to ensuremarket pay parity with the Canadian commercial aviation industry. This meant sizeable changes to thecurrent pay mix, and hence the senior leadership team had asked the pilot association to reconsiderparticular elements of the existing contract. The leadership team went on several road-shows to explain thecontract offer and build support for it. The feedback the team received during these road-shows was verynegative; and on-line feedback from the pilot forum was critical of the deal and the senior leadership team.Many of the pilots felt that the leadership team " ... had taken too many things away." The leadership teamhad met a crossroad. Play hard ball? Times were tough and difficult decisions needed to be made. Or25 Wacky WestJets Winning Ways: Passengers Respond to Stunts that Include Races to Determine Who Leaves theAirplane First, Financial Post," October 16, 2000, p. C01.26 http://www.nationalpost.comlrelated/topicslstory.html?id= 1200493, accessed April 20, 2009.
  • 17. Page 15 9B09C012should the team halt its process of selling the contract offer and step up its efforts to re-engage the pilots?How?The senior manager wondered whether WestJets culture could withstand the shocks that lay ahead. Whatcould the management team do to keep the unique culture intact? The airline could not afford tocompromise on its promise to offer an amazing guest experience and continue to grow and expand itsnetwork. And how should the team to proceed with the pilot issue?
  • 18. Page 16 9B09C012 Exhibit 1 THE WEST JET CARE-ANTEE r iL !:::;t charge you for calt centre bookings . ...••v.. i? , IV . charge you to change or cancei yourflight f?r 24 hours after you book . • y.:: r-" overbooK yourflight. N~ n:. r.;;, charge you for I.NO checked bags . ••.e l~~ave the tawast change, cancel and pre-reserved h seating fees in Canada. w" will accommodate you if yourfllghl is delayed - even ITits Mother Natures fault. We wiU fly you in the youngest all-jet fleet in North America. ~ wi:. f}rovide live seatback 1V on our flights. -11 Po wiL give yOU ample legroom and overhead bin space. I We. WItt publish our on-time. baggage and canceltation rates. . .? ,,,;, !;. /111.1 always let you know howwere doing as a company. offer fr-ee online seat selection 24 hours before departure. VIP v•. allow you to transfer your credit files to friends or family for free. l Vv v,". give you free snacks and refreshments on your flight ,••:.~atways Include smiles and thartK yous - always. And mostimportantty: W,,U ",:WByS ct>rc. Bec<;Iuse thats what owners do. Care-anteed.Source: .JsP, accessed June 2, 2009. Reprinted with permission. .
  • 19. Page 17 9B09C012 Exhibit 2 WEST JET DESTINATIONS ,- ...•.. ! - 1i-_t1t* !/1-1WIl •••• f j ! ,-~,Pu~m] " 1,--,.., r- ••••• , I , r-""""Ctt ---.~ ~J~ 1,* CtDlD ..-,. (;:~tlIIW~ _.--- ~JaiA$ J ~,---. U~IC~S~- ~1:"":WI--" W~.s •.••.. ",< lJlI!~ •. .cic: ,~, "".,."" ---," ~~ --*__ ":4- ;""""" __ /1:i SaOittt-,( "- ..... Uu»i ,.~~ _ Aiijol~1;o f,,, .,.,. -:::s: ~ :.:J.:::::" ~.!:tIrdolt-,; ,.,7 IIZIW» ~;. ,_e~:_. Ila!l1tttt,-..,.,,-., z.,_ .•. ---- ~. .•. _ "r . -- !I%J~U! ~ta~-·w 1Ill.lcc.~-mlB .. .,,;,,~";.;: , ::~-:Source: WestJet Annual Information Form 2008, Reprinted with permission.
  • 20. Page 18 9B09C012 Exhibit 3 WEST JET PROMOTIONWestJet Introduces Sleeper CabinsAirline is first to provide new service without need for cabin upgradesCALGARY, ALBERTA--(Marketwire - April 1, 2008) - WestJet (TSX:WJA) today announced that onApril 1,2008, sleeper cabins will be introduced onboard its existing fleet of73 Boeing 737 Next-Generation aircraft. These sleeper cabins can be booked on all ofWestJets existing flights for a nominalincremental fee of$12."WestJet now offers scheduled service to 47 destinations, continuing on our strategy to be Canadasfavourite airline," commented Bob Cummings, Executive Vice-President Guest Experience and Marketing."Our leather seats and live satellite television are a great part ofWestJets guest experience however, byoffering our existing overhead bins as sleeper cabins, guests will now have the opportunity to lie down fora period oftime and arrive at their destination refreshed, rested and ready to go.""The overhead compartment has traditionally been a place where guests have placed their carry-onbaggage. Given that the overhead bins on our fleet are among the most spacious of any airline, we madethe decision to offer sleeper cabins in that space."To verify sleeper cabin availability on a WestJet flight, guests are encouraged to call WestJet at 1-866-935-2702 (English) or 1-866-935-2703 (French).About WestJetWestJet is Canadas leading high-value, low-cost airline offering scheduled service throughout its 47-cityNorth American and Caribbean network. Named Canadas most admired corporate culture in 2005, 2006and 2007, WestJet pioneered low-cost flying in Canada. With increased legroom and leather seats on itsmodem fleet of 73 Boeing Next-Generation 737 aircraft, and live seatback television provided by BellExpressVu, WestJet strives to be the number one choice for travellers.Source: WestJet webpage, accessed May 24, 2009. Reprinted with permission.
  • 21. Page 19 9B09C012 Exhibit 4 ORGANIZATIONAL CHART fEVP I VP Levels , _v..~. _v..:::: E;j -- j , E.uaJlMv..,.._ -",,"p-" - Fnanoe & CFO I-a::~ gg -~I);st. -Corp- &MKTG i , ~ i---· , ---- v.._-..... I -EJ -Sate!y iI VP- Trusuy I l- v.._-Guest I ~ ! -,, andAdrninisn!ion ~-=I g ! ., I i I "- /P-ControOer .L VP-F"I1MICePro;ects& j VlcePresidenl- ,- E--"" GowommerIReiations I /P-s.Jos&AiIne end- : vce Pruident· Technical Operations bPresident· Oisbibliion
  • 22. Page 20 9B09C012 Exhibit 5 OPERATIONAL HIGHLIGHTS OF WEST JET AND AIR CANADAWESTJET Operational highlights Three month. ended December 31 Twelve months ended December 31 2008 2001 Change 20M 2007 Change ASM. 4;:f;QJIM,$2~ 3,81&,613,107 12..~"% 11,1»,&el~f5 ~4.544.i37.~O 17.6% R?M& 3.32S,1!56,003 2.9a7 ..a45.307 122% 1~,130,&aQ,2H i 1,739.0~3,C03 17.0% Load fatte! n~~~. 71.7% {O.! ~ts) 801% 60.7% {O.& ~t&l Yje1d (cents) 18.I>J (0.5%) HUT 13.12 2.5% RASM {cents} 14.45 (ll.7%) 14.e~ 14.62 1.6% CASM (cents} 12..013 4.3% 1::>.11 1.2.34· 6.7% CASf/.. e;; fuel and emp!-ayee profit $h.r" {,cent:.) 3.52 2.3% S.ll fJ.2%} Fue cc:nsunp>.-ion (litree.~ 210,09).4-34 !a?414.29S 10.9"" aSM~$.92j 723.1C4,Z03 113.1% F.ieJ CC$t$ per ttre (cente) $445 75.15 ~2.4% S5.S" 6?69 :7.3% s.e~me~t gt.:es~5 3.s1o.S6~ 3.260.342 7.:;<J!, t4,1S:J t5~C 1::.CC4,726 9.0% Aver.;;e mge ffigth (mUes) ~9if !63 35"b 113 355 5.7% U:Ji:z.a:::on (hours) 1::.1 1:.3 (1.€~;: _.,. 12-1 1.7% teurrber of f.l.~-time eecu.~a en: empmyee$ at period end 5.652 e.9% a,ler S,fB2 0,9% =teer i!zEi: at :Jerioo end 70 e.6% u, 70 H%Source: WestJet Airlines, Managements Discussion and Analysis of Financial Results 2008, p. 5.AIR CANADA {Cal1adiancollilrs in miUi~tls, except per share figure:). Operatlng Statirtlo ~- ..----.--- Chan~% 50(£2:1 {(2) 62.814 i (1.2 77,8% :-- SCl.6 % l..--~ 1&"1 lS,4 4.3 169 3" 17.4 15.3 10.2 12.4 12.2 , 7 ,.,j .I{l~rdge nurnt:i Dr rull-tiH1il l( {>mpicr-.1t~,,; £thcusanJs) {5! AHCrJrt in 00tT~t~ £><.lV! ti.i.s;;t f&f-(az p+>ri~;df>r~i (6:) "FTE} J L,o,Lt..v(rJ~_~:~::::.~t3~it;O!~J~LH3 .E~.~) r;-; _._. __ ._._~][%.i AV~}(;Jr;~ ~!:gTf";!inH~,!$j{~ cHrG;;ttn~.~ht Lt Fu~dxic~ n~!rtitr:! ((;r<t~,) <: <,1)4! FUi!t!ltt<S {rrHtiuFsl iJ~,Source: Air Canada, Annual Report 2008, p. 2.
  • 23. Page 21 9B09C012 Exhibit 6 MARKET SHARE - CANADIAN AIRLINES COMPANIES Historical Domestic Revenue Passengers (I) eo 70 ., E C 6() 50 ... 40 ~ ~ 30 ~ Co. 20 !C J::stinult~d Transburder Schcduted (apllcit~ Historical Trausburder Revenue Jlasseu;!crs (l) !larket Share (I) 25 20 ~ 5 ~ 0; !r D ~ Co. Estimated Internati(J" Scheduled Callaeity Hislnrh.ul Revenue Passengers in th,-, Iuteruutional Market Market Share (I) to and from Canada (1) • 25 20 ~ 15 E ~(1) Source: OAG data, based on ASMs during the period from January 1, 2008 to December 31,2008. The estimated shareof the overall domestic scheduled capacity of Air Canada includes the domestic scheduled capacity of Jazz.(2) Source: Transport Canada, Assumptions Report 2008-2022, December 11, 2008. Represents enplaned and deplaneddomestic revenue passengers.Source: Air Canada, Annual Information Form 2008, pp. 11-13.
  • 24. Page 22 9B09C012 Exhibit 7 WESTJET INCOME STATEMENTS, 2007-2008 2008 2007 Revenues: Guest revenues S 2,301,301 $ 1,899,159 Charter and other revenues 248,205 227,997 2:127,156 Expenses: Aircraft fuel 803,293 , 503,931 Airport operations 342,922 299,004 Flight operations and navigational charges 280,920 258,571 Marketing, general and administration 211,979 177,393 Sales and distribution 170,605 146,194 Depreciation and amortization 136,485 127,223 Inflight 105.,849 85,499 Aircratt leasing 86,050 75,201 Maintenance 85,093 74,653 Employee profit share 33,435 46,705 Loss on impairment of property and equipment {note 5) 31,881 2,256.631 1.826,255 Eamings from operations 292,875 300,901 Non-operating income (expense): Interest income 25.,485 24,301 Interest expense (r6.G78, . (75,749) Gain (loss) on foreign exchange 30,587 (12,750) Gain (loss) on disposal of property and equipment (701) 54 Loss on derivatives (note 11) (17,331) (38,038) (64,144) Earnings before income taxes 254,837 236,757 Income tax expense: (note 7j Current 2,549 2,149 Future 74,153 41,775 76,702 43,924 Net earnings S 178:135 $ 192,833Source: WestJet Airlines, Consolidated Financial Statement and Notes, 2008, p, 4,
  • 25. Page 23 9B09C012 Exhibit 7 WEST JET BALANCE SHEETS, 2007-2008 Consolidated Balance Sheet As at December 31 (Stated in thousands of Canadian dollars) 2008 2007 Assets Current assets: Cash and cash equivalents (note 4) 820,214 $ 653,558 Accounts receivable 16,837 15,009 Future income tax (note 7) 4,196 Prepaid expenses, deposits and other (note 12(a)) 67,693 39,0[9 Inventory 17.054 10,202 925,994 717,788 Property and equipment lnote 5) 2.281,850 2,213,063 Other assets (note 12(a}) 71,005 53,371 S 3.2713.849 $ 2,984.222 Liabilities and shareholders equity Current liabilities: Accounts payable and accrued liabilities 249.354 $ 168,171 Advance ticket sales 251,354 194,929 Non-refundable guest credits 73,020 54,139 Current portion of long-term debt (nete 5) 165,721 172,992 Current portion of Obligations under capital lease 395 375 739,844 590,6Q6 Long-term debt (note 6) 1:186,182 1.256.526 Obligations under capital lease 713 1,108 Other liabilities (note 12{a)) 24,233 11,337 Future income tax (note 7) 241,740 174,737 2.192,712 2,034,314 Shareholders equity: Share capital (note S(bil 452,885 448,568 Contributed surplus 60,193 57,889 Accumulated other comprehensive loss (note 12(c») (38,112) (11,914) Retained earnings 61.171 455,365 1,086.137 949,908 Commitments and contingencies (ncte 10) S 3.278.849 $ 2,984.222Source: WestJet Airlines, Consolidated Financial Statement and Notes, 2008, p. 5.
  • 26. (I) I!0t::<1 Stock Price· Adjusted for splits~ ...•. ...•. N N::r 0 0 01 0 0 01 0 0 0 ~-S 0 8 0 0 0 0 0 7/13/1999~Q)~. I 1/13/2000Q):::J@ I 7/13/2000~::r0p 1/13/2001 :e8.3 7/13/2001 r1 I m f/)Q) I ~g 1/13/2002 I m -t(1) f/)!:l S f/)(1)Q. 7/13/2002 -l n :lI" -t 0 0 ~"~ 111312003 I " :e :::!. :;: " CD " ;;:u II) c..." I00 7/13/2003 c:c: (; m~ x 1/13/2004 I -<~ !" c... ~ c: -» CD _. c: ;:+ - CD::1 CD _. r- 0) 7/13/2004 -I I I -::::;.?- I ! ! ::s -< SCD 1/13/2005 -I I ~ .f 1 »" C CD CD CD 7/13/2005 -I i j ~f ! . I 3: N C -t 0 C » 1/13/2006 -I I ! ---3- Ii I ! CD " ~ r- 7/13/2006 -l I J...:," I ~ J I N C c CD 1/13/2007 I I ~. • I I 7/13/2007 1/13/2008 7/13/2008 1 ! ! ~ ! I I ICD m 1/13/2009 -I I !~- :=::- t I I I .g - 0 0 r-.)
  • 27. IIIEI Harvard Business School 9-495-031 Rev. October 12, 1999~ Charlotte Beers at Ogilvy & Mather Worldwide (A) It was December 1993, and during the past year and a half, Charlotte Beers had found littletime for reflection. Since taking over as CEO and chairman of Ogilvy & Mather Worldwide in 1992,Beers had focused all her efforts on charting a new course for the worlds sixth-largest advertisingagency. The process of crafting a vision with her senior management team had been-by allaccounts-painful, messy, and chaotic. Beers, however, was pleased with the results. Ogilvy &Mather was now committed to becoming "the agency most valued by those who most value brands." During the past year, the agency had regained, expanded, or won several major accounts.Confidence and energy appeared to be returning to a company the press had labeled "beleaguered"only two years earlier. Yet, Beers sensed that the change effort was still fragile. "BrandStewardship," the agencys philosophy for building brands, was not well understood below the toptier of executives who had worked with Beers to develop the concept. Internal communication effortsto 272 worldwide offices were under way, as were plans to adjust O&Ms structures and systems to anew set of priorities. Not the least of the challenges before her was ensuring collaboration betweenoffices on multinational brand campaigns. The words of Kelly ODea, her Worldwide Client Servicepresident, still rang in her ears. "We cant lose momentum. Most change efforts fail after the initialsuccess. This could be the prologue, Charlotte ... or it could be the whole book." Ogiivy & Mather In 1948, David Ogilvy, a 38-year-old Englishman, sold his small tobacco farm inPennsylvania and invested his entire savings to start his own advertising agency.· The agency, basedin New York, had financial backing from two London agencies, Mather & Crowther and S.H. Benson."I had no clients, no credentials, and only $6,000 in the bank," Ogilvy would later write in hisautobiography, "[but] I managed to create a series of campaigns which, almost overnight, madeOgilvy & Mather famous."l Ogilvys initial ads-for Rolls-Royce, Schweppes, and Hathaway Shirts-were based on amarketing philosophy that Ogilvy had begun developing as a door-to-door salesman in the 1930s,and later, as a pollster for George Gallup. Ogilvy believed that effective advertising created anindelible image of the product in consumers minds and, furthermore, that campaigns should alwaysbe intelligent, stylish, and "first class." Most of all, however, David Ogilvy believed that advertisingmust sell. "We sell-or else" became his credo for the agency. In 1950, Ogilvys campaign forHathaway featured a distinguished man with a black eye patch, an idea that increased sales by 160%IDavid Ogilvy, Blood, Beer, and Advertising (London: Hamish Hamilton, 1977).Research Associate Nicole Sackley prepared this case under the supervision of Professor Herminia Ibarra as the basis forclass discussion rather than to illustrate either effective or ineffective handling of an administrative situation.Copyright © 1995by the President and Fellows of Harvard College. To order copies or request permission toreproduce materials, call 1-800-545-7685, rite Harvard Business School Publishing, Boston, MA 02163,or go to w No part of this publication may be reproduced, stored in a retrieval system,used in a spreadsheet, or transmitted in any form or by any means---electronic, mechanical, photocopying,recording, or otherwise--without the permission of Harvard Business School. 1
  • 28. 495-031 Charlotte Beers at Ogilvy & Mather Worldwide (A)and ran for 25 years. Other famous campaigns included Maxwell Houses "Good to the Last Drop"launched in 1958and American Expresss "Dont Leave Home Without It," which debuted in 1962.Gentlemen with Brains David Ogilvy imbued his agencys culture with the same "first class" focus that hedemanded of creative work. Employees were" gentlemen with brains," treating clients, consumers,and one another with respect. "The consumer is not a moron," admonished Ogilvy. In a distinctlyBritish way, collegiality and politeness were highly valued: "We abhor ruthlessness. We like peoplewith gentle manners and see no conflict between adherence to high professional standards in ourwork and human kindness in our dealings with others."? At Ogilvys agency, gentility did not mean blandness. Ogilvy took pride in his agencys"streak of unorthodoxy." He smoked a pipe, refused to fly, and peppered his speeches with literaryreferences and acerbic wit. He once advised a young account executive, "Develop your eccentricitiesearly, and no one will think youre going senile later in life." In a constant stream of letters, he madehis dislikes clear: "I despise toadies who suck up to their bosses. . .. 1 am revolted by pseudo-academic jargon like attitudinal, paradigms, and sub-optimal." He also exhorted his staff to achievebrilliance through "obsessive curiosity, guts under pressure, inspiring enthusiasm, and resilience inadversity." No one at Ogilvy & Mather ever forgot the full-page announcement he placed in the NewYork Times: "Wanted: Trumpeter Swans who combine personal genius with inspiring leadership. Ifyou are one of these rare birds, write to me in inviolable secrecy." In 1965, Ogilvy & Mather merged with its partner agencies in Britain to form Ogilvy &Mather International.3 "Our aim," wrote David Ogilvy, "is to be One Agency Indivisible; the sameadvertising disciplines, the same principles of management, the same striving for excellence." Eachoffice was carpeted in the same regal Ogilvy red. Individual offices, however, were runindependently by local presidents who exercised a great deal of autonomy. David Ogilvy retired in 1975. Succeeding the legendary founder proved daunting. "The nextfour chairmen," commented one longtime executive, "did not have his presence. David is quirky;they were straightforward, middle-of-the-road, New York." Ogilvys successors focused onextending the network offices internationally and building direct response, marketing research, andsales promotion capabilities. Revenues soared in the 1970s,culminating in record double-digit gainsin the mid-1980s (see Exhibit 1). The advertising industry boomed, and Ogilvy & Mather led thepack. Nowhere was the agencys reputation greater than at its New York office, heralded in 1986bythe press as "the class act of Madison Avenue."Advertising Industry Changes The booming economy of the 1980s shielded the advertising industry from the intensifyingpressures of global competition. Companies fought for consumer attention through marketing, andadvertising billings grew-on average, between 10% and 15% per annum. Brand manufacturers-challenged by the growth of quality generic products and the diverse tastes of a fragmented massmarket-s-created multiple line extensions and relied on agencies creative powers to differentiatethem. As business globalized, so did agencies. Responding to clients demands for globalcommunications and a range of integrated services, agencies expanded rapidly, many merging toachieve economies of scale as "mega-agencies" with millions in revenues worldwide.2David Ogilvy, Confessions of an Advertising Man (New York: Atheneum, 1963).3Dictionary of Company Histories, 1986.2
  • 29. Charlotte Beers at Ogilvy & Mather Worldwide (A) 495-031 After the stock market crash of 1987, companies reconsidered the value added by largeadvertising budgets. Increasingly, many chose to shift resources from expensive mass media andprint campaigns towards direct mail, cable, telemarketing, and sales promotion. Fixed fees began toreplace the agencies historical 15% commission on billings. Long-standing client-agency relationswere severed as companies sought the best bargains. Viewed by some as ad factories selling acommodity product, the mega-agencies were challenged by new, "boutique" creative shops. Theglobalization of media and pressures for cost efficiencies encouraged companies to consolidateproduct lines and to sell them in more markets worldwide. They, in turn, directed agencies totransport their brands around the world. The advertising agency of the 1990s-often a loosefederation of hundreds of independent firms-was asked to launch simultaneous brand campaigns inNorth America, Europe, and the emerging markets of Asia, Latin America, and Africa.Organizational Structure By 1991,Ogilvys 270 offices comprised four regions. The North American offices were themost autonomous, with office presidents reporting directly to the Worldwide CEO. Outside NorthAmerica, presidents of local offices-sometimes majority stakeholders (see Exhibit 2)-reported tocountry presidents, who in turn reported to regional chairmen. Europe was coordinated centrally,but-with significant European multinational clients and a tradition of high creativity-the regionmaintained its autonomy from New York. To establish a presence in Latin America, Ogilvy obtainedminority ownership in locally owned agencies and formed partnerships with local firms. The lastregion to be fully formed was Asia/Pacific, with the addition of Australia, India, and Southeast Asiain 1991(see Exhibit 3 for organization chart). Between and across regions, "worldwide management supervisors" coordinated the.requirements of multinational clients such as American Express and Unilever.. WMSs served as thepoint of contact among multiple parties: client headquarters, clients local subsidiaries, and theappropriate Ogilvy local offices. They were also responsible for forming and managing the coremulti-disciplinary account team. More important, they facilitated the exchange of informationthroughout the network, attempting to ensure strategic unity and avoid operating at cross-purposes. Over time, Ogilvy & Mather came to pride itself as "the most local of the internationals, themost international of the locals:" Local delivery channels and the need for consumer acceptance ofmultinational products required specialized local knowledge and relationships. Local and globalclients also served as magnets for each other: without local accounts, country offices were unable tobuild sufficient critical mass to service multinational clients well; without multinational accounts todraw top talent, the agency was less attractive to local clients. With a "light center and strong regions," most creative and operating decisions were madelocally. The role of Worldwide Headquarters in New York, staffed by 100 employees, was limitedlargely to ensuring consistency in financial reporting and corporate communications. Key capitalallocation and executive staffing decisions were made by the O&M Worldwide board of directors,which included regional chairmen and presidents of the most powerful countries and offices such asFrance, Germany, the United Kingdom, New York, and Los Angeles. The Ogilvy offices represented four core disciplines: sales promotion, public relations,advertising, and direct marketing.s Sales promotion developed point-of-purchase materials such asin-store displays and flyers. Public relations offices worked to promote clients corporate reputationand product visibility. Advertising focused on mass marketing, establishing the core of a clientsbrand image through the development and production of television commercials, print campaigns,4The number of Ogilvy offices by discipline in 1994 were as follows: 83 Advertising, 60 Direct Response, 12Promotional, 23 Public Relations, and 92 in other areas, including highly specialized market research firms. 3
  • 30. 495-031 Charlotte Beers at Ogilvy & Mather Worldwide (A)and billboards. Direct Marketing created and delivered targeted advertising-from mail ordercatalogues to coupons and television infomercials-designed to solicit a direct response fromconsumers. While the latter three resided within the regional structure, O&M Direct was anindependent subsidiary. In the late 1980s, the Ogilvy board of directors decided to focus onadvertising and direct marketing, the firms chief competitive strengths. Unlike advertising, Directsbusiness in the 1980s remained chiefly local, but expanded explosively. By 1991,O&M Direct hadreceived numerous industry accolades and was ranked the largest direct marketing company in theworld."Beleaguered" Ogilvy & Mather As clients demanded lower costs and greater service, Ogilvy & Mather-like many largeagencies at the time-was slow to make adjustments. In 1988,Ogilvy was ranked the sixth-largestadvertising firm in the world. As one executive remembered: Everything was going well. All we had to do was wake up in the morning and we were plus 15%. So why did we need to change? Our vision was "just keep doing the same thing, better." We failed either to recognize or acknowledge what were the first real indications that life around here was about to change fundamentally. In May 1989, WPP Group Pic, a leading marketing services company, acquired Ogilvy &Mather for $864 million.f WPP, led by Harvard Business School-trained Martin Sorrell, had alreadypurchased the J. Walter Thompson agency for $550 million two years earlier.s The takeover washostile, with agency executives-including CEO Kenneth Roman-opposed. "It was a shock,"explained one long-time executive. "We were a proud company with a constant stock marketgrowth, the masters of our destiny. Suddenly, we were raided." Within months of the takeover,CEO Roman resigned. "Ken had absolutely nothing in common with WPP. There was a lack of trust,an air of conflict, adversaries, and invasion," remembered another. A number of top creative andaccount executives followed Roman, leaving Ogilvy & Mather for other agencies." . Graham Phillips, a 24-y~arOgilvy veteran, was appointed Romans successor. One executivewho worked with Phillips described him as "a brilliant account guy and a very good manager whoidentified our need to become a total communications company. But few would describe him as aninspirational leader. " In 1989, the agency lost major advertising assignments from Unilever and Shell. In 1990,Seagrams Coolers and Nutrasweet withdrew their multinational accounts.f Account losses in 1991proved particularly damaging to the New York office, the agencys center and standard-bearer. "IfNew York thrives, the world thrives. If New York fails, the world fails" went a familiar companyadage. New Yorks client defections were explained by one executive as a failure in leadership: "Theoffice was run by czars with big accounts. People got used to a highly political way of working andwork deteriorated." In 1991, Campbell Soup withdrew $25 million in business, Roy Rogers $15million, and American Express-the account for which Ogilvy had won "Print Campaign of theDecade"-pulled out $60 million." "Losing American Express,had symbolism far beyond what theactual business losses were," recalled one Ogilvy executive. "People who were loyal OgilvySChristie Dugas, "The Death of Ogilvy and an Era," Newsday, May 17, 1989.6Ibid.7"Change Comes to Fabled Ogilvy," New York Times, April 12, 1992.8"Beers Succeeds Phillips at O&M Worldwide," Adweek, April 13, 1992.9"Operation Winback," Advertising Age, February 1993.4
  • 31. Charlotte Beers at Ogilvy & Mather Worldwide (A) 495-031-employees, believers for years, disengaged. They threw up their hands and said, This place is falling apart." Despite declines in revenue, the agency found itself unable to adapt to clients changingdemands. Budgets were not reduced at local offices, even as large clients pushed Ogilvy tostreamline and centralize their accounts. "We were a high-cost operation in a low-cost world. Therewas a lack of financial discipline, a lack of focus on cost, and a lack of structured decision making onbusiness issues," noted one executive. Another faulted the firms tradition of local autonomy andfailure to institute systems for managing collaboration: "We were spending a lot of money at thecreative center without cutting back locally-building costs at both ends." Recalling the atmosphere at the time, another executive concluded, "A shaken confidencepermeated the whole company. We talked about change and what we needed to do ad nauseam, butnothing was happening. We tried to work within the old framework when the old ways of workingwere irrelevant." At the end of 1991, Phillips stepped down as CEO, telling the press: "1 have -taken Ogilvythrough a very difficult period in the industry. I had to let go people whom I had worked with for 27years, and that wears you down." In April, Charlotte Beers was appointed CEO and chairman ofOgilvy & Mather Worldwide, the first outsider ever to lead the company. Charlotte Beers The daughter of a cowboy, Beers grew up in Texas, where she began her career as a researchanalyst for the Mars Company. In 1969,she moved to Chicago as an account executive with J. WalterThompson. Once there, she cultivated success with clients Sears, Kraft, and Gillette, combining aSouthern Texan charm with sharp business acumen. Beers rose quickly to senior vice president forClient Services. At Thompson, Beers was known for her passionate interest-unusual in account executives-in the philosophy of marketing. Commented Beers, "1 try never to discuss with clients only the stuffof business. I focus on advertising as well-on the ideas." Once described on a performanceevaluation as "completely fearless," Beers earned a reputation for her ability to win over clients.Colleagues retold the story of how Beers impressed a roomful of Sears executives in the early 1970sby taking apart, then reassembling, a Sears power drill without skipping a beat in her pitch for a newadvertising campaign. In 1979, Beers became COO of the Chicago agency Tatham-Laird & Kudner. Her success inwinning the mid-sized agency several new brands with Proctor & Gamble helped turn the firmaround. Accounts with Ralston-Purina and Stouffer Foods followed. Beers was elected CEO in 1982and chairman of the board in 1986. In 1987,she became the first woman ever named chairman of theAmerican Association of Advertising Agencies. One year later, she led TLK through a merger withthe international agency Eurocome-RSCG. Tathams billings had tripled during Beerss tenure, to$325million.Beers Takes Over Beerss appointment, recalled O&M veterans, created initial apprehension. Commented oneexecutive, "She was from a smaller agency in Chicago and had not managed multiple offices. O&Mis a worldwide ~ompany, and she had never worked outside the United States. And, she was notfrom Ogilvy." Added another, "This is an organization that rejects outsiders." 5
  • 32. 495-031 Charlotte Beers at Ogilvy & Mather Worldwide (A) Her approach quickly made an impression with Ogilvy insiders. "It was clear from day onethat Charlotte would be a different kind of leader. Full of life. Eyes open and clearly proud of thebrand she was now to lead. Here was somebody who could look around and see the risks, butwasnt afraid to turn the corner even though it was dark out," said one executive. "We had leadersbefore, who said all the right things, were terribly nice, did a good job, but they didnt inspire.Charlotte has an ability to inspire-Charlotte has presence." Commented another executive, "She isdelightfully informal, but you always know that she means business." Within two months of herappointment, Beers dismissed a top-level executive who had failed to instigate necessary changes.Activate the Assets "When I took over," recalled Beers, "all the press reports talked about beleaguered Ogilvy.My job was to remove, beleaguered from our name." In her first six weeks, Beers sent a "Hello"video to all 7,000of Ogilvys employees. It began: Everybody wants to know my nine-point plan for success and I cant tell you that I know yet what it is. Im building my own expectations and dreams for the agency-but I need a core of people who have lived in this company and who have similar dreams to help me. Thats going to happen fast, because we are rudderless without it. David [Ogilvy] gave us a greatdeal to build on, but I dont think its there for us to go backwards. Its there to go forward.Beers concluded that people had lost sight of Ogilvys still impressive assets-its vast network ofoffices worldwide, its creative talent, and its distinguished list of multinational clients. "We must,"she told senior executives, "activate the assets we already have." In her second month at Ogilvy, .Beers observed a major client presentation by the heads of five O&M offices: It was a fabulous piece of thinking. We had committed enormous resources. But in the end, they didnt tell the clients why it would work. When the client said, "Well get back to you," they didnt demand an immediate response, so I intervened. "You saw a remarkable presentation, and I think you need to comment." Ogilvy had gotten so far from its base, that talented people lacked the confidence to speak up. For Beers, her early interactions with a key client symbolized the state of the company. "Hekept retelling the tale of New Yorks downfall: how we blew a major account in Europe and how ourgroups fought among one another. The fourth time I heard this story," remembered Beers, "Iinterrupted. Thats never going to happen again, so lets not talk about it anymore. Lets talk aboutwhat we can accomplish together." Beers spent much of her first months at Ogilvy talking to investors and clients. For WallStreet, she focused on the quality of Ogilvys advertising. "I refused to do a typical analyst report,"she said. "When the Wall Street analysts asked me why I showed them our ads, I told them it was togive them reason to believe the numbers would happen again and again." Clients voiced otherconcerns. "I met with 50 clients in six months," recalled Beers, "and found there was a lot of affectionfor Ogilvy. Yet, they were also very candid. Clients stunned me by rating us below other agencies inour insight into the consumer." Beers shared these perceptions with senior managers: "Clients viewour people as uninvolved, distant, and reserved. We have organized ourselves into fiefdoms, andthat has taken its toll. Each departrnent-Creative, Account, Media, and Research-are oftenworking as separate entities. Its been a long time since weve had some famous advertising." To restore confidence both internally and externally, Beers maintained that the agencyneeded a clear direction. "1 think its fair to say Ogilvy had no clear sense of what it stood for. Iwanted to give people something that would release their passion, that would knit them together. Iwanted the extraneous discarded. I wanted a rallying point on what really matters."6
  • 33. Charlotte Beers at Ogilvy & Mather Worldwide (A) 495-031 For Beers, what mattered was brands. "She is intensely client- and brand-focused,"explained one executive. "You cant go into her office with financial minutia. You get about twoseconds of attention." Beers believed that clients wanted an agency that understood the complexityof managing the emotional as well as the logical relationship between a consumer and a product. "Ibecame confident that I knew what clients wanted and what Ogilvys strengths were. It was my jobto be the bridge." Beers, however, was as yet unsure what form that bridge would take or how itwould get built. One of her early challenges was to decide whom to ask for help in charting this newcourse: I knew I needed their involvement, and that I would be asking people to do much more than they had been, without the benefits of titles and status. I avoided calling on people on the basis of their titles. I watched the way they conducted business. I looked to see what they found valuable. I wanted people who felt the way I did about brands. I was looking for kindred spirits.The "Thirsty for Change" Group Over the next few months, Beers solicited ideas for change from her senior managers, askingthem to give candid evaluations of disciplines and regions, as well as of one another. In a style thatmanagers would describe as "quintessential Charlotte," Beers chose to meet with executives one-on-one and assigned them tasks without regard to their disciplinary backgrounds. She commented, "Iwas slow to pull an executive committee together. I didnt know who could do it. It was a clumsyperiod, and I was account executive on everything- everything carne to me." At first, some foundthe lack of structure unnerving. Noted one executive, "People werent quite sure what their roleswere. It caused discomfort. We began to wonder, ~Wheredo I fit? Who is whose boss?" Anotheradded, "She was purposely vague in hopes that people would stretch themselves to newconfigurations." Several executives, though cautious, found Beerss talk of change inspiring andresponded with their ideas. By May 1992, Beers had identified a group whom she described as "thirsty for change."Some were top executives heading regions or key offices; others were creative and account directorswho caught her eye as potential allies. Her selection criterion was "people who got it"-those whoagreed on the importance of change. All had been vocal about their desire to move Ogilvy forward.She sent a memo inviting them to a meeting in Vienna, Austria, that month: Date: May 19; 1992 HIGHLY CONFIDENTIAL From: Charlotte Beers To: LUIS BAssAT, President, Bassat, Ogilvy & ~th~r-Spain BILLHAMILTON; Creative Director-e-OedvlNewYork SHELLY LAZARUS, President~&M New York KELLY ODEA, Worldwide Client Service Director, Ford and AT-&T -London ROBYN PUITER, President and Creative DirectOl:~&M South Africa .HAlm.y REID, CE<J-..q&MEurope, London, -, . REIMER THEDENS, Vice:ChairIhan~&M Europe, Frankfurt MIKE WALsH,President::-O&M} United Kingdom, London -r ROD WRIGHT,Thairman~&M Asia /Pacific, Ho~g Kong . Will you please join me ... in re-inventing our beloved agency? I choose you because you seem -to be truth-tellers.timpatient with the state1:Ve,~e ill ai;l,<i<;ap~~le., leading this of revised, refreshed .agency. We want to end up with a vision for theagency.we can state ... and excite throughout the company. Bring some basics to Vienna, like where we are today and where wed like to be in terms of our clients and competition. Butbeyond the basics, bring your dreams for this gr~at brand. 7
  • 34. 495-031 Charlotte Beers at Ogilvy & Mather Worldwide (A) Brand Stewardship The Vienna meeting, recalled Beers, "put a diversity of talents in a climate of disruption."Having never met before for such a purpose, members were both tentative with each other and elatedto share their perspectives. Two common values provided an initial glue: "We agreed to take nomore baby steps. And it seemed clear that brands were what we were going to be about." Beers asked Rod Wright, who had led the Asia/Pacific region through a vision formulationprocess, to organize and facilitate the meeting. Wright proposed a conceptual framework, based onthe McKinsey "7-S" model.iv to guide discussion of the firms strengths and weaknesses. He alsohoped to generate debate. "We dont have passionate arguments in this company. We avoid conflict,and debates go off line. When you use a framework, its easier to depersonalize the discussion." Reactions to the discussion ranged from confusion to disinterest. "It was theoretical mumbo-jumbo," commented one participant, "I tend to be far more pragmatic and tactical." Added another,"I dont have much patience for the theoretical bent. I wanted to get on with it." Wright admitted,"They rolled their eyes and said, You mean weve got to do all that?" Beers agreed: "The B-schoolapproach had to be translated." As the discussion unfolded, the group discovered that theirpersonalities, priorities, and views on specific action implications diverged widely. One debate concerned priorities for change. Shelly Lazarus diagnosed a firm-wide moraleproblem. She argued for restoring confidence with a pragmatic focus on bottom-line client resultsand counseled against spending much energy on structural changes. Mike Walsh agreed but insistedthat the group take time to articulate clearly its vision and values. But Kelly ODea had becomefrustrated with Ogilvys geographical fragmentation and argued that anything short of majorstructural changes would be insufficient. Participants were also divided on whether the emerging brand focus was an end or a startingpoint. The" creatives" in the group u=-Luis Bassat, Bill Hamilton, and Robyn Putter-flanked byBeers, Lazarus and Walsh were interested primarily in finding an effective vehicle for communicatingO&Ms distinctive competency. An eloquent statement, they felt, would sell clients and inspireemployees. The others-ODea, Wright, Harry Reid, and Reimer Thedens-wanted a vision thatprovided guidelines for an internal transformation. Summarized Wright, "One school of thoughtwas looking for a line which encapsulates what we do: our creative credo. The other was looking fora strategy, a business mission to guide how we run the company." Yet another discussion concerned the route to competitive advantage. Bassat, Putter andHamilton, commented one participant, felt that Ogilvy had lost sight of the creative product in itsrush to worry about finances-"wed become too commercial." A recommitment to better, moreimaginative advertising, they believed, would differentiate the firm from its competitors. Reid andThedens, architects of a massive re-engineering effort in Europe, insisted on financial discipline andtighter operations throughout the company as the only means of survival in the lean operatingenvironment of the 1990s. Wright and Thedens added the O&M Direct perspective. Convinced thatmedia advertising by itself was becoming a commodity product, each pressed for a commitment tobrand building through a broader, more integrated range of communication services.lOWrights model included 10 issue categories: shared values, structures, stakeholders, staff, skills, strategy,suggestions, solutions, service systems, and a shared vision.l1Within advertising and direct marketing, "creatives" develop the art and copy for each media outlet of a brandcampaign.8
  • 35. Charlotte Beers at Ogilvy & Mather Worldwide (A) 495-031 At the close of the meeting, remembered one attender, "There was a great deal of cynicism.Was this just another chat session? we asked ourselves. But, we also had a sense that Charlotte feltright. She fit." In August 1992, the group reassembled at the English resort Chewton Glen. Memberspresented Beers with their respective lists of priorities requiring immediate attention. Takentogether, there were 22 "to do" items ranging from "examine the process by which we develop andpresent creative ideas" to "improve our delivery of services across geographical divisions." Beersrecalled, "No one can focus on 22 things! I was so depressed, I stayed up all night and wrote a newlist." She delivered her thoughts the next day: I think we have hit bottom and are poised for recovery. Poised but not assured. Our job is to give direction for change. So here is where I start. For 1993, we have three-and only three-strategies. They are: 1. Client Security. Lets focus our energy, resources and passion on our present clients. It takes three years to replace the revenue from a lost client. Under strategy one, theres a very important corollary: We must focus particularly on multinational clients. This is where we have our greatest opportunity for growth and where our attitudes, structure, and lack of focus have been obstacles. 2. Better Work, More Often. Without it, you can forget the rest. Our work is not good enough. Maybe it will never be, but thats O.K.-better to be so relentless about our work that we are never satisfied. You tell me theres nothing wrong with our credo, "We Sell, or Else," but you also say we need some fresh thinking on how to get there. We must have creative strategies that make the brand the central focus. 3. Financial Discipline. This has been a subject of high concentration but not very productively so. We simply have not managed our own resources very well, and that must change. These 1993strategies were linked to the emerging vision by a declaration: "The purpose ofour business is to build our clients brands." One participant recalled, "The idea of brandstewardship was still embryonic. Charlotte clearly understood it in. her own mind but was justlearning how to communicate it. She used us as guinea pigs to refine her thinking." But someexpressed concern: "There was no disagreement that the 1993strategy was correct. It was fine forthe short-term but we needed a long-term strategy." Through the fall of 1992,group members worked to communicate the strategy-dubbed the"Chewton Glen Declaration"-to the next level of managers. Beers directed her energy towardclients, working vigorously to win new and lost accounts. She spoke about the emotional power ofbrands, warning them of the abuse inflicted by agencies and brand managers who failed tounderstand the consumers relationship with their products. Ogilvy & Mather, Beers told clients, wasuniquely positioned to steward their brands growth and development. Clients were intrigued. ByOctober, O&Mboasted two major successes: Jaguar Motor cars entire Ll.S. account and the return ofAmerican Expresss $60million worldwide account.P The press hailed, "Ogilvy & Mather is back ontrack."12"Operation Winback," Advertising Age, February 1993. 9
  • 36. 495-031 Charlotte Beers at Ogilvy & Mather Worldwide (A)Worldwide Client Service The Chewton Glen mandate to focus on multinationals heightened the need for better globalcoordination. Although Ogilvy had pioneered multinational account service in the 1970s,the firm inthe 1990s remained "segregated into geographic and discipline fiefdoms" that hampered thedevelopment and delivery of brand campaigns worldwide. Noted ODea, "What most clients beganto seek was the best combination of global efficienciesand local sensitivity, but we were not set up tofacilitate that. We had the local strength, but international people were commandos with passportsand begging bowls, totally dependant on the goodwill of local agencies and their own personalcharisma." In the fall of 1992,Beers asked ODea to head a new organization, Worldwide Client Service,that would "tap the best brains from anywhere in the world for each account." ODea envisioneddozens of virtual organizations, each focused on a multinational client, with multiple "centers"located wherever their respective clients maintained international headquarters. Under WCS,members of multinational account teams became "dual citizens," reporting both to their local officepresidents and WCS supervisors. One WCS director noted, "International people coordinatingmultinational accounts used to be regarded by the local officesas staff. We thought we were line; theclients treated us like line; but internally, we had no real authority. What WCS did was give us teethby giving us line responsibility for our accounts-tenure, profits, growth, and evaluation of localoffices." WCS brand teams were structured to mirror their clients organizations. Some WCSdirectorsserved largely as. consultants, while others ran highly centralized operations, with a core teamresponsible for the entire creative and client development process. "We had to reinvent ourselves inthe clients footprint," remarked the WCS account director for Kimberly-Clark. His counterpart atUnilever agreed but noted that current trends favored centralization. "Speed, cost-efficiency, andcentralization are our clients priorities. What matters is not just having good ideas, but getting thoseideas to as many markets as possible, as fast as possible." . By 1993, ODea began to travel the world presenting the possibilities of transnational teamswithout borders. "Good sell-ins had to be done. Office heads had to understand that there were nochoices-global accounts had to be managed horizontally. Wed be dead if we didnt do it," saidReid.Tools for Brand Stewardship "The first six months were high excitement, high energy, and a steep learning curve," saidBeers. "That was followed by 12 months of disappointment and frustration. It didnt look as if wewere getting anywhere." In December 1992, Beers asked Robyn Putter and Luis Bassat, two of thefirms top creative talents, for help in developing the emerging notion of "Brand Stewardship." Theyanswered: "If we are to be successful, we must audit our brands. We must ask the kinds ofquestions that will systematically uncover the emotional subtleties and nuances by which brandslive." Beers took their insight directly to existing and prospective clients. One manager remembered: Clients immediately bought into Brand Stewardship. That created pressure to go public with it before we had every "i" dotted and "t" crossed. We didnt have a codified process, but Charlotte would talk to clients and wed have to do it. Clients came to O&M offices saying, "I want a brand audit." And, our offices responded with, Whats a brand audit? One client asked us for permission to use the term. We had to move quickly, or risk losing ownership of the idea.10
  • 37. Charlotte Beers at Ogilvy & Mather Worldwide (A) 495-031 Beers responded by asking a group of executives to elaborate the notion of a brand audit.Led by Walsh, they produced a series of questions designed to unveil the emotional as well as thelogical significance of a product in the users lives: "What memories or associations does the brandbring to mind? What specific feelings and emotions do you experience in connection with using thisbrand? What does this brand do for you in your life that other brands cannot?" The insightsgathered from these questions-which became the brand audit-would, in Beerss words, "guideeach brand team to the rock-bottom truth of the brand." Focusing on two of Ogilvys global brands-Jaguar and Dove-s-Beerss working group struggled to articulate in a few words and images eachbrands unique "genetic fingerprint." The result was O&Ms first Brandlrintst=: • A Jaguar is a copy of absolutely nothing-just like its owners. • Dove stands for attainable miracles.Crafting a Vision As the "technology" of brand stewardship developed, the senior team continued to wrestlewith the formulation of a vision statement. Some argued, "We have the vision-its BrandStewardship." Others maintained that Brand Stewardship was but a tool to be used in attaining a yetundefined, future state. Further, as ODea explained, "Nearly everyone had had some contact withBrand Stewardship and WCS but they viewed them as separate and isolated actions without astrategic context." The solution to the impasse, for some, was to include a larger group in the VISIOnformulation. "We needed to decide collectively what we were going to be. If you have 30 peopledeciding and 30 people who have bought into the vision, then they have no reason not to go out anddo it," reasoned Wright. Walsh agreed: "You get the 30 most influential people in the companytoopen their veins together-which hasnt happened in a very long time." Others, including Beers,worried about losing control of the end result. Advocates for a larger group prevailed, and the entireO&M Worldwide board of directors along with eight other local presidents attended the nextmeeting in July 1993at the Doral Arrowwood, a conference center in Westchester, New York. The purpose of the meeting, explained one of the organizers, was to get final agreement onthe vision and where brand stewardship fit in. Feedback from clients on brand stewardship andWCS was used to guide the initial discussion. Participants recollections of the three-day eventranged from "ghastly" to "painful" and "dreadful." Noted Lazarus, "It seemed an endless stream oftheoretical models. Everyone was frustrated and grumpy." The turning point, Beers recalled, took place at the end of a grueling first day, when oneperson voiced what many were thinking: "He said, Theres nothing new here. I dont see howBrand Stewardship can be unique to Ogilvy. This was very helpful. One of the negatives at Ogilvyis all the real debates unfold outside the meeting room." The next morning, Beers addressed thegroup: "Certainly, the individual pieces of this thinking are not new. But to practice it would beremarkable. I have heard that in any change effort, one-third are supporters, one-third are resisters,and one-third are apathetic. Im in the first group. Where are you?" With Beerss challenge precipitating consensus, attenders split into groups to tackle fourcategories of action implications. One group, which included Beers, was charged with crafting thespecific wording of the vision. A second began to develop a statement of shared values that wouldintegrate traditional Ogilvy principles with the emerging values of the new philosophy. "That washard to agree on," recalled Wright. "At issue was how much of the past do we want to take forward."The third group worked on a strategy for communicating the vision to all levels and officesthroughout the company. Plans for a Brand Stewardship handbook, regional conferences, and a 11
  • 38. 495-031 Charlotte Beers at Ogilvy & Mather Worldwide (A)training program were launched. A fourth group was asked to begin thinking about how to realigntitles, structures, systems, and incentives to support the new vision. After heated brainstorming and drawing freely from the other three groups to test and refinetheir thinking, Walsh remembered that, finally, "there it was: To be the agency most valued bythose who most value brands." Summing up the meeting, one attender said, "There had been anamazing amount of distraction, irrelevance, and digression. I didnt think we could pull it together,but we did."· (SeeExhibit 4 for the final version of the Vision and Values statement.) Moving Forward Through the fall of 1993, Beers and her senior team worked relentlessly to spread themessage of Brand Stewardship throughout the agency. It was a slow, sometimes arduous, process.By the end of the year, they had identified several issues that they felt required immediate attention.Spreading the Gospel Compared to clients enthusiasm, reactions to Brand Stewardship within the agency wereinitially tepid. Across disciplines, employees below the most senior level lacked experience with, andknowledge of how to use, the principles of Brand Stewardship. ODea remarked, "BrandStewardship has not seeped into everyday practice. Only a minority of the O&M population trulyunderstands and embraces it. Others are aware of Brand Stewardship, but not deeply proficient.Many are still not true believers." Account executives who misunderstood the concept were at a loss when their clientsdemanded it. Planners expressed confusion about how to use Brand Stewardship to develop acreative strategy.13 Recalled one executive, "People didnt understand such. basic things as thedifference between a Brandl-rint" and an advertising strategy." Greater familiarity with the process did not always mitigate opposition. Admitted Beers,"We didnt always have much internal support. It did not sound like anything new." Anotherproblem was that a brand audit might suggest a change of advertising strategy. "Doing an audit onexisting business can be seen as an indictment of what we have been doing," noted one executive vLazarus concluded: It will only be internalized throughout the organization with experience. I did a Brand Stewardship presentation recently with some of our account people. The client was mesmerized. They wanted the chairman of the company to see the presentation. Now, that had an effect on the people who were with me. I can bet you that when they make the next presentation, Brand Stewardship will be their focal point. . Perhaps the greatest resistance came from the creative side. "Weve got to get greater buy-infrom the creative people," noted Walsh. Their initial reactions ranged from viewing the Brandfrintt"as an infringement on their artistic license-"I didnt believe in recipe approaches. They can lead toformulaic solutions," said one early convert-to the tolerant skepticism reported by another: "Thecraatives tell me, If it helps you get new business, thats great, but why are you in my office talking13Accountexecutives managed the agencys contact with clients, bringing in new accounts and coordinatinginformation flow between other functions and the client. Planners worked with account executives to establishcreative marketing strategies.12
  • 39. Charlotte Beers at Ogilvy & Mather Worldwide (A) 495-031about this? I have a deadline and dont see what this has to do with creating advertising. But youcant develop a good Brandfrint" without cross-functional involvement." Others questioned the relevance of Brand Stewardship for O&M Direct. While clear to Beersthat Brand Stewardship clarified the rewards to clients from integrating advertising and directmarketing, some were slow to see this potential. Dispelling the popular notion that direct encouragesshort-term sales while advertising builds brands over the long-term, Thedens argued, "You cantsend a message by mail that contradicts what you show on television. Both disciplines sell and bothbuild the brand." One executive concluded that the biggest problem was insufficient communication: "Anyonewho heard it firsthand from Charlotte bought in. From the moment she opens her mouth to talkabout brands, you know she has a depth of understanding that few people have. The problem is that,until recently, she has been the only missionary. Although the senior team had started "taking theshow on the road," Walsh felt they were too few for the magnitude of the task: "The same six orseven people keep getting reshuffled. The result is that follow-through is not good." ODea,however, pointed out that the new missionaries had different tribes to convert. He emphasized theimportance of translating the vision into a new role for each employee: We need to move beyond a vision that is useful to the top five percent of account and creative people, to one that has meaning for everyone at Ogilvy. The Information Systems staff should see themselves as brand stewards, because without information technology, we cant respond with appropriate speed. I want the Media people to say, "I will not buy airtime on these T.V. shows because they dont fit the Brandlrintt"." Creatives at O&M Direct developing coupon designs must be as true to the BrandPrint as creatives in .advertising. Everyone must see themselves as co- stewards of the vision.Local/Global Tensions Success in 1993 winning several, large multinational accounts created further challenges forthe embryonic WCS. Their g09-1of helping clients to develop a consistent brand image globallycreated tension in the firms traditional balance of power. WCS pressed local agencies to give priorityto brands with high global development potential over local accounts. For local agencies, however,local accounts often provided the most stable revenue stream and greatest profit. Further, in theirzeal to exercise their newfound "line" responsibility, WCS supervisors were viewed at times asoverstepping the bounds of their authority. While tension had always existed between the centers and local markets, the increasinglycentralized brand campaigns exacerbated conflicts. "Local agencies were used to always giving theclient what they wanted," explained one WCS supervisor, "I had to start telling them to stop over-servicing the client." Some balked. Local expertise had always been one of Ogilvys greatestcompetitive strengths. As one senior executive explained, "Certain local offices have not respondedwell to some of the advertising created centrally. One downside of global work is that it can end upbeing middle-of-the-road. When this happens, its bad for an offices creative image locally." But with costs escalating both centrally and locally, many felt that "the local barons" had tobe reigned in. "How do we help our clients globalize," asked Walsh, "when our local managementwill conspire to keep them geographically oriented?" For smaller agencies, issues of creative pride and autonomy were especially salient. Underthe new system, the central WCS team developed the Brandfrint" and advertising campaign withinput from local offices. Local offices then tailored execution to regional markets. But while largeoffices usually served as the center for at least one global account, smaller offices, explained one WCS 13
  • 40. 495-031 Charlotte Beers at Ogilvy & Mather Worldwide (A)director, "are more often on the receiving end now. They begin to feel like post boxes. How do youattract good people to smaller officesif they never get to run big accounts?" Beers felt that maintaining flexibility was key. "Some of our competitors-McCann Ericksonis a good example-are excellent at running highly centralized campaigns. For us to view WCS thatway would be a mistake. WCS should build upon, not diminish, our local strength." Creative andexecution roles, she explained further, should shift according to the locus of the best ideas or relevantresources: I want to continue to cultivate the tension between local and center. The easiest thing would be to have far more dominance centrally. It is more efficient, and the clients like it, because they invariably wish they had more control at the center. The reality is that nothing substitutes for full-blown, local agencies where the people are talented enough to articulate the heart of the brand, to interpret it in a sophisticated way, and-if necessary-to change it. If you have messengers or outlets, you will never execute well. The best ideas have unique, local modifications. One brand campaign we tested, for example, was an absolute win around the world, except in Asia, where the humor did not translate well. Our creative director in Asia worked with the idea, and it became the print campaign we use globally. Also on her mind was the brewing controversy about how to split fees and allocate costsbetween WCS and local offices. Agency compensation on large accounts consisted frequently of fixedfees that were negotiated up front. With new clients, it could be difficult to estimate the range ofOgilvy services needed and the extent of local adaptation that would be required. Agencies in moredistant markets were asked to contribute-sometimes without compensation-when the need foradditional local work was discovered. Local presidents complained that, although WCS accountspulled their people away from local accounts with clear-cut billable time, their portion .ofmultinational fees was small. WCS, on the other hand, maintained that they were being forced toabsorb more than their fair share of local costs. Beers recounted one specific incident that unfolded in December. "Kelly told me that one ofour officeshad refused to do any more work for a client, because they did not have any fees. I said tohim, I think you ought to talk to them about our new way of working and how much promise thereis in it. Give them more information. If they still cant see their way, have them come to me. Youask for collaboration," she concluded, "but occasionally you act autocratically." As conflicts continued to erupt, senior management was divided on the solution. "We havehighly individual personalities running our offices. With 272 worldwide," one account directorobserved, "its been like herding cats." Debate swirled around the degree of management structurerequired. Lazarus advocated common sense resolutions between the global account director andlocal agency presidents: "In our business, the quality of the work that gets done all comes down tothe people who are doing it, not to bureaucratic structures. If you create the right environment andyou have the right people, you dont need a whole structure." Others, ODea and his WCS corpsincluded, insisted that organizational changes were necessary to make Brand Stewardship a realityagencywide. Walsh agreed: "What we dont have is a structure, working practices, remuneration,praise of people-all based on Brand Stewardship." Referring to the trademark Ogilvy color, Beersoffered her perspective: We have to make Ogilvy "redder." The finances should follow our goal of killing geography as a barrier to serving the brand. ... Lets get the emotional content high and the structure will follow. We have people in the company who would prefer it the other way, but I want to get it done in my lifetime. So much of what happens at Ogilvy is cerebral, thoughtful and slow. We cant afford to move at a "grey" pace.14
  • 41. Charlotte Beers at Ogilvy & Mather Worldwide (A) 495-031 At the end of 1993,yet another issue had come to the fore. With large multinational accounts,some WCS heads controlled billings that easily surpassed those of many countries in the network.The agency, however, had always accorded the greatest prestige and biggest bonuses to presidents oflocal offices, countries, and regional chairmen. Brand Stewardship now required top-notch brandstewards and organizations centered around products and processes rather than Ogilvy officelocations. "I ask people to collaborate, but I dont pay them for it. This company has never asked itsfeudal chiefs to consider the sum," observed Beers. She pondered how to attract the best and thebrightest to WCS posts, knowing she would be asking them to leave the safety of turf to head brand-focused, virtual organizations. The "thirsty for change" veterans believed another hurdle would be learning to work betteras a team. Said Lazarus, "I dont think we make a lot of group decisions. We talk about it, butdecisions tend to get made by Charlotte and by the specific individuals who are affected." Butimplementation revived many of the debates of the first Vienna meeting. "I think we are all still veryguarded," explained Walsh. "As each meeting goes by, its a bit like a lump of ice slowly melting-our edges getting smoother all the time." Lazarus hoped that team members would grow"comfortable enough to disagree openly with one another." Battling a culture she had once describedas "grotesquely polite" was still on Beers list of priorities as she considered the group she hadassembled to help carry the change forward. By December 1993, Charlotte Beers assessed the years progress: "Clients love BrandStewardship. Competitors are trying to copy it. And internally, we lack consensus." She wonderedwhat course of action in 1994would provide the best stewardship of the Ogilvy brand. 15
  • 42. 495-031 Charlotte Beers at Ogilvy & Mather Worldwide (A)Exhibit 1 Selected Financial and Organization Data1984-1988 1984 1985 1986 1987 1988 Revenues (in thousands) $428,604 $490,486 $560,132 $738,508 $838,090 Net income (in thousands) 25,838 30,247 26,995 29,757 32,950 Operating profit (in thousands) 49,191 45,355 47,764 57,933 65,922Source: The Ogilvy Group Annual Report, 1988.1989-1993a 1989 1990 1991 1992 1993 Total annual billings (in thousandsj $4,089,000 $4,563,700 $5,271,000 $5,205,700 $5,814,100 Revenues (in thousands) 592,600 653,700 757,600 754,800 740,000 Percent change in net income? NA 4.7 -2.8 1.9 5.3 Operating margin NA 6.4 4.1 4.9 7.6Source: Advertising Age.aFinancial information for 1989-1993 is not comparable to 1984-1988 due to the restructuring of the company following sale toWPP Group, pic. It is the policy of WPP Group, plc not to release revenue and net income information about its subsidiaries.bRepresents an estimate by Advertising Age of the total value of all advertising and direct marketing campaigns run in a givenyear.cThe percent increase or decrease is given from an undisclosed sum at base year 1989.Exhibit 2 Percent of Regional Offices Owned by O&M Worldwide # of Offices 100% >50% <50% 0%North America 40 80 20 0 0Europe 97 63 24 8 5Asia/Pacific 66 57 36 7 0Latin America 48 25 6 21 4816
  • 43. 495-031 -17-Exhibit 3 Ogilvy & Mather Worldwide Organization Chart, 1991 Chairman & CEO Charlotte Beers 1 1 EUROPE LATIN AMERICA ASIA PACIFIC Regional Headquarters, Regional Headquarters, Regional Headquarters, O&M DIRECT WORLDWIDE Londqn I-- U.S. Offices Sao Paulo & Miami Hong Kong Headquarters, Chairman & CEO, New York New York CEO, Harry Reid President- President, Chairmant, Jerome Pickholz Vice Chairman, Finance . Shelly Lazarus Flavio Correa Rod Wright Reimer Thedens Human Resources Chicago Corporate Communications Los Angeles Information Services Houston Atlanta Seattle Portland Country Presidents (27) Detroit Honolulu United Kingdom Buffalo Chairman, Miami Mike Walsh L-Canadian Offices r Toronto Montreal 48 offices 66 offices Calgary 97 offices in 17 countries in 15 countries
  • 44. 495-031 -18-Exhibit 4 Statement of Vision and Values, 1993 To our peoJJU, our dimts, and ()UT Jrimtls- The market in which we compete is not a static one. To progress toward our The Winds change are blowingthrough 0gi1vy& Mather. We are raising the sights c:A: new Vision will demand restless challenge and frequent change. The values of everybodyin the companyto a sweepingnewvision: we share, however, the way we do things day-ta-day. will remain constant. TO BETIlE AGENCYMOST VALUED BYTiiOSE WHO MOSTVALUEBRANDS We work not for ourselves, not for the company, not even for a client. We work for Brands. Not that we have ever been unmindful of the importance of brands. Quite the con- trary. Our new thrust gets a big boost from ingrained 0giIvy & Mather strengths. Its roots lie in the teachings of David0giIvy that reverberate through our halls. We We work with the client, as Brand Teams. These Teams have alwaysaimed to create great campaigns with the spark to ignite sales and the represent the collective skills of our clients and ourselves. On stayingpower to build enduring brands. their performance, our client willjudge the whole agency. Whats ntrl is a TUtructuring of Ttscnmts, an arsenal of modern tech- niques, and an intensity of focus that add up to a 1II4jOTadvance in the We encourage individuals, entrepreneurs, inventive mavericks: way we tk business. We call it BRAND STEWARDSHIP - the art of with such members. teams thrive. We have no time Mating, building, and energizing profiUlble brands. for prima donnas and politicians. The new techniques and procedures of Brand Stewardship have already proved their value for many important brands. As I write they are being put to work for We value candor, curiosity, originality, intellectual rigor, others. In March wewill launch them formally - in print. on tape, and through- perseverance. brains - and civility. We see no conflict between out the Ogilvy&Mather network. a commitment to the highest professional standards in our work and to human kindness in our dealings with each other. This will affect the working habits of every professional in the agency. to the benefit. I am convinced, of t!Very brand we work for. I predict that it will bring out the best in all of you - creativelyand in every other aspect of your work - and We prefer the discipline of knowledge to the anarchy of ignorance. add a lot to the pleasure and satisfactionyou get out of yourjobs. We pursue knowledge the way a pig pursues truffles. As a first formal step the Board of Directors is putting forward the new state- We prize both analytical and creative skills. Without the first, ment of Shared Values on the facing page. You may notice that several of the you cant know where to go; without the second, points are taken from principles that have guided the company since its start - principles that were most recently set on paper in 1990 when David Ogilvy you wont be able to get there. brought our Corporate Culture up to date. The line between confidence and arrogance is a fine one. Thus the Shared Values perform two functions: they expand our culture to We watch it obsessively. reflect inexorable change, and in the same breath they mnfOTU its timeless standards. We respect the intelligence of our audiences: All vital cultures - national, artistic. corporate - tend to evolve as conditions " The consumer is not a moron." change, preservingvaluable old characteristics as new ones come into the spotlight. In just that way these Shared Values now take their place at the forefront of the dynamic culture of Ogilvy& Mather. ./2 We expect our clients to hold us accountable for our Stewardship of their Brands. Only if we have built, nourished, and developed ~~ prosperous Brands. only if we have made them more valuable both to CbadoUe Beets <lIairiBm, ~ Be Masher Woridwide their users and to their owners, may we judge ourselves successful.
  • 45. HARVARD BUSINESS SCHOOL 9-407-053 NOVEMBER 14, 2006BOR1S GROYSBERGSCOTT SNOOKThe Pine Street Initiative at Goldman Sachs Pine Street is a planned structure that lets line leaders at Goldman Sachs teach and share. Because we groworganically, we need to develop our own leaders. Even when we hire people laterally, we need to train andacculturate them. We have 1,200 managing directors and a good number of people below that level doing veryimportant jobs. Our business changes extremely quickly, to the point that experience is only so valuable. Thekey thing is judgment. The markets are changing, the technology is changing, the products are changing, butthe values remain the same. Pine Street is the focal point for training leaders at Goldman Sachs. Its anextension of the apprenticeship system. -Hank Paulson, Goldman Sachs Chairman & CEO, May 2005 Early in May 2005, members of the Pine Street Board of Directors gathered for their quarterlymeeting. Almost five years had passed since Goldman Sachs launched an innovative leadershipdevelopment initiative called Pine Street. Focused primarily on developing Goldmans most seniormanagers, Pine Street had built and executed a number of programs since its inception in Novemberof 1999 (See Exhibit 1, Evolution of Pine Street Offerings). But with each string of successes carne anew set of challenges. At each turn, members of the Pine Street Board--comprised primarily of seniorline leaders from Goldmans key businesses around the world-provided institutional guidance andsupport to meet these challenges. The agenda for todays meeting was broader than usual: how toleverage Pine Streets initial success and maximize its value into the future. Moving forward, Pine Street faced several broad challenges. First, its curriculum needed tomaintain the interest of an increasingly demanding internal clientele. Second, program contentneeded to keep pace with the constantly changing requirements of a rapidly shifting competitive andregulatory landscape. Third, Pine Street itself needed to pursue creative ways of renewing itsstructure and people without compromising either its mission or its unique culture. Fourth, PineStreet needed to retain the continued support of Goldman Sachs senior leadership, without whichsuch an innovative venture could not succeed. Finally, as program offerings grew, so didfundamental questions of identity. After five years of evolutionary growth, what did the Pine Streetbrand mean to Goldman Sachs? How should Pine Street staff think about their unique contributionwithin the broader structure of a constantly evolving organization? How should Pine Street bepositioned vis-a-vis Goldman Sachs University, which focuses on development and skill-basedtraining of the broader non-Managing Director (MD) population?Professors Boris Groysberg and Scott Snook and Global Research Group Senior Researcher David Lane prepared this case. HBS cases aredeveloped solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations ofeffectiveor ineffectivemanagement.Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may bereproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means--electronic, mechanical,photocopying, recording, or otherwise-without the permission of Harvard Business School.
  • 46. 407-053 The Pine Street Initiative at Goldman SachsThe Origins of Pine Streett In the early days of 21st century, the investment banking world was changing. Customers wereincreasingly price-sensitive, and banks were betting that competitiveness correlated directly withscale and scope. By 2005, the technology bubble of the early 2000shad ended, and the industry waspredicted to grow quickly again. Several firms announced record profits, mostly fueled by tradingactivities. Many banks also started to significantly increase their hiring. The ensuing "war for talent"threatened to put a damper on the growth of banks. Though Goldman Sachs preserved its reputationas an employer of choice for many graduates, it was not immune to broader industry dynamics. Thecompanys objective was growth, taking advantage of new opportunities while maintaining andextending its competitive position and sustaining its cultural identity among leading full-serviceinvestment banks. (See Exhibit 2 for selected financial data.) Goldmans business was divided into three segments: investment banking, trading and principalinvestments, and asset management and securities services. Investment banking activities weredivided into two categories, financial advisory and underwriting. Financial advisory includedadvising companies on mergers and acquisitions, divestitures, corporate defense activities,restructurings, and spin-offs. Underwriting included public offerings and private placements ofequity and debt securities. Trading and principal investments facilitated client transactions, but alsoincluded taking proprietary positions through market-making in, and trading of, fixed-income andequity products, currencies, commodities, swaps and other derivatives. Principal investmentsprimarily represented revenue from merchant-banking investments. Asset management andsecurities-service activities fell into three categories: asset management, securities services, andcommissions. In asset management, Goldman provided a broad array of investment advisoryservices to a diverse client base. Securities services included prime brokerage, financing services andsecurities lending, and matched-book business. Commissions included agency transactions forclients on major stock and futures exchanges, revenues from the increased share of the income, andgains derived from merchant-banking funds.tHisioru Goldman Sachs was founded in 1869on lower Manhattans Pine Street as a broker of promissorynotes. In 1906, the company strategically moved into the underwriting business. The firms effortspaid off with the $650 million Ford Motor Company IPa in 1956, at that time the largest publicoffering on record. This and subsequent high-profile transactions sustained Goldmans reputation asthe leading U.S. investment bank, with performance consistently at or near the top of the leaguetables in the most defining categories. In the early 1980s,Goldman Sachs staff grew at an annual rate of about eight percent. Over 90%of that new growth carne from entry-level hires. During the same period, annual turnover averagedonly about five percent. Typical industry turnover rates hovered around 20% annually. The rule ofthumb among professional-service firms. was that it cost about one years salary to replace aprofessional. By the mid-1990s, however, Goldmans annual turnover had grown to double digits ashiring grew to between 20% and 25%-split about evenly between entry-level and experienced hires. By 1996, the 172 partners concluded that they needed to increase their competitive strength bycreating a new title of managing director (MD) for hundreds of vice presidents (as well as allpartners). This new title was intended to convey the responsibility and leadership being asked of thisgroup. MDs who were not partners received many of the benefits of partnership-s-equal salaries and2
  • 47. The Pine Street Initiative at Goldman Sachs 407-053offices, for example-with the exception of an ownership stake in the firm.5,6 In only a few years, thenumber of MDs exceeded 1,000.Structure A IS-member Management Committee was the firms senior-most leadership group. TheCommittees charter extended to all issues that did not require a vote by the full partnership or apartners individual consent. The Partnership Committee oversaw partnership policy, selection andpractices, as well as the firms capital structure? Hank Paulson, Goldman Sachs Chairman & CEO,emphasized the important role that the Partnership Committee played in dealing with cultural issuesconnected to the firms managing directors and partners. Specificmanagement topics were addressedby ad hoc committees. Far more than other investment banks, Goldman relied on teams of two or even three linemanagers to jointly lead departments and divisions. This relatively unusual practice of managementby "co-heads" offers several significant advantages. First, it allowed the firm to maximize the benefitof complementary skill sets. Second, having multiple heads with different lengths of service at thecompany made transitions easier by guaranteeing built-in overlap. Finally, small leadership teamsincrease representation and ownership, which helped retain top players by providing them withaccess to leadership opportunities. One manager noted that Goldman often had the advantage ofbeing able to field more than one senior executive to meet clients and win business: "Virtually all ofthe leaders of the firm spend a big part of their time in execution, in meetings with clients, workingon specific deals. Having co-heads allows each to play an active business role and still have capacityto handle core management tasks." At a more junior level, co-headships supported the developmentand transfer of skills. As one HR professional noted, "Theres always this hand off, thisapprenticeship, this kind of cordial approach to how we hand the business over. We take a lot of timeand we try to do it carefully."Culture, the Special Ingredient Goldman Sachs prized its rich corporate culture. According to managing director John Rogers, amember of the firms Management Committee: Our bankers travel on the same planes as our competitors. We stay in the same hotels. In a lot of cases we have the same clients as our competition. So when it comes down to it, it is a combination of execution and culture that makes the difference between us and other firms. Behavior is shaped by it. People who think culture is just a bunch of bacteria in yogurt set a tone that strips values from a company. Thats why our culture is necessary-its the glue that binds us together. We hold onto the values, symbols and rituals that have guided us for years, and anything new that we add to the culture always supports what already exists. Lloyd Blankfein, the Chief Operating Officer of the firm, summarized elements of Goldman Sachsculture as "an interesting blend of confidence and commitment to excellence, and an inbredinsecurity that drives people to keep working and producing long after they need to. We cringe at theprospect of not being liked by a client. People who go on to other commercial pursuits frequentlyself-identify as a former Goldman Sachs employee long after they have left the firm. Alumni take a lotof pride in having worked here." A natural by-product of hiring so many high achievers was an almost universal expectation ofhigh standards. "Execution, the ability to turn around a product and do it flawlessly, is paramount at 3
  • 48. 407-053 The Pine Street Initiative at Goldman SachsGoldman," said one manager. "This is an environment where people expect successes and theyremember failures for a long, long time," added another. "Things have to be done in a very high-endway. People at Goldman Sachs are pretty intolerant of weak execution and weak quality, even ofthings most people might think of as trivial. Word of mouth about how good something is spreads inabout seven seconds. If its a bust, youve got no second swing at the ball." With high standards camea tendency toward self-criticism, added one senior manager: "Were harshest on ourselves,competitively. Once youre here, youre in. So the question becomes how to make ourselves betterevery single day. People say to each other, That was a good argument. But next time, it wouldactually be really interesting if you also added these three things." A relentless drive for excellencewhen coupled with openness to critique reinforced a strong norm of "feedback-seeking" behavior.More so than at most financial services firms, Goldman employees were known for their collaborativepractices.Human Capital As a long-time employer of choice for elite undergraduates and MBAs, Goldman was able toselect from a broad array of talented applicants for the traits it preferred. Overwhelmingly, the firmchose smart high achievers. As Paulson put it, "Our people are what my wife calls gold-star types.They want the gold star, to get the A on the test. They want to be told theyre doing a good job, andthey want to get good feedback. We all do." While everyone had high expectations, no one was aprima donna. Despite the emphasis on teamwork, Goldman Sachs also stressed the importance ofleadership. Everyone, no matter how junior, was expected to lead. Paulson explained, "Were globaland multicultural like other professional service firms, but we also have huge capital commitmentsand risks to manage. It takes many, many leaders. Goldman Sachs is leaders working with leaders."Blankfein supported this notion by citing typical career choices made by departing Goldmanpartners: "A fair number of people who leave Goldman Sachs go into public service, whether asleader of the NYSE or to senior government posts. " But as Goldman Sachs became increasingly largeand complex, it became increasingly difficult to grow enough leaders to meet the demand, let alonefacilitate productive interaction among so many of them.The Pine Street Concepts In June 1999,Goldmans senior leaders selected a diverse group of managers from across the firmto form the Leadership Development Advisory Committee (see Exhibit 3). Their official charter wasto "assess the future training and development needs of Goldman Sachs, with particular focus on theneed for a more systematic and effective approach to developing managing directors." Early in theprocess, Committee members agreed that Goldmans focus on professional development would bedriven by the following four objectives (direct excerpts are below): 1. Developing the firms key asset: With the firms people representing our most critical asset and competitive advantage, the task of keeping our talent excited and moving up a steep learning curve has become mission-critical. 2. Winning the "War for Talent": Accelerated professional development is a key element in the overall "value proposition" to the most talented people. 3. Building a cadre of outstanding leaders: The firms growth and ambitious business objectives demand a larger group of outstanding, well-rounded leaders.4
  • 49. The Pine Street Initiative at Goldman Sachs 407-053 4. Maintaining quality and cultural strength amidst rapid growth: Our expanded scale dictates that our traditional "apprenticeship" model of professional development be supplemented with more structural measures. For six months, committee members gathered extensive data using four different researchapproaches. First, using both internal surveys and in-depth interviews, they elicited a broad range ofopinions from Goldman Sachs leaders and employees about professional development. Second, theyanalyzed the status quo within Goldman: How much professional development was currently takingplace within the firm, and how effective were these initiatives at meeting the firms needs? Third,committee members traveled extensively to benchmark "best-of-class" firms around the world tolearn how they developed their leaders. Finally, they interviewed a select group of externalconsultants and thought leaders about current best practices in senior-level executive developmentand corporate universities. Several broad themes (described in detail in Exhibit 4) emerged from these benchmarking visitsand consultant interviews. In the most successful firms, senior management devoted significantenergy to people issues and held their senior line managers accountable for talent development.Leadership development focused more on boosting high-potential groups than on bringing slowlearners up to minimum standards. Only a small percentage (thought to be about 10%)of leadershipdevelopment happened in formal classroom settings. Instead of an exclusive focus on structuredprograms, best-in-class companies preferred to have teams working on real projects as the primaryvehicle for development. In practice, firms relied on multiple developmental experiences to growleaders. On the morning of November 8, 1999, the Leadership Development Advisory Committeepresented its findings to the firms Management Committee. The original proposal included fourmain components: 1) an initial two-day mandatory seminar for all Goldman Sachs managingdirectors (MDs), 2) action-based learning projects, 3) executive coaching, and 4) master classes. Thecommittee also recommended establishing a special supervisory board and initiating a search for aChief Learning Officer (CLO) to oversee the evolution and execution of these programs. With theexception of the action-based learning projects, which were deemed to be "too much too soon," theManagement Committee accepted the proposal, and "Pine Street" was born. The initiative wasnamed "Pine Street"-after the location of the firms Wall Street headquarters in the late 1800s-toconnote an effort specific to the firms culture and heritage. It was agreed that the focus of Pine Street would be on leadership development of the most seniorpeople within the firm, the MD population and Goldman Sachs University would continue to focusprimarily on skill-based training for the non-MD population. Given the nature of the business andthe highly educated workforce, this would ensure that leaders would be developed at all levels in theorganization. Having passed this initial milestone, it became clear that Pine Streets central challenge would beto convince Goldmans extremely busy, capable, and business-minded managers that leadershipdevelopment was an investment worth considering. Despite strong support from several influentialManagement Committee sponsors, wholesale acceptance of the fundamental premise for pursuing amore systematic approach to leadership development was not a given. Many excellent leaders haddeveloped over the years at Goldman Sachs, without the benefit of formal programs such as the onesproposed by Pine Street. Furthermore, Goldman Sachs was not a firm like General Electric where Jack Welch could simplyrequire all managers quarterly attendance at Crotonville for leadership development. Approval bythe Management Committee in no way guaranteed that Pine Street would succeed. For Pine Street to 5
  • 50. 407-053 The Pine StreetInitiative at Goldman Sachshave a chance, it had to be tightly aligned with Goldman Sachs business and culture. For example,all notions of a brick-and-mortar corporate university were quickly rejected. Said Pine Street COOSteffen Landauer, "That was probably one of the best decisions we made. We really wentaggressively in the other direction to embed Pine Street in the business, to blur the lines between usand the business, to do things that are close to peoples desks." Following a similar logic, Pine Streetsboard of directors was designed to link the Pine Street team in the learning and development worldwith a group of respected leaders out on the line. Creating a board composed of leaders from acrossall Goldman divisions was seen as a critical way to broaden internal ownership of Pine Streetinitiatives. Selection criteria for board members included a demonstrated interest in talentdevelopment, credibility within the firm, connection to ones division and business, and the ability torepresent ones division. Members also had to have reputations as strong commercial contributors.Landauer continued, "We talked person by person with senior leaders. In the beginning it was veryimportant to get powerful, highly-respected, leaders to serve." Eventually what distinguished Pine Streets board was the remarkable level of hands-onengagement by its members. "We never build an initiative without either a board member or anotherline person," Landauer emphasized. From the start, senior line leaders from across Goldman Sachswere heavily involved in both the design and actual delivery of every initiative. Pine Streets initialoffering was no exception.Getting Started Steffen Landauer recalled the very moment when he realized that Pine Street was "for real."According to him: It was Christmas Day, 2000 when I-together with a group of senior leaders around the firm-received the following voicemail from Mark Schwartz, the Pine Street Board member who had offered to lead development of the Pine Street Leadership Program (PSLP) for all MDs. It began as follows: "This is Mark Schwartz from Ho Chi Minh City, inviting you to serve as faculty in the most important leadership initiative ever at Goldman Sachs." At the outset of Pine Street, it sent a powerful signal to the firm that such a well-respected leader as Mark Schwartz was sending Christmas Day voicemails about this program launch from the back alleys of Ho Chi Minh City. Six weeks later, sixteen partners flew to London, not for the first PSLP program, but rather to rehearse for the program. Its probably safe to say thats something that never happened before at Goldman Sachs and will never happen again. During much of 2000, Mark Schwartz, an early champion of Pine Street and at the time head ofGoldman Sachs Asia, led a twelve-person team through weekly meetings to design Pine Streetsinaugural program. For almost eight months, every Friday morning at 6 a.m. NY time, the PSLP teammet to discuss every detail of this landmark event. Finally, in February of 2001 the entire team,including all faculty members, converged on London for a series of intense rehearsals. Everyone,including John Thornton, the firms co-President, sat through multiple repetitions. The stakes werehigh and there was a great deal of pressure to get it right the first time. Over the next 18 monthsevery Managing Director in Goldman Sachs would attend the program. Landauer described theelaborate preparations and tense atmosphere: We designed and recruited a faculty group of 20 for this program-primarily GS line leaders. We broughllhem to London to rehearse for a day tu make sure they understood their roles and how all the pieces fit together. We would never do that again now, but at that moment we wanted to get it right. We were very afraid that if it wasnt successful, it would be6
  • 51. The Pine Street Initiative at Goldman Sachs 407-053 not only the first but also the last Pine Street program. This program was a big bet, and one that really got Pine Street on the map. Schwartz too felt pressure to make the first program a success, but for different reasons. Thesewere anxious times at Goldman. The company had just gone public, the equities bubble had burst,and most investment banks were cutting costs. Any program or activity that did not directly affectproductivity was vulnerable-and ultimately expendable. "That first program was going to bechallenged if it hadnt been successful," he explained. "Killing it would have been easy. Divisionsthat were under a lot of financial pressure were being asked to subsidize the program, though itwasnt obvious what the return on investment was going to be." . Offsetting these risks, key senior leaders lent their support. John Thornton sent personal voicemails to each MD, describing the inaugural PSLP and promising them an invitation. "When wedecided to run these 10 Pine Street programs, we basically said we are not running anyone of themwithout a commitment from Hank, the CEO, or the co-COOs at the time, to be a host for the wholetwo-day program," explained one Pine Street team member. "So they ultimately made the businesscase for us. It was being shopped in every speech that Hank made, every conference he appeared in.Your personal invitation to Pine Street from Paulson was viewed as recognition of you as a leader ofthe firm. Yet in every single training program that first year, if half of the crowd was feeling proud tobe there, the other half was skeptical." The first PSLP debuted on March 22, 2001 and largely met expectations. As a leader developmentinitiative, PSLP had relatively modest goals. First, the Pine Street group wanted to create a commonlanguage and a certain baseline of leadership capacity among the MD population, most of whom hadonly limited previous exposure to such training in their careers at Goldman Sachs. Early on aconscious decision was made not to adopt an external model of leadership. Instead, during eachiteration of PSLP, Hank Paulson or one of the firms co-chief operating officers led interactivediscussions to develop Goldmans unique approach to leading. A second goal of PSLP was to generate a shared understanding of and common-set of expectationsfor Pine Street itself. To achieve these goals, Schwartz explained: "We wanted everyone exposed tothis program as quickly as we could, but in groups small enough so everyone who attended wouldfeel that it was intimate enough that they could participate fully." Ten programs in London and NewYork ran over a period of 18 months. In addition to exposing MDs to a few world class thoughtleaders on the subject, each.program included heavy doses of senior Goldman line leaders sharingpersonal insights and experiences from their careers. Following each program, a member from the Pine Street staff held a 45 minute "live debrief" withparticipants to note reactions and solicit suggestions. According to Landauer, "From the beginningthey got the idea that we were listening to them." Each event was rigorously evaluated andcontinuous adjustments were made. As a result, successive programs became increasingly interactiveand less presentation-oriented. . Schwartz felt that PSLP generated enough enthusiasm and support to buy time for Pine Street todevelop. This was crucial, he added, because "if people feel something is a waste of time at GoldmanSachs, nobody can make you do it. It wasnt that the first program in and of itself convinced everyonethat leadership training was essential and that Pine Street was the most effective and efficient way toget to a great leadership program, but it was good enough and there was enough enthusiasm that theprogram survived and got traction. I think Paulsons support was really critical at that time." 7
  • 52. 407-053 The Pine Street Initiative at Goldman SachsProving its Value Despite the personal commitment and support of senior Goldman Sachs leaders, most attendeescalculated the programs expected utility before deciding to attend. They simply couldnt helpthemselves. One investment banker described the process this way: Pine Street was presented to me from the start as a way to make senior people here feel special, to connect them to one another-as some group of them will continue to rise and lead parts of the firm, as well as lead practical projects within their business. My first reaction to being included in the program was "Sounds good, but what is it? How much time is it going to take? Im honored to attend but, ultimately, will this be time well spent?" So I asked around to see what people thought of it. When I realized it had the full sponsorship of the Executive Office, that gave credibility to the program for me. Other participants believed that not all of their time was well spent. For example, as part of dinnerentertainment, Pine Street invited a leaderless orchestra to perform. It went poorly; one partnerrecalled: "Everybodys bitching and moaning and complaining, What a waste of time, these idiots atPine Street. This is a zero-defects place. And any start-up, as we know, has defects." PSLP put PineStreet on the map, but clearly there was much to learn.Steve Kerr In an organization where systematic senior leader development was a novel idea, establishingcredibility early on was critical. One of the most public demonstrations of Goldmans commitment toPine Street was the decision to invest in a Chief Learning Officer (CLO). Paulson recalled, "We decided to go outside, which was a big step for us. Thain [co-President JohnThain] and Thornton went through a search and found Steve Kerr at GEs Crotonville trainingcampus. Steve convinced all of us that he understood that we are not GE and that he wanted adifferent challenge." Most everyone agreed that Kerrs arrival gave momentum to Pine Street.According to Schwartz, Kerr was a heavyweight who added credibility to Pine Street at a time whenthe business was first being created: "His style, his delivery, and his expertise really resonated withpeople. Having great credentials in academia and great credentials at Crotonville, he spoke to us in away that suggested he really understood his business." Another insider agreed, "Steve Kerr broughta kind of celebrity status with him. He was so well known to senior leaders in the firm that hebrought instant credibility to this fledgling group that otherwise might have had a more difficulttime." The Financial Times praised not only Kerrs deep understanding of leadership, but also hisuncanny ability to get a roomful of "type-A managers itching to be back at their desks makingmoney" to actually put their Blackberries away to listen to him.? This was precisely the challengePine Street faced at Goldman Sachs. After a year of courtship, Kerr finally arrived on March 22, 2001, just in time for the inauguralPSLP program. Landauer recalled, "Even before he joined the firm, Steve offered to join in many ofthose 6 a.m. meetings, but I think the whole process horrified him. We spent a long time getting itright. Steve was shocked at the amount of resources, and meetings, and people and everything thatwas involved in it." Kerr himself recalled thinking, "Fourteen people had devoted serious time to it(PSLP)for months. How one could use that many people on a two-day program was beyond me. Butthats what they did. I caused one module to be cancelled and they threw me in because they did nothave anyone else."8
  • 53. The Pine Street Initiative at Goldman Sachs 407-053Lessons Learned With extensive participant feedback pouring in from multiple iterations of PSLP and anexperienced CLO on board to help them interpret it, Pine Street managers quickly grasped a fewfundamental insights that would shape the general trajectory of leadership development at GoldmanSachs for years to come. First, as a group, Goldmans senior leaders desired more customized content.Since PSLP targeted all MDs in the firm, its content and coverage had to be very general. Landauerframed the challenge this way, "People-including people on the Pine Street team-would get tiredof it very quickly. It served its purpose, but then we wanted to target more specific groups, higher-touch events, more intensive offerings for people whom division heads designated as leaders." Onelesson was clear: two-day, one-size-fits-all training programs could never be the primary vehicle fordeveloping senior leaders at Goldman Sachs. A second insight concerned faculty composition. Initially, faculty came from top universities. "Wefound pretty quickly that even outstanding professors didnt necessarily have enough understandingof the Goldman Sachs experience to really connect with our people," Schwartz recalled. "We decidedquickly to add our own trainers and managers to the program faculty to help legitimize the programsinternally and increase their perceived effectiveness." He elaborated: When division heads ended up teaching at Pine Street, it was a lot easier to persuade vice presidents and younger managing directors in those divisions that they should be participating thoughtfully. Over time it became really inspirational. People wanted to participate in the program and thought it might be pretty neat to teach in the program, and over time we developed outstanding internal teachers. Ultimately we got the balance right, using a few external speakers who had great wisdom and great intellectual thought, but merging and melding that with internal division heads, internal partners who obviously knew the way the firm worked intimately, connected well with participants directly, and could relate their own experiences to the experiences that younger people were about to go through. Added Landauer, "We have an intimate culture, a producing culture, a culture of apprenticeship.You learn from your colleague in the next office, and people here liked that model; the only issue isthat Goldman Sachs had outgrown apprenticeship as a sole means of leader development. Wequickly figured out that making the apprenticeship idea scalable required Pine Street to use internalleaders. If you look at how knowledge is transmitted, Pine Street continues to ask experiencedleaders to teach what they know and outline best practices to others at the firm." By 2005, Goldman Sachs line managers taught over 80% of Pine Street courses. Programparticipants list "internal faculty" as one of the most valuable aspects of the Pine Street experience.According to one, "It makes it very tangible and real when someone says why these things haveworked for them personally in their career and why I need to learn them too. Its about what leadersdo, but more importantly, its about what Goldman Sachs leaders do." Teaching developed thefaculty as well, noted Blankfein, the firms President and Chief Operating Officer. "The professorgenerally gets more out of a good class than the students do in terms of affirmation of principles.Anyone at Goldman Sachs who trains junior people, seeing the quality of the people and thequestions asked, feels good about him or herself and feels good about the institution."The Evolution of Pine Street From its inception, Pine Street was a work in progress, constantly evolving and adapting tointernal feedback and external demands. Exhibit 1 summarizes the evolution of Pine Street from its 9
  • 54. 407-053 The Pine Street Initiative at Goldman Sachslaunch in November of 1999 through May of 2005. By tracing the general evolution of Pine Street,several discemable themes emerge. First, Pine Street offerings became increasingly specialized. Fromthe original "one size fits all" PSLP, to its eventual mix of highly focused curricula, Pine Streetresponded to customer demands for increasingly customized interventions designed to meet theunique needs of specific businesses and individuals. Second, the relative mix of traditional classroomtraining programs as a percentage of the overall curriculum continued to decrease with time. In fact,by 2005 the core practice area "Leadership Programs" was dwarfed by all other major components ofPine Street. Third, Pine Street continued to broaden its connections with line leaders, from therelatively small initial team of champions out of the Executive Office, to over 107 line leaders servingas Pine Street Faculty in 2005 (including 91% of the firms Management Committee). Fourth, overtime Pine Street offerings grew to include not only senior leaders within Goldman, but significantclient participation as well. A fifth trend was the gradual globalization of Pine Street events andservices. Finally, from its initial image as a small standalone effort with a distinct brand, Pine Streetstaff worked increasingly closely with many other parts of the firm, including the Executive Office,the Partnership Committee, Goldman Sachs University, and other Human Capital Management(HCM) functions. In particular, closer integration with Goldman Sachs University becameincreasingly important to ensure the whole leadership and management development curriculumwas seamless from junior level managers through to the most senior leaders in the firm. As CarolPledger, Managing Director, Goldman Sachs University, observed, We jointly agreed to a framework to be used as the anchor in all the key leadership and management programs, regardless of whether they were being delivered at the Associate, VP or MD level. This has served us well in ensuring our curriculum is holistic and that programs build on each other as an individual transitions from being an individual contributor to a manager of people to the leader of a significant business.The Early Years (1999-2000) In addition to spending a great deal of time and effort planning for the Pine Street LeadershipProgram (PSLP),important seeds were planted during the first few years that would eventually growinto a comprehensive suite of core practice areas. Goldman always had a Managing DirectorsOrientation Program. Since Pine Streets initial focus was on MDs, it was only natural for the groupto pick up responsibility for this legacy program. One of the Leadership Development AdvisoryCommittees initial recommendations was to "link development to performance reviews." Accordingto Landauer, "performance review training was a way for us to collaborate with HCM in addingvalue to the firm as a whole. We had talked in our report about how important it was to incentivizepeople to the correct behaviors, not just commercial behavior; so we got involved in performancereview training right in the beginning. In an attempt to get people engaged in the topic of leading, aseries of Master Classes were also introduced in 2000. Landauer explains, "We brought some big-name outsiders (e.g. Clay Christensen! Dan Goleman, Philip Evans, and Gary Hamel) to interact indiscussion, not lecture, with leaders on issues of their choosing. The Master Classes ran their courseand we decided to stop doing them, but they served a purpose. Most people had a positiveexperience and got insights in 40 person group discussions with thought leaders in relevantdisciplines. That was also helpful in getting Pine Street on the map." Perhaps the most powerful program launched in 2000 was Executive Coaching. Coaching hadbeen available at Goldman prior to Pine Street, but had largely remedial rather than developmentalgoals. According to Advisory Director Jon Cohen, "It was implied that you had a choice betweengetting fired or getting coaching. That didnt give it a very good patina. But once the world learnedthat over a third of the firms Management Committee had been coached, it was seen as more10
  • 55. The Pine Street Initiative at Goldman Sachs 407-053desirable to do." Goldman transformed coachings image from a last-ditch effort to save problemchildren into a highly sought after investment in Goldmans high-performing leaders. Cohencontinued, "Maybe theyve gotten sent to China to run a joint venture. Thats not a three-inch putt, asgolfers would say. Theyre perfect candidates for coaching that can make them more effective at newchallenges and assignments." Customer satisfaction was high. "Based on what our clients tell us,executive coaching remains one of our most valued offerings," reported Cary Friedman, whomanaged the program for Pine Street. "Weve invested a tremendous amount trying to scope outwhat makes it work. Weve interviewed more than 250 coaches, looking for the ones that we thoughtwould be most effectivewithin Goldman Sachs. Exposing the right inside senior people to individualone-on-one work with the right outsiders is an important leverage point in developing theirleadership skills." About 50 MDs were being coached at any given time, each engagement lasting from four to amaximum of nine months. Seeing high profile executives with coaches had a powerful impactFriedman noted, "A Management Committee member will come into a meeting and say, Please payno attention to the individual in the back of the room. Thats my coach, who will be observing me inthis meeting. Nothing is more powerful than hearing a senior leader say that. Oh, this guys got acoach? Wow." Every executive who wanted coaching needed approval from their global division head, andeveryone in the program worked toward specific developmental objectives approved by their directmanager. To reduce potentially sensitive political obstacles, all coaches were external, not Goldmanemployees. Additionally, the content of coaching sessions was not tied to executive compensation orpromotion decisions. Part of the argument to create Pine Street in the first place was to help facilitate the rapidexpansion of the firm by accelerating the growth of its leaders. Informal mentoring was stillimportant at Goldman, but as the firm grew exponentially (see Exhibit 5 for growth in employeenumbers) Pine Streets move to supplement traditional approaches with additional resources was anobvious solution. In the words of one long-time observer, coaching "filled a gap that was created bythe gradual diffusion of a mentoring legacy inside the firm. Ten or 15 years ago at Goldman, mostrising stars had an informal teacher, a coach, a mentor to help that individual develop. When the firmgrew all of a sudden and went through the IPO, you ended up with a 20,000-person organization,and that legacy was diluted."Involving Clients (2001-2002) During 2001 and 2002 period, Wall Street experienced one of its worst bear markets in recenthistory. Landauer recalled this difficult period as a real test for his fledgling office inasmuch astraditional wisdom argued that one of the first line items to cut during tough financial times wastraining and development: Goldman Sachs cut way back on most businesses during this time, and many support functions were restructured as well. We were brutally careful on costs and everything was bare bones. And Pine Street ended up being protected and preserved. Hank Paulson and the firms leadership deserve a lot of credit. They made a decision that they were going to do this and they stuck with it, through one of the toughest period in recent times on Wall Street. Surviving this "gut check" infused Pine Street with a new found confidence to take some risks.When they werent directly involved with executing the high-profile PSLP and continuing to operate 11
  • 56. 407-053 The Pine Street Initiative at Goldman Sachsprograms initiated in 2000,Pine Streets lean staff (about eight people at this time) set about breakingthe mold by reaching out to clients. The idea of inviting external clients to internal leadership development initiatives was a conceptSteve Kerr expanded from GE. Pine Street managers had been trying to find a way to get the mostcommercially-minded Goldman managers to participate in their programs and realized that one wayto get their attention was by getting their clients attention. Goldman Sachs University also openedup a number of their product programs to clients with great success. Not only did this provide anopportunity for relationship building over an extended period around a substantive topic, but as aresult of the training, clients were better educated as buyers of GS offerings. About Pine Streets initiative to include clients in its programs, Schwartz recalled, "It was a smartmove, and the results were excellent." Client participants were grateful to join and brought theirenthusiasm and knowledge to class. Goldman participants appreciated the added perspective. As onepointed out, clients for the most part "are better at this stuff than we are. Were just investmentbankers, but weve got some of the best clients in the world. They are leaders in their business and assuch are leaders in thinking about leadership issues. So what better way than to bring them into aclassroom where you can learn from them?" But the benefits of client participation ran even deeper.A senior leader explained the beauty of this novel insight: Regrettably, nothing here stays credible for very long unless you do it with clients. The cool people here do not want to be associated with something for very long unless it has some commercial attribute, and enthusiastic client feedback on the experience validated Pine Street for the skeptics. Pine Street holds these client sessions on a regular basis now. And we have the same cast of characters, including some of the most commercially driven people in the firm. They do it once for 60 clients; it goes so well they bring in a different group of 60. Not surprisingly, the opportunity to invite a client quickly became one of the most powerful toolsfor convincing some of Goldmans highest-profile leaders to attend a Pine Street event. Paired withtheir Goldman Sachs relationship managers, most clients were not only honored to attend, but manyexternal attendees were also willing to discuss their reactions (see Exhibit 6 for Selected ClientComment on 2004 Pine Street Programs). Alison Mass, a Partner who co-headed the firms FinancialSponsors group, offered an explanation: "Leadership training of this quality is something no otherinvestment bank offers clients. Its different than the usual client entertainment you do outsidenormal work hours. Its different than going to a Yankees game or taking their family to TheNutcracker. Its helpful to them as individuals, helpful to their companies, and enhances yourrelationship with them as you work together on the program." One relationship manager explainedthe logic this way: I spent five and half hours with my client one-on-one. My relationship with her is much stronger as a result of that interaction than it would ever otherwise have been. It would have taken me five years to get the same amount of quality time with that client. So it was an ingenious way to get us to bond with our clients. She was a captive at Goldman Sachs for a day where its Goldman Sachs Day, and shes going to walk away from it feeling fondly about it. This is a competitive advantage for us. Not everybody offers something similar to this. And so if the client comes away from it feeling they learned something new, and they spent a day with Goldman Sachs, and they realize the resources that we made available to them, they have to have the feeling that we are a place that is a great partner for them to grow their business. Pine Street staff never invited clients themselves; extending actual invitations was left up torelationship managers. One Pine Street Staff member explained the process this way:12
  • 57. The Pine Street Initiative at Goldman Sachs 407-053 You are a high performer at Goldman Sachs, invited to attend one of the prestigious Pine Street programs where we have our CEO teaching, our vice chairman teaching, world-class external experts teaching. But we also suggest you invite one of your key clients. Youll find superstar investment bankers, who would never step away from the desk for anything, spending a whole day with a client in the program, because"they know theyll strengthen their client relationships. Client programs were seen primarily as an additional opportunity to serve Goldmans clients and deepen personal relationships. Said one Goldman manager, "Hopefully we learn a little bit more as well. Any time you have concentrated time with your clients its helpful, but we do not use these.sessions as business opportunities." Goldman managers did consider carefully which clients to invite. Some were simply large and important customers for which such attention was expected. Others were invited if Goldman Sachs knew that the client could clearly benefit from the course material being offered. . Client programs were a particular hit with some of Goldmans most commercially-mindedmanagers. According to participant feedback, clients found the experience valuable as well.l? • "The action oriented bent to this program is extremely valuable and unique ... [There are] several things I will put to use immediately." • "I found it extremely valuable and hope that we will be able to send delegates in the future. I was left with a very positive impression of Goldman Sachs, the culture and people. You are an organization with exceptional talent working hard to ensure it is fully realized." . • "It is clearer to me now how Goldman Sachs is able to attract and retain the level of people I have interacted with across all segments of the company. The time and energy commitment to the leadership process is very impressive." Pine Streets focus on clients wasnt limited to formal programs. Almost from the start, Pine Streetoffered Individual Goldman Sachs Client Meetings. Typically this took the form of Steve Kerraccompanying a line leader on a client visit. One leader described the offering this way: The approach from the relationship manager is that Goldman Sachs has gotten very serious over the last few years about leadership development. Weve got this group called Pine Street that is doing both leadership development and more internal consulting type services with people at Goldman. We occasionally make available to favored clients the chance to have similar meetings with them, and if you would be interested, wed be happy to explore that possibility with you. For those who find this type of offering "unusual" for an investment bank, Pine Street stafferDaisy Wademan, who worked as an investment banker before joining Pine Street, explained, A client who has a good relationship with an investment bank tends to look to that firm- and to the relationship manager they work with-for more than just financial advice and execution. A good relationship manager becomes his or her clients advisor-an all-purpose, go-to problem solver. In the context of client service first, the individual Pine Street visits make a lot of sense. Were putting another Goldman Sachs resource at our clients disposal. As more and more Goldman managers (and clients) gained experience with Pine Street offerings,they began to push for content that was tailored to their specific business needs. The move away fromone-size-fits-allwas fine with Pine Street managers, as Kerr explained: 13
  • 58. 407-053 The Pine Street Initiative at Goldman Sachs To say youre going to run a program just for MDs is the same as saying youre going to run a program for brown-eyed people. You can do it, its not against the law, theres an objective test to see who has brown eyes, but when theyre all in the room, what are you going to teach brown-eyed people? Other than the title, they dont have anything in common. There are MDs here who boss nobody; theyre very good at selling or trading or advising. Then there are MDs here who manage hundreds of people. What do you teach both groups that is not totally bland? Instead of saturation bombing, you can smart bomb. Focus on people with common problems, not common titles. Say youre a new manager. Well teach you hierarchical leadership. Then you manage many people, so then we teach you management across time zones, management across countries. First time as a co-head? Weve got a module for you. During this period, the inaugural PSLP began to wind down and was succeeded by the PineStreet Business Leadership Program. This marked the start of specific programs for discreteaudiences rather than one size fits all. The Business Leadership Program focused specifically on howto grow and lead a business. This program was eventually extended to clients in 2002.Action Learning (2003-2004) By 2003,Pine Street offerings had grown to the point where staff began to organize them in termsof five core practice areas: Leadership Programs; Leadership Acceleration; Leadership AdvisoryServices; GS Culture, Networks, and MD Community; and GS Client Services (see Exhibit 1 for adetailed list of offerings in each area). According to Landauer: "That was an important step in ourdevelopment. We gave specific individuals responsibility for specific practice areas. We started tothink more about clusters of offerings rather than one-off training programs. The client piece was adiscrete bucket, culture and networks was a discrete bucket." In addition to adopting a more formalstructure, by 2003 Pine Street staff had also codified a set of internal governing principles (see Exhibit7 for a detailed description), which represented the groups attempt to embody the same principles ofleadership which it taught in its programs. As Pine Street evolved, so did its commitment to offer content focused on actionable, business-relevant best practices. According to Landauer: This is one of the fundamental dilemmas of leadership development: all of the research shows that training programs arent very effective at developing leaders. And yet when you look at what most firms do and where they put their resources, most of it is invested in traditional classroom training programs. We quickly adopted a different approach. Thats the main story of how Pine Street has evolved, from devoting nearly all of our resources to training programs, to branching more broadly into other types of learning initiatives. By 2003, none of the new initiatives that we invested in was a training program. From the start, Pine Streets charter mandated a focus on developing Goldmans most seniorleaders, its Managing Directors (MDs). However, by 2002 many leaders were concerned thatGoldman was losing some of its finest Vice Presidents (VPs). As a result, several ManagementCommittee members asked Pine Street to expand its scope to include high potential VPs. In additionto including selected VPs in client programs, Pine Street launched perhaps its most ambitiousprogram yet, its VP Leadership Acceleration Initiative (LAD. LAI was a 12-month action learningprogram designed to accelerate the development of a select group of 90 top-performing VPs. Thisinitiative included job-based stretch assignments, intensive developmental feedback, systematicrelationship building/networking, and training on key leadership skills as well as selectedcommercial topics (see Exhibit 8 for a detailed description). The following year, Pine Street launcheda similar initiative for its core audience, the MD Leadership Acceleration Initiative (see Exhibit 9 for14
  • 59. The Pine Street Initiative at Goldman Sachs 407-053a detailed description). Similar to the program for VPs, the MD program was a 9-month actionlearning initiative designed to accelerate the development of a select group of 40 MDs. Its coreobjective was to prepare them for broader leadership responsibility at the firm through one-on-oneexecutive coaching, individual action plans, participation in Executive Office taskforces, and small-group sessions with senior leaders. LAI programs were a real stretch for the Pine Street staff, as well as the participants. One recalledhis experience working on two LAI projects over three or four months this way: One was a project within my own business on sales force integration. The other was a research project with a colleague on changes within global investing-potential for unbundling, regulatory changes relating to soft dollars, and how to optimize secondary equities sales in the world of electronic trading. Both were interesting and time consuming. For the next round, I recommended considering one rather than two projects. Time wouldnt be diluted trying to manage both, but could be concentrated on one. For Pine Street staff, locating a continuous stream of meaningful action learning projects andenlisting committed line leader sponsorship was a much greater challenge than planning a traditionalclassroom training event for 130participants. When asked if such an intensive approach to leadershipdevelopment was economical, Landauer replied: Thats part of our strategy, to offer deeper, richer, more intensive offerings to a smaller number of leaders as designated by division leadership. Its a strategic choice: you either try to outfit an enormous expedition that will get everyone a certain distance up the mountain, or you decide to take a smaller group of people up a to a higher level. Weve chosen the latter, and its critical to ensure that we are investing in the people designated by the businesses. Were under pressure to make a difference to Goldman Sachs, not to fill huge numbers of seats at training programs. Another resource-intensive way that Pine Street attempted to "make a difference" during thisperiod was by launching a suite of internal consulting products. Pine Street had always offered" one-off" consultations to Goldman Sachs leaders. However, in 2003 Pine Street staff member RajeevPeshawaria spurred the group to formalize this service into a cluster of offerings targeted atindividual managers and their teams. By 2005, Leadership Advisory Services consisted of smallworkshops (ranging from two to 20people at a time) covering the following topics: • Jump Start: Accelerates a leaders transition into a new business by identifying issues and opportunities shared by leaders and their teams. • Optimizing the Co-Headship: Improves effectiveness of new co-head relationships through individual discussions around proven best practices. • Establishing a Vision & Strategy: Defines the strategic direction of a business through a practical approach. • Business Planning/Aligning Roles & Responsibilities: Translates VISIOnand strategy into a tangible business plan through a working session that charts specific projects, action steps, and roles and responsibilities. • Team Effectiveness: Resolves people and process issues impacting business performance. • Cultural Integration: Advises on critical steps involving cultural integration pre- and post- transaction following interviews with key leaders of both organizations. 15
  • 60. 407-053 The Pine Street Initiative at Goldman Sachs Pine Street team member Jennifer Riessen, recalled initial reactions to this unusual offering:"Leadership Advisory Services was a new idea of working with leaders in their own businesses andon their own issues ... Helping leaders with real problems. No one necessarily imagined that PineStreet would help with that. But when leaders are focused on success, they are receptive to leadershipand organizational oriented topics that add value to their own businesses." Through its constantlyevolving suite of Leadership Advisory Services, Pine Street provided "just-in-time" targetedassistance to leaders and their teams when they needed it the most. According to Riessen, "Leadersare more open to being developed when learning is driven by real-time challenges." In addition to in-house consulting, Pine Street designed specialized programs for individualbusinesses and their clients, Customized Goldman Sachs/Client Programs. One example was aprogram created for client hedge fund managers. By 2005, some hedge funds had grown to the pointof becoming alternative asset management organizations, but many of the people running them hadlimited experience building businesses and managing people. Their talent lay in generatinginvestment returns. Dean Backer,who worked closely with major hedge fund clients, described howPine Street helped make Goldman Sachs.relevant to these important clients: We offer a program specifically for hedge fund managers that helps them think about how to manage and grow their business, how to think about compensation structure and retention. Our clients truly get value out of that guidance and expertise. In a world where you want to be relevant to your clients, to be differentiated, it gives Goldman Sachs professionals who are on the franchise side of the business another way to do that. The Goldman SachslHBS Nonprofit Program was an example of how Pine Street explored novelcontexts within which to pursue its leadership development mandate, and a characteristic example ofhow the group enlists line leaders to help design and execute the initiative. Since many seniorGoldman leaders also served on boards in the nonprofit sector, Pine Street partnered with theGoldman Sachs Foundation and HBSfaculty to create a customized program designed to improve GSMDs effectiveness as board members. David Dechman and Chuck Harris, two members of the PineStreet Board highly experienced in the not-for-profit world, worked with the group in designing theprogram, and also helped market it to MDs across the firm. At the first HBS program itself, facultyincluded John Whitehead, John Thornton, and a panel of highly experienced Goldman Sachs leadersdiscussing best practices in nonprofit board service. - This program became an annual Pine Streetoffering and was expanded to include Goldman Sachs clients as well. The construct of line leadersserving in design, execution, and faculty roles was critical-for this initiative and others-incontinuing to engage busy, often- skeptical MDs in Pine Street programs. While action-oriented and customized offerings grew significantly during this period, PineStreets more traditional leadership programs were increasingly refined to target specific populationsof leaders at critical points in their careers. Pine Streets flagship program for MDs, formalized in 2004as Leadership Excellence I (see Exhibit 10 for a detailed program agenda), targeted managers whowere preparing for critical career transitions. A new leader of a local team in New York or HongKong would attend Leadership Excellence.This program targeted relevant developmental assistancejust at the point where leaders were most receptive to hearing the message.Reaching Out (2005) After six years, an indication of Pine Streets maturity was its increased integration in Goldmansculture and broader organization. Landauer, promoted to MD at the end of 2004, reflected on thisevolutionary process:16
  • 61. The Pine Street Initiative at Goldman Sachs 407-053 Were now becoming more integrated into the fabric of Goldman Sachs. At this point, were asked to do a lot of projects together with other groups, which I think is a good thing and a sign of progress. One example of this trend was in how Pine Street partnered with the Executive Office to helpdesign the Chairmans Forum. Landauer explained: Hank Paulson and John Rogers wanted to convey to all Managing Directors how important it was for them to show leadership and take accountability with respect to business judgment and the firms reputation. We worked with the Executive Office to understand the objectives, and then helped design the video-based case studies and interactive discussions which formed the core of the program. The key was engage the audience on this topic, rather than Simply talk at them. Although the Chairmans Forum was not a Pine Street Program, we were able to help in creating a design and methodology through which Hank could interact directly with every MD of the firm. It was a huge commitment from Hank, who spoke at 26 sessions around the world in the first six months of 2005. Not only did Pine Street help design the Chairmans Forum, but in 2005, the group also, workedwith the firms Partnership Committee to organize a series of events specifically targeted tostrengthen the Culture, Networks, and MD Community. These included roundtable discussions atperiodic dinners hosted by leaders from throughout the firm. The common goal was to encourageleaders to discuss key topics in the business while strengthening the Goldman culture and criticalnetworks across the firm. Annual MD and partner orientation programs every other year had similarimpact. The MD orientation was one of the few global opportunities for the large MD cohort to gatherin one place. Every other year a new partner class was chosen. For example, in 2005, there were 330 .partners in a firm of 21,000.Partner orientations were a way to reinforce the feeling that they wereindeed part of something very special. Some sessions were focused on the history of the partnership,largely through stories told by current and retired partners about the outstanding leaders anddefining moments of the firm. Other sessions focused more on the present day, and the role andresponsibilities of the partners in helping drive the businesses and strengthen the culture of the firm. Not only was Pine Street extending its reach within Goldman, but it was also expandingoperations overseas. By 2005, virtually all programs available to leaders in New York were alsoavailable in London, Hong Kong, and Tokyo. Pine Street staff worked hard to ensure that globalcontent was culturally appropriate. Kerr argued: "We should be offering development that isculturally sensitive. We shouldnt be imposing the U.S. model. We should have great local talent torun operations in Singapore or Paris, not Americans who dont speak the language. It should belocally led, the content should be globally relevant to specific locations." Paul Choi, who leads Pine Streets efforts in Asia, added, "We have translated content into bothChinese and Japanese for our people in Asia. The local environment also influences the topics weteach. For example, given the very rapid pace of change in Asia, we have emphasized topics relatedto leading change, and adapted this content to the specific context in Asia." Six years after itsinception, Pine Street had come a long way. Its programs were more customized, client-focused,action-oriented, integrated and global. But how do you measure the cumulative impact of this "moresystematic approach" to developing leaders? How do you know if its working?Assessing Pine Streets Value Pine Street marked a significant shift in the way that Goldman Sachs thought about the establishment ofmarket leadership. Historically, I think we were known as a fast follower, a world class adopter, always doing it 17
  • 62. 407-053 The Pine Street Initiative at Goldman Sachsbest =noi first. Our people have always been our most important competitive advantage. It was critical thatwe be at the cutting edge in the leadership development of such valuable assets. Pine Street ushered in a newera of being first and being innovative while still continuing to be adaptive. -Suzanne Nora Johnson, Vice ChairmanThe Challenge of Measuring ROI Measuring the impact of leader development interventions was a perpetual challenge. As onemanager said: "Were big on measurement. Everyone is big on measurement. But given the amountof noise in the equation, to isolate the Pine Street variable may not be possible, and in any case it isprobably not worth investing tons of mental energy on." Pine Street managers did track allparticipant comments, but in the end, another asserted, "You cant measure the return on Pine Street.Thats ridiculous. Its like being healthy. Statistically I could find out that if I exercise and eat right Imight live 2.1 years longer, but in the end I dont need that information to realize the benefits-Iknow them, I feel them, and you know them too." Kerr put it another way: "If one manager makes agreat decision or avoids a bad one, youve paid for a whole program." Recognizing the difficulty of justifying Pine Streets impact quantitatively, everyone was keen topoint to the programs positive word-of-mouth. As one Pine Street manager said: The business units think theres a return on Pine Street. We hear it all the time: "It improved our business. It built our relationship with so-and-so critical client. It builds better relationships. I cant point to the specific piece of business, but it helped us do business with them generally, I want to do more." Thats the buzz out there. We hear a lot about deals that are in the works. Vice Chairman Bob Steel, who became an Advisory Director to the firm in early 2005, offeredanother useful metaphor: "How do you know youve got a hit record? They play it on the radio. Youcan get someone to play the record once, but if no one cares about it or likes it, the radio stationswont play it. If it isnt valuable, people wont think its valuable, and this is a pretty discerningcrowd." The first survey of program participants, conducted a few weeks after the March 2001 debut,found that 45% of MDs viewed Goldman Sachs formal training opportunities favorably. In 2003,thisproportion rose to 50%. In 2005, when MDs rated both training classes and leadership developmentprograms, 71% of the MDs who responded to the survey (representing 75% of the entire MDpopulation) rated them favorably. Most Pine Street programs cost relatively little to run-one manager estimated that a singleprogram might cost no more than a traditional golf outing for an important group of clients. Onereason that Pine Street was so inexpensive was its labor productivity: As an office, Pine Street hadmaintained its small size and flat organization despite quintupling its workload. There was virtuallyno increase in staff until 2005,when several junior people were hired to help support the load. The flat organization was not just a byproduct of a small staffing budget. Pine Street also soughtto model the same leadership principles maintained by the larger firm, and its structure simplyreinforced those principles. Said Kerr: "Were trying to be a little miniature organization of whatwere trying to teach everyone, to walk our talk." This included empowering even the most juniorstaffer to make executive-level presentations, if that individual was most knowledgeable about theissues. Several executives noted that Pine Street staff had blossomed when given opportunities forleadership. "The Pine Street team is pretty small, and it leverages this place immensely well. Its notphysical leverage but psychological leverage," explained Kerr. "If it didnt feel as though Pine Street18
  • 63. The Pine Street Initiative at Goldman Sachs 407-053always had to prove itself, always justify what it was delivering, Im not sure it would be quite asfocused and effective at what it does." (SeeExhibit 7, Pine Streets Internal Running Rules).Reaffirming Company Culture Company culture was modeled not only in Pine Streets internal workings, but in itsdevelopmental offerings as well. Hank Paulsons Chairmans Forum for MDs was one formal way tofacilitate the dissemination of Goldman culture worldwide. In 2005, Pine Street worked with theExecutive Office to help organize sessions of 40 MDs each around the world. As John Rogers recalled: Paulson manages to touch each and every entity with the issues of accountability and leadership. At the heart of it remain business judgment and the responsibility of MDs for the oversight and direction of their people. Hank begins with a discussion of reputation, and is followed by two video-based case studies on ethics. After case discussion, Hank adopts the metaphor of a compass to discuss Goldmans values. Obviously, true north is integrity, so what does this mean and what questions do you ask yourself to reinforce integrity? Other major categories include communications. Do your people feel too intimidated to tell you about a situation? Do you create an environment that encourages them to come forward? The next is leadership by example. Are you yourself actively engaged here? The last one is called "trust but verify," or "dont assume." And Hank discusses examples of his own good and bad judgments. This discussion generates the notion of yellow flags, the things that should raise caution. Im not sure we could have executed all that without Pine Street.Improving Communication and Building Relationships Whether they had participated in the earliest MD training sessions or in a more specializedseminar, most Pine Street attendees felt that the experience had bridged distances betweencolleagues. Participants were reassured and inspired by seeing that their colleagues were ascommitted and capable as they were. As one manager put it: I walked away from the program with a reaffirmation of how close to the businesses and the clients the senior-most leadership at this firm really are. That was very positive for me to see. Second, I thought it was extremely helpful to have the ability to connect with a group of 20 or 25 people like me. Part of working is about having confidence in your peers abilities, and having trust that you know and can work with each other. Its reaffirming that these are some of the very best at what they do in the world. They know as much about their business as I know about mine. That creates comfort, trust, and credibility. Realizing the extent to which they shared similar challenges built a feeling of connectedness. ViceChairman Kaplan echoed these sentiments: At its best, Pine Street is a reflective experience for attendees; discussing how to handle various types of difficult issues. It gives business leaders a chance to step back, get a better perspective, compare notes with colleagues and ask themselves key questions: What do I do under pressure? Do I look at my business with a clean sheet of paper? Do I coach my people? The investment banking business is chaotic and constantly changing. To be effective, a leader needs to learn how to get perspective on the business and see their situation more clearly. Pine Street gave business leaders a chance to step out of the daily chaos and focus on what they. needed to do differently .. 19
  • 64. 407-053 The Pine Street Initiative at Goldman SachsDifferentiating Goldman Sachs The enthusiasm for client participation, both internally and among clients, suggested that PineStreet had also succeeded in defining itself as a partner to clients and as a standout among investmentbanks. Clients remembered Pine Street (and Goldman Sachs) as a source of value, howeverunquantifiable. As Kaplan pointed out, that recognition helped deepen the clients connection toGoldman: "Its a way to give the client something unique that will help develop our relationship. It isanother element of the value package that Goldman Sachs brings to clients. It gives our clients areason to say, Gee, I could use somebody else for this deal, but Im going to use Goldman Sachsbecause of the overall value they- bring me. In an increasingly commoditized world, Pine Streetprovides clients with something meaningful that they cant get from one of our competitors." It was relatively easy to see that this message was getting through. Kerr recounted feedbackrelayed from a client to his Goldman Sachs relationship manager: "I had always felt that Wall Street is made up of people with a lot of degrees trying to figure out ways to take other peoples and companies money." That was his perception until he attended a two-day Pine Street seminar for clients. After that meeting, his perception of the industry did not necessarily change, but his perception of Goldman Sachs changed significantly. His comment was, "Goldman Sachs gets it. They went out of their way to help educate me and others on how Goldman Sachs adds value and how as a client I can take advantage of their services not only to help my company but also my career."Challenges This is a cynical organization, and its an organization that is so focused commercially that if it thinks thatsomething is superfluous, it has no patience for it. If it doesnt see a direct correlation between what Pine Streetdoes and making this place more commercially effective, itll forget about Pine Street in a nanosecond. - A Goldman Sachs Managing DirectorStaying Fresh Pine Street programs and personnel sought to demonstrate continuous improvement. "If PineStreet becomes perceived as declining in quality or repetitive, then I think it will probably go away,"warned one leader. Suzanne Nora Johnson, who took responsibility for Pine Street as board chairmanin 2005, singled out the need for fresh, relevant content as a critical hurdle to overcome if Pine Streetsquality was going to continue at its high level. By 2005 a large number of people within Goldman Sachs had already been through Pine Streetprograms. Business-unit leaders had been asked to nominate many of their high performers to PineStreet programs. What follow-ups could or should be added? One Pine Street staffer noted, "We needto keep it fresh and new and interesting." Abby Cohen, Goldmans chief investment strategist,captured the essence of this conundrum: What could derail Pine Street is getting stale. What do you do for the encore when people have already been through the training? Are you going to put them through the same program again? What is critical is to continually freshen the offerings by recognizing new challenges as they arise. For example, one recognized challenge is the large number of co-heads here. Thats an unusual structure and an appropriate thing for Pine Street to be dealing with. The other20
  • 65. The Pine Street Initiative at Goldman Sachs 407-053 thing is that we are truly a multi-national firm. When we work on projects, we do so with people in different time zones and cultures. Given the increasing scope of Goldman Sachs global reach, this represented a significantchallenge (see Exhibit 2 for revenue and earnings growth by region). JStaying Relevant Closely related to the need to keep Pine Street offerings fresh was the equally important need tokeep them relevant. Kaplan explained the problem with a sales analogy: The Pine Street guys had lots of good reasons why managers should want to spend a day at one of their events. Their thinking went, "This is a great car, you should want to buy it!" I was not sure that Pine Street really understood the needs and perspectives of potential attendees. As a result, when potential participants were saying, "1 dont want that car. It doesnt fit my needs," Pine Streets response was, "But you should want the car. Look at all the stuff it does." My argument to Pine Street was that they had to do much more work understanding the needs of their customers and then tailor the program to fit those needs. To Steel, the consequences of irrelevance were perfectly clear: We talk about Goldman Sachs being a culture, but lets face it, its an economic relationship that we have. If Goldman Sachs doesnt earn any money, were not going to end the day singing songs around the campfire and come back the next day with a warm glow. In the end, people need to believe that this will help them do better at the firm and with their career or as individuals. They have to believe that. Its got to be about doing better at your job and being recognized as being better. With this perspective in mind, Pine Street managers held a battery of interviews with programparticipants and division heads. The goal was to better understand current needs. To have thegreatest impact, Pine Street managers had learned to anticipate division needs and positionthemselves to offer solutions, as one manager explained: We have to stop imposing stuff and treat the Goldman Sachs divisions like clients. We have to call on them. We have to get on their calendar and go see them, "What can we be doing better? Whats on your mind? What would be interesting?" Its just like me calling on Merck. Merck does not exist to produce investment banking revenue. They dont really give a hoot what Im interested in. And so when Im really doing my job well I go and I get them to talk, and I just shut up and listen. Theyre clients. We should listen to them and create things that are good for them. An even more integrated role might help make Pine Street more relevant and more impactful,argued Suzanne Nora Johnson: "Pine Street should be providing value in the succession-planningprocess. High-potential leaders who attend programs return to their line organization often withoutfollow-up. Pine Street is not yet used as a vehicle for talent identification or evaluation back to theline or the HeM organization. The Pine Street Board of Directors has worked to make Pine Streetprogrammatically and commercially relevant but it has the opportunity to enhance the utilization ofour people more broadly in the firm." 21
  • 66. 407-053 The Pine Street Initiative at Goldman SachsStaying Viable Of course, for Pine Street the leadership development initiative to survive, its internal staff andculture had to remain viable as well. The demand for increasingly specialized programs with highfaculty-client ratios placed a great deal of stress on Pine Streets low headcount and limited budget.Pine Streets first program reached 1,000people. Subsequent programs reached far fewer. Landauerestimated that one program had reached just 120 to 150 people over a cumulative three years ofoperation. This kind of specialization made it hard for Pine Street to take advantage of economies ofscale. It was fairly easy to run the same program 10 times, but more difficult and costly to tailorprograms for individual audiences. The question was: Could existing Pine Street resources meetincreasing demands and still maintain its valued image of "lean and mean"? While there was obviously a limit to what Pine Street could do given its size, there were alsocultural reasons for not expanding the organization. As one staff member described Pine Street, "Wearea small group of people working in partnership with a lot of people with strong credibilitybecause they work on the line. I would hope that it remains a small shop of training professionals likewe are now who will continue to pair up with line leaders who sit on the Pine Street Board. I wouldhope that what it doesnt have to turn into is an institution that requires having a huge number oftraining professionals." According to one team member, Pine Street was seen as "a consulting groupwith a reputation as a third party able to go into [Goldman Sachs] businesses and have them shareeverything with us. We look to help teams become more effective, whether in people skills orbusiness strategy. The knowledge that our work will be completely anonymous within theorganization is very important to helping us do our job." Others worried that staff turnover would result in the loss of critical institutional memory. As yet,no key players had departed, even though several had worked at Pine Street since its very firstprogram. The roles of chief operating officer and business unit manager were formalized in 2003,butno clear career path yet existed either within or through Pine Street.Staying Valued In addition to satisfied participants, the ongoing commitment of Goldman Sachs seniorleadership was among the most critical factors sustaining Pine Street and its mission. Yet Landauerfelt that in that success lay Pine Streets biggest challenge. "Our biggest challenge is to continuallyrenew the spirit and methodology of line partnership with a new group of people," he said. "Thissense of partnership is the biggest distinguishing characteristic and life blood of Pine Street. The bestavailable people would have no impact here without that partnership." Rogers agreed, pointing outthe tenuous nature of maintaining such a partnership: Pine Street has two levels of protection: its own board and the Partnership Committee. And then of course it comes back full-circle to the Management Committee, which wanted it created in the first place. But if you had a program that was filled with incompetence or wasnt meeting its objectives or generated negative client feedback, I can assure you it would have been gone in 10 seconds. Senior leadership commitment to Pine Street had been demonstrated repeatedly, and manifesteditself in several ways. At the organizations inception, Goldmans most senior leaders made theircommitment clear in a way that sent a strong signal to the rest of Goldman Sachs: leadership trainingwas a priority, and Pine Street was to be valued by participants and non-participants alike. As oneMD remembered, "The program kickoff was hosted by Lloyd [Blankfein],and it was very clear to methat this program was something meaningful and had the full sponsorship of the Executive Office. I22
  • 67. The Pine Street Initiative at Goldman Sachs 407-053was encouraged to see that level of participation and time spent in the program by our ExecutiveOffice members. Not everyone can say they just spent an hour with Hank Paulson, the CEO ofGoldman Sachs." One way Pine Street has managed to mitigate this risk is by creating and sustaining a credible andactive advisory board. The Pine Street Board connected Pine Street to the firms senior leadership andbusinesses. As such, it played an advisory role for Pine Street managers and helped link them closelyto the constantly evolving developmental needs of Goldmans business leaders. Staying "in touch"was important, but in the end, according to Steel, the reallitrnus test was commitment: "Managementhas to remain committed. Theres a difference between bacon and eggs. The chicken is involved butthe pig is committed. You want people who are committed to Pine Street, not just involved." For all its impact to date, Schwartz said, Pine Street remained an "unnatural appendage" to thefirm. "Probably the greatest risk is that Pine Street might not be viewed as central to the core strategyof an investment banking business or a trading business. As an appendage, Pine Street would alwaysbe at risk of being cut in a difficult market or a restructuring environment." The departure of highranking supporters over the years had thrown Pine Streets future in doubt on more than oneprevious occasion. Landauer recalls a particularly difficult period in 2003when many of Pine Streetsoriginal champions had moved on: Thornton had left midway through 2003 and John Thain announced his retirement at the end of 2003 to go to the NYSE. That was an important moment because together with Hank Paulson they were founding fathers and sponsors. We had already lost Mark Schwartz. We faced a real challenge in maintaining a robust executive office partnership and senior line sponsorship without these people. It wasnt clear who was going to take over for them. We were really lucky at the beginning of 2004 that Rob Kaplan stepped in. He was heading the Partnership Committee and offered to head the Pine Street board as well. Staying valued over a long period of time would take more than "luck" if Pine Street hoped tosurvive the natural turnover of senior leadership sponsors. Staying Focused One way for Pine Street to nurture senior-level commitment was to remain focused on what thoseleaders truly valued. George Parsons, an executive coach at Goldman Sachs, noted: The real beauty of Pine Street is that it only focuses on developing senior and managing- director talent. It has a fairly narrow mission, which has been its genius. It only has to focus on that group. Pine Street works because the people who run it pay a lot of attention to their internal customers. They stay close to the leaders who consume the service. They spend a lot of time listening to them, and thats been going on from the very beginning. As long as they continue that practice, the future will remain bright. When Kaplan stepped up to lead the Pine Street Board in 2004,"staying focused" was his numberone message. Landauer recalls his first formal meeting with Kaplan: His view was that "nobody understood what Pine Street does." He thought that people were confused and that our offerings were all over the map. We of course didnt feel that way, but upon conducting a set of interviews with senior leaders, it turned out that he was more right than wrong. He forced us to prune and rationalize our offerings and put them together in a more coherent way. He said, "I care a lot about what Pine Street does, but even I dont understand it. Everything needs to be very clear and simple, or no one will take the time to 23
  • 68. 407-053 The Pine Street Initiative at Goldman Sachs figure it out." We learned that we need to stay focused on our highest priorities, communicate better, and stay closer to our customers and clients, continually checking for understanding. Kaplan also sought to maximize Pine Streets value by focusing the organization on providingonly those services that no other part of Goldman Sachs could provide. "If someone else in the firmcan do it, youre going to have to explain to me why Pine Street does it. Pine Street should befocusing only on those high value activities that only it can do. If an activity flunks that test then thattime should be spent on something more valuable." On the basis of this test, Kaplan had seen PineStreet end its sponsorship of a popular program of invited speakers. Pine Street also relinquishedresponsibility for MD performance review training. Course offerings were also redefined; marginaldistinctions between programs were eliminated and nomenclature was simplified to make sure PineStreet content was easily understood by its clients.Looking Ahead As the Pine Street Board meeting got underway in May 2005, its members considered thesechallenges and more. How might unanticipated changes in the marketplace impact its mission?Could Pine Street retain critical senior sponsorship in the face of natural turnover in the ExecutiveOffice? How could such a unique initiative, now five years old, convincingly maintain its aspirationalimage among MDs and partners now that all of them had been touched by its programs in someway? How would such a small group continue to attract, retain, and grow its own talent? As PineStreet programs rolled out across Europe and Asia, how would Goldman Sachs executives reconciletheir desire to maintain a common culture and shared language of leadership with the need to adaptmaterial to local norms? Whatever position one took on any of these questions, the fact remained thatGoldman Sachs was, in the words of one seasoned insider, "a culture where what you did yesterdaydoesnt matter much. The question every day is What have you done for me today? This is a very,very demanding place."24
  • 69. 407-053 -25-Exhibit 1 Evolution of Pine Street Offerings, 1999-2005 JL PI~tE STREET Evolution of Pine StreetYEAR 1999 2000 2001 2002 2003 2004 2005Geographic Scope New York New York New York New York New York New York, London New York, London, Hong Kong, TokyoMajor New Working group develops Pine Sireet Leadership Program Pine Sireel Leadership Program Pine Sireel Leadership Program VP Leadership Acceleraton MD Leadership Acceleralion GS Assimilation CoachingInillatives Pine Sireet blueprint" and (develcprnent of) (development and execulion) (execulion) lnitiative Initiative Global Partners Meeting delivers 10 MC Executive Coaching , Individual GS Client Visits GS/Client Business Leadership , GS/HBS Nonprofit Program GS/Client Senior Leadership Chairmans Forum , Master Classes Program Leadership Advisory Services Program Global Rollout of Leadership (launch) , Customized GS/Clienl Programs Excellence Programs Global Rollout of GS/Client Programs Optimizing the Co- HeadshipKey Programs ALL PROGRAMS ALL PROGRAMS ALL PROGRAMS LEADERSHIP PROGRAMS LEADERSHIP PROGRAMS LEADERSHIP PROGRAMS , Executive Coaching , Executive Coaching , Executive Coaching , Pine Street Business Leadership , Leadership Excellence 1 Leadership Excellence , MD Orientation MD Orientation MD Orientation Program Performance Review Training Pine Street Master Classes Performance Review Training • Performance Review Training , Pine Street Leadership Program Pine Street Leadership Program LEADERSHIP ACCELERATION Masler Classes Pine Street Business Leadership , Pine Street Business LEADERSHIP ACCELERATION LEADERSHIP ACCELERATION VP Leadership Acceleration Program Leadership Program VP teadersho Acceleration . , VP Leade"hip Acceleration MD Leadership Acceleration • Performance Review Training • Performance Review Training Executive Coaching , MD teacersbip Acceleration Executive Coaching , Individual GS Client Meetings Individual GS Client Meetings GS/HBS Nonprofit Leadership , Executive Coaching , GS/Client Business Leadership Initiative LEADERSHIP ADVISORY SERVICES P(Ogram LEADERSHIP Leading Change , Ascend Women Client LEADERSHIP ADVISORY ADVISORY SERVICES R Eslablishing Vision & Stralegy Initlative" SERVICES Leading Change Team Effectiveness Leading Change Establishing Vision & Strategy Jump Start , Aligning Reward Systems • Team Effectiveness Business Planning/Aligning Roles , Team Effectiveness Jump Start and Responsibilities , JumpStart Business Planning/Aligning Merger Integration Business Planning/Aligning Roles Roles and Responsibilities Optimizing the Co-Headsho and Responsibilities Merger Integration , Succession Planning 04 Succession Planning 05--° In a>Uabol"ationwith ExecutlW:"lnc:ollaborationwithGlobaIlaad/lrsh!pI Oiversily GS CULTURE, NETWORKS, MD COMMUNITY MD Orientation , MD Non·Comp Benefils AND GS CULTURE, NETWORKS, AND MD COMMUNtTY MD Orientation • Partner Orientation • PS Speaker Series GS CULTURE, NETWORKS, COMMUNITY MD Orientation Partner Orientation GS Assimilation Coaching AND MD GS CLIENT SERVICES Partnership Commillee Support Global Panners Meeting• , GS/Client Business teacersbip Partnership Committee Support Program GS CLIENT SERVICES Chairmans Forum Individual GS Client Meetings GS/Client Senior Leadersblp • ascend Women Clienllnitiative" Program GS CLIENT SERVICES • GS/Client Business Leadership GS/Client Senior Leadership Program Program • Individual GS Client Meetings GSiClient Business Leadership • GS/HBS Nonprofit teaoersbip Program Program Individual GS Client Meetings • Customized GS/Client GS/HBS Nonprofit Leadership Leadership Programs ·FICC· Program Structured Products Group Customized GS/Client Leadership ascend Women Client Programs Initiative" ·FICC·Structured Products Group ·Hedge Fund Business ascend Women Client InitiativeSource: Pine Street document, Goldman Sachs.
  • 70. 407-053 The Pine Street Initiative at Goldman SachsExhibit 2 Goldman Sachs Financial Data, 2002-2004-Segment Operating Results As of or For the Year Ended November(in millions) 2004 2003 2002 Investment Banking: Net revenuesa $ 3,374 $ 2,711 $ 2,830 Operating expenses? 2,973 2,504 2,454 Pretax earnings $ 401 $ 207 $ 376 Segment assets $ 4,759 $ 4,867 $ 4,555Trading and Net revenuesa $ 13,327 $ 10,443 $ 8,647Principal Investments: Operating expenses? 8,287 6,938 6,505 Pretax earnings . . :$5;040 $ 3,505 $ 2,142 Segment assets $358,137 $250,490 $246,789 ,Asset Management and Net revenuesa s 3;849. $ 2,858 $ 2,509Securities Services: Operating expenses? 2,430 . 1,890 1,562 Pretax earnings $ 1;419 $ 968 $ 947 Segment assets $167.;957 $147,647 $103,436 ..Total: Net revenuesa :$ 29,550 $16,012 $ 13,986 Operating expensesv-? /13,874 11,567 10,733 Pretax earnings s. 6;676 $ 4,445 $ 3,253 Total assets" .~531,379, $403,799 $355,574Source: Goldman Sachs 2004 Annual Report, P: 104.aNet revenues include net interest and cost of power generation.bOperating expenses include depreciation and amortization, including the amortization of identifiable intangible assets.cIncludes the following expenses that have not been allocated to the firms segments: (i) the amortization of employee initialpublic offering awards, net of forfeitures, of $19 million and $212 million for the years ended November 2004, November 2003,and November 2002, respectively; (ii) net provisions for a number of litigation and regulatory proceedings of $103 million and$155 million for the years ended November 2004 and November 2003, respectively; and (iii) $62 million in connection with theestablishment of Goldman Sachs Gao Hua Securities Company Limited, an investment banking and securities venture inChina, for the year ended November 2004.dincludes deferred-tax assets relating to the firms conversion to corporate form and certain assets that management believeare not allocable to a particular segment26
  • 71. The Pine Street Initiative at Goldman Sachs 407-053Exhibit 2 (continued) Goldman Sach Financial Data, 2002-2004 - Geographic Information As of or For the Year Ended November (in millions) 2004 2003 2002 Net revenues: United States $ 10,040 $ 8,633 Other Americas 231 352 United Kingdom 3,610 2,991 Other Europe 427 479 Asia 1,704 1,531 Total net revenues $ 16,012 $ 13,986 Pretax earnings: United States $ 3,105 $ 1,850 Other Americas 217 293 United Kingdom 610 525 Other Europe 90 173 Asia 658 624 Other" (235) (212) Total pretax earnings $ 4,445 $ 3,253 Employees: United States 12,786 12,511 International 6,690 7,228 Total employees 19,476 19,739Source: Goldman Sachs 2004 Annual Report, pp. 105, 107.a Includes the following expenses that have not been allocated to the firms segments: (i) the amortization of employee initial public offeringawards, net of forfeitures, of $19 million and $212 million for the years ended November 2004, November 2003, and November 2002,respectively; (ii) net provisions for a number of litigation and regulatory proceedings of $103 million and $155 million for the years endedNovember 2004 and November 2003, respectively; and (iii) $62 million in connection with the establishment of Goldman Sachs Gao HuaSecurities Company Limited, an investment banking and securities venture in China, for the year ended November 2004 27
  • 72. 407-053 The Pine Street Initiative at Goldman SachsExhibit 3 Leadership Development Advisory Committee Members, November 1999 Head of Goldman Sachs Europe and Management Committee member Head of Goldman Sachs Asia and Management Committee member a senior leader in Equities Head of Human Capital Management (HR) COO of Global Investment Research a senior leader in Equities Asset Management Controllers Office Training and Development Training and Development Private Wealth ManagementSource: Goldman Sachs.28
  • 73. The Pine Street Initiative at Goldman Sachs 407-053Exhibit 4 Key Findings of Goldman Sachs Strategy Committee Benchmarking, 1999Senior Management Focus and AccountabilitySenior time and focus is spent on people development issues. It is very striking how many senior people see the"people thing" as a critical issue they cannot delegate. • Jack Welch (GE)devotes approximately 50% of his time to people development issues. • Andy Grove routinely leads Intels new hire orientation. • Twice a year Scott McNealy (Sun Microsystems) asks each of his direct reports: "What are you doing for your own development?" and, "What are you doing for my development?"Leaders feel they are fighting a "war for talent" which is critical to the companys success • Intel focuses significant resources on defining and marketing superior employee value propositions in order to capture more talent share.CEOs hold their senior managers accountable for talent development. • At McKinsey, every Director has people development responsibilities, success at which influences compensation. • John Chambers (Cisco) holds his top 200 leaders accountable for developing their staff.Taking a Systemic ApproachDeveloped a leadership model by reviewing strategy and assessing high performers • Arthur Andersen, BP Amoco, Dell, GE, IBM, Intel, Lloyds TSB,McKinsey, Motorola, Shell UK and Sun Microsystems have a clearly defined leadership competency model.Structured succession planning process, focused on high risk or high reward • BP Amoco, Cisco, Intel, Shell UK, and Sun all focus extra effort on high-potential pools. • GE devotes enormous energy moving people into key jobs that maximize high reward for high-risk type of assignments.Link development to reviews and rewards • Intels practice of "constructive confrontation" is often a key part of the development review process. • PWC is developing a formal planning process that links professional development, employee reviews, career advancement and rewards and recognition. • GE annually reviews all employees. Welch and a few other senior executives visit the 12. operating units to conduct one-day personnel reviews. At each site, they focus on the top leadership and pair people with job assignments that link to key rewards.Relentless and disciplined execution • GE devotes enormous energy to match key managers with jobs in a process called "Session C" that consumes nearly a month of Jack Welchs time each year.Focus on High-Potential LeadershipCareers of select high-potential groups, managed by senior committees or CEO • At BP Amoco, the CEO, HR Director, and six of the top business leaders oversee development of senior leadership. • Lou Gerstner (IBM) works closely with the director of Global Executive and Organization Development to develop key leaders.Rigorous, objective assessment based on company definition of leadership • BP Amoco, GE, and Shell UKs assessment processes are an integral component of senior leadership development. 29
  • 74. 407-053 The Pine Street Initiative at Goldman Sachs • All LG Group employees are required to take and pass one of six levels of promotion examinations. People that fail an exam remain in the incumbent grade for another year.Flexible pool-people move in and out of program • Lou Gerstner (IBM) is very involved in the development of his Senior Management Group, he adds new people and deletes others from his group at least twice a year.Aggressively manage out bottom quintile • GE annually ranks their people on a scale from A to F. Performers that fall into the bottom quintile are typically pushed out the door.Selective use of executive education • Sun Microsystems favors a "concierge" approach to education for their senior group. This includes tailor-made developmental job assigmnents and committee work.Use of Non- Training Initiatives • GE provides high-potential managers with full-time assignments to destroy a particular GE business. • BP Amoco is in the process of deploying a new Executive Education initiative for the top 250 leaders. This initiative will focus on macro issues (geopolitical, sociopolitical, and environmental). • Intel focuses on non-programmatic developmental levels: on-line tools/systems, communication, work with intact teams, consulting assessments, and "environmental supports." • Sun does an increasing amount of training with intact work teams (25% of total training in 1998 vs. 2% in 1995).Bias towards Use of "Real Work"Move away from traditional classroom model • At Lloyds TSB, development programs for senior executives include various "charity projects" and a "UK Development Consortium" which involves the London Business School, along with benchmarking visits to other organizations. • Technology plays a critical role at Arthur Andersen. It is a key enabler in supporting a number of key processes that are essential to organizational success: continuous learning, change, knowledge sharing, and improved performance. • Dell believes in "stealth learning," a process that blurs the lines between development, training, information and job aids. They aim to make employees unaware that they are being trained; education occurs as they are solving business needs. • Motorola plans to deliver at least 30%-40% of its training via technology by 2002. Networked- based learning is a critical part of their strategy.Use of real projects/issues as focus for learning sponsored by CEO/Executive group • At BP Amoco, action learning is used informally and consistently. It is CEO-driven; John Browne selects six people to work on a project with him on issues he considers key. • At IBM, each global cross-functional team spends approximately 20%-30% of their time, in addition to daily responsibilities, solving large-scale organizational issues assigned by the Chairman. • At Shell UK, action learning is seen as an important part of the development of high-potential managers. High potential managers are asked to be members of value creation teams and one particular project resulted in the establishment of a new business unit.Source: Excerpted from Goldman Sachs Training and Development Group, "Best-in-Class Benchmarking Overview,"November 3,1999, pp. 4-7.30
  • 75. The Pine Street Initiative at Goldman Sachs 407-053Exhibit Sa Goldman Sachs Number of Partners and Managing Directors, 1989-2004 1,200 1/1 ~ c 1,000 - ::E ... 1/1 -: 800 C1) c: t: -: - 111 e, 600 0 ... ;/ C1) 400 / .0 E ::J z 200 .•.. .....- 0 m co 0 m ..- m m N c:0 m """ m L() m <0 m "- m co m m m 0 0 ..- 0 N 0 c:0 0 """ 0 ..- ..- ..- ..- m m mm m -e-- m ..- ..- ..- m m m m -e- ..- m 0 N 0 N 0 N 0 N 0 N YearSource: Casewriter compilation via Factiva, accessed July 11,2005.Exhibit Sb Total Number of Goldman Sachs Employees, 1989-2004 25,000 1/1 20,000 C1) C1) >- 0 0.. 15,000 - w E 0 ... C1) .0 10,000 E ::J Z 5,000 0 c» co 0 m ..- m N m c:0 m """ m L() m <0 m "- m co m m m 0 0 ..- 0 N 0 c:0 0 """ 0 m m c» ..- ..- ..- m m m m m ..- m m ..- c» 0 N 0 N 0 N 0 N 0 N YearSource: Casewriter compilation via Factiva, accessed July 11,2005. 31
  • 76. 407-053 The Pine Street Initiative at Goldman SachsExhibit 6 Selected Client Comment on 2004 Pine Street ProgramsCLIENTC "I enjoyed the line up of speakers very much. I took careful notes that I hope to refer to for months and years to come."CLIENTD "Generally quite excellent. Appreciated the focus on practical enhancements. Also appreciated keeping the focus on the relatively few things that can be acted upon in the near term. Nice mix of attendees as well. Liked Building internal credibility, and contact with an executive at GS with new business management experience."CLIENTE "1 thought the speakers were very interesting and kept the audiences attention. Also, they consistently attempted to apply their points to real day to day life.... rrCLIENTF "Overall a very good program with good content and speakers. The Business Leadership content was a good topic that we can all benefit from. The external speakers were very good with related information to the topic and yet very entertaining.CLIENTG "The outside guest speakers greatly enhanced the value of the program. It was good to get multiple outside perspectives."CLIENTH "I thought the program was highly successful in three principal areas. First, I thought the mix of participants from different industries and specialties was terrific in that it generated a diversity of viewpoints and stimulated discussion. Second, the combination of tactical, pragmatic topics with more strategic, global discussions allowed the program to change scale and focus and maintain participant interest. Third, the speakers you employed were terrific; very engaging and offing very interesting perspectives. Obviously, the tactical topics are things one can pick up and use immediately. The more strategic leadership concepts are things that, upon reflection and applying to ones specific situation, are longer-term value adds and need to be viewed critically over time."CLIENT I "A good mix of internal GS folks and external experts. It was a good idea to get away from our normal jobs and, in a more relaxed atmosphere, with our peers, discuss relevant issues affecting our careers and lives. I was very pleased with the program and it exceeded my initial expectations. The memory expert (I dont remember his name--just kidding) provided some very relevant insights."CLIENT] "It is clearer to me now how GS is able to attract and retain the level of people I have interacted with across all segments of the company. The time and energy commitment to the leadership process is very impressive. The Personal Traits of Leaders and the GS Vice- Chairman discussion were the two most useful and directly applicable portions of the program"CLIENTK "I thought the speakers were all very good and a good mix of internal and external speakers. What I especially appreciated was the practical nature of the talks, here was information one could take home and use."CLIENTLCLIENTM "The program was an excellent mix of practical advice and vision about leadership. The group exercises and participation opportunities were excellent tools for quickly developing a group bond. All in all, I came away feeling that the program was a good investment of time away from the office and it helped me think about how I can improve my performance. I also met some really great people. Most useful to me were sessions in which successful leaders shared their views on traits and provided some anecdotes etc. They were really excellent."CLIENTN "I would rate the program a 5 and will hopefully have the opportunity to recommend others at [my firm] for participation in the future. Overall, I liked the mixture of content and speakers, which held my interest throughout. ... insights on leadership credibility will no32
  • 77. The Pine Street Initiative at Goldman Sachs 407-053 doubt be very useful in the future."CLIENT 0 "Great range of topics and presentations on leadership development and management skills, career management, risk taking, market analysis and communication. The program provided tangible examples of leadership in action as well as a framework to help further develop my leadership skills. I found the sessions on Leadership Credibility, Leading Growth and Innovation, Personal Leadership and Reaching Your Potential to be most enlightening and helpful for further developing my potential as a leader within my organization. The speakers personal experiences resonated with issues/problems I am encountering within my organization and challenged me to take responsibility for leading change."CLIENTP "The material was interesting and useful and distinctive relative to what I see from other sources. The program could be shortened to one day by dropping the economics/market info and be even more efficient in terms of value relative to time commitment."Source: Pine Street document, Goldman Sachs. 33
  • 78. 407-053 The Pine Street Initiative at Goldman SachsExhibit 7 Pine Streets Internal Running Rules1. We work very hard to practice what we teach. In particular, we seek to operate smoothly across boundaries (divisional, regional, business unit, firm/ client) and in a non-hierarchical manner.2. We never slow a project down, except when necessary to improve the quality. If our client wants to do something tomorrow, thats when we db it. We regularly seek input to improve the quality of our work, but we make every effort to avoid excessive meetings, postings, and consensus- building. (We keep in mind that sometimes "consensus" means: disagree and commit.)3. We never refuse requests to help. When it doesnt make sense for us to do something, we help identify someone who can do the job.4. We search for opportunities to work with individuals from other parts of the firm. Sometimes this takes the form of a formal partnership, but we also benefit from "resources in place", i.e., people whose primary responsibilities lie outside Pine Street, but care enough about some Pine Street project to work with us on it. We also welcome opportunities to run pilot sessions of our programs within one division or region before rolling them out firmwide.5. Each of us spends nearly all his/her time working on projects and programs. We have a very flat organization and strongly believe in empowering people -- giving them considerable operating freedom and expecting them to ask for help when they need it. All of our team members lead projects. Senior people regularly work for, and report to, more junior team members.6. Any member of the team can speak for Pine Street and can commit Pine Street to a project or a completion date, and that commitment will always be honored.7. We support and encourage all team members, regardless of their level or years of service, to develop a particular area of expertise.8. We seek to balance the tendency to leverage each persons expertise with our effort to expose team members to new products and interests. We believe that most people have the good sense to sign up for things they are capable of doing, have the time for, and ask for help when needed.9. We share credit. When someone leaves a voicemail about a completed piece of work, it is usually to give credit to another team member for a job well done. We also see to it that whoever does the work gets formal recognition for that work (and gets to make the presentation, no matter to whom).10. We work hard to develop each other both formally through an advocate structure and less formally from on-going apprenticeship, feedback from the team, and the advice of the broader Goldman Sachs community.Source: Pine Street document, Goldman Sachs.34
  • 79. The Pine Street Initiative at Goldman Sachs 407-053Exhibit 8 VPlED Leadership Acceleration InitiativeObjectives: 1. Accelerate the development of a select group of high-performing future leaders, primarily through on-the-job learning 2. Facilitate relationship-building among future leaders of GS 3. Increase exposure of participants to senior leadershipTarget Audience: High performing individuals at the VPlEDDesign: 12-month initiative incorporating job-based stretch assignments, shadowing, developmentalfeedback, network and formal learning on key business and leadership tops. The participantsmanagers also playa key role in coaching their VP throughout the initiative.Sponors: Suzanne Nora Johnson (Global), Lisa Shalett (Americas), Stuart Rothenberg (Americas), RonLee (AEJ),Isabelle Ealet (Europe), Rurniko Hasegawa Gapan) Action Planning Participants identify key developmental objectives and a specific plan to accomplish them Job-based Development! Participants gain broader perspective of the firm and expand their network by Stretch Assignments taking on stretch assignments: All participants take on a within-business assignment which represent a stretch or expanded activity within their current role that is challenging and developmental for the participant, as well as important to the business A group region-wide or firm-wide project is also assigned to help solve broader issues for the firm -A Shadowing program allows participants to expand their view of a particular business or individual by shadowing a senior leader of the firm for a set period of time Relationships/Feedback! Managers guide, coach and support participants throughout the initiative Coaching (includes identifying within business stretch assignment, action planning, developmental review delivery and ongoing coaching and mentoring) Senior leaders of the firm host discussions to get to know the participants, expose them to the issues of their respective businesses and share career advice Training Participants attend a two-day Global Convergence and periodic regional Pine Street sessions to address individualized development needs as identified on action plans. Initiative culminates with a Closing EventSOurce: Pine Street document, Goldman Sachs. 35
  • 80. 407-053 The Pine Street Initiative at Goldman SachsExhibit 9 MD Leadership Acceleration InitiativePURPOSETo accelerate the development of a select group of high-performing MDs as they prepare forpositions of increased leadership responsibilityPROGRAM OBJECTIVES AND SUPPORTING ACTIVITIES1. Develop Leadership Skills • Get individual feedback and ongoing coaching from a top Pine Street Executive Coach • Develop personal action plan focusing on developmental needs through stretch assignments • Attend select Pine Street leadership sessions2. Build Knowledge of Key Firm Issues and Businesses Outside Your Own • Address issues critical to the firm in small-group taskforces; report findings to Executive Office or Divisional Leaders • Attend briefings where leaders of the firms major businesses discuss current issues and opportunities • Expand view of a particular business/ committee by engaging with senior leaders or firmwide committees3. Broaden Relationships Among Your Peers and Senior Leaders • Work side-by-side with your peers on taskforces • Participate in focused individual and group discussions with senior leadersSOUIce: Pine Street document, Goldman Sachs.36
  • 81. The Pine Street Initiative at Goldman Sachs 407-053Exhibit 10 Goldman Sachs-Leadership Excellence I Program Agenda, Wednesday, July 13,2005 8:00 am BreakfasVRegistration 8:30 am Opening Remarks Michael Carr, Co-Head, Global Industrial and Natural Resources Group 8:45 am What Leaders Do Michael Carr 9:45am Break 10:00 am Strategies for Growth Tim ONeill, Senior Strategy Officer 11 :30 am Break 11 :45 am Leading Change Steve Kerr, Chief Learning Officer and Head of Pine Street 1:15 pm Lunch 1:45pm Panel Discussion: Developing Your People Via Effective Feedback Steve Feldman, Head of Global Real Estate Josephine Linden, Regional Manager, New York Private Wealth Management Rich Silvestri, Pine Street Executive Coach Moderator: Daisy Wademan, Pine Street 2:45 pm Break 3:00 pm Motivating Your People Tony Smith, Managing Director, Leadership Research Institute 4:30 pm Break 4:45pm Enhancing Your Power of Influence Steffen Landauer, Managing Director and COO of Pine Street 6:00 pm Closing Remarks Steffen LandauerSource: Pine Street document, Goldman Sachs. 37
  • 82. 407-053 The Pine Street Initiative at Goldman SachsEndnotes 1 This section draws heavily upon Boris Groysberg, Scott Snook, and David Lane, "Leadership Developmentat Goldman Sachs," HBS case No. 406-002 (Boston: Harvard Business School Publishing, 2005), and BorisGroysberg, Sarah Matthews, Ashish Nanda and Malcolm Salter, "The Goldman Sachs IPa (A)," HBS case No.800-016 (Boston: Harvard Business School Publishing, 1999)For more on the firms history and growth, see LisaEndlich, Goldman Sachs: The Culture of Success (New York: Knopf, 1999). 2 Books were matched when the distribution of maturities of assets and liabilities were equal. 3 Goldman Sachs, 1999 Annual Report (New York: Goldman Sachs), p. 4. 4 This section draws upon Groysberg, et al., 1999. For more on the firms history and growth, see LisaEndlich, Goldman Sachs: The Culture of Success (New York: Knopf, 1999). 5 Ibid., p. 235. 6 Ibid., p. 236. 7 See Groysberg, et al., 1999, p. 11. B This section draws upon Boris Groysberg, Scott Snook, and David Lane, "Leadership Development atGoldman Sachs," HBS case No. 406-002(Boston: Harvard Business School Publishing, 2005). 9 David Wells, "A Masterclass in How to Be an Insider," Financial Times, February 12,2004, p. 8. 10 The quotes cited come from Pine Street, "GS Client Feedback on 5 Fall 04 Pine Street Client Programs,"n.d.38
  • 83. Richard Ivey School of BusinessThe University of Western Ontario IVEY 9A98C008HEAL THCARE EQUIPMENT CORPORATION - MANAGINGIN KOREATom Gleave prepared this case under the supervision of Professor John Eggers solely to provide material forclass discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerialsituation. The authors may have disguised certain names and other identifying information to protectconfidentiality.Ivey Management services prohibits any form of reproduction, storage or transmittal without its writtenpermission. This material is not covered under authorization from CanCopy or any reproduction rightsorganization. To order copies or request permission to reproduce materials, contact Ivey Publishing, IveyManagement SeNices c/o Richard Ivey School of Business, The University of Western Ontario, London,Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail @ 1998, Ivey Management Services Version: (A) 1998-12-02In March 1996, Lynn Delaney, Managing Director of HealthCare EquipmentLimited - Asia Pacific (Health Care AP), was becoming increasingly concernedabout the state of leadership at the companys Korean subsidiary. The source ofher concern was S.Y. Lee, President of Health Care APs wholly owned Koreansubsidiary. Lee had been instrumental in ensuring the very successful launch ofthe Korean operation during its start-up in 1993-94. Since then, however, hisbehavior had become increasingly problematic, to the point that he had becomevery disruptive to the operation. Therefore, Delaney needed to craft a leadershipdevelopment plan for Lee, or else face the unpleasant task of having to terminatehim.COMPANY BACKGROUNDHealthCare Equipment Corporation, a wholly owned subsidiary of HealthCareIndustries Inc., was an international leader in the research, development,manufacture and support of in vitro diagnostics - the testing of blood outside thebody. The company provided public and private clinics and laboratories withvarious "automated immuno-assay test systems" (AITS) and consumable
  • 84. Page 2 9A98C008 "reagents," 1 as well as other tests and controls used for detecting and measuring a broad range of medical conditions. HealthCare Industries prided itself on remaining leading edge, having developed notable advances in the automation of laboratory procedures and pioneered the application of nucleic acid diagnostics as a means of quantifying different viruses. One of the companys key strategic aims was to seek out and establish close partnerships with other industry players in an effort to develop greater market opportunities. The company was based in Atlanta, Georgia and had established subsidiaries in 20 countries while selling its products in over 70 others. By 1996, it had become the eighth largest diagnostic company in the world, with revenues projected to be US $675 to 690 million for the coming year, a six to ten per cent increase over 1995. The regional office for HealthCare Equipment Corporation .- Asia Pacific (HealthCare AP) was in Singapore. The area managed by the office extended from China to the north, Korea to the east, Indonesia to the south and Pakistan to the west, in total covering 20 countries. A separate office was established in Japan because the Japanese market was large and mature enough to warrant its own operation. The Managing Director for HealthCare AP was Lynn Delaney, an Irish expatriate who had been working in Asia since 1982. Delaney first became involved in the immunodiagnostics industry in 1979 when she became a sales representative in London, England, where she had completed her formal training in clinical technology. In 1982, she was dispatched to Australia with the mandate to establish an exclusive supply network with a major local distributor. Later, she became involved in marketing and sales, first in Hong Kong (1985) and then in Singapore (1986). She assumed the Managing Directors position of HealthCare AP in 1992. During the period under Delaneys leadership, sales for the Asia Pacific region had grown from about US$8 million (in 1992) to a projected $55- 58 million in 1996. Despite the flat industry sales growth being experienced by most other diagnostics players in 1996, HealthCare AP was poised to achieve a 25 to 30 per cent increase in its installed base of AITS, as well as 25 per cent growth in reagents. HealthCare AP operated wholly owned subsidiaries in Singapore, Taiwan and Korea, while maintaining seven representative offices and ten exclusive country distributorships throughout the region. HealthCare APs key marketing strategy was to focus on the sales and installation of AITS along with the complementary reagents. The economics of the business demanded that a balance be struck between the sales of the two products. This was because a typical AITS installation yielded a one-time revenue of about US $70,000 per unit, with a profit margin of 45 per cent if the unit was leased, or 60 I AITS were sophisticated instruments which provided users with a range of immunoassays (tests), including tests for thyroid, fertility and cardiac diseases, as well as allergies and anemia. Reagents were the consumable quality control products used in the AITS during testing. Ms. Delaney likened the reagents to "the gasoline that drives the AITS, except that you can only use one specific (proprietary) qesotine for any given AITS. " 2 Immunodiagnostics is the use of antibodies to find antigens.
  • 85. Page 3 9A98C008 per cent if it was purchased. Meanwhile, the recurring annual consumption of reagent used in each installed AITS ranged from US$40,000 to $100,000 per year at a profit margin of about 50 per cent. Therefore, a premium was placed upon the ability to sell AITS units to clients who were potentially heavy users of reagent. DISTRIBUTION: A KEY SUCCESS FACTOR One of the key factors for success in the imrnunodiagnostics industry was the establishment of secure and manageable distribution channels. In bringing its, products to market, HealthCare AP relied upon exclusive distributorships throughout the various countries where it sold its products. These distributors were, in turn, managed by either an in-country representative office, a direct subsidiary company (as was the case in Korea), or by the regional office in Singapore. The criteria used by HealthCare AP to select its exclusive distributors included the following: sales volume in associated product lines; availability of credit for customers; market and product knowledge; and long-term market development strategy. Both the representative offices and subsidiary companies worked directly with the distributors to educate clients on the merits of the products, particularly AITS and reagents. HealthCare APs drive to establish a comprehensive distributor network in Asia evolved from a conflict between US legislation and Asian business customs. As Lynn Delaney explained: In many Asian countries, whenever products are delivered, clients expect to receive about 10 per cent of the invoice amount. However, doing so is contrary to US law which prohibits US businesses from paying "bribes" in order to secure contracts. Company officials who knowingly pay such bribes are subject to fines and prison terms, even if the transaction is completed outside the borders of the US. For me, it is highly debatable whether you can impose USA standards on Asian business practice. This is simply an Asian business custom - plain and simple. In any event, to comply with U.S. practice a network of distributors is used in most counties to avoid any possible trouble. That way, we can limit our concern to ensuring that the transactions we execute with our distributors are legally sound. There are also major cost-effective benefits to employing a distribution network when revenues are below a critical mass.
  • 86. Page 4 9A98C008 STARTING THE KOREAN OPERATION HealthCare AP established its wholly owned subsidiary in Korea in 1993. Since then, annual sales had increased from an initial US$1.8 million to $9.0 million in 1995, although a downward trend was being experienced in 1996. Given HealthCare Industries Incs strong belief in the need to localize management, Delaney hired S.Y. Lee as President of the new Korean subsidiary. While she recognized that hiring a local manager had obvious benefits, it also presented a unique set of management challenges. Delaney stated: We strongly believe in the localization of management; however, this raises some rather important issues for us. For instance, how much interference should our subsidiaries expect, or tolerate, from our regional office? At the same time, how much latitude should we allow in accommodating so-called cultural differences between the management teams of our subsidiaries and our regional operations? After all, our business has been built mostly on Western management ideas and practices, and we have been successful all over the world. In rationalizing the selection of Lee, Delaney offered the following reasons: I felt that Lee was suitable for a variety of reasons. First, he had attended the countrys most prestigious learning institution, Seoul National University. This gave him immediate credibility in the marketplace, as well as access to well-placed alumni. These alumni could be used to develop client relationships, as well as provide the operation with access to the high calibre employees who were needed to fill the various finance, marketing, sales, service and administrative support roles in the office. Second, he had previously worked in the finance area and presumably understood the need for financial control. Third, he had also previously worked for a, joint venture company involving Samsung and General Electric. This meant that he had likely been exposed to leading edge American business practices. Whats more, his English was quite good and he also had quite a charismatic personality. I think part of the mystique came from the fact that he was a decorated Vietnam war hero, having undertaken some clandestine work for the Korean special forces. And since he was 54 years old, I thought that his age was ideal for our start-up operation. I anticipated that he could manage the subsidiary for five to eight years before being replaced by someone internally.
  • 87. Page 5 9A98C008 Delaney was very pleased with Lees performance during the initial start-up phase of the Korean subsidiary. Sales growth was substantial over the first two years and he had been able to recruit very capable people to staff the steadily growing number of office and field marketing positions. HealthCare Equipment Corporations head office was so impressed by the gains made in Korea that it congratulated Delaney and the Korean management team for making the subsidiary the most successful start-up operation in the companys history. In testimony to HealthCare - Koreas achievement, Delaney noted that "the method used in Korea during the start up is still considered the model for HealthCare Equipments entry into other undeveloped markets throughout the world." UNDERCURRENTS By fall 1995, Delaney began to detect that "a torrent of undercurrents was running through the Korean operation." The tensions in the office had become increasingly dysfunctional and manifested· themselves in the formation of two opposing "cliques," with the sales and service departments at "loggerheads" with the marketing department, while the finance and administrative personnel remained neutral. As Delaney later discovered, this came about because there was a "disconnect" between the marketing department, which developed the sales forecasts and marketing programs for Korea, and the sales and service staff, who worked with the end-users. She noted that, under this arrangement, "the sales and service employees were the people in touch with the customer, yet they did not have ownership over the sales forecast to which they were held accountable." The problems soon became so severe that several people started to complain behind Lees back, a behavior Delaney described as "very un-Korean.,,3 This alarmed her because "Koreans were usually very deferential to authority and paid great attention to age and hierarchy." After investigating the situation thoroughly, Delaney concluded that two main factors were contributing to the problems in Korea, both of which were directly related to Lees management style. She commented: Lee is very much an adherent to the "old school" of Korean business. This means that he expects instant respect due to his age, position and background. He feels that, because of these factors, he warrants total control. I have learned that he has a very autocratic, do as I say attitude, and this leads him to have a sense of invulnerability. The other issue is Lees perception of business priorities. I have discovered that he is very much a short-term planner. He remains very sales-driven, but has little understanding 3 See also Appendix 1- The Korean People
  • 88. Page 6 9A98C008 of the need for achieving a proper sales mix or the need for providing proper marketing support. OTHER TROUBLING SIGNS Delaney also cited several other indicators that suggested S.Y. Lees leadership and management style was. becoming more problematic. For example, like all other subsidiary and representative office leaders, Lee automatically assumed a position on both HealthCare APs Executive Management and Strategic Planning Committees. However, whenever he attended these committee meetings, he refused to participate in any discussions. And, according to Delaney, "whenever he was called upon to present Koreas results, his presentations lacked professionalism." Furthermore, in terms of sales priorities, Lee emphasized the placement of AITS at the expense of providing adequate support towards the sale of the consumable reagents used in the AITS. Delaney recognized that "AlTS placements were great, but our reagent sales were not." She surmised that Lees rationale for emphasizing AlTS sales was because he felt it was more important to meet revenue targets instead of profit targets. "He wanted to be seen as the hero of the day based upon sales per period, but he failed to see the bigger picture." Another issue that Delaney found particularly disconcerting about Lees behavior was that his annual performance reviews were based largely upon areas he neglected. For instance, he was assessed according to his ability to meet profitability targets, his willingness to participate in Executive and Strategic Planning committee meetings, his team-building and people development initiatives and the overall team spirit he instilled in the office. At the same time, Delaney was becoming exasperated with Lees failure to comply with her wishes. This caused her to employ an authoritarian management style with Lee with increasing frequency. She related: In trying to manage Lee, I would start by explaining the rationale for my request. Then I would give him the opportunity to respond accordingly. If he failed to do so, I would then lay down the law. For example, on one occasion, I concluded that he was deliberately trying to sabotage one of Koreas longest serving distributors, one that was established by me prior to the set up of the subsidiary company. This distributor was a high volume producer and provided us with one of our most profitable accounts. But all of a sudden Lee stopped giving the distributor proper organizational support while starting to look for an alternative distributor. I suspect he was trying to establish his own legacy, but I tried to persuade him differently fur obvious economic reasons. I figured he would understand what we should be trying to accomplish, but
  • 89. Page 7 9A98C008 this did not appear to be the case. He continued to ignore my wishes until, finally, I simply said ... You will not interfere or negate any of the distributors business activities whatsoever. It is as simple as that, and there will be no more discussion on the issue. I must say, I do not like using this management style. It lowers respect between a manager and myself and creates a duo of concern to method of implementation. ASSESSING KOREAS LEADERSHIP AND ORGANIZATIONAL CULTURE In September 1995, Lynn Delaney attended a leadership and management program sponsored by the Singapore chapter of the Young Presidents Association. The program was conducted by Professor John Eggers (from the U.S.-based Center of Creative Leadership) and was designed to provide top-level executives with insights into the strengths and weaknesses of their leadership styles. Delaney found the experience so fruitful that she immediately hired Eggers to work with her in diagnosing both the leadership and organizational culture characteristics of her management team in Singapore. Once again inspired by the results, Delaney contracted Eggers to complete similar work on HealthCare - AP s operations in Malaysia, Taiwan and Korea. The diagnosis and analysis of HealthCare - APs management teams were done using a formal assessment tool - the Organizational Culture Survey. The Organizational Culture Survey used 26 dimensions to evaluate the values, norms, behavior, structure and outcomes of an organization. The survey was developed to provide a systematic view of.the organization by measuring dimensions related to systems, processes, total quality management, and diagnostic models. Research from the Center for Creative Leadership indicated that these organizational culture dimensions correlated highly with a companys financial success. By examining the output of the survey, it was hoped that links between a leaders behavior and organizational practices could be identified. Eggers commenced the surveying of the Malaysian, Taiwanese and Korean operations in November 1995 and brought the initial results to Delaneys attention in February 1996. After an initial review of the results, she scheduled a meeting for the coming March in Singapore for all of the leaders recently surveyed, as well as HealthCare APs senior management team, which had been previously surveyed. At the meeting, unbeknown to those surveyed, Eggers conducted the session by using Koreas results as the vehicle for discussion. The results were not labelled so that the graphs could not identify the operation surveyed. In gauging the reaction of the managers, Delaney suggested that "Lee was seemingly the only 4 See Exhibit 1 for descriptions of the respective survey dimensions. See Exhibit 2 for the respective survey results in Korea.
  • 90. Page 8 9A98C008 one who failed to recognize that the results were actually his." This episode crystallized her resolve that something drastic had to be done about Lees management behavior, and caused her to state: I am very grateful for what Mr. Lee has accomplished in Korea. However, at this stage, I am not sure whether or not he can make the leap to the next level of development. Even if he can, I am not sure how to go about supporting him since we are so personally and culturally different. We have used formal assessment tools to identify and quantify our problems in Korea, and hopefully these exercises will give us some insight about how to proceed. At the same time, I recognize that there is a need to accommodate the culture differences at play in Korea. But, at some point, I also have to be prepared to put a stake in the ground and say culture differences or not, this is the culture and operating style of HealthCare. That said, the challenge remains to come up with a viable action plan. that will remedy the situation because my preference is to work through this issue, instead of simply letting Mr. Lee go. rrhe Richard Ivey School of Business gratefully acknowledges the generous support of rrhe Richard and Jean Ivey Fund in the development of this case as part of the RICHARD AND JEAN IVEY FUND ASIAN CASE SERIES.
  • 91. Page 9 9A98C008 Appendix 1 THE KOREAN PEOPLEThe Republic of Korea (South Korea) has a population of about 45.5 million which is growingannually at about one per cent. Except for a small Chinese minority, the people are all ethnicKoreans, making Korea one of the most homogenous countries in the world. The countrysHuman Development Index, as established and assessed by the United Nations, ranks SouthKorea 32nd out of 146 nations. When adjusted for females, it ranks ss", implying that Koreansgenerally have very good access to resources that allow them to pursue personal goals, but thatwomen are less likely to earn a decent wage or attend college. Women are also under-representedin government and business.Confucianism permeates all aspects of Korean society. It encourages such practices asworshipping at shrines and ancestral tombs. In addition, Confucianism orders social behavior,stressing righteousness and filial piety (family relationships), especially between father and son.The Confucian ethic is evident in the general attitudes of Koreans. Many rituals of courtesy,behavioral formalities, and customs regulate social relations. Hard work and filial piety arehighly regarded, although education is the most valued element of Korean culture because it isconsidered the key to success, respect and power. Koreans often use extreme modesty whenspeaking about themselves. They are reluctant to accept high honors and they graciously denycompliments. Success also depends greatly upon social contacts. Koreans are quick to make.friends, whom they come to value highly. Friends expect to rely on each other for just aboutanything.Confucian principles, although less important in modem Korean society than in the past, are stillan integral part of social interactions, including greetings. How one is greeted depends on onesage and social standing relative to the greeter. In the case of new acquaintances, it is consideredappropriate to ask about each others age so that both parties will know how to behave towardseach other. A bow is the traditional greeting, but is usually accompanied by a handshake betweenmen. As a sign of respect, the left hand may support or rest under the right forearm during thehandshake. Women shake hands less often than men do. Professionals who meet for the first timeexchange business cards, presenting and accepting the card with both hands after a handshake. Acommon greeting is Annyong haseyo? (Are you at peace?)Giving gifts as a means of obtaining favors is common, especially in the workplace, andaccepting a gift carries the responsibility of reciprocity. Open criticism and public disagreementare considered inappropriate because they can damage another persons reputation. Out of respectfor the feelings of others, Koreans may withhold bad news or adverse opinions, or express themin an indirect way.Source: Cuiturgrom 98, Publications Division, David M. Kennedy Center for International Studies, Brigham YoungUniversity, Provo, Utah.
  • 92. Page 10 9A98C008 Exhibit 1 ORGANIZATIONAL CULTURE SURVEY DIMENSION DESCRIPTIONS Organizational Structure 1. Job Design Jobs, reporting relationships, job support and work-flow are designed to meet organizational goals. 2. Work Group Processes Work groups are organized effectively to reach company goals. Work and performance load is shared. 3. Organizational Work is well coordinated between groups. Each groups objectives are Integration clear to all employees. Human Relationships/Group Functioning 4. Conflict Open discussion of differing views, ideas and suggestions is welcome. Constructive criticism is encouraged. 5. Job Pressure Work load is positively challenging and can be completed in the hours allowed and with the tools provided. 6. Training and People are trained and developed to increase their skills and advance Development within the company. 7. Selection The selection process is effective in hiring the right people for each job. Employees are highly skilled. 8. Job Satisfaction Employees are satisfied with their work and working relationships. 9. Commitment Employees are committed to, and are proud to be at, the organization 10. Trust Rules and management decisions are seen as supporting the employees. Leadership 11. Openness to Change Leaders are quick to take advantage of improved ways of doing things. There is an openness to new ideas. 12. Planning A visible, clearly stated planning process is used to direct the companys future. 13. Recognize Contributions Employees are verbally recognized for ajob well done. 14. Leadership There is a trust and confidence in the organizations leaders to make Confidence Index competent decisions and plans for a successful future.
  • 93. Page 11 9A98C008 Vision 15. Vision Clarity Company vision and goals are clear to all employees. Communication 16. Openness and Theorganization is quick to respond to changes, decisions are timely, Vitality and the pace is fast. 17. Challenge Up Management is open to input from all employees. 18. Downward All levels of the organization receive timely information and are well Communication involved in change processes and decisions. 19. Across Groups Information from one group to another is quick and clear. Communication 20. Performance Feedback Employees receive constructive and timely feedback regarding their performance. Decision Making 21. Getting Adequate Decisions are based upon adequate information and employee input Information when needed. 22. Delegating When possible, decision making is carried out by employees or teams where the most accurate information is available. Motivation 23. Rewards / Social There is a clear connection between performance and pay. People who Justice work hard are rewarded. 24. Performance Policies, practices and work conditions encourage employees to perform Facilitation well. Output 25. Product Quality Products and service are of high quality. 26. Customer Satisfaction Customers are satisfied with the companys products and services. Future needs of customers are anticipated. Source: Entrepreneurial Performance Indicators Development Guide - Profiling the Potential for Entrepreneurial Growth. John H. Eggers & Kim T. Leahy (1996). Ewing Marion Kauffman Foundation, Center for Entrepreneurial Leadership tnc., Greensboro, NC.
  • 94. "0 I» (Q z en "tl :> ..•. (II (1) ~ 0 3 ~ ~ o N ~ ..• (1) a .0 s:: .., Q" (1) " < 3 g " I2. " .< - I] N ~ ~ .... .... ~ o ~ o U. ~ u. ~ u. ~ u. ~" " 10 l::l Job Design (") s:: 1;:;- Work Group Performance :E; Organizational Integration s:: ~ WorkmgConmtions ~------~--------~------~------~~------~~--~~------~~------1 Conflict ~------~------~-------T-----i~----~~~----~~------~----~ Cooperation ~------~------~~------~--~~~------~r-----~~------~--------1 Job Pressure : Training and Development Selection T: -7~ :~/:"",,- 0 Job Satisfaction Commitment :/ i~7 ~ rr ~ I "( == Q ~ » z 0 § ~ (j) Openness To Change Trust = ~ = Iii -I 0 Z r.rl » m Planning ~ r >C ~ t) =- 0 C c: Recognize Contributions Vision Clarity = ~ =- r -I C ;:;: N ~ ~ < m Focus Towards Performance O· ""! (j) ~ 0 Quality 7 .... ... . :/ . . . . j 0 " ~ 0 C OpennessfVitality -... ..:"0 ~: . -~--. . . : / ""! -e ~ "tJ ~ m Challenge Up .~ Q. "tJ 0 ~ Downward Communication Across Groups . _r~ ~/ -I Performance FeedbackGetting Adequate Information Delegating Performance Rewards/Social Emphasis Justice I :~~ ~t t T t ~~~c;l~ Ono.""C-, Performance Facilitation g-"~OZ C1> Z;; c:: II Benefits ~~:c~~ t;; - g ..• ~ ~ ~ Product Quality .g _ ~ e; < C1> Customer Satisfaction VJ C1> r Organizational Efficiency 1-------:.-.--------...;...----------------;1-- •. ----="*--------------= •..--1 ~ Z ~i II ~ZII Confidence Index ~ :::; CD ». CD (XI o o o (XI
  • 95. HARVARD BUSINESS SCHOOL 9-410-049 OCTOBER 16. 200~LINDA A. H11.L.l.IS0N BERKLEY WAGONFELDDigital Chocolate Trip Hawkins, founder and CEO of Digital Chocolate, checked the battery status of his Apple i-Phone as he boarded his plane in Helsinki, Finland. It was July of 2009, and Hawkins was headingback to his company: headquarters in San Mateo, California after several days of meetings with gamedevelopers at Digital Chocolates studio in Helsinki. As Hawkins settled into his seat, he scannedthrough the game icons on his mobile smartphone, excited to spend the next few hours playingseveral original game prototypes that were scheduled to launch in the fall. Hawkins was particularlyintrigued by the new Digital Chocolate games that combined social interaction with the type of gamethat had traditionally been played solo. This was the kind of social gaming that Hawkins envisionedduring his early game development days in the 1970s, and he was thrilled that the newest mobiletechnology enabled his vision to become a reality. However, Hawkins knew just how hard it was todevelop games that resonated with millions of consumers around the world, and it was alwaysdifficult to predict which games would become break-out successes. Hawkins had founded Digital Chocolate in 2003 to "develop outstanding games for mobiledevices." Two decades earlier, Hawkins had founded Electronic Arts, which he grew into one of thelargest video game publishers in the world. Hawkins years as CEO of Electronic Arts helped himappreciate the challenges associated with coming up with creative content and making that contentavailable on different platforms. As the CEO of Digital Chocolate, Hawkins put a great deal ofthought into how to organize his latest company to foster creativity and innovation, while alsomaximizing revenue and profits. These collective goals had led Hawkins down a path that involvedbuilding a company based in four locations: San Mateo, California; Helsinki, Finland; Bangalore,India; and Barcelona, Spain. Hawkins valued the unique strengths that were resident in each of these offices, but he also knewthat coordination and teamwork among the offices were critical components of the companyssuccess. The pace of change in the mobile device industry, particularly after the introduction ofApples iPhone, highlighted just how important it was to adapt quickly to market changes. Hawkinsworked closely with Digital Chocolates chief operating officer, Jason Loia, and the president ofstudios, Ilkka Paananen, to focus on the growing demand for applications on this new platform.Digital Chocolate opted to take a few months to redirect resources towards iPhone games, and once itdid, Digital Chocolate had come out with a couple of winners. .Professor Linda A. Hill and Alison Berkley Wagonfeld, Executive Director of the HBS California Research Center, prepared this case. Theassistance of Randy Haykin, Professional Faculty at U.C Berkeley Haas School of Business, is gratefully acknowledged. HBS cases aredeveloped solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations ofeffective or ineffective managemen t.Copyright © 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,write Harvard Business School Publishing, Boston, MA 02163,or go to TIlls publication may not be digitized,photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
  • 96. ,nO-049 Digital Chocolate Hawkins was pleased with his companys ability to shift gears in 2008 for the iPhone, and now in2009 he wondered how he should redirect his team to focus on social gaming. He wondered ifDigital Chocolate should do an acquisition in this sector, or if he should have one or more of hisstudios in Finland, Spain or California ramp up their social gaming development efforts. Hawkinswas sensitive to disrupting the creative workflow that had proved successful over the last few years,but he also didnt want to miss out on one of the most exciting new trends in mobile gaming. Hisintuition told him that the potential for social interaction in mobile games was huge; the question washow to organize his teams to leverage-this potential. As Hawkins started a new game on his iPhone,he wondered how to guide his company into this new area without losing any of the tremendouscreative momentum the team had built over the previous years.Company Background Trip Hawkins started developing board games as a teenager, and he translated his love of gamesinto a custom-designed major at Harvard University called Strategy and Applied Game Theory.Hawkins went on to business school at Stanford and then joined Apple Computer in 1978 as one ofthe first members of the marketing staff. While at Apple, Hawkins grew increasingly excited aboutusing personal computers as a platform for games, and he left Apple in 1982to found Electronic Arts(EA). (See Exhibit 1 for management bios.) Hawkins served as CEO of EA until 1991,during whichtime the company published over 600 unique titles resulting in tens of millions of game units sold forpersonal computers and game consoles. EA reached nearly $200 million in revenues by the timeHawkins left to start 300, a company that designed devices with video and audio features inaddition to gaming functionality. Although 300 devices offered more than nearly all video gameconsoles, its $599 price tag was considered expensive for consumers. Hawkins eventually shut down300, but he remained focused on the gaming industry. In the early 2000s Hawkins was intrigued byanalyst predictions that over two billion people in the world would be carrying mobile phones withinfive years. He believed this would create a big opportunity for entertainment applications, and in2003, Hawkins founded Digital Chocolate to focus on this market. As Hawkins described, "Ichosethe name Digital Chocolate because I want our customers to think of our games as a delicious snackthat offers instant gratification." Hawkins wrote a business plan and quickly secured funding from top Silicon Valley venturecapital firms. By 2006, Digital Chocolate had raised a total of $43.8 million over three rounds offunding, with Sutter Hill Ventures as the lead investor. The company first became profitable in 2006. Hawkins made some key decisions when he started the company. From the beginning, he decidedto focus on developing original game titles rather than licensing names and ideas from entertainmentor sports. He believed that game publishers could get squeezed if they didnt own the intellectualproperty ("IP") behind the game, so nearly all of Digital Chocolates games were based on originalideas developed in-house. Along those lines, Hawkins was committed to having "lots and lots ofcreativity on the management team." He added, "Companies with strong, original IP need leaderswho can manage the suits and the ponytails. You cant just put 1,000people in a room and say Gocreate the next hit song. Fortunately I learned about creativity from my own experiences as acreative person, beginning in childhood. I learned things at Apple and EA but my success in bothcases had to do with what I already knew about creative people from my own experiences." At thesame time, Hawkins was committed to being a "technology company" that had a strong engineeringteam to ensure the companys products would work on every kind of mobile device. Hawkins wanted to establish core values that would permeate the company; they were: Energy,Innovation, Excellence, Integrity and Ownership (referred to internally as E-I-E-I-O from the OldMcDonald song). Hawkins elaborated:2
  • 97. Digital Chocolate 410-049 Cultural fit is extremely important to us, and we try to only hire people that share our values. I have learned over the years that it is better to weed out people that dont fit well with the team, rather than keep them on board, even if they have valuable skills. For example, we have an extremely simple performance review. We only ask a manager to answer three questions about their subordinates: First, what is the most important thing that this person contributed in the last year? Second, what is the most important strength that this employee has, and third, how well do they conform to the E-I-E-I-Ovalues. Thats it.Organizational Overview Hawkins established Digital Chocolate in San Mateo, California because he believed, "It was easyto reach from both San Francisco and Silicon Valley, and it was also near the venture capital firmsthat liked to invest in companies with headquarters in the area." However, Hawkins knew that thecompany would ultimately operate out of multiple locations because the cost of building the entireteam in the Bay Area would be prohibitive. In addition, Hawkins believed that companies in SiliconValley "always had to battle for top talent," and they faced higher levels of turnover. Hawkins alsobelieved that an international workforce would help Digital Chocolate create games that appealed toa global customer base.Global Operations During the first half of 2004,Hawkins met with gaming developers around the world in order toseek out potential acquisitions to jump start the company. In June 2004 Digital Chocolate announceda deal to acquire Sumea, a three-year old Finnish company that developed mobile games. Hawkinswas drawn to Sumeas high quality game titles as well as its existing relationships with leadingEuropean cellular phone carriers who had the power to decide which games would come pre-loadedon wireless phones. Hawkins also believed that Sumeas CEO, Illka Paananen, age 26, would serveas an outstanding head of Digital Chocolates creative studios because he demonstrated the ability tomanage creative talent. Communication between the two locations was aided by the Sumeacompany policy that all employees had to speak English fluently. At the time of the acquisition,Hawkins commented, "Acquiring Sumea provides Digital Chocolate with strong, establishedpartnerships with major global carriers, broad geographic distribution and an entire catalog of top-rated games."! According to Paananen, "We were very excited about working with Digital Chocolateand industry veterans like Trip Hawkins toward a common, immediate goal of developing andpublishing high quality games that change the way people think about and use their mobile phones.This merger also increased access to new financial and development resources." Following the acquisition, Paananen assumed the title of president of studios, and the Sumeagroup became the core set of game developers in the organization. The team was responsible for thedesign and development of games, and the Finnish group collaborated frequently with colleagues inthe U.S. through phone and email. Although everyone at the Helsinki office spoke English, Hawkinsexplained, "The staff was born in 32 different countries, giving us a multicultural and globalviewpoint about products and markets. Finland attracts people from other lands who tend to speakEnglish." By 2006, the Finland team had grown from 25 to 150 employees. Most employees were in theirtwenties and the office had a global orientation. Hawkins was pleased with the games that werebeing produced, but he found that the company cost structure remained too high. In particular, the1 Digital Chocolate Press Release, June 24, 2004,, accessed July 24, 2009. 3
  • 98. 410-049 Digital Chocolatecompany was finding it very expensive to modify each of the completed games to work on everytype of mobile phone in the market. Screens, colors, sounds, languages and keypads varied fromphone to phone, and the wireless carriers such as Verizon and AT&T wanted games that workedwith all of the devices they offered. In addition, Hawkins believed that Digital Chocolate needed tosell more games in order to get the attention of carriers and to enjoy more economies of scale.Hawkins promoted his vice president of operations at the time, Jason Loia (based in San Mateo), tochief operating officer, and together they began looking at ways to increase sales, expand operationsand drive down costs. Hawkins and Loia looked for acquisition candidates around the world, hoping to find a company,potentially in Asia, Russia or Eastern Europe, that would help the company reduce its costs andenhance its engineering capabilities. According to Hawkins, "The vision was to shift U.S. work toFinland, and shift some of the Finland work to a country with a lower wage structure. We planned todevelop tools and training that would give us more leverage in our business." After an exhaustivesearch, Digital Chocolate identified a 25-person company in Bangalore, India called Small Device, ledby Dikshant Dave. Hawkins found the India location appealing because the country had moreEnglish speaking college graduates with computer and electrical engineering degrees than any othercountry in the world. Hawkins also found that the founders of Small Device and other developers hemet in India had a "mature understanding of capitalism and were culturally experienced andcomfortable collaborating with the West." In fact, Hawkins had read articles that suggested thatIndians and Finns would work well together, giving him comfort that the integration would gosmoothly. Hawkins and Loia also looked at companies in other countries such as China, Hong Kong,Vietnam, Philippines, but in each of these situations they had a difficult time finding a team andlocation that looked promising. The Small Device acquisition was completed in early 2007, and theIndia team became the operations center for Digital Chocolate. The developers in Bangalore tookover the primary responsibility of adapting games to work on all devices, and the India teamreported into Loia. Around the same time, Digital Chocolate also acquired a small creative development team inBarcelona, Spain run by Gerard Fernandez. Hawkins found Fernandezs 20-person team interestingbecause of the development talent, low costs and Spanish-speaking developers that could helpDigital Chocolate penetrate Latin America, South America and Spain. In addition, the Barcelonacompany, Microjocs, had a distribution agreement in place with Telefonica, the leadingtelecommunications operator in Spanish and Portuguese-speaking countries. The acquisition alsogave Digital Chocolate a presence in Southern Europe. Hawkins was eager to leverage therelationships that Microjocs and Small Device had in their respective regions to increase the reach ofDigital Chocolate games. Paananen described the group in Spain as "energetic, young, creative andpassionate." By 2009, Digital Chocolate had 370 employees: approximately 150 were part of thecreative/studio team reporting into Paananen (115in Helsinki, 25 in Barcelona and 10 in San Mateo);200 were involved with operations reporting into Loia (140in Bangalore, 30 in Helsinki and 30 in SanMateo). (See Exhibit 2a for a Digital Chocolate executive organizational chart and Exhibit 2b forPaananens creative team.) Loia also managed a 10-person sales team split between Europe (six),United States (three) and one in Asia. There were a handful of other employees in marketing, financeand information technology who worked with the other executives in San Mateo. Digital Chocolatealso formed a team of engineers and testers close to the border in Mexico who could port to devicesthat required U.S. cell network connectivity. The Mexico team performed at significantly lowerwages than employees in the U.S. and was able to free up engineers in San Mateo to focus on newplatforms and initiatives. 4
  • 99. Digital Chocolate 410-049Management Team and Communications In addition to Hawkins, Loia and Paananen, the executive group included Paul Abbassi, chieftechnology officer; Mark Richman, chief financial officer; and Mark Metis, vice president ofmarketing. Abbassi joined the company in April 2007, and Richman and Metis joined in 2008; allthree were based out of San Mateo. The company did not have a business development person, soHawkins and Loia filled in as needed. According to Hawkins, "We are careful with our overheadspending, and we do whatever needs to be done. We can be fluid with our roles when necessary."Although the majority of the executive team was based in San Mateo, Hawkins communicatedfrequently with Digital Chocolate employees throughout the world. Hawkins travelled to Finlandapproximately two times each year and Paananen visited the United States about once each quarter.Hawkins also visited Spain and India approximately once each year. He described hiscommunication patterns: I probably write and receive at least 100 emails each day with employees at all levels of the company. We also all use texting, phone calls and instant messenger to stay in touch. I use an email distribution list called "DC-Mon" that stemmed from Digital Chocolates Monday morning staff meetings. This is the primary way I communicate with our senior team of about 40 people. I used to call the list "T-Staff" for "Trips Staff" but people felt as if it was a status symbol to be on that list, so I changed the name to make it less political. I also use that group to solicit input on decisions. Its important that everyone feels part of the team, and I want every employee to feel that his or her ideas are valued. Hawkins recalled a time early in the companys history when there was more turnover at thesenior level. He elaborated: There was a time in 2005 when I was frustrated and disappointed with my ability to hire . and retain executives in San Mateo. About 50% of the senior managers were not working out, primarily due to personality issues. In a company like ours, everyone has to play on the same team in order to win. If we have too many solo flyers, the company will not succeed. Perhaps earlier in my career I would have tried to make it work, but I have learned over the years that it is better to cut the ties if there is an issue with cultural fit. I have also learned that I would rather bet on people who have talent, passion and aptitude, rather than focusing on past roles. Today, our turnover is really low throughout all of our offices. Hawkins hosted staff meetings every three weeks, and all department heads used the followingtemplate to present updates: (1) Whats going well; (2) Whats not going well; (3) Opportunities; (4)Threats; and (5) Asks. Loia believed these meetings provided a great opportunity for the groups tostay informed. Paananen called in from Finland for the meetings, and all of the other participantswere based in San Mateo. Paananen noted that the time difference was one of the biggest challengeshe faced. He explained, "Sometimes I spend late nights on the phone - when it is 9am in California, itis 7pm in Finland." Hawkins explained decision-making among his executive team: We rarely make key decisions unless all of the executives are in agreement. I believe if I cant get people on board, then its probably not a good decision. This is particularly important in a distributed organization such as ours where execution is happening in different locations around the world. There are times, however, where Jason and I dont always see eye- to-eye on management practices. Jason has a background with the Coast Guard, so hes more bought into the literal roles about chain of command. Personally, I try to respect the chain of command, but I think youre better off if everybody could talk to everybody because 5
  • 100. 410-049 Digital Chocolate everybody learns a lot more that way. Its empowering for the lower level people to have contact with higher level people that are not their boss. It frees up information flow. Loia expanded, "I am a stickler about tasks or projects being commissioned outside of the direct managers knowledge, as there is the potential for that to create a hidden drain on resources and a clouded view of corporate priorities." Business Overview The global gaming industry was estimated at $34 billion for 2009, geographically split almost evenly across Asia, Europe and the United States. Digital Chocolate estimated that garners were 60% male and 40% female, split among the following age groups: <18 years (25%);19-49years (50%);and >50 years (25%). Digital Chocolate perceived a shift in game users from "hard core garners" who were focused on immersive games on consoles to "omni garners" who sought out convenient, social. experiences across a variety of platforms. Within the broad gaming industry, the mobile gaming sector generated approximately $5.4 billion in revenues worldwide in 2008, and it was predicted to reach $10 billion by 2013.2 Large players in the mobile gaming sector included: Digital Chocolate, Electronic Arts, Gameloft, Namco, Glu Mobile, and Oberon Media. Digital Chocolate estimated that the ten largest mobile game companies generated at least 70% of the gaming revenue worldwide in 2008. Game Distribution through Carriers From 2003 to 2008, the primary sales channel for game content providers was through the bigwireless carriers such as Verizon/ Alltel, Sprint/Nextel, ATI, Vodafone and TMobile. Contentproviders such as Digital Chocolate (also referred to as game publishers or game developers)presented new games to wireless carriers a few months before they were completed, and the carriersdecided which games they were willing to sell through their phones. Carriers had control over howgames were categorized and marketed on their phones, and these decisions played critical roles in thesuccess of each game. Loia explained, "Games that were placed on the first page of game listingswere often 1,000times more likely to be downloaded than games on later pages. Brand recognitionoften played a key role in the order games were listed." Another factor that influenced placement wasthe user experience across the many different devices, so content providers had to make their gamesusable on as many devices as possible. In order to achieve this operability level, content providersworked with handset manufacturers such as Samsung, LG, Motorola, Nokia, Sony, and Ericsson togather all the specifications of each device that would be coming out in the next several months. In2009, there were thousands of game-capable devices on the market and Digital Chocolate supported1,500of the most popular devices. (See Exhibit 3 for mock-ups of Digital Chocolate games on variousdevices.) Digital Chocolate competed in this channel by developing relationships with all of the majorcarriers as well as many of the smaller ones; by late 2008,the company had agreements in place with200 carriers. Digital Chocolate struggled for placement because its own IP was less recognizable thangames that used licensed brand names (e.g., Tetris). Digital Chocolate worked to influence carriersby making high quality, award-winning games that worked on all devices, and by building brandrecognition through the Internet. Digital Chocolate was compensated for its games by carriers based2 Juniper Research, "Press Release: Mobile Games Market to Reach $10bn by 2013, but Growth to be Severely Restricted byOperator Business Models," November 18, 2008., accessed July 28, 2009.6
  • 101. Digital Chocolate 410-049on the number of downloads and the negotiated revenue share agreement. Carriers dictated gamepricing on this channel, and most games cost $4.99. On average, Digital Chocolate and the carrierssplit game revenues 50%/50%, and Digital Chocolate received a check from the carrier 30 to 90 daysafter the games were downloaded. Loia explained: One of the challenges with selling our games through carriers is that we dont get any real- time feedback about how our games our doing in the market in terms of downloads. With the exception of a handful of our 200 carrier partners who publish real-time download metrics, it is difficult for us to gauge the success of a title until after the check from the carrier is received, sometimes months later. It was even more difficult getting consumer feedback on our titles since there was no mechanism for that, and we reli~d mostly on professional game reviews.Game Distribution through Consumer Marketplaces In mid-2008, a new distribution channel for mobile games emerged with the introduction ofApples Application Store (App Store) for its iPhone and iTouch devices. The App Store enabledconsumers to search, purchase and download games directly and instantly to their devices.Consumers with Apple iTunes accounts could use the same account to purchase games, enablingimpulse purchases. When the iPhone was released, Apple already had tens of millions of iTunesaccounts with active credit cards on file. Approximately half of Digital Chocolates iPhone gameusers were based in the U.S. Game developers had the flexibility to upload new games, select prices,and adjust the games and prices as they wanted on the App Store. In addition, they could offer freetrial versions of their games and cross-sell their games in the App Store. Game prices varied from$0.99 to $9.99,and Digital Chocolate calculated that the average price of the top 25 paid applicationswas $1.95. Game publishers received 700/0 the revenues generated through the App Store with ofApple. Many games were free, and the more downloads recorded, the higher the game ranked onthe App Store top 100 list. With 65,000 games available in mid-2009, consumers relied on userreviews and the top-downloads list as valuable sources of information .about which games. todownload.! An analysis of the top-lOOpaid games through the U.S. App Store indicated that $0.99was the most popular price point with 36 of the top-lOOgames, but the second most popular pricepoint was $4.99.5 (See Exhibit 4.for statistics and analysis about the 100 paid games from the U.S.App Store.) Of the 100 top paid games in July 2009, five had been on the chart since July 2008.6Pricing above $3.99 was considered "premium pricing," and was typical of companies such as EAthat had brand recognition as a company and with its game titles. Although the App Store was the largest mobile game marketplace, others were being launched byGoogle (Android Market), RIM/Blackberry (App World) and Nokia (Ovi). Each of these platformsenabled publishers to offer content directly to consumers, similar to the App Store. The biggestdifference involved the payment experience, as Google, RIM and Nokia did not have the benefit ofleveraging the millions of iTunes accounts that had been previously set up. As a result, manyconsumers had to go through the tedious process of setting up a credit-card account for the device to3 Gabriel Madway, "Big game publishers muscle in on iPhones upstarts," Reuters News, July 15, 2009.4 Yukari Iwatani Kane, "Seeking Fame in Apples Sea of Apps," TIle Wall Street Journal, July 15, 2009, page B1.5 Stuart Dredge, "Analysing the App Store Paid Garnes Chart," Pocket-Gamer.Biz, July 9, 2009, accessed July 30, 2009.6 Ibid. 7
  • 102. 410-049 Digital Chocolatebuy new applications. The devices that ran these platforms were also different, as most did not havethe same touch and swipe features as the Apple iPhone and iTouch. Analysts predicted that some ofthese other smartphones and corresponding marketplaces would gain traction by 2010.Game Development Process Digital Chocolate developed games in six genres: puzzle & word, action & adventure, sports &racing, simulation, social entertainment, and cards & casino. (See Exhibit 5 for a list of DigitalChocolate games introduced through carriers in 2008-2009.) Nearly all of the games producedthrough July 2009 were standalone games designed for solo users, internally referred to as "cookies."These games tended to challenge users to progress individually through levels. In contrast, some ofthe companys newer games being developed for multiple users were referred to as "cakes,"representing products that could be shared and consumed over time. Cakes tended to evolve basedon how friends interacted together within the game. Digital Chocolate published its games on mobile phones and the App Store, and a portion werealso available on the Internet through the companys website and through Facebook, a leading socialnetworking site with over 200 million users worldwide. The companys goal was to publish two tothree new games each month, so the team was continuously generating new ideas. Everyone in thecompany was encouraged to submit ideas through a company blog that was reviewed by a productmanagement team in Finland. The product management team also spent time analyzing thecharacteristics of top games in multiple categories in order to define common themes that permeatedwinning titles. Paananen explained, "For every game we make, we probably filter through 300 ideas.We have a group that pulls ideas from the blog and thinks about factors such as: target market,competitive offerings, cost of production and follow-on ideas." The most promising ideas were fleshed out in PowerPoint presentations with simple graphicsdemonstrating the game objective and as well as marketing and production considerations. Thesepresentations, internally referred to as "Why Should this be a Digital Chocolate Product?" or "YDC?"pitches, were shared with Paananen and then later run by the executives based in San Mateo. Loiaexplained, "Our team in Finland has become very good at creating traditional mobile games, and theexecutive team tends to give the go-ahead to most of the traditional games presented." However,discussion was encouraged. Hawkins expanded, "We validate every idea because we dont want todiscourage creativity by throwing wet blankets over everything, and we also encourage people toexpress passion and criticize constructively. All of our games require a great deal of collaboration toreach consensus, and we try to have that happen at the lowest level possible." Paananen describedhis leadership style as someone who "enables others to be successful." He explained, "Our team isself-motivated and I make sure they have the right resources." Once the product group received the greenlight from the executive team, a sales team membershared the game proposal with carriers to ensure the carrier would accept the game. Assumingeverything looked promising on that front, the game developers spent the next two to three monthscreating the designs, graphics, sounds, languages and engineering code that formed the basis of thegame. Paananens team developed a product "road map" that looked out six to eight months, andgame developers were separated into "tracks" that worked on a series of games. Each track tended toinclude a producer who served as a team lead/project manager, along with several artists,developers and designers. Some games had particularly intensive artistic requirements such as 3-Dgraphics. Every Friday afternoon, all teams were required to post their interim game "builds" on aninternal company website so that anyone in the company could play with them and providefeedback. This also allowed the various tracks to see what other teams were working on.8
  • 103. Digital Chocolate 410-049 All Digital Chocolate games were developed using a custom-designed engineering platform thatallowed the same game to be deployed on a wide variety of devices in multiple languages. Thisplatform enabled the operations team in India to modify the games in a cost-effective manner socustomers around the world could enjoy the games. Hawkins noted: We believe our technology platform gives us a tremendous amount of leverage. We are one of the few creative companies that is also a technology company, and it has been a real competitive advantage for us. Initially we thought we might be able to get outside developers to develop games for us and port them to our platform, but it is said that working with developers is like herding tats, and its even harder when they are outside developers that are not in your office as your own employees. Developers have their own tools and software code libraries and tricks and it was hard for us to get everyone to conform to our restrictions and rules. It was easier to make it work internally with employees so we became vertically integrated. The studio teams in Finland and Spain communicated frequently with the operations team inIndia to ensure a smooth transition from development to deployment. Loia explained, "Ourdevelopers and operations teams often function like a baseball team. Each function specializes intheir area of expertise and as a result there is a high level of teamwork and efficiency." Hawkinselaborated, "Communication is key during every step of the process. Our commercial successinvolves thousands of creative decisions and many execution decisions. Its not about each decision;its the combination that matters." On average, each game took approximately six months to developfrom the "YDC?" document until it was available on a phone. Digital Chocolate did not reveal itsgame development costs; however, one of its competitors, Glu Mobile, disclosed that is spent$200,000- $300,000to develop a game? Paananen believed that Digital Chocolate had "some of the best game developers in the world,"which he viewed as the primary reason for the companys success. Hawkins shared his perspectiveon what makes a great game developer: Great game developers grew up playing and studying games and realized that they personally knew how to make the games better. Then they got an education that taught them the tools to do so. Great game developers have the creativity and market sensibility to think of new ideas that are practical, as well as the courage to fight for their ideas and make them into reality. They also have the passion to stick with their projects no matter how hard it gets. In addition, great game developers have the humility to respect and study the competition. Paananen explained, "We have great, talented, passionate people who have experience makingaward-winning games; however, it is still very hard to predict which games will be commerciallysuccessful. We approach game development with a portfolio strategy. On the iPhone platform,about 20% of our games make up 80% of our revenues, but we dont know in advance which gameswill be in that top 20%." Paananen believed the creative team enjoyed working in an environmentwhere they had the freedom to propose ideas and turn them into a product. In addition, he believed,"The creative teams in Finland and Spain were motivated by press reviews and winning gamingawards, while the creative group in San Mateo tended to be more focused on user metrics." (SeeExhibit 6 for sample game reviews.)7 Gabriel Madway, "Big game publishers muscle in on iPhones upstarts," Reuters News, July 15,2009. 9
  • 104. 410-049 Digital ChocolateEmbracing the iPhone For the first five years of the companys life, Digital Chocolate focused primarily on games thatwere played solo with a standard mobile phone keypad. Some of the games were also availablethrough the Internet, but most of the developers time was spent building games for mobile devices.When Apple introduced its iPhone in early 2008, Hawkins was curious and hopeful, but also a bitskeptical. Hawkins explained, "Over the 12 years I was at EA, there were over 300 unique computingplatforms. We chose not to work with most of them, and some of them that we embraced lost money.There were very few big winners, and they were hard to predict." Hawkins also noted that, "For thefirst three decades of Apples life, Apple did not promote games, and when the iPhone launched in2007 Apple didnt have a store." The App Store opened in July 2008,but Hawkins recalled, "Applegave more air time to applications other than games." In addition, Hawkins remarked, "We sawsimilarities between the iPhone and the web and social networks - where discovery and monetizationwere challenging because there were tens of thousands of applications as well as billing challenges."Given all these reasons, Hawkins was not sure if the iPhone would be a great game business, andHawkins wanted Digital Chocolate to work on some projects but wait before scaling up. However,by August 2008 Hawkins heard that consumers were downloading a substantial volume of games.At that time, Hawkins decided that Digital Chocolate should "attack the iPhone with scale" andconvert some of its top selling games into iPhone applications, with the goal of having the first fewavailable by the end of 2008. . Hawkins, Loia and Paananen discussed the various ways they could redirect resources to theiPhone, and they ultimately concluded that Loia would drive the development process by workingwith the Operations engineering teams in India, San Mateo, and Helsinki. Hawkins explained: Jason had the engineering background, the operations experience, and the entrepreneurial energy to lead this effort. In addition, we didnt want to distract the studios in Finland and Spain, as they were in the process of inventing new games and keeping them flowing into the market. We had some concern that the game developers would get caught up in the romance of the new platform before we knew how our games would do on it. Jasons work on the iPhone represents one of the fundamental elements of our management team: we can also be a basketball team when the situation calls for it. We realize that we may have to play different positions - a point guard may have to drive to the hoop or get a rebound. Most of the initial work involved adapting games to take advantage of the swiping motion andtouch screen, and by March 2009, Digital Chocolate had launched five games on the AppStore. Thecompany was able to leverage its game library and technology platform to convert games at arelatively low cost. The games did extremely well, right from the start. Within 100 days, DigitalChocolate had over 10 million downloads of its titles. During a media interview in mid-April 2009,Hawkins admitted: The iPhone for us was a spectacularly pleasant surprise. We had no idea it was going to be as good for us as it turned out to be. There are 35,000 iPhone applications and thousands are free. To get to number one is pretty rare. [Three of] our first four games all made it to number one on the download charts, which is a mathematical freak...The iPhone is by far our most10
  • 105. Digital Chocolate 410-049 effective platform. We make as much money with these games as we do putting a game on 100 different cell phone platforms. 8 Once the platforms potential became apparent, Hawkins announced internally that DigitalChocolates biggest area of focus would be "Conquer the iPhone." He explained, "It may have takenus a little while to see the value of the iPhone platform, but as a company, we have a culturalwillingness to identify a theme and commit. We have learned the value of agility, and we are willingto turn the rudder hard, even if we all get wet. 1 interview almost everyone that we hire and Imalways focused on finding people that are comfortable with change." By the end of April 2009,Hawkins, Loia and Paananen agreed it was time to get the Studios more involved in building for theiPhone platform, and the creative teams in Finland and Spain were asked to integrate iPhonefunctionality into all new games. Hawkins explained, "At the time we spent a lot of time redefiningthe boundaries between studio and operations, and were still doing that." Loia elaborated, "Initially,the operations team did most of the work in adapting our existing games into the iPhone format, butwe realized that we could make much better games if our studio was involved at the beginning,designing specifically for the iPhone." The creative team was excited to tackle this new challenge. AsPaananen described: Game developers are excited to work with the coolest hardware, and once we distributed some iPhones to the team, everyone realized the potential. However, we did have to develop some new skills in terms of adjusting to the bigger screen and leveraging the user interface. One of our bigger challenges involved keeping our developers interested in carrier projects. Even though the iPhone is sexier, we still have a good business selling titles through standard mobile phones that we dont want to give up. By July 2009,nearly all of Digital Chocolates games were being made for both the iPhone and thestandard carrier platform, and the team in India had modified its publishing platform to make itpossible to deploy games through both channels without a great deal of incremental costs.Social Gaming on the Horizon As the teams ramped up their iPhone capabilities, Hawkins became increasingly focused on thepotential for multi-player, interactive games ("social gaming") that could be played on multipleplatforms (e.g, mobile phones, iPhone, Internet) simultaneously. Hawkins interest in social gamingdated back to his childhood. He explained, "1 had an awareness of both the social and intellectualvalue of board games when 1 was less than 10 years old, and I became a serious fan ofcard/ chart/ dice-based pre-computer sports simulation games in which my friends and 1could draftplayers and manage our own teams and stats." His interest continued, and when Hawkins wasrunning 300 he filed a patent in the mid-1990s that covered the way users could buy and use packetsof digital characters that could persist across multiple social platforms, internally referred to as the"DNA patent." Hawkins explained, "Ive been thinking about the social power of media for a longtime, and it was part of the founding business plan that I wrote for Digital Chocolate. We were goingto be a social media company built on mobile phones." However, when Hawkins tried to launchsocial games at 300 and his early days at Digital Chocolate, he found that the hardware, softwareand payment systems were not ready to support his vision. He explained:8 Dean Takahasi, "Late to the iPhone, Trip Hawkins Digital Chocolate Falls in Love with it," Venti.ueBeat, April 14, 2009, 2009/ 04/ 14/ late-to-the-iphone-trip-haw kins-digital-choco!ate-falls-in-love-with-it / , accessedAugust 18, 2009. 11
  • 106. 410-049 Digital Chocolate We had a series of misadventures because the platforms wouldnt do what we wanted, or the consumers wouldnt behave the way we wanted on those early mobile platforms. We found some success with our games on the Web when we engineered in viral spread and added features such as point rankings ("leader boards") among friends. That worked great for TowerBloxx on Facebook. Several months after launch we had 100 million free downloads. But we had no way to monetize our success with that game. Digital Chocolate tried introducing a few social games through the carrier channel, one of whichwas called AvaPeeps that involved creating avatars [digital characters] that dated other avatars. Thegame didnt take off as hoped, which Paananen attributed to the limitations of standard mobilephones. In addition, Hawkins noted, "We know more about making good games than we knowabout the dating marketplace." Paananen commented, "We have had some misses in social gaming,but we have learned along the way. Digital Chocolate has a learning culture. In fact, sometimes Tripeven gives themanagement team books he wants us all to read. " There were several U.S. based companies that started to demonstrate the potential for a broaderset of users engaging in revenue-generating social games in 2008 and 2009. Most of these companieswere run by developers in their early twenties that focused exclusively on social games availablethrough a variety of networks (e.g., Facebook, MySpace).(See Exhibit 7 for profiles of the top social-gaming companies.) One of the leading companies, Zynga, had two big hits available during thesummer of 2009. Launched in June of 2009, FannVille allowed users to set up virtual plots of land andinteract with friends through buying, selling and borrowing farm equipment, animals and farmproducts. Zynga announced that FannVille had 11 million daily users as of August of 2009,9 and thegame had over 1 million "fans" on Facebook. Another popular Zynga game was Mafia Wars,whichattracted 4 million users a day in July of 2009.10 This game enabled users to build a mafia family andinvite friends to join through Facebook or other social networking sites. The game was initially free,but as participants built out their crime businesses, they could use micropayments (purchases under$1.00 that could be aggregated) to buy property and resources. Users could also buy items in thegame by responding to offers (i.e., free trial at Netflix), enabling a new form of payment and currencyknown as "offer completion." Hawkins explained, "We are learning that offer completion is a greatlitmus test of whether or not we are making the right kind of social game. In a great game, acustomer will be motivated enough to fill out a form for a free trial or offer in order to get points,purchase virtual goods, or increase levels." Hawkins expanded: We have aspirations to build games that leverage social networks and engage users so that we can monetize our offerings. Its not rocket science; it involves studying the competition, figuring out how the models work, identifying the principles of engagement, selecting the kind of themes and content you have to make, and then building products according to that rule set. Weve done this again and again because we are a creative organization that also has a nice combination of empirical and analytical skills. We dont have a bunch of divas who are only caught up in themselves. Instead, we have the discipline to study and analyze opportunities, and then provide the creative mojo to go with it.9 Zynga, "Zyngas FarmVille Becomes Largest and Fastest Growing Social Game Ever," Company Blog, August 27, 2009., accessed September 24,2009.10 Gamasutra, "Social Game MaJi11 Wars Hits 4 Million Daily Users,", accessed August 25,2009.12
  • 107. Digital Chocolate 410-049 Paananen noted that developing social games would require some different skills than those histeam had cultivated to date. For example, the social games needed to be thought of as an ongoingservice, not a project that got "completed" and "handed over" to another team. Developers iteratedon social games after launch, and new features were continuously added, requiring developers tostay engaged. In addition, the visual quality in the early social gaming hits was often seen assecondary to the viral quality. Nevertheless, Paananen believed, "Digital Chocolate has the ability toincrease customers expectations of the visual experience within social games, as we have the abilityto create better graphics than most social game developers." Loia recruited an experienced socialgame producer, Saurin Shah, to join Digital Chocolate in early 2009 as director of productmanagement to help teach the organization about developing compelling online social environments.Shah had been a product manager at Gaia Online, an online hangout that attracted millions of teens.Loia explained, "Saurin had extensive experience with developing online social games and heunderstood the principles of engagement, viral spread, and monetization. We were looking to bringsomeone on board with that background." Shah reported directly to Hawkins, which Paananendescribed as "a logical decision given the importance of social gaming right now, and they are both inSan Mateo." Hawkins wanted to see the organization moving "fast in the direction of social gaming," with thegoal of having 18new social games launched by the middle of 2010. Hawkins had high expectations,but he also expressed some concerns: . The problem is that we have many parts of the organization that are accustomed to doing what theyre already doing, and the games they come up with would not be suitable as a social game. I think the most challenging thing right now is to get everybody to understand that there are different genres of games that you would want to make if youre going to make proper use of virtual items, plus we have a patented concept for a more advanced platform for virtual items, and Im still struggling to explain that to people. I want to be involved in all games before they go into production, and .Im looking for games that can generate revenue from offer completion on a social network; perform well on the iPhone; and can be packaged in the old school carrier deck. For the first game using the DNA patent, NanoVerse Castles, Ill be the creative director and executive producer demonstrating how these games can be made with our new virtual goods platform. I want to do this so the team can actually see it, instead of trying to explain a concept and then having them build it. Although this level of CEO involvement was new to the organization, Paananen believed thatmembers of his team would appreciate the time Hawkins was spending with them. Paananenexplained, "Our game developers would find it motivating to work with Trip. He is known as agaming legend." Loia was also pleased that Hawkins was devoting so much time to social games.Loia explained, "Who better than the CEO to drive the most important initiative of the future?"Conclusion As Hawkins continued playing games on his iPhone during his flight home from Helsinki, hethought about all of the opportunities and challenges that lay ahead. Hawkins was prepared toproduce the first social game, but he was eager to talk with his executive team about the best way tostructure the organization going forward to be successful in this new area. The team had sharedseveral ideas through email, and they hoped to make an organizational decision within a few weeks.One option involved buying a start-up that already had several winning social gaming titles. Whilethis option seemed appealing as a quick way to enter the category, Hawkins found that the socialgaming start-ups were optimistic about their futures based on some early wins, so "they were not forsale, or they were out of our price range." If Digital Chocolate was to merge with one of these 13
  • 108. ·nO-049 Digital Chocolatecompanies, Digital Chocolate might find itself with less equity, even though its revenues were higher.In addition, Hawkins was also sensitive to doing an acquisition in which the cultures didnt blendwell. Nevertheless, Hawkins had been successful with acquisitions in the past, so it was worthconsidering this path. Another option was specifying one office location as the "social gaming" office to avoiddistracting the rest of the organization that was generating revenues and profits for the company. Forexample, San Mateo could play this role given its geographical proximity to the cutting edgedevelopers in this genre. Or perhaps Spain, where there was a young, energetic creative team thatcould focus on this type of game. Loia liked the idea of a self-contained, dedicated team, but he wasconcerned that certain functional areas such as the platform engineering might not get done correctlywithout the group in San Mateo getting involved. Paananen expressed concern about the developermorale among the core creative team in Finland if they were not selected to work on the "hottest"new projects. A third option involved designating a group of employees from each location to form tracks ofsocial gaming teams. These employees could volunteer themselves because of personal interest insocial games, or the lead developers and producers from the studios in Helsinki, Barcelona and SanMateo could hand-pick their own teams to focus on this genre. Paananen and Loia liked the idea ofincluding employees from multiple locations, but they were concerned about conducting manysimultaneous experiments around the world with developers who were just starting to learn aboutthe potential in this category. They were also concerned about decoupled knowledge transfer acrosslocations as each team came up to speed. This decision was further complicated by Hawkins desire to have a portfolio of new social gamesin just a couple of months. Loia explained, "When we met with the leading social game companies,we found there were four to five 20-year olds who were producing new games every four weeks. Thegames didnt have the same high-quality graphics that we produce during our six-monthdevelopment cycle, but they were attracting millions of users. It gives us confidence to speed up ourdevelopment process." The creative teams would need to adjust to the shorter development times,figuring out where they could cut out production steps. There was also work to do with theengineering teams in India and San Mateo to determine the operational backbone of the social games. Hawkins recognized that he was asking a lot of his team, yet he was optimistic about DigitalChocolates ability to leverage its strengths to help define the next big trend in mobile gaming. Heexplained, "We are involved in a dynamic industry, and we all need to be comfortable living withchange. We hire people that can adapt. Digital Chocolate has the creative magic, the engineering andthe business acumen to win. We are the Pixar of mobile."14
  • 109. Digital Chocolate 410-049Exhibit 1 Management Bios Trip Hawkins, founder and CEO. Early in his career, Hawkins played a key role in defining the personalcomputer at Apple. He went on to found Electronic Arts and built the company into the industry leader.Hawkins also founded 3DO, a pioneer in digital video, network gaming, and social communities. The author ofthree patents, Hawkins introduced the use of celebrities and athletes in video games, and his design creditsinclude award-winning best-sellers such as John Madden Football, Army Men, M.U.L.E.,Doctor J and Larry BirdGo One on One, and High Heat Baseball. Hawkins received an MBA from Stanford University and developedhis own major at Harvard University, where he graduated magna cum laude with a degree in Strategy andApplied Game Theory. He was the first business executive to be inducted into the Hall of Fame by the Academyof Interactive Arts and Sciences. Jason Loia, chief operating officer. Loia was responsible for successfully bringing Digital Chocolate softwareto life across multiple platforms, carriers, and handsets. Loia joined the company after serving as vice presidentof product development and executive producer at Lavastorm, a mobile game developer for Disney, Sega, andother media companies. Jason received a BSEEfrom the Ll.S.Coast Guard Academy, a MSEE from StanfordUniversity, and an MBA from Harvard Business School.. Ilkka Paananen, president, studios. Ilkka was responsible for the global publishing operations of DigitalChocolate. Paananen joined Sumea in 2000and served as the CEO as it grew into one of the top developers andpublishers of mobile games with a distribution network of over 100 channels that included every majorEuropean carrier. Paananen and the companys founders sold Sumea to Digital Chocolate in 2004, and Paananenbecame the managing director of the European operations for two years before being promoted to president ofstudios. Paananen graduated from the Department of Industrial Management at Helsinki University ofTechnology. Paul Abbassi, chief technology officer. Abbassi joined Digital Chocolate after serving as the chieftechnology officer at Limelife and the chief executive officer at Lavastorm Engineering. In his previous rolesAbbassi gained Significant experience in massively scaling server architecture. Abbassi holds a MS in electricalengineering from Stanford University and San Jose State University as well as a BS in mechanical engineeringfrom University of California, Berkeley. Mark Richman, chief financial officer. Richman previously served as CFO and Senior VP of Finance andAdministration at Terayon until the company was acquired by Motorola. Prior to Terayon, he served as CFO andSenior VP of Covad Communication Systems, Ine. Prior to Covad, Richman served as CFO of Main StreetNetworks and VP of Finance at Adecco. He holds a B.s. degree in Managerial Economics from the University ofCalifornia, Davis and an MBA from the University of California, Los Angeles. Marc Metis, vice president, marketing. Prior to joining Digital Chocolate, Metis was senior vice president,marketing at Atari. Before Atari, Metis was senior vice president, brand management at Acclaim Entertainmentwhere he restructured the companys brand portfolio and oversaw domestic marketing. Previously, Metis heldroles in Digital Market Strategy and Product Management at Cablevision. Earlier in his career, Metis was the vicepresident of global brand management at Activision. He began his career at McKinsey & Company in 1989,working with Fortune 500 media, telecommunications and consumer products companies. Metis received hisMBA from Harvard Business School in 1993 and graduated Phi Beta Kappa from Dartmouth College.Source: Casewriters research based on published bios. 15
  • 110. ,nO·049 -16-Exhibit 2a Digital Chocolate Executive Team ,.,," .•• ..,,,,-,,,~=,,,,~, ,~ ~-"~ ._.v,··_~ __ . .,~u_ .~·~,""" ~ .._:~:~u~~~ _ ~ , ....1.:. .•"-,."",-.."""",,, •• "",,"a~v._.¥,-» " _u"._M."~H~~~~" . I I! .• - •.•••• ·;~·s·o"n~""D~Lo·~ia~l " i Saurin M L ,Paul 8. Abbassi Marc Metis Dkka Paananen, Mark A Richman ~"f-jE~fnn~mcli1;omc~~r Shah L·~~t:hn(jhqOf(;-(1 ~,h;c·r CDPirH n~~ {Hh ", P!l~"idcl u.. ~~: C~lS U ", , VOiJffvLHkft~nQ - UiH:,.Jllr, Sv: . w StJ :f,r Et~~,JtrH~t!inq ~r, I ~~wY;; ;"!~1 , ," ~-d. r.~~,""k•. t..~:-.! : sr.! Pn::::h;::l :·;Jft.t ~ ~L G&fl . SH (:~~;P~flglL::!! ~;:1r~-,:~ ,(~~:n.
  • 111. 410-049 -17-Exhibit 2b Digital Chocolate Creative Organization Chart (Paananens Team) [ IIkka President, Paananen Helskinki Studios, I I I I I I T 1 I[ I[ Gerard Chief Financial [ I Ir I Principal Engineer [ Senior Product Creath .•e I Fernandez VP Studios Product Manager Officer + G&A + Server Manager + Director + VPStudio Product Mgmt. Team Engineering Team I + Barcelona Product ttgmt. Team Design Team Team r l Production Director I [ Technical Director I ( Art Director I I I I I I I Game Game Artist Senior Game [ [ Production Software [ Producer (4) Programmer Artist (3) (5) Manager Engineer (3) I I I I T I [ I[ I I I I I Tools Senior Game I Lead Audio Audio Junior Game Programmer Programmer 3D Artist (2) Designer Designor Artlst (3) (2) (2) . I I I I I ) I I JuniorGame External Lead Game Programmer Flesh Artist l.ead Artlst Programmer (3) I T I I { Technical tllanager I Technical Manager l r Lead Game Artist I. Lead Artist I ( Senior Tools Programmer Sell lor Game Programmer I I Game ( Lead Tools Programmer [ Programmer (3) I Lead Game Programmer r (2) JunlorGame [ Programmer (2) ISource: Digital Chocolate.
  • 112. 410-049 Digital Chocolate Exhibit 3 Digital Chocolate Games on Standard Cell Phone and iPhone •••.• • ww_.< ..... . ~ --- . . Multiplatform example: Tower Bloxx ,. ., .. ! ~..~ .... Mobile phone iPhone/iTouchSource: Digital Chocolate. Exhibit 4 Top Paid iPhone Applications App Store Top 100 Games - Price Points App Store Top 100 Games - Price by Rank Price No. of Games Position Ave Price 0.99 36 1 to 10 $1.89 1.99 10 11 to 20 $1.19 2.99 18 21 to 40 $4.34 3.99 3 41 to 60 $2.79 4.99 20 61 to 80 $3.24 5.99 5 81 to 100 $4.09 6.99 3 Source: Appie I PocKerGomer.bil 7.99 1 9.99 4 Source: Appie I iockerGamer.bil App Store Top 100 Games - Publishers Publisher No. of Games Avg Price Gameloft 12 $3.57 Electrcnic Arts 10 $5.49 Digital Chocolate 5 $2.99 ngmoco 3 $3.99 PopCap Games 3 $4.32 Source: Apple / PockerGomer.uizSource:, accessed September 14, 2009.18
  • 113. Digital Chocolate 410-049Exhibit 5 Digital Chocolate Games (January 2008-September 2009) Digital Chocolate Carrier Games Released January 2008 - September 2009 First Shipment First Shipment Month Game Titles Month Game Titles Jan-08 24: Special Ops Jan-09 Bubble Ducky 3 in 1 Cafe Hearts Bully Fight Cafe Spades Jungle Twister Mini Golf 99 Holes Pirate Ship Battles Feb-08 Cafe Crosswords Feb-09 Cleopatras Treasures Club K-OS Mar-09 Diamond Tumble Cafe Dominoes Mafia Wars New York My Pet Store Smash Kart Racing Tower Bloxx Deluxe Apr-09 Brain Tester 24-pack Vol. 2 Mar-08 Diamond Islands May-09 California Gold Rush 20Q: Mind Reader Crazy Monkey Spin Apr-08 Bikini Jump Jun-09 Beach Games 12-Pack Brain Tester 24-Pack Jul-09 Diamond Islands 2 Cafe Sea Battleship Night Club Fever Carnival Games 12-Pack Party Island Solitaire 16-Pack Chocolate Shop Frenzy Aug-09 Captain Galactic: Super Space Hero May-08 Bubble Popper Deluxe Jurassic 3D Rollercoaster Rush 20Q: Sports Quiz Sep-09 Snake Revolution Jun-08 20Q: Celebrity Quiz Halloween RolierCoaster Jul-08 Cafe Hangman 1001: Fashion Edition Shopping Madness Aug-08 FotoQuest Bikini Pictoplay Plus Bikini Paparazzi Parade Sep-08 Ghost Train Ride Pary Island: Pool 2-in-1 Oct-08 Hawaii Tiki 100 Quests High School Party Crashers Nov-08 Party Island: Bowling Santas Challenge Stuntcar Racing 99 Tracks Brick Breaker Revolution 3D Dec-08 Bull Ru n Fever Super Water Bomber Mini Golf 99 Holes: Theme Park Rollercoaster Revolution 99 Tracks Party Island TriviaSource: Digital Chocolate. / 19
  • 114. 410-049 Digital ChocolateExhibit 6 Sample Digital Chocolate Critic Game Review and Game Review ChartSample Game Critic Review from Touch Arcade: Mobile developer Digital Chocolate has brought an iPhone version of its mobile handset title BrickBreaker Revolution 3D to the App Store. Brick Breaker is an Arkanoid style game with a bit more depththan most. Its a 3D, touch-controlled affair that presents a colorful array of blocks set at an angle. In ClassicMode, the game plays pretty much .likethe typical Arkanoid clone-use the paddle destroy bricks witha ball, collecting power-ups along the way. In this mode you move through 99 levels and then face afinal boss. Its well done and fun, but its the Revolution Mode that sets this game apart. In Revolution Mode, each level contains one key brick. When that brick is destroyed the top andbottom walls vanish and a paddle appears at the top of the screen, mirroring the one on the bottom.You can continue destroying bricks by keeping the ball on the screen with the paddles, but letting theball pass out of the playfield slides the action upwards or downwards to the neighboring level. Youcan move freely up or down from any level once its key brick is destroyed, and at the top of eachseries of levels lies an animated brick boss that must be defeated. Theres also a Time Trail modewhere its a race against the clock to destroy the most bricks. Brick Breaker Revolution 3D is a clever twist on the formula thats actually a lot of fun. RevolutionMode is truly unique and the in-game power-ups are some of the most interesting Ive seen in a titleof this sort. The following gameplay video of the mobile version gives a feel for the action, but withless polish than the superior iPhone offering.Source: Adapted from reviewer posting at 3d/, accessed October 5, 2009.Pocket Gamer Quality Index based on reviews from users of Java mobile phone games (does notinclude games for the iPhone) Quality Index, Q22009 - Publishers Rank Publisher Reviews Avg. Score YoYChange 1 Digital Chocolate 24 8.00 0.45 2 t-plav 13 7.82 0.49 3 HeroCraft 13 7.54 G.44 4 Connect2Media 12 7.50 1.49 5 GlobalFun 14 7.46 - 6 HandyGames 12 7.43 0.00 7 RealArcade 8 7.38 -0.69 8 EA Mobile 29 7.32 -0.30 9 Glu Mobile 24 7.30 -0.38 10 Disney Mobile 10 7.26 -0.17 11 Gameloft 27 7.04 -0.95 Source: PociterGamer.OfzSource:, http://www.pocketgamer.bizlr/, accessed October 5,2009.20
  • 115. Digital Chocolate 410-049Exhibit 7 Social Gaming Company ProfilesCompany Name Company Location Top Titles Primary Platforms Playfish London, England; Restaurant City, Facebook,~ySpace San Francisco, CA Country Story Playdom Mountain View, CA Mobsters, Sorority Life MySpace Zynga San Francisco, CA Farmville, Mafia Wars, Pacebook, MySpace, Texas Hold Em BeboSource: Casewriter research. 21