benefits of innovation

Deep Change How Operational Innovation Can Transform Your Company Breakthrough innovations in operations--not just steady improvement--can destroy competitors and shake up industries. Such advances don't have to be as rare as they are. In 1991, Progressive Insurance, an automobile insurer based in Mayfield Village, Ohio, had approximately $1.3 billion in sales. By 2002, that figure had grown to $9.5 billion. What fashionable strategies did Progressive employ to achieve sevenfold growth in just over a decade? Was it positioned in a high-growth industry? Hardly. Auto insurance is a mature, l00-year-old industry that grows with GDP. Did it diversify into new businesses? No, Progressive's business was and is overwhelmingly concentrated in consumer auto insurance. Did it go global? Again, no. Progressive operates only in the United States. Neither did it grow through acquisitions or clever marketing schemes. For years, Progressive did little advertising, and some of its campaigns were notably unsuccessful. It didn't unveil a slew of new products. Nor did it grow at the expense of its margins, even when it set low prices. The proof is Progressive's combined ratio (expenses plus claims payouts, divided by premiums), the measure of financial performance in the insurance industry. Most auto insurers have combined ratios that fluctuate around 102%--that is, they run a 2% loss on their underwriting activities and recover the loss with investment income. By contrast, Progressive's combined ratio fluctuates around 96%. The company's growth has not only been dramatic-it is now the country's third largest auto insurer--it has also been profitable. The secret of Progressive's success is maddeningly simple: It out-operated its competitors. By offering lower prices and better service than its rivals, it simply took their customers away. And what enabled Progressive to have better prices and service was operational innovation, the invention and deployment of new ways of doing work. Operational innovation should not be confused with operational improvement or operational excellence. Those terms refer to achieving high performance via existing modes of operation: ensuring that work is done as it ought to be to reduce errors, costs, and delays but without fundamentally changing how that work gets accomplished. Operational innovation means coming up with entirely new ways of filling orders, developing products, providing customer service, or doing any other activity that an enterprise performs. Operational innovation has been central to some of the greatest success stories in recent business history, including Wal-Mart, Toyota, and Dell. Wal-Mart is now the largest organization in the world, and it owns one of the world's strongest brands. Between 1972 and 1992, Wal-Mart went from $44 million in sales to $44 billion, powering past Sears and Kmart with faster growth, higher profits, and lower prices. How did it score that hat trick? Wal-Mart pioneered a great many innovations in how it purchased and distributed goods. One of the best known of these is cross-docking, in which goods trucked to a distribution center from suppliers are immediately transferred to trucks bound for stores--without ever being placed into storage. Cross-docking and companion innovations led to lower inventory levels and lower operating costs, which Wal-Mart translated into lower prices. The rest is history. Although operational innovation wasn't the sole ingredient in Wal-Mart's success--its culture, strategy, human resource policies, and a host of other elements (including operational excellence) were also critical--it was the foundation on which the company was built. Similar observations can be made about Dell and Toyota, organizations whose operational innovations have become proper nouns: the Dell Business Model and the Toyota Production System. Each of these three companies fundamentally rethought how to do work in its industry. Their operational innovations dislodged some of the mightiest corporations in the history of capitalism, including Sears, General Motors, and IBM. These stories are well known for two reasons. First, the stories are worth telling: Operational innovations fuel extraordinary results. But the stories are also repeated because there are, frankly, not many of them. Operational innovation is rare. By my estimate, no more than 10% of large enterprises have made a serious and successful effort at it. And that shouldn't be. Executives who understand how operational innovation happens--and who also understand the cultural and organizational barriers that prevent it from happening more often--can add to their strategic arsenal one of the most powerful competitive weapons in existence. The Payoffs For most of its history, Progressive focused on high-risk drivers, a market that it served profitably through extremely precise pricing. But in the early 1990s, the insurer believed that much larger companies were about to enter this niche and emulate its approach to pricing; the company's managers realized it couldn't compete against larger players on a level playing field. So Progressive decided to win the game by changing the rules. It reinvented claims processing to lower its costs and boost customer satisfaction and retention. The company introduced what it calls Immediate Response claims handling: A claimant can reach a Progressive representative by phone 24 hours a day, and the representative then schedules a time when an adjuster will inspect the vehicle. Adjusters no longer work out of offices from nine to five but out of mobile claims vans. Instead of taking between seven and ten days for an adjuster to see the vehicle, Progressive's target is now just nine hours. The adjuster not only examines the vehicle but also prepares an on-site estimate of the damage and, if possible, writes a check on the spot. This approach has many benefits. Claimants get faster service with less hassle, which means they're less likely to abandon Progressive because of an unsatisfactory claims experience. And the shortened cycle time reduced Progressive's costs dramatically. The cost of storing a damaged vehicle or renting a replacement car for one day-around $28--is roughly equal to the expected underwriting profit on a six-month policy. It's not hard to calculate the savings this translates into for a company that handles more than 10,000 claims each day. Other benefits for Progressive are an improved ability to detect fraud (because it is easier to conduct an accident investigation before skid marks wash away and witnesses leave the scene), lower operating costs (because fewer people are involved in handling the claim), and a reduction in claim payouts (because claimants often accept less money if it's given sooner and with less travail). No single innovation conveys a lasting advantage, however. In addition to Immediate Response, Progressive has also introduced a system that allows customers to call an 800 number or visit its Web site and, by providing a small amount of information, compare Progressive's rates with those of three competitors. (Because insurance is a regulated industry, rates are on file with state insurance commissioners.) This offer has attracted customers in droves. The company has also devised even better ways of assessing an applicant's risk profile to calculate the right rate to quote. When Progressive realized that an applicant's credit rating was a good proxy for responsible driving behavior, it changed its application process. Now its computer systems automatically contact those of a credit agency, and the applicant's credit score is factored into its pricing calculation. More accurate pricing translates into increased underwriting profit. Put these all together, and Progressive's remarkable growth becomes comprehensible. Other companies have made similar performance gains through operational innovations. Beginning in 1994, Eastern Electric, a UK power utility, created a process that reduced the time needed to initiate electrical service by 90% and its cost by 66%. In the late 1990s, IBM invented a new product-development process that caused a 75% reduction in the time to develop new products, a 45% reduction in development expenses, and a 26% increase in customer satisfaction with these new products. In 2002, Shell Lubricants reinvented its order fulfillment process by replacing a group of people who handled different parts of an order with one individual who does it all. As a result, Shell has cut the cycle time of turning an order into cash by 75%, reduced operating expenses by 45%, and boosted customer satisfaction l05%--all by introducing a new way of handling orders. Time, cost, and customer satisfaction--the dimensions of performance shaped by operations--get major boosts from operational innovation. Organizational Barriers Compared with most of the other ways that managers try to stimulate growth--technology investments, acquisitions, major marketing campaigns, and the like--operational innovation is relatively reliable and low cost. So why don't more companies embrace it? The question is particularly significant because operational innovation is needed now more than ever. Most industries today are struggling with low-growth, even stagnant, markets. Overcapacity is rampant, and competition--particularly global competition--is fierce. Virtually all product and service offerings have become commodities, almost no one has any pricing power, and none of this is likely to change in the near future. In this environment, the only way to grow is to take market share from competitors by running rings around them: by operating at lower costs that can be turned into lower prices and by providing extraordinary levels of quality and service. In other words, the game must now be played on the field of operations. Mere operational improvement is not enough to win the game. Excellence in execution can win a close game, but it can't break a game wide open and turn it into a rout. The only way to get and stay ahead of competitors is by executing in a totally different way--that is, through operational innovation. But operational innovation entails a departure from familiar norms and requires major changes in how departments conduct their work and relate to one another. It is truly deep change, affecting the very essence of a company: how its work is done. The effects of operational innovation ripple outward to all aspects of the enterprise, from measurement and reward systems and job designs to organizational structure and managerial roles. Thus, it will never get off the ground without executive leadership. Yet senior managers rarely perceive operational innovation as an important endeavor, nor do they enthusiastically embrace it when others present it to them. Why not? The answers hinge on some unpleasant characteristics of contemporary corporate leadership. Business culture undervalues operations. I have spoken with thousands of managers from hundreds of companies about operational innovation. Overwhelmingly, they've told me that their senior executives did not understand, support, or encourage it. As one manager said, "In our company, operations is not glamorous. Deals are." Making acquisitions, planning mergers, and buying and selling divisions will get the company's name and the CEO's picture in business magazines. Redesigning procurement or transforming product development will not, even though it might be much more important to the company's performance. Deals are easily explained to and understood by boards, shareholders, and the media. They offer the prospect of nearly immediate gratification, and the bold stroke of a deal is consistent with the modern image of the executive as someone who focuses on grand strategy and leaves operational details to others. The fact that the great majority of deals are unsuccessful does not deter executives from pursuing them. Operations simply aren't sexy. One business school student recently observed to me, "There seems to be a hierarchy in the business world. Finance and strategy are at the top, marketing and sales occupy the middle tier, and operations is at the bottom." An insurance CEO once quipped that managers work hard at operations so they can be promoted to the executive level, where they can stop worrying about operations. A journalist at a prominent business magazine, assigned to do a story on operations, confessed that he thought it boring. This is the state of our business culture. The core, value-creating work of enterprises has become low status. Operations are out of sight (and out of mind-set). At its heart, operations is a branch of engineering. It requires a skill set and a mind-set different from those needed in most other executive activities. Most senior managers focus on strategic planning, budgeting, capital allocation, financial management, mergers and acquisitions, personnel issues, regulatory concerns, and other macro issues, very different from the design work at the heart of operational innovation. Many top managers are ignorant about operations and uninterested in learning more. They've ascended to the highest levels of the enterprise without ever getting their hands dirty. They enter the organization through finance, strategy, or marketing and build their reputations on work in these domains. When they move into their first general management role, they rely on others--plant managers, engineers, customer service leaders--to mind the details of the actual work. Their role is one of supervision, resource allocation, and direction--all vital, but all perched precariously on a foundation not grounded in the bedrock of the organization's real work. At a major semiconductor maker, for instance, a group of middle managers who were frustrated with the complexity and poor performance of their order fulfillment process decided to make a case for change to executive management. They created a two-page diagram illustrating the endless series of steps every order went through, the redundant moves of the product between factories and depots, the accumulations of inventory, and the enormous delays. When members of the company's executive committee saw it, they were incredulous: "We do this?" It should not be surprising that executives without experience in operations do not look there for competitive advantage. The information they usually get does little to focus their attention on the mechanics of operations. How many executives receive data about order fulfillment cycle time, or the accuracy of customer service responses, or the cost of each procurement transaction, or the percentage of parts that are reused in new products? Indeed, in how many organizations is such information available at all? Financial data dominate the discourse in the modern organization, although operational performance is the driver of financial results. Nobody owns it. No one holds the title Vice President of Operational Innovation; it is organizationally homeless. It doesn't fit into R&D, where product innovation is based. Functional line managers are too focused on meeting deadlines to have time for or interest in inventing new ways of doing things. What's more, important innovations are not limited to individual departments but involve end-to-end processes that cross departmental boundaries. Normal planning and budgeting focus on investments in new equipment, products, and services and take account of process improvement. It's a rare company whose budget or planning process explicitly looks for process breakthroughs. No wonder operational innovation has a hard time gaining traction in an organization. This is particularly problematic because operational innovation can easily founder in a sea of competing but smaller change initiatives. It is all too common for enterprises today to have dozens -- even hundreds -- of operational improvement programs under way at any point in time. Some are technologically based, such as the implementation of enterprise resource planning (ERP), customer relationship management (CRM), or supply chain management (SCM) software systems. Others are centered on specific bodies of improvement techniques, such as Six Sigma quality or lean enterprise programs. Still others are defined in terms of outcomes, such as accelerating time to market or presenting a single face to customers, or focused on improving a particular aspect of the enterprise (procurement or customer service, for example). Each project typically has a narrow scope, a group of experts dedicated to it, and a sponsor whose enthusiasm is tolerated by his or her peers only as long as it is kept within bounds. This kind of situation can cripple operational innovation because an organization has only so much capacity for change. If people are already juggling a great many improvement projects, they may conclude that they can't handle an innovation effort as well. Indeed, in a company consumed with improvement projects, the distinction between improvement and innovation may be lost. Improvement projects can also get in the way of innovation efforts by appearing to address similar issues. For instance, many companies implementing ERP or SCM systems merely use them to enhance existing processes. Real innovations in order fulfillment or supply chain management are also likely to involve these technologies, but they may be dismissed because, people think, "we're already doing ERP." Making It Work How do operational innovation efforts begin if no one is responsible for them and no formal channels for creating programs exist? Most often they start as grassroots movements, fostered by people sprinkled throughout organizations who are passionately committed to finding and exploiting opportunities for operational innovation. These catalysts take it upon themselves to find a leader who can grasp what they have in mind and then spearhead the innovation effort. The executive must have both the imagination and the charisma needed to drive major operational change. Then the catalysts relentlessly campaign for the cause-confronting the executive with the inadequacies of existing operations and arranging for meetings with peers from other companies that have successfully implemented operational innovations. The campaign will be helped immensely if catalysts can tout existing pockets of operational innovation within their own organization. Maybe one plant implemented a new way of scheduling production, or a customer service center used a CRM system in a new way, or a sales team created a new way to support customers. Examples like these will help convince a leader that operational innovation can work. Once the top executive is convinced that operational innovation is worth pursuing, the organization needs to focus its efforts. Because operational innovation is by nature disruptive, it should be concentrated in those activities with the greatest impact on an enterprise's strategic goals. Progressive, for instance, realized that the key to its profitable growth is customer retention because acquiring new customers through commission-based agents is very expensive. And the key to customer retention is making sure customers have rewarding interactions with the company. That's why Progressive concentrated on streamlining claims; making it a more pleasant experience for customers would directly affect overall performance. Many auto insurers, by contrast, view claims as a nuisance at best because it entails paying claimants. They consider it to be a low-priority activity that doesn't deserve attention. Or consider how American Standard, the diversified manufacturer, decided where to focus its innovation efforts in the early 1990s. It had just survived a hostile takeover bid by going through a leveraged buyout, and leaders realized that servicing the debt would consume virtually all the company's available cash and starve product development efforts. Because a large amount of cash was tied up in inventories, the CEO mandated that the company would have to drive down its working capital and dramatically increase inventory turns. A program was instituted to transform manufacturing from a conventional push-based system to one pulled by actual demand using a system known as Demand Flow Manufacturing. The innovation paid off and led to a successful IPO a few years later. Using similar analyses, other companies have pinpointed procurement, order fulfillment, new product development, post-sales customer support, and even budgeting as the place where innovation would have the greatest effect on achieving key strategic goals. While operational innovation need not be confined to just one area, most companies find it prudent to limit their innovation programs to no more than two or three major efforts at a time. To undertake more would probably consume too many resources and create too much organizational disruption. After selecting the area for innovation, the company must set stretch performance goals. At American Standard, the goal was to triple its inventory turns; at Progressive, to initiate claims within nine hours. Absent such specific targets, innovation efforts are likely to drift or degenerate into incremental improvement projects. Only a daunting target--clearly unattainable through existing modes of operation--will stimulate radical thinking and willingness to overturn tradition. Inventing a new way of operating that achieves the target need not be simply a matter of crossing your fingers and hoping for inspiration. Following these suggestions should accelerate your efforts. Look for role models outside your industry. Benchmarking within your own industry is unlikely to uncover breakthrough concepts. But techniques used in other industries with seemingly very different characteristics may turn out to be unexpectedly applicable. For instance, in the 1980s, Taco Bell transformed its restaurant operations by thinking about them in manufacturing rather than in fast-food terms. The restaurant chain reduced the amount of on-site food preparation by outsourcing to its suppliers, centralizing the production of key components, and concentrating on assembly rather than fabrication in the restaurants. The new approach lowered Taco Bell's costs and increased customer satisfaction by ensuring consistency and by allowing restaurant personnel to focus on customers rather than production. Harvard Pilgrim Health Care has applied techniques of market segmentation, common in consumer goods but not in health insurance, to identify patients most likely to have a medical crisis and to intervene before the crisis occurs. Identify and defy a constraining assumption. At its heart, every operational innovation defies an assumption about how work should be done. Cross-docking negates the assumption that goods need to be stored in a warehouse, build-to-order that goods should be produced based on forecasts and destined for inventory. Zero in on the assumption that interferes with achieving a strategic goal, and then figure out how to get rid of it. A major hospital, for instance, recognized that to increase the number of patients admitted for (well-reimbursed) cardiac bypass graft operations, it needed to respond more quickly to physicians who wanted to refer a patient. The reason for the delay in response was the assumption that the hospital first had to assign a prospective patient a bed, a supposition that generated hours of delay and often led physicians to send their patients somewhere else. The solution? Send the patient to the hospital immediately, and assign the bed while the patient is in transit. Make the special case into the norm. Companies often achieve extraordinary levels of performance under extraordinary conditions; their problem is performing extraordinarily in normal situations. One way to accomplish this is to turn the special-case process into the norm. A consumer packaged-goods maker, for instance, based its production scheduling on sales forecasts rather than on actual customer demand. When demand for a new product wildly exceeded forecasts, an ad hoc process was created that gave the manufacturing division real-time information about customer demand, which in turn allowed them to do production planning and product distribution much more efficiently. After the crisis had passed, the company decided to adopt this emergency mode of operation as its standard one. The results included a dramatic drop in inventory, an improvement in customer service, and a major reduction in the total cost of product deployment. Rethink critical dimensions of work. Designing operations entails making choices in seven areas. It requires specifying what results are to be produced and deciding who should perform the necessary activities, where they should be performed, and when. It also involves determining under which circumstances (whether) each of the activities should or should not be performed, what information should be available to the performers, and how thoroughly or intensively each activity needs to be performed. Managers looking to innovate should consider changing one or more of these dimensions to create a new operational design that delivers better performance. (The exhibit "Reimagining Processes" shows examples of companies that have rethought these various dimensions of work.) Getting Implementation Right In The Innovator's Dilemma, Clayton Christensen observed that conventional market-analysis tools lead organizations astray when applied to disruptive technologies. In a similar way, conventional implementation methodologies often lead to failure when applied to disruptive modes of operation. Companies that follow traditional implementation methodologies inevitably take too long. There is so much to be done, and so much that must be integrated with everything else, that years can pass before the innovation is implemented and its benefits start to flow. Furthermore, because every proposed major change in operating procedures is invariably greeted with a chorus of "it will never work," a lengthy implementation period gives opponents an extended opportunity to campaign against it. In fact, even those who aren't aggressively opposed to the innovation will find a protracted transition unsettling and disquieting. As more time passes and more money is spent without the innovation or its payoffs seeing the light of day, organizational support leaks away. Executive leadership then loses heart, and the denouement is inevitable. Another problem with conventional implementation is that it assumes that the initial specifications for an operational innovation will be accurate and complete. In reality, they will be neither. When envisioning new ways of working, it is impossible to get everything right from the outset. Ideas that look good on paper don't always work as well in practice; only when a concept is actually tried does one learn what it should really have been in the first place. Companies must be prepared to roll with the punches and learn as they go. An apparel manufacturer had to regroup when the technology underlying its plans for a new approach to production scheduling did not live up to expectations; a consumer goods maker had to scale back an innovation in logistics when its implementation became more difficult than expected. Companies need to adopt a new approach to implementing operational innovations. This alternative method builds on an idea that is popular in software product development, an idea variously known as iterative, evolutionary, or spiral development. One begins with one's best estimate of the innovation, builds a first version of it, and then tries it out with customers or users. Knowledge gained from these tests is then fed back into a fast-cycle iteration of the next version.[1] Companies would also be wise not to try to implement an innovation all at once. Breaking a large-scale implementation into a series of limited releases creates momentum, dispels skepticism and anxiety, and delivers a powerful rejoinder to carping critics. When MetLife, for instance, was implementing a new process for installing coverage of a new customer, it did so in two releases. The first involved the creation of a new role--a case-implementation leader, who was responsible for collecting all the information to establish coverage. In that release, a new project-management tool was also introduced to control the process. That took only a few months and delivered substantial reductions in cycle time, as well as a 15% productivity gain. But it continued to rely on old information systems to support the process. In the second release, a new information system was installed that facilitated data collection and the production of documentation and also offered enhanced reporting capabilities. This second release delivered another 20% productivity improvement, as well as a 20-point increase in customer satisfaction. Shell Lubricants followed a similar strategy when it transformed its order fulfillment process. The first release brought all the departments involved in the process under a single manager. This easy-to-implement change quickly delivered a degree of performance improvement. The improvements continued when the next release brought people from the various departments together into cross-functional teams. In the final release, each team member was trained to handle an entire order. This was the goal from the outset; Shell simply reached it in manageable steps. Is It Sustainable? Even with all the benefits operational innovation can deliver, some executives may wonder if it is truly worth the effort. Why bother to be the first on the block to develop and deploy a new way of working? Why not let a competitor break that ground and then capitalize on its experiences, doing an even better job? Indeed, where is the real strategic advantage in operational innovation at all? Once one company introduces a new way of doing things, all competitors can follow, and before long all are back on the same level playing field. In theory, that is a powerful argument, but in the real world, operational innovations have legs. Even today, not all auto insurers offer immediate claims response. And despite Dell's success, build-to-order has not swept the PC industry. At one major PC maker, an effort to do so was suppressed by both the head of manufacturing (who was concerned that it would lead to outsourcing) and the head of marketing (who was afraid of alienating the retail channel), and top leadership was too preoccupied with other matters to intervene. Toyota has confidently opened its factories to visitors from other automakers and yet continues to expand its productivity lead. There are many reasons why theoretically imitable operational innovations have staying power. Some companies, even when confronted by a competitor's innovations, will not rush to emulate them. Denial of competitor superiority and a disinclination to truck with operations are powerful forces of nature, and so is organizational inertia. Some competitors who attempt to imitate the innovation won't under- stand it, and others won't be able to implement it. Even those who do follow will be at a disadvantage until they catch up. Operational innovation is a step change: It moves a company to an entirely new level. Once there, the organization can focus its efforts on a generation of additional changes--refinements of the innovation--that will keep it ahead of the pack until the inevitable time comes for a new wave of innovation. That's why companies should strive to make operational innovation not an extraordinary project but a way of life. Even areas of the business that have already been rethought can benefit from subsequent rethinking as new technologies and new customer needs make the old innovations passé. Companies that bake operational innovation into their culture make competitors continually scramble to catch up with the changing rules. What's more, they can even develop a reputation with customers for relentlessly improving performance, a brand promise of extraordinary value. Progressive has created such a culture; leaving well enough alone is a principle with which the company is systemically uncomfortable. It recently revised its very successful Immediate Response claims process so that the representative no longer attempts to assign an adjuster as soon as the claimant calls. Rather, the representative guarantees to call the claimant back within two hours with specifics about when an adjuster will see the vehicle. This two-hour window gives the company the opportunity to assign the right kind of adjuster given the specifics of the case, so that a junior adjuster is not confronted with a complex accident beyond his level of expertise. Progressive is also deploying in select markets what it calls a concierge approach to claims handling. Here, a claimant simply brings the car to a Progressive claims facility at a convenient time and leaves it there, picking up a loaner at the same time. Progressive then takes responsibility for getting the car fixed. Under this system, the claimant is spared the hassle of dealing with body shops, the Progressive adjuster works in a climate-controlled environment that allows more careful inspection, and the body shop doesn't have to get between Progressive and its customers. By the time its competitors imitate this latest innovation, Progressive will no doubt have moved onto something else. Operational innovation may appear unglamorous or unfamiliar to many executives, but it is the only lasting basis for superior performance. In an economy that has overdosed on hype and in which customers rule as they never have before, operational innovation offers a meaningful and sustainable way to get ahead -- and stay ahead--of the pack. A Powerful Weapon Innovative operations can result in direct performance improvements (faster cycle time and lower costs), which lead to superior market performance (greater customer satisfaction and more highly differentiated products). And improved market performance yields a host of strategic payoffs, from higher customer retention to the ability to penetrate new markets. Strategic benefits higher customer retention greater market share ability to execute strategies ability to enter new markets Marketplace benefits lower prices greater customer satisfaction differential offerings stronger customer relationships greater agility Operational benefits lower direct costs better use of assets faster cycle time increased accuracy greater customization or precision more added value simplified processes Reimagining Processes A: Dimension of work B: Example A: What results the work delivers B: Progressive insurance increased market share by informing customers of its competitors' rates as well as its own. A: Who performs the work B: Shell Lubricant improved cycle time by changing its order fulfillment process so that one person handles al aspects of an order instead of seven people each working on one aspect). A: Where the work is performed B: Taco Bell cut cost by preparing ingredients in commissaries rather than n individual restaurants. A: When the work is performed B: A major hospital responded to physician referrals more quickly by assigning a bed after, rather than before, agreeing to accept a patient. A: Whether the work is performed B: Wal-Marl cut costs by cross-docking from truck to truck instead of storing goods in warehouses. A: What information the work employs B: A consumer packaged-goods manufacturer reduced inventory by basing its production scheduling on actual orders rather than on forecasts. A: How thoroughly the work is performed B: Harvard Pilgrim Health Care cut costs by carefully analyzing patients to identify those who need intervention before a crisis strikes. By Michael Hammer Michael Hammer is the founder of Hammer and Company, a management education firm based in Cambridge, Massachusetts. He can be reached at michael_hammer@hammerandco.com. Hammer responds: Saul Kaplan's prescription for operational innovation--"think big, start small, and scale fast"--is precisely correct and is in fact the way to undertake any kind of innovation: operational, technological, or product related. It is therefore striking to note that even firms that succeed with technological or product innovation have a bad track record in applying their experiences and techniques to the operational sphere. To be sure, operational innovation is difficult. I have heard the same litany of excuses from executives that Kaplan has, but excuses is all they are. Engaged senior managers who are determined to succeed with operational innovation can make it happen. To do so, they must show personal commitment and invest their own time; they need to stick with it through the inevitable bumps in the road; they have to make the required organizational changes rather than shy away from them; and they must communicate endlessly and deal forcefully with those who try to impede operational innovation. As one manager put it to me, "This stuff is not mysterious--it's just hard." Actually, we should be grateful that operational innovation is not easy to do. If it were, it would scarcely be worth the effort, since everyone would be succeeding with it. Because of its difficulty, leaders and organizations that do overcome the hurdles have a lot to show for their efforts.

manage your self

adapted from By: Hurley, Robert F., Harvard Business Review, 00178012, Sep2006, Vol. Section: MANAGING YOURSELF A new model explains the mental calculations people make before choosing to trust someone Roughly half of all managers don't trust their leaders. That's what I found when I recently surveyed 450 executives of 30 companies from around the world. Results from a Golin-Harris survey of Americans back in 2002 were similarly bleak: 69% of respondents agreed with the statement "I just don't know who to trust anymore." In that same year the University of Chicago surveyed 800 Americans and discovered that more than four out of five had "only some" or "hardly any" confidence in the people running major corporations. Granted, trusting corporate leaders in the abstract is different from trusting your own CEO, and some companies and executives are almost universally considered trustworthy; but the general trend is troubling.

It's troubling because a distrustful environment leads to expensive and sometimes terminal problems. We hardly need reminding of the recent wave of scandals that shattered the public's faith in corporate leaders. And although you'll never see a financial statement with a line item labeled "distrust," the WorldCom fiasco underscores just how expensive broken trust can be. When I teach executive seminars on trust, I ask participants to describe how a working environment feels when it is characterized by low levels of trust. The most frequent responses include "stressful," "threatening," "divisive," "unproductive," and "tense." When asked how a high-trust work environment feels, the participants most frequently say "fun," "supportive," "motivating," "productive," and "comfortable." Clearly, companies that foster a trusting culture will have a competitive advantage in the war for talent: Who would choose to stay in a stressful, divisive atmosphere if offered a productive, supportive one? It is crucial, then, for managers to develop a better understanding of trust and of how to manage it. I define trust as confident reliance on someone when you are in a position of vulnerability. Given the pace of change in organizations today - mergers, downsizing, new business models, globalization - it is not surprising that trust is an issue. Fortunately, 50 years of research in social psychology has shown that trust isn't magically created. In fact, it's not even that mysterious. When people choose to trust, they have gone through a decision-making process - one involving factors that can be identified, analyzed, and influenced. This article presents a model that sheds light on how the decision to trust is made.(We will ignore the extremes of complete trust based on blind faith and total distrust based on paranoia, and focus instead on the familiar situation in which uncertainty, possible damage, and multiple other reasons to trust or distrust are combined.) By understanding the mental calculations behind the decision whether or not to trust, managers can create an environment in which trust flourishes. A Model for Trust Building on the social psychologist Morton Deutsch's research on trust, suspicion, and the resolution of conflict, and on my own experience over the past 15 years consulting with organizations and executives on trust, I developed a model that can be used to predict whether an individual will choose to trust or distrust another in a given situation. (See the exhibit "To Trust or Not to Trust?") I have tested this model, which identifies ten factors at play in the decision-making process, with hundreds of top executives. Using it, they were able to identify relationships that would benefit from greater trust and to diagnose the root causes of distrust. Armed with that knowledge, they took concrete steps that made it easier for others to place confidence in them. Decision-maker factors. The first three factors concern the decision maker himself: the "truster." These factors often have little to do with the person asking for trust: the "trustee." They are the result of a complex mix of personality, culture, and experience. Risk tolerance. Some people are natural risk takers; others are innately cautious. How tolerant people are of risk has a big impact on their willingness to trust - regardless of who the trustee is. Risk seekers don't spend much time calculating what might go wrong in a given situation; in the absence of any glaring problems, they tend to have faith that things will work out. Risk avoiders, however, often need to feel in control before they place their trust in someone, and are reluctant to act without approval. Not only do they not trust others, they don't even trust themselves. Research by the organizational anthropologist Geert Hofstede suggests that at some level, culture influences risk tolerance. The Japanese, for instance, tend to have a lower tolerance for risk than Americans. Level of adjustment. Psychologists have shown that individuals vary widely in how well adjusted they are. Like risk tolerance, this aspect of personality affects the amount of time people need to build trust. Well-adjusted people are comfortable with themselves and see the world as a generally benign place. Their high levels of confidence often make them quick to trust, because they believe that nothing bad will happen to them. People who are poorly adjusted, by contrast, tend to see many threats in the world, and so they carry more anxiety into every situation. These people take longer to get to a position of comfort and trust, regardless of the trustee. For example, Bill, a senior vice president at a major financial services firm, was a poorly adjusted person who always operated in "high alert" mode. He micromanaged his direct reports, even his most talented ones, because he couldn't feel secure unless he was personally involved in the details. His inability to delegate had little to do with the trustees and everything to do with his own nature; he regularly chose suspicion over trust because he saw even the slightest mistake as a potential threat to his reputation. Relative power. Relative power is another important factor in the decision to trust. If the truster is in a position of authority, he is more likely to trust, because he can sanction a person who violates his trust. But if the truster has little authority, and thus no recourse, he is more vulnerable and so will be less comfortable trusting. For instance, a CEO who delegates a task to one of her vice presidents is primarily concerned with that person's competence. She can be reasonably confident that the VP will try to serve her interests, because if he doesn't, he may face unpleasant repercussions. The vice president, however, has little power to reward or sanction the CEO. Therefore, his choice to trust the CEO is less automatic; he must consider such things as her intentions and her integrity. Situational factors. The remaining seven factors concern aspects of a particular situation and of the relationship between the parties. These are the factors that a trustee can most effectively address in order to gain the confidence of trusters. Security. Earlier we dealt with risk tolerance as a personality factor in the truster. Here we look at the opposite of risk - security - as it relates to a given situation. Clearly, not all risks are equal. An employee who in good times trusts that his supervisor will approve the funding for his attendance at an expensive training program might be very suspicious of that same supervisor when the company is making layoffs. A general rule to remember: The higher the stakes, the less likely people are to trust. If the answer to the question "What's the worst that could happen?" isn't that scary, it's easier to be trustful. We have a crisis of trust today in part because virtually nobody's job is truly secure, whereas just a generation ago, most people could count on staying with one company throughout their careers. Number of similarities. At heart we are still quite tribal, which is why people tend to more easily trust those who appear similar to themselves. Similarities may include common values (such as a strong work ethic), membership in a defined group (such as the manufacturing department, or a local church, or even a gender), and shared personality traits (extroversion, for instance, or ambition). In deciding how much to trust someone, people often begin by tallying up their similarities and differences. Imagine that you are looking to hire a consultant for a strategy assignment. The first candidate walks into your office wearing a robe; he speaks with an accent and has a degree from a university you've never heard of. When you meet the second candidate, she is dressed very much like you and speaks as you do. You learn that she also attended your alma mater. Most people would feel more comfortable hiring the second candidate, rationalizing that she could be counted on to act as they would in a given situation. That's partly why companies with a strong unifying culture enjoy higher levels of trust - particularly if their cultural values include candor, integrity, and fair process - than companies without one. A good example of this is QuikTrip, a convenience store chain with more than 7,000 employees, which has been named to Fortune's 100 Best Companies to Work For in each of the past four years. One of the company's bedrock values is do the right thing - for the employee and for the customer. This meaningful and relevant shared value serves as a foundation for an exceptionally strong culture of trust. On the flip side, a lack of similarities and shared values explains why, in many organizations, the workaholic manager is suspicious of his family-oriented employee, or the entrepreneurial field sales group and the control-oriented headquarters never get along: It's more difficult to trust people who seem different. Alignment of interests. Before a person places her trust in someone else, she carefully weighs the question "How likely is this person to serve my interests?" When people's interests are completely aligned, trust is a reasonable response.(Because both the patient and the surgeon, for instance, benefit from a successful operation, the patient doesn't need to question the surgeon's motives.) A fairly unsophisticated leader will assume that everyone in the organization has the same interests. But in reality people have both common and unique interests. A good leader will turn critical success factors for the company into common interests that are clear and superordinate. Consider compensation policies. We've all heard of companies that have massive layoffs, drive their stock prices up, and reward their CEOs with handsome bonuses - in the same year. It's no wonder that so many employees distrust management. Whole Foods Market, by contrast, has a policy stating that the CEO cannot make more than 14 times the average employee's salary; in 2005 CEO John Mackey forfeited a bonus of $46,000. That policy helps demonstrate to workers that the CEO is serving the best interests of the company, not only his own. Aligned interests lead to trust; misaligned interests lead to suspicion. This factor also operates on a more macro-organizational level. In "Fair Process: Managing in the Knowledge Economy" (HBR July-August 1997), W. Chan Kim and Renée Mauborgne described how a transparent, rigorous process for decision making leads to higher levels of organizational trust. Opaque decision-making processes, which may appear to serve special interests whether they do or not, breed distrust. Benevolent concern. Trust is an issue not because people are evil but because they are often self-centered. We've all known a manager whom employees don't trust because they don't believe he will fight for them. In other words, he has never demonstrated a greater concern for others' interests than for his own. The manager who demonstrates benevolent concern - who shows his employees that he will put himself at risk for them - engenders not only trust but also loyalty and commitment. Aaron Feuerstein, the former CEO of Malden Mills, represents an extreme example of benevolent concern. In 1995 a fire destroyed his textile mill in Lawrence, Massachusetts, which had employed some 3, 200 people. He could have taken the insurance money and moved his manufacturing overseas. Then 70, he could have retired. Instead Feuerstein promised his workers that he would rebuild the mill and save their jobs, and he kept them on the payroll. Feuerstein's benevolent concern for his employees, despite the cost to himself, gained their trust. Unfortunately, it lost the trust of his banks, which probably would have preferred that more benevolent concern be directed toward them. The resulting debt eventually forced the company to file for bankruptcy protection. This points to a real challenge in managing trust: how to balance multiple and sometimes competing interests. Capability. Similarities, aligned interests, and benevolent concern have little meaning if the trustee is incompetent. (If you're going to have surgery, you're probably more concerned about your surgeon's technical skills than about how much the two of you have in common.) Managers routinely assess capability when deciding to trust or delegate authority to those who work for them. Capability is also relevant at the group and organizational levels. Shareholders will be suspicious of a board of directors that can't establish reliable processes for compensating CEOs fairly and uncovering unethical behavior. A customer will not trust a firm that has not demonstrated a consistent ability to meet his or her needs. Predictability and integrity. At some point in the trust decision the truster asks, "How certain am I of how the trustee will act?" A trustee whose behavior can be reliably predicted will be seen as more trustworthy. One whose behavior is erratic will be met with suspicion. Here the issue of integrity comes into play - that is, doing what you say you will do. Trustees who say one thing but do another lack integrity. The audio does not match the video, and we are confused as to which message to believe. The result is distrust. In my executive-coaching work, I have seen some managers consistently overpromise but underdeliver. These people are well-intentioned, and they care passionately about their work, but their enthusiasm leads them to promise things they simply cannot produce. Despite their hard work and good intentions, colleagues don't trust them because of their poor track records. Take the case of Bob, the managing partner of a global consulting firm. Bob was a creative and strategic thinker who was well liked by everyone. He had good intentions and had demonstrated benevolent concern for employees. But the other partners in the firm did not trust Bob, because he often failed to deliver what he had promised when he had promised it. Despite his good intentions, people in the firm said that any project that relied on Bob was in a "danger zone." With time and coaching, Bob learned to delegate more and to live up to his commitments. But the point here is that when a person fails to deliver, he's not just missing a deadline; he's undermining his own trustworthiness. Level of communication. Because trust is a relational concept, good communication is critical. Not surprisingly, open and honest communication tends to support the decision to trust, whereas poor (or no) communication creates suspicion. Many organizations fall into a downward spiral: Miscommunication causes employees to feel betrayed, which leads to a greater breakdown in communication and, eventually, outright distrust. Consider how the Catholic Church handled allegations of sexual abuse by priests in the Boston area. Cardinal Bernard Law failed to openly communicate the nature and scope of the allegations. When the details emerged during legal proceedings, parishioners felt betrayed, and trust was destroyed. The word "cover-up" was frequently used in the media to describe Law's response to the crisis. His lack of candor caused people to feel that the truth was being obscured at the expense of the victims. Around that time I witnessed an example of excellent communication within the same Catholic Church. I sat with my family one Sunday while, in an agonizingly uncomfortable homily, a priest confessed from the altar that he had had an inappropriate encounter 20 years earlier with a woman employed by the parish. He acknowledged his mistake, talked about how he had dealt with the issue, and asked for forgiveness. Over time his parishioners came once again to regard him as a trusted spiritual leader. His offense was less serious than Law's, but his story shows that honest communication can go a long way toward building or repairing relationships and engendering trust. To some degree, one person's openness induces openness in others, and the decision to put faith in others makes it more likely that they will reciprocate. Managing with the Trust Model Once these ten factors are understood, executives can begin managing trust in their own relationships and within their organizations. Consider the example of Sue and Joe, a manager and her direct report in a Fortune 500 consumer goods company that was in the midst of a major turnaround. Sue, a relatively new VP of sales, wanted to make some aggressive personnel moves in response to pressure from her boss to improve performance. Joe, one of Sue's employees, was three years shy of his retirement date. He had been a loyal employee for 17 years and had been successful in previous staff roles. Recently, however, he had taken on a new job as a line manager in sales and was not performing well. In fact, Sue's boss had suggested that it was time to move Joe out. Joe was a confident person (high level of adjustment), but he knew that he was in the wrong job and wanted to find a different way to contribute (high alignment of interests with Sue). He was concerned about how candid to be with Sue, because he was afraid of being terminated (low risk tolerance and low security). And because Sue was a new VP, Joe was uncertain whether she was the decision maker and had any real control (low predictability and low capability). As the situation originally stood, Joe wasn't inclined to trust his manager; there were too many risks and uncertainties. The trust model helped Sue identify what she could do to change the situation and create a climate of trust afterward.(See the exhibit "Trust Intervention: Sue and Joe.") Sue and I realized, for instance, that we could do little to raise Joe's tolerance for risk. Cautious by nature, he was genuinely - and quite rightly - fearful of losing his job. So I encouraged Sue to demonstrate greater benevolent concern: to have a candid but supportive conversation with Joe and give him time to go through a self-discovery process using an outside consultant. After that process, Joe requested a transfer. I also coached Sue to work with her boss to gain approval for some alternate options for Joe, thus increasing her capability and predictability in Joe's eyes. In addition, Sue began communicating more frequently and openly to Joe about his options in the organization and was sincerely empathetic about how this career uncertainty would affect him and his wife - showing still more benevolent concern. Eventually Joe was moved into a more suitable position. He wasn't shy in sharing his positive feelings about the whole process with his former colleagues, who still reported to Sue. As a result, those people were more apt to place their faith in her, and trust increased in the department even though it was experiencing major change. The trust model can also be applied on a broader, organizational scale. Consider the situation at Texaco in the 1990s. In 1994 a group of minority employees filed a racial-discrimination suit against the oil giant, charging that black employees were being paid less than white employees for equal work. Two years later tensions reached a crisis level when senior Texaco executives were secretly recorded denigrating black workers. It's safe to say that among black workers, trust in their company's executives bottomed out. Then-chairman and CEO Peter Bijur recognized the graveness of the situation and knew he needed to act quickly to repair the broken trust. Bijur started by hiring outside counsel to investigate the matter; bringing in a neutral third party alleviated any suspicions that conflict of interest would taint the investigation. He also created a special board of directors committee, which was charged with evaluating the company's diversity training. That step demonstrated that Texaco placed a high value on diversity. New diversity and sensitivity training led to a corporate culture built on shared values. Those who didn't belong - specifically, the senior executives heard speaking offensively on the tape - were terminated, suspended, or had their retirement benefits cut off. To make the company's actions more predictable for employees, Bijur hired a respected judge to evaluate Texaco's HR policies, and the company changed those that were deemed unfair or not transparent. Moreover, senior executives were sent to all company locations to apologize for the humiliation to which black workers had been subjected. These meetings not only demonstrated benevolent concern but also opened up lines of communication between skeptical employees and top management. Collectively, these actions made it easier for disillusioned workers to place their faith in the company again. Trust wasn't restored overnight - there's no quick fix for broken faith - but concerted efforts to correct the sources of distrust eventually paid off. In 1999 Bijur received an award from a national African-American group for commitment to diversity, and in 2000 Texaco received praise from SocialFunds.com for being a "model for challenging corporate racism." Broken trust can be mended over time if leaders consistently engage in the right behaviors. The exhibit "Practical Ways of Managing Trust" identifies some behaviors that are particularly effective. *** Trust is a measure of the quality of a relationship - between two people, between groups of people, or between a person and an organization. In totally predictable situations the question of trust doesn't arise: When you know exactly what to expect, there's no need to make a judgment call. The turbulence of outsourcing, mergers, downsizing, and changing business models creates a breeding ground for distrust. Leading in such an environment requires acting in ways that provide clear reasons to decide to trust. There is no returning to the days when organizations expected - and received - unconditional loyalty from employees. But by using this model, you may be able to create a more dynamic and sustainable foundation for productive relationships. Reprint R0609B; HBR OnPoint 1056 To Trust or Not to Trust? When deciding whether to trust someone, people weigh ten basic factors. Three relate to the decision maker alone - the "truster" - and seven reflect the specific situation involving him or her and the person asking for trust - the "trustee." The more factors that score on the high end of the scale, the more likely the decision maker is to choose trust. Trust Intervention: Sue and Joe Sue, a VP of sales, needed to make some personnel changes in her department. Joe, her direct report, wasn't inclined to trust Sue, because the company was going through a turnaround and he feared for his job. Moreover, since she was relatively new to the company, he couldn't predict what she would do or gauge how capable she was. Sue used the trust model to identify what she could do to change Joe's feelings. By getting approval from her own boss for alternate positions for Joe, for instance, she demonstrated capability in finding solutions. And by empathizing with Joe's feeling of insecurity and openly discussing his options with him, she demonstrated both benevolent concern and increased communication. The result was that Joe found it easier to place his faith in Sue. Practical Ways of Managing Trust If this factor is low… then you should: Risk Tolerance Spend more time explaining options and risks. Evaluate processes and results separately; recognize excellent work regardless of the outcome. Offer some sort of safety net. Level of Adjustment Be patient; it simply takes longer to build trust with some individuals. Try to enhance confidence by recognizing achievements and by correcting failures through coaching rather than harsh discipline. Relative Power Provide choices when possible; avoid being coercive. Communicate that leadership decisions aren't made arbitrarily by explaining how they serve organizational interests. Security Find ways to temper the risk inherent in the situation. Expect to invest time in raising comfort levels. Number of Similarities Use the word "we" more and the word "I" less. Emphasize what you have in common (values, membership, and so on). Alignment of Interests Be clear yourself about whose interests you are serving. Take others' interests into account and find a way to accommodate them where possible. Focus on the overarching strategy, vision, and goals. Shape a culture that reinforces doing the right thing for the enterprise. Benevolent Concern Take actions that demonstrate a genuine concern for others. Serve others' interests even if, on occasion, you bear some loss (and find a tasteful way to show that - by your choice - they gained more than you did). Engage in fair process. Capability Find ways to demonstrate competence in carrying out the task at hand. Acknowledge areas of incompetence and compensate by sharing or delegating responsibility. Predictability and Underpromise and overdeliver. Integrity If you can't fulfill your promises, explain why honestly. Describe the values that drive your behavior so that others see consistency rather than randomness. Level of Communication Increase the frequency and candor of your communications. Build a relationship beyond the constraints of your respective roles - for example, by going out to lunch or playing golf.

steve jobs-leadership

adapted from the real leadership of steve jobs The Real Leadership Lessons of Steve Jobs Six months after Jobs's death, the author of his best-selling biography identifies the practices that every CEO can try to emulate HIS SAGA IS the entrepreneurial creation myth writ large: Steve Jobs cofounded Apple in his parents' garage in 1976, was ousted in 1985, returned to rescue it from near bankruptcy in 1997, and by the time he died, in October 2011, had built it into the world's most valuable company. Along the way he helped to transform seven industries: personal computing, animated movies, music, phones, tablet computing, retail stores, and digital publishing. He thus belongs in the pantheon of America's great innovators, along with Thomas Edison, Henry Ford, and Walt Disney. None of these men was a saint, but long after their personalities are forgotten, history will remember how they applied imagination to technology and business. In the months since my biography of Jobs came out, countless commentators have tried to draw management lessons from it. Some of those readers have been insightful, but I think that many of them (especially those with no experience in entrepreneurship) Fixate too much on the rough edges of his personality. The essence of Jobs, I think, is that his personality was integral to his way of doing business. He acted as if the normal rules didn't apply to him, and the passion, intensity, and extreme emotionalism he brought to everyday life were things he also poured into the products he made. His petulance and impatience were part and parcel of his perfectionism. One of the last times I saw him, after I had finished writing most of the book, I asked him again about his tendency to be rough on people. "Look at the results," he replied. "These are all smart people I work with, and any of them could get a top job at another place if they were truly feeling brutalized. But they don't." Then he paused for a few moments and said, almost wistfully, "And we got some amazing things done." Indeed, he and Apple had had a string of hits over the past dozen years that was greater than that of any other innovative company in modern times: iMac, iPod, iPod nano, iTunes Store, Apple Stores, MacBook, iPhone, iPad, App Store, OS X Lion--not to mention every Pixar film. And as he battled his final illness, Jobs was surrounded by an intensely loyal cadre of colleagues who had been inspired by him for years and a very loving wife, sister, and four children. So I think the real lessons from Steve Jobs have to be drawn from looking at what he actually accomplished. I once asked him what he thought was his most important creation, thinking he would answer the iPad or the Macintosh. Instead he said it was Apple the company. Making an enduring company, he said, was both far harder and more important than making a great product. How did he do it? Business schools will be studying that question a century from now. Here are what I consider the keys to his success. Focus When Jobs returned to Apple in 1997, it was producing a random array of computers and peripherals, including a dozen different versions of the Macintosh. After a few weeks of product review sessions, he'd finally had enough. "Stop!" he shouted. "This is crazy." He grabbed a Magic Marker, padded in his bare feet to a whiteboard, and drew a two-by-two grid. "Here's what we need," he declared. Atop the two columns, he wrote "Consumer" and "Pro." He labeled the two rows "Desktop" and "Portable." Their job, he told his team members, was to focus on four great products, one for each quadrant. All other products should be canceled. There was a stunned silence. But by getting Apple to focus on making just four computers, he saved the company. "Deciding what not to do is as important as deciding what to do," he told me. "That's true for companies, and it's true for products." After he righted the company, Jobs began taking his "top 100" people on a retreat each year. On the last day, he would stand in front of a whiteboard (he loved whiteboards, because they gave him complete control of a situation and they engendered focus) and ask, "What are the 10 things we should be doing next?" People would fight to get their suggestions on the list. Jobs would write them down--and then cross off the ones he decreed dumb. After much jockeying, the group would come up with a list of 10. Then Jobs would slash the bottom seven and announce, "We can only do three." Focus was ingrained in Jobs's personality and had been honed by his Zen training. He relentlessly filtered out what he considered distractions. Colleagues and family members would at times be exasperated as they tried to get him to deal with issues--a legal problem, a medical diagnosis--they considered important. But he would give a cold stare and refuse to shift his laser-like focus until he was ready. Near the end of his life, Jobs was visited at home by Larry Page, who was about to resume control of Google, the company he had cofounded. Even though their companies were feuding, Jobs was willing to give some advice. "The main thing I stressed was focus," he recalled. Figure out what Google wants to be when it grows up, he told Page. "It's now all over the map. What are the five products you want to focus on? Get rid of the rest, because they're dragging you down. They're turning you into Microsoft. They're causing you to turn out products that are adequate but not great." Page followed the advice. In January 2012 he told employees to focus on just a few priorities, such as Android and Google+, and to make them "beautiful," the way Jobs would have done. Simplify Jobs's Zen-like ability to focus was accompanied by the related instinct to simplify things by zeroing in on their essence and eliminating unnecessary components. "Simplicity is the ultimate sophistication," declared Apple's first marketing brochure. To see what that means, compare any Apple software with, say, Microsoft Word, which keeps getting uglier and more cluttered with nonintuitive navigational ribbons and intrusive features. It is a reminder of the glory of Apple's quest for simplicity. Jobs learned to admire simplicity when he was working the night shift at Atari as a college dropout. Atari's games came with no manual and needed to be uncomplicated enough that a stoned freshman could figure them out. The only instructions for its Star Trek game were: "1. Insert quarter. 2. Avoid Klingons." His love of simplicity in design was refined at design conferences he attended at the Aspen Institute in the late 1970s on a campus built in the Bauhaus style, which emphasized clean lines and functional design devoid of frills or distractions. When Jobs visited Xerox's Palo Alto Research Center and saw the plans for a computer that had a graphical user interface and a mouse, he set about making the design both more intuitive (his team enabled the user to drag and drop documents and folders on a virtual desktop) and simpler. For example, the Xerox mouse had three buttons and cost $300; Jobs went to a local industrial design firm and told one of its founders, Dean Hovey, that he wanted a simple, single-button model that cost $15. Hovey complied. Jobs aimed for the simplicity that comes from conquering, rather than merely ignoring, complexity. Achieving this depth of simplicity, he realized, would produce a machine that felt as if it deferred to users in a friendly way, rather than challenging them. "It takes a lot of hard work," he said, "to make something simple, to truly understand the underlying challenges and come up with elegant solutions." In Jony Ive, Apple's industrial designer, Jobs met his soul mate in the quest for deep rather than superficial simplicity. They knew that simplicity is not merely a minimalist style or the removal of clutter. In order to eliminate screws, buttons, or excess navigational screens, it was necessary to understand profoundly the role each element played. "To be truly simple, you have to go really deep," Ive explained. "For example, to have no screws on something, you can end up having a product that is so convoluted and so complex. The better way is to go deeper with the simplicity, to understand everything about it and how it's manufactured." During the design of the iPod interface, Jobs tried at every meeting to find ways to cut clutter. He insisted on being able to get to whatever he wanted in three clicks. One navigation screen, for example, asked users whether they wanted to search by song, album, or artist. "Why do we need that screen?" Jobs demanded. The designers realized they didn't. "There would be times when we'd rack our brains on a user interface problem, and he would go, 'Did you think of this?'" says Tony Fadell, who led the iPod team. "And then we'd all go, 'Holy shit.' He'd redefine the problem or approach, and our little problem would go away." At one point Jobs made the simplest of all suggestions: Let's get rid of the on/off button. At first the team members were taken aback, but then they realized the button was unnecessary. The device would gradually power down if it wasn't being used and would spring to life when reengaged. Likewise, when Jobs was shown a cluttered set of proposed navigation screens for iDVD, which allowed users to burn video onto a disk, he jumped up and drew a simple rectangle on a whiteboard. "Here's the new application," he said. "It's got one window. You drag your video into the window. Then you click the button that says 'Burn.' That's it. That's what we're going to make." In looking for industries or categories ripe for disruption, Jobs always asked who was making products more complicated than they should be. In 2001 portable music players and ways to acquire songs online fit that description, leading to the iPod and the iTunes Store. Mobile phones were next. Jobs would grab a phone at a meeting and rant (correctly) that nobody could possibly figure out how to navigate half the features, including the address book. At the end of his career he was setting his sights on the television industry, which had made it almost impossible for people to click on a simple device to watch what they wanted when they wanted. Take Responsibility End to End Jobs knew that the best way to achieve simplicity was to make sure that hardware, software, and peripheral devices were seamlessly integrated. An Apple ecosystem--an iPod connected to a Mac with iTunes software, for example--allowed devices to be simpler, syncing to be smoother, and glitches to be rarer. The more complex tasks, such as making new playlists, could be done on the computer, allowing the iPod to have fewer functions and buttons. Jobs and Apple took end-to-end responsibility for the user experience--something too few companies do. From the performance of the ARM microprocessor in the iPhone to the act of buying that phone in an Apple Store, every aspect of the customer experience was tightly linked together. Both Microsoft in the 1980s and Google in the past few years have taken a more open approach that allows their operating systems and software to be used by various hardware manufacturers. That has sometimes proved the better business model. But Jobs fervently believed that it was a recipe for (to use his technical term) crappier products. "People are busy," he said. "They have other things to do than think about how to integrate their computers and devices." Part of Jobs's compulsion to take responsibility for what he called "the whole widget" stemmed from his personality, which was very controlling. But it was also driven by his passion for perfection and making elegant products. He got hives, or worse, when contemplating the use of great Apple software on another company's uninspired hardware, and he was equally allergic to the thought that unapproved apps or content might pollute the perfection of an Apple device. It was an approach that did not always maximize short-term profits, but in a world filled with junky devices, inscrutable error messages, and annoying interfaces, it led to astonishing products marked by delightful user experiences. Being in the Apple ecosystem could be as sublime as walking in one of the Zen gardens of Kyoto that Jobs loved, and neither experience was created by worshipping at the altar of openness or by letting a thousand flowers bloom. Sometimes it's nice to be in the hands of a control freak. When Behind, Leapfrog The mark of an innovative company is not only that it comes up with new ideas first. It also knows how to leapfrog when it finds itself behind. That happened when Jobs built the original iMac. He focused on making it useful for managing a user's photos and videos, but it was left behind when dealing with music. People with PCs were downloading and swapping music and then ripping and burning their own CDs. The iMac's slot drive couldn't burn CDs. "I felt like a dope," he said. "I thought we had missed it." But instead of merely catching up by upgrading the iMac's CD drive, he decided to create an integrated system that would transform the music industry. The result was the combination of iTunes, the iTunes Store, and the iPod, which allowed users to buy, share, manage, store, and play music better than they could with any other devices. After the iPod became a huge success, Jobs spent little time relishing it. Instead he began to worry about what might endanger it. One possibility was that mobile phone makers would start adding music players to their handsets. So he cannibalized iPod sales by creating the iPhone. "If we don't cannibalize ourselves, someone else will," he said. Put Products Before Profits When Jobs and his small team designed the original Macintosh, in the early 1980s, his injunction was to make it "insanely great." He never spoke of profit maximization or cost trade-offs. "Don't worry about price, just specify the computer's abilities," he told the original team leader. At his first retreat with the Macintosh team, he began by writing a maxim on his whiteboard: "Don't compromise." The machine that resulted cost too much and led to Jobs's ouster from Apple. But the Macintosh also "put a dent in the universe," as he said, by accelerating the home computer revolution. And in the long run he got the balance right: Focus on making the product great and the profits will follow. John Sculley, who ran Apple from 1983 to 1993, was a marketing and sales executive from Pepsi. He focused more on profit maximization than on product design after Jobs left, and Apple gradually declined. "I have my own theory about why decline happens at companies," Jobs told me: They make some great products, but then the sales and marketing people take over the company, because they are the ones who can juice up profits. "When the sales guys run the company, the product guys don't matter so much, and a lot of them just turn off. It happened at Apple when Sculley came in, which was my fault, and it happened when Ballmer took over at Microsoft." When Jobs returned, he shifted Apple's focus back to making innovative products: the sprightly iMac, the PowerBook, and then the iPod, the iPhone, and the iPad. As he explained, "My passion has been to build an enduring company where people were motivated to make great products. Everything else was secondary. Sure, it was great to make a profit, because that was what allowed you to make great products. But the products, not the profits, were the motivation. Sculley flipped these priorities to where the goal was to make money. It's a subtle difference, but it ends up meaning everything--the people you hire, who gets promoted, what you discuss in meetings." Don't Be a Slave To Focus Groups When Jobs took his original Macintosh team on its first retreat, one member asked whether they should do some market research to see what customers wanted. "No," Jobs replied, "because customers don't know what they want until we've shown them." He invoked Henry Ford's line "If I'd asked customers what they wanted, they would have told me, 'A faster horse!'" Caring deeply about what customers want is much different from continually asking them what they want; it requires intuition and instinct about desires that have not yet formed. "Our task is to read things that are not yet on the page," Jobs explained. Instead of relying on market research, he honed his version of empathy--an intimate intuition about the desires of his customers. He developed his appreciation for intuition--feelings that are based on accumulated experiential wisdom--while he was studying Buddhism in India as a college dropout. "The people in the Indian countryside don't use their intellect like we do; they use their intuition instead," he recalled. "Intuition is a very powerful thing--more powerful than intellect, in my opinion." Sometimes that meant that Jobs used a one-person focus group: himself. He made products that he and his friends wanted. For example, there were many portable music players around in 2000, but Jobs felt they were all lame, and as a music fanatic he wanted a simple device that would allow him to carry a thousand songs in his pocket. "We made the iPod for ourselves," he said, "and when you're doing something for yourself, or your best friend or family, you're not going to cheese out." Bend Reality Jobs's (in)famous ability to push people to do the impossible was dubbed by colleagues his Reality Distortion Field, after an episode of Star Trek in which aliens create a convincing alternative reality through sheer mental force. An early example was when Jobs was on the night shift at Atari and pushed Steve Wozniak to create a game called Breakout. Woz said it would take months, but Jobs stared at him and insisted he could do it in four days. Woz knew that was impossible, but he ended up doing it. Those who did not know Jobs interpreted the Reality Distortion Field as a euphemism for bullying and lying. But those who worked with him admitted that the trait, infuriating as it might be, led them to perform extraordinary feats. Because Jobs felt that life's ordinary rules didn't apply to him, he could inspire his team to change the course of computer history with a small fraction of the resources that Xerox or IBM had. "It was a self-fulfilling distortion," recalls Debi Coleman, a member of the original Mac team who won an award one year for being the employee who best stood up to Jobs. "You did the impossible because you didn't realize it was impossible." One day Jobs marched into the cubicle of Larry Kenyon, the engineer who was working on the Macintosh operating system, and complained that it was taking too long to boot up. Kenyon started to explain why reducing the boot-up time wasn't possible, but Jobs cut him off. "If it would save a person's life, could you find a way to shave 10 seconds off the boot time?" he asked. Kenyon allowed that he probably could. Jobs went to a whiteboard and showed that if five million people were using the Mac and it took 10 seconds extra to turn it on every day, that added up to 300 million or so hours a year--the equivalent of at least 100 lifetimes a year. After a few weeks Kenyon had the machine booting up 28 seconds faster. When Jobs was designing the iPhone, he decided that he wanted its face to be a tough, scratchproof glass, rather than plastic. He met with Wendell Weeks, the CEO of Corning, who told him that Corning had developed a chemical exchange process in the 1960s that led to what it dubbed "Gorilla glass." Jobs replied that he wanted a major shipment of Gorilla glass in six months. Weeks said that Corning was not making the glass and didn't have that capacity. "Don't be afraid," Jobs replied. This stunned Weeks, who was unfamiliar with Jobs's Reality Distortion Field. He tried to explain that a false sense of confidence would not overcome engineering challenges, but Jobs had repeatedly shown that he didn't accept that premise. He stared unblinking at Weeks. "Yes, you can do it," he said. "Get your mind around it. You can do it." Weeks recalls that he shook his head in astonishment and then called the managers of Corning's facility in Harrodsburg, Kentucky, which had been making LCD displays, and told them to convert immediately to making Gorilla glass full-time. "We did it in under six months," he says. "We put our best scientists and engineers on it, and we just made it work." As a result, every piece of glass on an iPhone or an iPad is made in America by Corning. Impute Jobs's early mentor Mike Markkula wrote him a memo in 1979 that urged three principles. The first two were "empathy" and "focus." The third was an awkward word, "impute," but it became one of Jobs's key doctrines. He knew that people form an opinion about a product or a company on the basis of how it is presented and packaged. "Mike taught me that people do judge a book by its cover," he told me. When he was getting ready to ship the Macintosh in 1984, he obsessed over the colors and design of the box. Similarly, he personally spent time designing and redesigning the jewel-like boxes that cradle the iPod and the iPhone and listed himself on the patents for them. He and Ive believed that unpacking was a ritual like theater and heralded the glory of the product. "When you open the box of an iPhone or iPad, we want that tactile experience to set the tone for how you perceive the product," Jobs said. Sometimes Jobs used the design of a machine to "impute" a signal rather than to be merely functional. For example, when he was creating the new and playful iMac, after his return to Apple, he was shown a design by Ive that had a little recessed handle nestled in the top. It was more semiotic than useful. This was a desktop computer. Not many people were really going to carry it around. But Jobs and Ive realized that a lot of people were still intimidated by computers. If it had a handle, the new machine would seem friendly, deferential, and at one's service. The handle signaled permission to touch the iMac. The manufacturing team was opposed to the extra cost, but Jobs simply announced, "No, we're doing this." He didn't even try to explain. Push for Perfection During the development of almost every product he ever created, Jobs at a certain point "hit the pause button" and went back to the drawing board because he felt it wasn't perfect. That happened even with the movie Toy Story. After Jeff Katzenberg and the team at Disney, which had bought the rights to the movie, pushed the Pixar team to make it edgier and darker, Jobs and the director, John Lasseter, finally stopped production and rewrote the story to make it friendlier. When he was about to launch Apple Stores, he and his store guru, Ron Johnson, suddenly decided to delay everything a few months so that the stores' layouts could be reorganized around activities and not just product categories. The same was true for the iPhone. The initial design had the glass screen set into an aluminum case. One Monday morning Jobs went over to see Ive. "I didn't sleep last night," he said, "because I realized that I just don't love it." Ive, to his dismay, instantly saw that Jobs was right. "I remember feeling absolutely embarrassed that he had to make the observation," he says. The problem was that the iPhone should have been all about the display, but in its current design the case competed with the display instead of getting out of the way. The whole device felt too masculine, task-driven, efficient. "Guys, you've killed yourselves over this design for the last nine months, but we're going to change it," Jobs told Ive's team. "We're all going to have to work nights and weekends, and if you want, we can hand out some guns so you can kill us now." Instead of balking, the team agreed. "It was one of my proudest moments at Apple," Jobs recalled. A similar thing happened as Jobs and Ive were finishing the iPad. At one point Jobs looked at the model and felt slightly dissatisfied. It didn't seem casual and friendly enough to scoop up and whisk away. They needed to signal that you could grab it with one hand, on impulse. They decided that the bottom edge should be slightly rounded, so that a user would feel comfortable just snatching it up rather than lifting it carefully. That meant engineering had to design the necessary connection ports and buttons in a thin, simple lip that sloped away gently underneath. Jobs delayed the product until the change could be made. Jobs's perfectionism extended even to the parts unseen. As a young boy, he had helped his father build a fence around their backyard, and he was told they had to use just as much care on the back of the fence as on the front. "Nobody will ever know," Steve said. His father replied, "But you will know." A true craftsman uses a good piece of wood even for the back of a cabinet against the wall, his father explained, and they should do the same for the back of the fence. It was the mark of an artist to have such a passion for perfection. In overseeing the Apple II and the Macintosh, Jobs applied this lesson to the circuit board inside the machine. In both instances he sent the engineers back to make the chips line up neatly so the board would look nice. This seemed particularly odd to the engineers of the Macintosh, because Jobs had decreed that the machine be tightly sealed. "Nobody is going to see the PC board," one of them protested. Jobs reacted as his father had: "I want it to be as beautiful as possible, even if it's inside the box. A great carpenter isn't going to use lousy wood for the back of a cabinet, even though nobody's going to see it." They were true artists, he said, and should act that way. And once the board was redesigned, he had the engineers and other members of the Macintosh team sign their names so that they could be engraved inside the case. "Real artists sign their work," he said. Tolerate Only "A" Players Jobs was famously impatient, petulant, and tough with the people around him. But his treatment of people, though not laudable, emanated from his passion for perfection and his desire to work with only the best. It was his way of preventing what he called "the bozo explosion," in which managers are so polite that mediocre people feel comfortable sticking around. "I don't think I run roughshod over people," he said, "but if something sucks, I tell people to their face. It's my job to be honest." When I pressed him on whether he could have gotten the same results while being nicer, he said perhaps so. "But it's not who I am," he said. "Maybe there's a better way--a gentlemen's club where we all wear ties and speak in this Brahmin language and velvet code words--but I don't know that way, because I am middle-class from California." Was all his stormy and abusive behavior necessary? Probably not. There were other ways he could have motivated his team. "Steve's contributions could have been made without so many stories about him terrorizing folks," Apple's cofounder, Wozniak, said. "I like being more patient and not having so many conflicts. I think a company can be a good family." But then he added something that is undeniably true: "If the Macintosh project had been run my way, things probably would have been a mess." It's important to appreciate that Jobs's rudeness and roughness were accompanied by an ability to be inspirational. He infused Apple employees with an abiding passion to create groundbreaking products and a belief that they could accomplish what seemed impossible. And we have to judge him by the outcome. Jobs had a close-knit family, and so it was at Apple: His top players tended to stick around longer and be more loyal than those at other companies, including ones led by bosses who were kinder and gentler. CEOs who study Jobs and decide to emulate his roughness without understanding his ability to generate loyalty make a dangerous mistake. "I've learned over the years that when you have really good people, you don't have to baby them," Jobs told me. "By expecting them to do great things, you can get them to do great things. Ask any member of that Mac team. They will tell you it was worth the pain." Most of them do. "He would shout at a meeting, 'You asshole, you never do anything right,'" Debi Coleman recalls. "Yet I consider myself the absolute luckiest person in the world to have worked with him." Engage Face-to-Face Despite being a denizen of the digital world, or maybe because he knew all too well its potential to be isolating, Jobs was a strong believer in face-to-face meetings. "There's a temptation in our networked age to think that ideas can be developed by e-mail and iChat," he told me. "That's crazy. Creativity comes from spontaneous meetings, from random discussions. You run into someone, you ask what they're doing, you say 'Wow,' and soon you're cooking up all sorts of ideas." He had the Pixar building designed to promote unplanned encounters and collaborations. "If a building doesn't encourage that, you'll lose a lot of innovation and the magic that's sparked by serendipity," he said. "So we designed the building to make people get out of their offices and mingle in the central atrium with people they might not otherwise see." The front doors and main stairs and corridors all led to the atrium; the café and the mailboxes were there; the conference rooms had windows that looked out onto it; and the 600-seat theater and two smaller screening rooms all spilled into it. "Steve's theory worked from day one," Lasseter recalls. "I kept running into people I hadn't seen for months. I've never seen a building that promoted collaboration and creativity as well as this one." Jobs hated formal presentations, but he loved freewheeling face-to-face meetings. He gathered his executive team every week to kick around ideas without a formal agenda, and he spent every Wednesday afternoon doing the same with his marketing and advertising team. Slide shows were banned. "I hate the way people use slide presentations instead of thinking," Jobs recalled. "People would confront a problem by creating a presentation. I wanted them to engage, to hash things out at the table, rather than show a bunch of slides. People who know what they're talking about don't need PowerPoint." Know Both the Big Picture and The Details Jobs's passion was applied to issues both large and minuscule. Some CEOs are great at vision; others are managers who know that God is in the details. Jobs was both. Time Warner CEO Jeff Bewkes says that one of Jobs's salient traits was his ability and desire to envision overarching strategy while also focusing on the tiniest aspects of design. For example, in 2000 he came up with the grand vision that the personal computer should become a "digital hub" for managing all of a user's music, videos, photos, and content, and thus got Apple into the personal-device business with the iPod and then the iPad. In 2010 he came up with the successor strategy--the "hub" would move to the cloud--and Apple began building a huge server farm so that all a user's content could be uploaded and then seamlessly synced to other personal devices. But even as he was laying out these grand visions, he was fretting over the shape and color of the screws inside the iMac. Combine the Humanities with The Sciences "I always thought of myself as a humanities person as a kid, but I liked electronics," Jobs told me on the day he decided to cooperate on a biography. "Then I read something that one of my heroes, Edwin Land of Polaroid, said about the importance of people who could stand at the intersection of humanities and sciences, and I decided that's what I wanted to do." It was as if he was describing the theme of his life, and the more I studied him, the more I realized that this was, indeed, the essence of his tale. He connected the humanities to the sciences, creativity to technology, arts to engineering. There were greater technologists (Wozniak, Gates), and certainly better designers and artists. But no one else in our era could better rewire together poetry and processors in a way that jolted innovation. And he did it with an intuitive feel for business strategy. At almost every product launch over the past decade, Jobs ended with a slide that showed a sign at the intersection of Liberal Arts and Technology Streets. The creativity that can occur when a feel for both the humanities and the sciences exists in one strong personality was what most interested me in my biographies of Franklin and Einstein, and I believe that it will be a key to building innovative economies in the 21st century. It is the essence of applied imagination, and it's why both the humanities and the sciences are critical for any society that is to have a creative edge in the future. Even when he was dying, Jobs set his sights on disrupting more industries. He had a vision for turning textbooks into artistic creations that anyone with a Mac could fashion and craft--something that Apple announced in January 2012. He also dreamed of producing magical tools for digital photography and ways to make television simple and personal. Those, no doubt, will come as well. And even though he will not be around to see them to fruition, his rules for success helped him build a company that not only will create these and other disruptive products, but will stand at the intersection of creativity and technology as long as Jobs's DNA persists at its core. Stay Hungry, Stay Foolish Steve Jobs was a product of the two great social movements that emanated from the San Francisco Bay Area in the late 1960s. The first was the counterculture of hippies and antiwar activists, which was marked by psychedelic drugs, rock music, and antiauthoritarianism. The second was the high-tech and hacker culture of Silicon Valley, filled with engineers, geeks, wireheads, phreakers, cyberpunks, hobbyists, and garage entrepreneurs. Overlying both were various paths to personal enlightenment--Zen and Hinduism, meditation and yoga, primal scream therapy and sensory deprivation, Esalen and est. An admixture of these cultures was found in publications such as Stewart Brand's Whole Earth Catalog. On its first cover was the famous picture of Earth taken from space, and its subtitle was "access to tools." The underlying philosophy was that technology could be our friend. Jobs--who became a hippie, a rebel, a spiritual seeker, a phone phreaker, and an electronic hobbyist all wrapped into one--was a fan. He was particularly taken by the final issue, which came out in 1971, when he was still in high school. He took it with him to college and then to the apple farm commune where he lived after dropping out. He later recalled: "On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: 'Stay Hungry. Stay Foolish.'" Jobs stayed hungry and foolish throughout his career by making sure that the business and engineering aspect of his personality was always complemented by a hippie nonconformist side from his days as an artistic, acid-dropping, enlightenment-seeking rebel. In every aspect of his life--the women he dated, the way he dealt with his cancer diagnosis, the way he ran his business--his behavior reflected the contradictions, confluence, and eventual synthesis of all these varying strands. Even as Apple became corporate, Jobs asserted his rebel and counterculture streak in its ads, as if to proclaim that he was still a hacker and a hippie at heart. The famous "1984" ad showed a renegade woman outrunning the thought police to sling a sledgehammer at the screen of an Orwellian Big Brother. And when he returned to Apple, Jobs helped write the text for the "Think Different" ads: "Here's to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes…" If there was any doubt that, consciously or not, he was describing himself, he dispelled it with the last lines: "While some see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world are the ones who do." HBR Reprint R1204F ~~~~~~~~ By Walter Isaacson Walter Isaacson, the CEO of the Aspen Institute, is the author of Steve Jobs and of biographies of Henry Kissinger, Benjamin Franklin, and Albert Einstein. ________________________________________ Harvard Business Review Notice of Use Restrictions, May 2009Harvard Business Review and Harvard Business Publishing Newsletter content on EBSCOhost is licensed for the private individual use of authorized EBSCOhost users. It is not intended for use as assigned course material in academic institutions nor as corporate learning or training materials in businesses. 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