Harvard Business Review

Executive Summaries

Cover Feature

The New Leader's Guide to Diagnosing the Business

Mark Gottfredson, Steve Schaubert, and Hernan Saenz Reprint: R0802C

Incoming CEOs and general managers don't have much time to show what they can do to improve a business's performance. (In 2006, for instance, about 40% of CEOs who left their jobs had lasted an average of just 1.8 years--and many of them were ushered out the door.) Within a few months at most, leaders must find ways to boost profitability, increase market share, overtake a competitor--whatever the key tasks may be. But they can't map out specific objectives and initiatives until they have accurately assessed their companies' distinctive strengths and weaknesses and the particular threats and opportunities they face. In this article, Bain consultants Gottfredson, Schaubert, and Saenz provide a diagnostic template to help organizations figure all that out so they can decide which goals are reasonable and where to focus performance-improvement efforts.

The template is built on four widely accepted principles. First, costs and prices almost always decline; second, your competitive position determines your options; third, customers and profit pools don't stand still; and fourth, simplicity gets results. Along with each principle, the authors offer diagnostic questions and analytic tools. Of course, each manager will emphasize certain elements of the template and de-emphasize others, based on his or her business situation.

This process will show incoming CEOs and general managers where they are starting from (their point of departure) and help them establish their performance objectives (their point of arrival) as well as the change initiatives that will take them where they want to go. The HBR List

Breakthrough Ideas for 2008 Reprint: R0802A

Our annual survey of ideas and trends that will make an impact on business:

Stan Stalnaker heralds a peer-to-peer economy in which consumers become consumer-producers. Tamara J. Erickson dissects the expectations of Gen Y workers. Dr. Jerome Groopman writes a prescription for avoiding misdiagnoses in decision making. Michael Sheehan warns not to resort to the tools of competition when it's really opposition that threatens your company. John J. Medina conceives of a brain-friendly workplace that applies modern science to daily performance. Dan Ariely studies the minds of "honest" people when they cheat. Paul Root Wolpe and Daniel D. Langleben share truths about technologically sophisticated lie detection. Scott Berinato shines a light on the cybercrime service economy. Mark Kuznicki, Eli Singer, and Jay Goldman showcase Toronto, where a technology-driven event led to real social change. John Seely Brown and Douglas Thomas argue that online games are preparing the twenty-first-century workforce. Jane McGonigal calls alternate reality games the promising new operating systems for real-world business. Miklos Sarvary mines the history of broadcasting for wisdom about competing in the metaverses of the internet. Judith Donath asks how true to yourself you'll be in the virtual world. Jan Chipchase surveys the soon-to-be-charted territory of metadata trails. Lew McCreary points a finger at people who blame technology for their bad behavior. Jaime Lerner sees the city of the future in a turtle's shell. David Vogel catalogs the advantages of socially responsible lobbying. George Pohle lets the numbers prove the mass-market promise of China's second-tier cities. Aamir A. Rehman and S. Nazim Ali discuss the boom in sharia-compliant finance. Michael J. Mauboussin identifies the shrinking domain in which experts are the best problem solvers. Garrett Gruener reveals his list of sustainable and unsustainable trends. HBR Case Study

The Corporate Brand: Help or Hindrance?

Chekitan S. Dev Reprint: R0802B

Each of Lilypad's boutique hotels has its own sense of place and definition of customer experience. Though loyal to their favorites, guests don't visit other luxury properties in the collection or even realize they're affiliated. To boost the lifetime value of existing customers and reach new ones, CEO Andre Cleary is thinking about positioning the hotels more directly under the corporate umbrella. The company could gain scale efficiencies and possibly increase visits--but does one brand really fit all? Four experts comment on this fictional case study.

Horst Schulze, the CEO and president of the West Paces Hotel Group, says that Lilypad must build up its corporate brand to create long-term value. This would also help the company become more efficient at cross-promoting properties, offering services, and buying supplies in bulk.

Jill Granoff, the executive vice president of direct brands at Liz Claiborne, says that the financial risks of putting the Lilypad name front and center may outweigh the potential rewards. The company should instead market its hotels more aggressively to travel agents and selectively acquire new properties to propel further growth.

Kevin Lane Keller of Dartmouth argues that Lilypad must clarify what its brand represents before giving it any more emphasis. Rather than making significant changes in the rooms themselves, which could weaken the individual brands, management should coordinate behind the scenes to improve cross-sell numbers.

Jez Frampton, the global CEO of the consultancy Interbrand, thinks Andre should systematically examine the brand in terms of Lilypad's customers and culture. That means conducting market research and moving away from the current "warlord" approach of managing each property as a separate fiefdom. Features

How Star Women Build Portable Skills

Boris Groysberg Reprint: R0802D

In May 2004, with the war for talent in high gear, Groysberg and colleagues from Harvard Business School wrote in these pages about the risks of hiring star performers away from competitors. After studying the fortunes of more than 1,000 star stock analysts, they found that when a star switched companies, not only did his performance plunge, so did the effectiveness of the group he joined and the market value of his new company. But further analysis of the data reveals that it's not that simple. In fact, one group of analysts reliably maintained star rankings even after changing employers: women. Unlike their male counterparts, female stars who switched firms performed just as well, in the aggregate, as those who stayed put. The 189 star women in the sample (18% of the star analysts studied) achieved a higher rank after switching firms than the men did.

Why the discrepancy? First, says the author, the best female analysts appear to have built their franchises on portable, external relationships with clients and the companies they covered, rather than on relationships rooted within their firms. By contrast, male analysts built up greater firm- and team-specific human capital by investing more in the internal networks and unique capabilities and resources of their own companies. Second, women took greater care when assessing a prospective new employer. In this article, Groysberg explores the reasons behind the star women's portable performance.

The Existential Necessity of Midlife Change

Carlo Strenger and Arie Ruttenberg Reprint: R0802E

As life expectancy in the West increases and companies can no longer promise lifelong security, many businesspeople will need to make major changes during middle age, embarking on a second life and a second career. They must start by getting beyond two pervasive and opposing myths.

The first is that midlife marks the onset of decline. Problems do arise during middle age--concerns about health and finances, for instance--but one's life force does not expire at 65, nor do possibilities vanish. In fact, by middle age, most executives have gained a freedom that only self-knowledge can impart, and they relish unprecedented opportunities for personal growth.

Midlife transitions, however, must be rooted in realism, not driven by the second myth, which paints middle age as a time of magical transformation. Contrary to what self-help books and inspirational speakers proclaim, such transformations do not happen. A 50-year-old with little musical training, for instance, will not suddenly become a concert pianist. People who buy into this myth find that their inevitable disappointment can be debilitating. Paradoxically, the doctrine that aims to encourage change actually stifles it. To make successful transitions, executives must stay open to the possibilities their experience qualifies them for but remain realistic about what they can achieve.

For companies, employees' midlife transitions represent both a challenge (senior managers seemingly on track to become CEO may instead leave) and an opportunity (other midlife executives, with different perspectives and experiences, may knock on the door). Organizations must help middle-aged executives through this difficult period, not just by offering a workshop or two but by providing ongoing coaching and opportunities for personal and professional development.

The Experience Trap

Kishore Sengupta, Tarek K. Abdel-Hamid, and Luk N. Van Wassenhove Reprint: R0802F

When companies put seasoned managers in charge of important projects, they don't expect missed deadlines, budget overruns, and rampant defects. However, that's what researchers found when they tested hundreds of experienced project managers with computer games that simulated software development projects. The study, conducted by two professors from Insead and one from Naval Postgraduate School, strongly suggests that veterans in complex environments suffer a breakdown in the learning process.

The research reveals three reasons for the breakdowns: Time lags between causes and effects make it difficult to see how they're connected; fallible estimates color the chain of decisions that determine a project's outcome; and a bias toward the initial goals prevents managers from setting revised, more appropriate, targets when project circumstances change. Sticking to an initial low budget goal after a project grew in scope, for instance, led subjects to ignore quality assurance, which led to soaring defect rates--and costs.

Companies can take practical steps to fix the learning cycle. They can provide feedback that shows the relationships between important variables in the environment. Such feedback might reveal, say, the 20-day ramp-up that a new quality assurance team needs before becoming fully effective. Tools that apply formal models to calculate such things as the effect of turnover on team productivity also help. Setting goals for behavior, instead of targets for performance, is critical as well. Finally, firms can create project "flight simulators" that mimic actual learning environments but don't let complexity overwhelm trainees.

Managers can continue learning only if they get decision support tailored to the challenges they face. Firms would do well to focus more on training people higher up in the organization and stop leaving them to fend for themselves.

The Founder's Dilemma

Noam Wasserman Reprint: R0802G

Why do people start businesses? For the money and the chance to control their own companies, certainly. But new research from Harvard Business School professor Wasserman shows that those goals are largely incompatible.

The author's studies indicate that a founder who gives up more equity to attract cofounders, new hires, and investors builds a more valuable company than one who parts with less equity. More often than not, however, those superior returns come from replacing the founder with a professional CEO more experienced with the needs of a growing company. This fundamental tension requires founders to make "rich" versus "king" trade-offs to maximize either their wealth or their control over the company.

Founders seeking to remain in control (as John Gabbert of the furniture retailer Room & Board has done) would do well to restrict themselves to businesses where large amounts of capital aren't required and where they already have the skills and contacts they need. They may also want to wait until late in their careers, after they have developed broader management skills, before setting up shop. Entrepreneurs who focus on wealth, such as Jim Triandiflou, who founded Ockham Technologies, can make the leap sooner because they won't mind taking money from investors or depending on executives to manage their ventures. Such founders will often bring in new CEOs themselves and be more likely to work with their boards to develop new, post-succession roles for themselves.

Choosing between money and power allows entrepreneurs to come to grips with what success means to them. Founders who want to manage empires will not believe they are successes if they lose control, even if they end up rich. Conversely, founders who understand that their goal is to amass wealth will not view themselves as failures when they step down from the top job.

The Biosphere Rules

Gregory C. Unruh Reprint: R0802H

Sustainability, defined by natural scientists as the capacity of healthy ecosystems to function indefinitely, has become a clarion call for business. Leading companies have taken high-profile steps toward achieving it: Wal-Mart, for example, with its efforts to reduce packaging waste, and Nike, which has removed toxic chemicals from its shoes. But, says Unruh, the director of Thunderbird's Lincoln Center for Ethics in Global Management, sustainability is more than an endless journey of incremental steps. It is a destination, for which the biosphere of planet Earth--refined through billions of years of trial and error--is a perfect model. Unruh distills some lessons from the biosphere into three rules:

Use a parsimonious palette. Managers can rethink their sourcing strategies and dramatically simplify the number and types of materials their companies use in production, making recycling cost-effective. After the furniture manufacturer Herman Miller discovered that its leading desk chair had 200 components made from more than 800 chemical compounds, it designed an award-winning successor whose far more limited materials palette is 96% recyclable.

Cycle up, virtuously. Manufacturers should design recovery value into their products at the outset. Shaw Industries, for example, recycles the nylon fiber from its worn-out carpet into brand-new carpet tile.

Exploit the power of platforms. Platform design in industry tends to occur at the component level--but the materials in those components constitute a more fundamental platform. Patagonia, by recycling Capilene brand performance underwear, has achieved energy costs 76% below those for virgin sourcing.

Biosphere rules can teach companies how to build ecologically friendly products that both reduce manufacturing costs and prove highly attractive to consumers. And managers need not wait for a green technological revolution to implement them.

Managing Demographic Risk

Rainer Strack, Jens Baier, and Anders Fahlander Reprint: R0802J

In developed nations, the workforce is aging rapidly. That trend has serious implications. Companies could face severe labor shortages in a few years as workers retire, taking critical knowledge with them. Businesses may also see productivity decline among older employees, especially in physically demanding jobs.

The authors, partners at Boston Consulting Group, offer managers a systematic way to assess these dual threats--capacity risk and productivity risk--at their companies. It involves studying the age distribution of their employees to see if large percentages fall within high age brackets and then projecting--by location, unit, and job category--how the distribution will change over the next 15 years. Managers must also factor in both the impact of strategic moves on personnel needs and the future supply of workers in the market.

When RWE Power analyzed its trends, the company learned that in 2018 almost 80% of its workers would be over 50. What's more, in certain critical areas its labor surplus was about to become a sizable shortfall. For instance, a shortage of specialized engineers would develop in the company just as their ranks in the job market thinned and competition to hire them intensified. Reversing its downsizing course, RWE Power took steps to increase its supply of workers in those key positions.

The authors show how companies that face talent gaps, as RWE Power did, can close them through training, transfers, recruitment, retention, productivity improvements, and outsourcing. They also describe measures that companies can take to keep older workers productive, including workplace accommodations, revised compensation structures, performance incentives, and targeted health care management. The key is to identify and address potential problems early. Firms that do so will gain an edge on rivals that are still relentlessly focused on reducing head count.

The New Leader's Guide to Diagnosing the Business

How can an incoming leader lay the groundwork for dramatic performance improvement?

by Mark Gottfredson, Steve Schaubert, and Hernan Saenz

From 1999 to 2006, the average tenure of departing chief executive officers in the United States declined from about 10 years to slightly more than eight. Although some CEOs stay a long time, a lot of them find that their stint in the corner office is remarkably brief. In 2006, for instance, about 40% of CEOs who left their jobs had lasted an average of just 1.8 years, according to the outplacement firm Challenger, Gray & Christmas. Tenure for the lower half of this group was only eight months. Some of these short-timers were simply a poor fit and left of their own accord, but many others were ushered out the door because they appeared unable to improve the business's performance. Nobody these days gets much time to show what he or she can do.

So within a few months at most, incoming CEOs and general managers must identify ways to boost profitability, increase market share, overtake competitors--whatever the key tasks may be. But they can't map out specific objectives and initiatives until they know where they are starting from. Every organization, after all, has its distinctive strengths and weaknesses and faces a unique combination of threats and opportunities. Accurately assessing all these is the only way to determine what goals are reasonable and where a management team should focus its performance-improvement efforts.

Embarking on this kind of diagnosis, however, can be daunting because there are countless possible points of entry. Your company's operations may span the globe and involve many thousands of employees and customers. Should you start by talking to those employees and customers or by examining your processes? Should you focus on the effectiveness of your procurement or analyze your product lines? Managers often begin with whatever they know best--customer segments, for example, or the supply chain. But that approach is not likely to produce either the thoroughness or the accuracy that the management team and the business situation require.

What's needed instead is a systematic diagnostic template that can be tailored as necessary to an individual business's situation. Such a template has to meet at least three criteria: It must reflect an understanding of the fundamentals of business performance--the basic constraints under which any company must operate. The template must be both comprehensive and focused--covering all the critical bases of the business, but only those bases, without requiring any waste of time or resources on less important matters. And it should lend itself to easy communication and action.

This article presents a template that we think meets these criteria. It is built on four widely accepted principles that define any successful performance-improvement program. First, costs and prices almost always decline; second, your competitive position determines your options; third, customers and profit pools don't stand still; and fourth, simplicity gets results. Along with each principle, we offer question sets and analytic tools to help you determine your position and future actions.

We developed and refined this template over our combined 50-plus years of working with clients, nearly all of whom have needed to perform an accurate diagnosis quickly. We have recently used it both with large corporations and with private equity firms evaluating the potential of their portfolio companies. We tested it through a series of research studies and interviews that we conducted in preparation for writing the book from which this article is adapted. Our experience and research convinced us that the template is a powerful tool. Its four principles cover the critical bases of virtually every business, providing managers with the minimum information required for a comprehensive diagnosis. Of course each manager will have to decide which elements of the template to emphasize (or de-emphasize) based on his or her business situation.

A word of caution: As the article makes clear, you will need to gather a lot of data quickly, ideally within the first three or four months of your tenure. Ask your senior leaders to head up teams that take on as many questions relevant to their areas of responsibility as they can handle. Ask for short, focused presentations to facilitate discussions about the main threats and opportunities. That should enable you and your teams to make quick, accurate decisions about the few areas on which to concentrate your efforts.

Sidebar Icon Questions That Will Lead You to Breakthrough Performance (Located at the end of this article)

This process not only will show you where you are starting from (your point of departure, so to speak) but also will help you map out your performance objectives (or desired point of arrival) along with three to five critical change initiatives that will take you where you want to go. Indeed, many companies have used the template to create a set of charts showing exactly where and how the business can improve. Incoming leaders find that reaching a diagnosis within their first three to four months helps them lay a foundation for breakthrough performance--and avoid the pitfalls that other new leaders encounter all too frequently.

Analyze Costs and Prices

The first principle in our template is that costs and prices almost always decline. This may seem counterintuitive: Inflation often clouds the view, and special circumstances can sometimes drive costs and prices upward. But it is a well-established fact that inflation-adjusted costs--and therefore inflation-adjusted prices--decline over time in nearly every competitive industry. The analytic tool that best charts this principle is the experience curve, a graph showing the decline in a company's or an industry's costs or prices as a function of accumulated experience. For example, you might find that for every doubling of total units produced in your company, your per-unit cost in constant dollars drops by 20%. (In this case your experience curve is said to have a "slope" of 80%.) Because the same principle holds true for your competitors--and thus for your entire industry--the curve allows you to estimate where costs or prices are likely to be in the future. By comparing your company's cost curve with your industry's price curve, you can determine whether your costs are declining at the rate necessary for your company to remain competitive.

Construct cost and price experience curves.

The first diagnostic questions to ask regarding this principle are "What is the slope of price change in our industry right now for the products or services we offer?" and "How does our cost curve compare with the industry's price curve and with our competitors' cost curves?" (See the exhibit "Understanding Experience Curves.")

Sidebar Icon Understanding Experience Curves (Located at the end of this article)

The relationship between prices and costs in any given business area will determine some of your top priorities. If industry prices are going down while your costs are going up or holding steady, for instance, cost improvement is likely to be your single most urgent challenge. Your costs need to be decreasing over the long term regardless of what prices are doing. An upward movement in prices is frequently only temporary.

Understanding your overall cost trends, of course, is just a preliminary step. You then need to examine every segment of costs to determine where the central challenges and opportunities lie. Dig into the cost areas that are most important for your organization: manufacturing, supply chain, service operations, overhead--whatever they may be. Identify the key cost components and the trends in each one. Look specifically for instances of failure to manage to the experience curve, such as rising unit costs for labor or rising procurement costs. This kind of detailed analysis will identify opportunities for improvement at the most granular level and will provide the basis for a plan of action.

One CEO we spoke with reflected on what he called his biggest mistake in his first few months on the job. One of his company's business units was the leader in an industrial market. It had been raising prices, so it was quite profitable, and the new CEO decided to leave it alone for the time being. Then new, low-cost competitors from Asia entered the market and found that this unit had established both a price umbrella and a cost umbrella. The competitors soon undermined the unit's pricing power. The situation required urgent action to reduce costs by at least 15%, an initiative that is well under way. The lesson that CEO drew from the experience was stark: Be sure to diagnose every business position carefully, particularly in units that seem to be doing well.

Determine costs relative to competitors'.

After comparing your overall costs with industry prices and your competitors' costs, you need to take a more detailed look at your cost position in your industry. How do you compare with your key competitors in each cost area? Which company is most efficient and effective in priority areas? Where can you improve most relative to others? An analysis of cost position quantifies cost differences between your business and your competitors'; it also shows which cost elements and specific practices are different. Drill down until you understand where and how you differ, and why. That, in turn, will help you figure out where you can close cost gaps and gain or regain competitive advantage. It will also help you formulate detailed plans to do so.

Not long after he took on the top job, David Weidman, CEO of the $6.7 billion chemical company Celanese, headquartered in Dallas, asked his management team to conduct such a competitive assessment. "They came back and said, `Holy cow, our average EBITDA to sales is seven or eight percentage points lower than the competition's,'" he told us. "And this was not in one business--this was across every organization." Weidman asked the team to identify specific areas where the company could improve relative to the competition. He wanted to find out, for instance, what one key competitor was doing in maintenance, because that company's maintenance spending was far better than Celanese's.

Understanding your cost position as well as your experience curve enables you to set proper targets. You will know, for example, that your lower-cost competitors are on their own experience curves and will have improved their own positions by the time you reach their current cost levels.

This kind of analysis presents a unique opportunity. Rather than simply comparing yourself with your top competitor, figure out which firm (including yours) is the best in each area. Maybe one is world-class in supply-chain logistics practices, another in a particular manufacturing step, and so on. You can then construct a hypothetical competitor representing the best of the best, or what we call best demonstrated practices. That hypothetical company will have lower costs and better performance than any real-world company; you can use it as a benchmark for improvement, striving to leapfrog your competitors instead of just trying to catch up.

Assess the profitability of your product lines.

Your next job is to determine which of your products or services are making money (or not), and why. The goal is to calculate the true margins of your products or services. First, you need to figure out direct costs for each product based on actual activities performed, rather than using standard costing. Then you must accurately allocate indirect costs--logistics, selling expenses, general and administrative expenses--to each product line and customer segment. Activity-based costing will give you a more accurate picture than you or your predecessor may have had in the past. The analysis should reveal the key cost and revenue drivers you need to address: areas where the cost of goods sold, for instance, is out of line, or where your revenue performance is below benchmark levels.

When Warren Knowlton, until recently the CEO of the venerable British company Morgan Crucible, agreed to take the top job there, he learned that Morgan had hundreds of products, ranging from crucibles and advanced piezoceramics to body armor and state-of-the-art superconductor magnetic systems. He needed to determine which were making money and which were dragging the company down, so he drew up a list of critical questions for the heads of his business units. For example, he asked them to delineate their expectations for operating profit during the coming year and to explain expected changes from the preceding year. Then he asked for details. One question was "What percentage of your revenues represents sales to customers you would consider to have significant leverage over you?" Another was "How much of your revenue do you believe represents price-sensitive, commodity-type products?" Other questions focused on the cost side, including matters such as purchasing procedures and performance compared with that of rivals. The answers gave Knowlton a jump-start on his analysis of product-line profitability. He subsequently made major shifts in product lines to de-emphasize commodity products and unprofitable customers. Along with significant cost reductions, these moves enabled him to engineer a remarkable performance breakthrough, increasing the company's share price 10-fold in just three and a half years.

Evaluate Your Competitive Position

The second principle in our template is that your competitive position determines your options. Depending on your industry, there can be different drivers of profit leadership, including customer loyalty and "premiumness" of the product. But in most industries, one of the strongest predictors of a company's performance is its relative market share (RMS).

RMS is easy to calculate. If your company is a market leader, simply divide your share by the share held by your closest competitor (30% divided by 20%, say, equals an RMS of 1.5). If you're a follower, divide your share by that of the market leader (20% divided by 30% equals 0.67 RMS). Now plot the companies in your industry according to their RMS and their returns on assets (ROA). (See the exhibit "A Map of the Marketplace.")

Sidebar Icon A Map of the Marketplace (Located at the end of this article)

You are likely to find that for many firms, higher RMS corresponds to higher ROA, and vice versa. This reflects the fact that market leaders typically outperform market followers on ROA; they have greater accumulated experience, leading to lower costs and superior customer insights, which in turn lead to higher profits. They thus have a greater ability to outinvest the competition in innovation, customer service, branding, and product support.

Compare your returns and market share with those of your rivals.

The ROA/RMS chart is an extraordinarily useful diagnostic tool because it helps you narrow down your options for performance improvement. There are five generic positions on the ROA/RMS chart: in-band leaders, in-band followers, distant or below-band followers, below-band leaders, and overperformers. Each has its own imperatives. Typically, for instance, in-band leaders find that they can raise the bar for competitors by investing in still-greater market share and in product or service improvements. In-band followers usually need to work hard just to keep up; only occasionally can they jump into a leadership role through heavy investment in innovation, the way Sony Computer Entertainment's PlayStation leapfrogged Nintendo in the video game industry in the 1990s. Overperformers, which earn returns well beyond what their relative market share would suggest, typically need to maintain high levels of investment in whatever has enabled them to escape the pull of the band (assuming they aren't simply capitalizing on a temporary price umbrella). That might be a trusted or prestigious brand, an innovative or patented technology, exceptionally loyal customers, or some other asset. Below-band companies, of course, have probably not been managing their costs down the experience curve, which would be a primary reason for their underperformance.

Whatever your company's position, the band helps you understand its full potential by showing both opportunities and constraints. An in-band follower, for example, can't expect to earn the returns of a leader unless it moves up the band or escapes into the overperformer category through one of the strategies mentioned.

Band analysis can be used for two other diagnostic tasks: anticipating competitors' improvement strategies and assessing businesses in a multiunit organization.

Mapping your company against competitors is the first step toward seeing how each firm is making money or where it is failing to do so. It allows you to spot potential threats to and opportunities for your business, and to assess the strategic options available to others. For example, when we and our colleagues began compiling a band chart for credit card companies, we could find no relationship between market share and returns--a highly unusual situation. So we asked what was driving the returns of the most successful players. The analysis showed us that in this business, customer loyalty was the single most important factor in determining profitability. If every company were equally skilled at retaining customers, then market share would be the principal driver--but that wasn't the case. Because of the high cost of customer acquisition and the tendency of customers to increase their credit card use over time, sophisticated techniques for retaining customers could overcome advantages of pure scale and allow successful companies to become more profitable than their competitors. That would increase their RMS as well. Companies that had not developed such techniques were operating at a serious disadvantage.

Band analysis can also help the leader of a multiunit organization determine whether each business is achieving close to its full-potential performance. This objective was at the heart of Knowlton's decision-making process regarding Morgan Crucible's many businesses. Placing Morgan's business units on a band chart that compared their economic performance with their region-weighted relative market share, Knowlton could see at a glance that some units, such as the company's industrial rail and traction division, were in the band: They were performing as expected. Others, such as thermal ceramics, were below the band and needed to be moved upward, typically through aggressive cost control and measures designed to grow revenue. Still others were laggards in the lower left of the band and were candidates for divestiture.

Measure your market size and trends.

How big is your market, exactly? Which parts are growing fastest? Where are you gaining or losing share? A simple way to map your market's size and dynamics is to draw a rectangle and then divide it into vertical segments representing your most important submarkets or products. The width of the segments should be set in proportion to the share of revenues they account for in the market. Next, divide each of these vertical segments into boxes representing the share held by each principal competitor. Create one chart for three to five years ago and one for the present. The two charts will show you the sectors and the competitors experiencing market growth. Depending on your situation, of course, you may need to customize the basic chart. A company selling telecommunications equipment in Asia might first map the Asian telecom market by country and by sector (wireline, wireless, and so on) and then break it down into competitors' market shares. Again, comparing two or more points in time will show you where, and how fast, the market is growing. Faster-growing markets attract more competitive interest, so you will need an aggressive plan to win your share.

Other tools may be useful as well. A so-called S-curve chart, for instance, which plots industry growth against time, can show the inflection points where growth accelerates and then tapers off.

Assess your firm's capabilities.

Your company's chances to achieve its full potential--to improve its position on the band chart--depend significantly on its capabilities. Which critical capabilities are giving you a competitive advantage? Which do you lack? Which need to be strengthened or acquired? The global technology and engineering company Emerson, for example, knows how to manage its costs so aggressively that it can acquire other businesses and then add substantial amounts of value. Companies can also succeed if they can develop capabilities they don't currently have. The iPod didn't really take off until Apple developed the capabilities to manage and sell digitized music through its iTunes store.

Every company, of course, must make decisions about which capabilities it wants to develop or maintain in house and which it wants to obtain from suppliers. The context for these decisions has changed dramatically in recent years. In many industries the primary basis of competition has shifted from ownership of assets (stores, factories, and so on) to ownership of intangibles (expertise in supply chain or brand management, for example). At the same time, a handful of vanguard companies have transformed what used to be purely internal corporate functions into entirely new industries. Thus FedEx and UPS offer world-class logistics-management services, while Wipro and IBM offer numerous business and IT services.

The result of all this is that companies can no longer afford to make sourcing decisions on a piecemeal basis--nor can they be satisfied with a "good enough" approach to selecting and working with suppliers. Today, you must assess every capability that you need in order to create or develop a product or service. You should analyze every step of your value chain, from design and engineering to product or service delivery. You should compare yourself not only with competitors in your industry at every step of the chain but also with whatever companies are the best in the world at performing each particular step. Are you the best? Or do you have some capability that creates a sustainable competitive advantage in a given step? If the answer to both questions is no, you should ask whether you can improve or acquire the relevant capability, or whether you might be better off sourcing that part of your value chain to the best supplier.

Understand Your Industry's Profit Pool

The third principle in our template is that customers and profit pools don't stand still. Markets undergo massive changes all the time, mostly because customers' desires and needs evolve. Companies repeatedly discover that the landscape they operate in has altered significantly and that the plans and strategies that worked so well yesterday no longer work today. They find that the profit pool from which they were drawing their earnings has dried up or attracted new competitors, and that deep new pools of profit have appeared elsewhere. (For more on profit pools, see Orit Gadiesh and James L. Gilbert, "Profit Pools: A Fresh Look at Strategy," HBR May-June 1998.) For these reasons, you'll need to examine the profit pools you currently draw on and those that might hold potential for the future.

Study customer needs and behavior by segment.

Correctly segmenting customers and developing proprietary insights into their purchasing behavior is one of the most powerful methods of building loyalty, increasing growth, gaining market share, and thus expanding your share of the profit pool. Which are the biggest, fastest-growing, and most profitable segments? How well do you meet customers' needs, compared with competitors and substitutes? As you raise these questions, you will want more-specific answers, such as how customers are segmented. On the basis of needs? Behavior? Occasion of use? Demographics? What are each segment's characteristics and spending habits? What share of wallet is each one currently giving you, and is there reason to think that you can increase that share?

You can use many tools to delve deeply into customer needs and behavior. These range from cluster analysis to sophisticated ethnographic research. It's often worthwhile to look at customers through many different lenses because you may spot something that customers themselves aren't even aware of. While we don't have space to discuss all such tools in this article, we'll mention a simple one that has been remarkably effective even in highly sophisticated industries. We call it a SNAP (segment needs and performance) chart. It can help you assess how well you are meeting the needs of the segments you are targeting.

To develop a SNAP chart, start by defining the attributes of the products or services you offer that may be important to the customer segments you want to target. Then conduct research to determine how important each of these actually is to these customers. A bank, for instance, might study everything from its hours of business to its loan rates to the quality of the advice it offers and the ease of access to its ATMs. Finally, assess where you stand on each scale and where your competitors stand.

This process will show how you measure up to the competition in the eyes of your key customer segments. You can use the SNAP chart to identify which gaps are most important to close (if you're behind) or widen (if you're ahead). You can also see where you might be overshooting the mark. (See the exhibit "Segment Needs and Performance.")

Sidebar Icon Segment Needs and Performance (Located at the end of this article)

Track customer retention and loyalty.

What proportion of customers are you retaining? Loyalty can be a critical factor in the economics of a business, particularly when the cost of acquiring a customer is high, switching costs are relatively low, or both. Accordingly, you need to know your retention rates for each segment. Doing so not only will help you determine the profitability of the segment but also will help you make plans to boost retention rates where necessary.

A good indicator of loyalty and probable retention is the Net Promoter Score (NPS), developed by our colleague Fred Reichheld. This measures customers' responses to the question "How likely is it that you would recommend this company (or product or service) to a friend or colleague?" Respondents answer on a zero-to-10 scale, where a 10 means "Extremely likely" and a zero means "Not at all likely." Those who give you a nine or a 10 are your promoters. Research shows they spend more with you, are likely to increase their spending in the future, and sing your praises to their friends and colleagues. Those who give you a seven or an eight are passives, and those who rank you zero to six are detractors. Promoters are an engine of growth, but detractors often cost your company more than they are worth, and they bad-mouth you to anybody who will listen.

Your Net Promoter Score is simply the percentage of promoters minus the percentage of detractors. Measured relative to competitors, NPS has been shown to correlate with growth rates and with other measures of customer satisfaction. Properly implemented, NPS creates a closed learning loop among customers, the front line, and management, and thus can be used as a basis for managerial decisions, just as financial reports are. American Express and many other companies use NPS-like metrics throughout their organizations to give them quick, regular reads on customers' attitudes and potential behavior.

Segmentation and retention efforts are at the opposite ends of a six-step chain of activity that enables a company to earn more profits per customer than its competitors and then to outinvest the competitors to generate faster growth. The first steps are (1) identifying the most attractive target segments and (2) designing the best value propositions to meet their needs. The next ones are (3) acquiring more customers in the target segment and (4) delivering a superior customer experience. That enables the company (5) to grow its share of wallet and (6) to increase loyalty and retention, with more promoters and fewer detractors.

Anticipate profit-pool shifts.

CEOs and general managers naturally need to assess how much of their industry's profit pools their firms own today. But they must also gauge how profit pools are likely to change in the future and what opportunities or threats these shifts may create. One useful tool is a profit-pool map, which shows the channels, products, or sequential value-chain activities in the market and indicates the total profits available from them. You can then locate your business and its competitors on the map, showing how much each company takes from each part of the profit pool. It's wise to do this for all customer segments and all sets of products.

A company we'll call FitEquipCo mapped the growth (historical and projected) of its industry. Then it gathered extensive data about customers' intent to purchase or repurchase and developed profit-pool projections by product (treadmills, elliptical machines, and so on), by sales channel (mass merchants, specialty stores, and so on), and by price point (entry-level, value, and premium). The map showed, for instance, that FitEquipCo needed to build up its distribution through sports specialty stores, which delivered higher margins. Through such measures, the company projected, it could increase earnings by $86 million over a three-year period, more than doubling operating profits. (See "A Map of the Profit Pool.")

Sidebar Icon A Map of the Profit Pool (Located at the end of this article)

As with the market map, it's wise to compare at least two points in time so that you can see how the pool is evolving. Often a significant threat to the profit pool comes from companies that don't yet compete in your industry or are still too small to be noticed. Yet these competitors can turn an industry upside down. Think, for example, of the effects minimill companies such as Nucor had on the U.S. steel industry.

Simplify, Simplify

The fourth principle in our template is that simplicity gets results. A couple of years ago, researchers from Bain & Company surveyed executives in 960 companies around the world, asking them about complexity in their organizations. Nearly 70% of the respondents told us that complexity was raising their companies' costs and hindering growth. Another team of researchers studied the impact of complexity on the growth rates of 110 companies in 17 different industries. The researchers found that the least complex companies grew 30% to 50% faster than companies with average levels of complexity, and 80% to 100% faster than the most complex companies. In one particularly dramatic example, a telecommunications company that offered consumers only about one-fifth the number of options offered by a competitor was growing almost 10 times as fast.

Gauge the complexity of your products or services.

To diagnose your company's level of complexity, begin by asking how complex your product or service offerings are and what that degree of complexity may be costing you. Benchmark your line of products or services against the competition's; try to identify your "innovation fulcrum," the point at which the variety of products or services you offer maximizes your sales and profits. It will be helpful to construct what we call a Model T chart, showing the costs when you add features to the basic product or service. It's valuable to do this exercise not only with your own company's data but also with your competitors'. (For more on complexity and the Model T chart, see Mark Gottfredson and Keith Aspinall, "Innovation Versus Complexity: What Is Too Much of a Good Thing?" HBR November 2005.) Ask yourself which of your competitors has the advantage as variety and complexity in the industry increase--and why. You can apply what you learned from your customer segmentation research to this assessment. If you know what customers want now and what they are likely to want in the future, you can better judge what level of variety is appropriate for your marketplace.

The complexity test is a necessary counterbalance to tools such as customer segmentation. The temptation, after all, is to divide your customer base into finer and finer subcategories and tailor your offerings to each segment, all in the name of giving customers exactly what they want. That was one way Charles Schwab, the financial-services firm, got itself into a difficult situation in the early 2000s. Schwab added a plethora of new offerings and divisions, including a firm specializing in institutional investments and an East Coast wealth-management company. In 2004, founder Charles Schwab returned to the firm as CEO and promptly took steps to reduce the complexity. He sold off most of the recent acquisitions, reduced the number of service offerings, and streamlined internal roles and processes. These and other moves allowed him to take out some $600 million in costs, reduce commissions, gain market share, and increase the firm's operating income by 3%.

Assess the complexity of your organization.

Decision-making procedures and organizations grow complex over time as well. You need to know how your company stacks up against competitors on these dimensions and what the effects of undue complexity may be. Our colleagues Paul Rogers and Marcia Blenko have developed what they call a RAPID analysis, which allows managers to assess decision-making bottlenecks, assign clear decision roles to individuals in the organization, and hold them accountable. (RAPID is a loose acronym for the different roles people can take on: recommend; agree; give input; decide; and perform, or implement the decision.) Another useful tool is a spans-and-layers analysis, which shows the number of levels in an organization from the CEO to the frontline worker, and the number of people reporting up to each level. Spans that are too narrow--meaning too few people report to individual bosses--are likely to lead to excess overhead costs, slow decision making, and unnecessary managerial oversight.

When sizing up your company's decision making, turn to suppliers, distributors, and customers for feedback. They are often good judges of how quickly and effectively you can make a decision compared with others in the industry. Employees will be quick to tell you whether they feel supported and empowered by the organization's management structure or whether it just gets in their way.

Determine where you can simplify processes.

Where does complexity reside in your processes? What is that costing you? St. George Bank, like others in Australia, experienced a slowdown in residential lending at one point and so was developing a growth strategy for commercial banking. But the complexity of the bank's commercial credit processes was a major constraint on growth. All loan applications, large or small, were treated in a similar way. A sizable number of applications had to be sent up the ladder to a central credit group. Then-CEO Gail Kelly and her management team determined that this level of complexity was not inevitable--for example, they could create a fast-track system for applications from existing customers that fell within certain risk boundaries. That alone led to a 30% reduction in time spent by the lending officers. The bank also increased the amounts that a local lending officer could approve, resulting in a reduction of 50% or more in deals sent to the central credit group.

How can you identify such opportunities for process improvement? As at St. George Bank, process complexity can show up in any number of areas: on the production floor, in distribution networks, in interactions with customers, in back-office procedures. The key is to figure out where complexity is unavoidable--and where, by contrast, you can put practices in place to reduce complexity while still delivering the products and services that customers want. Process mapping is a good way to get started. In a process map, diagrams show the interactions among different steps in a process and the people or departments responsible for the steps. This enables the management team to visualize and understand the whole process, spot problems and opportunities for improvement, and address them through root-cause analysis. You want to map activities, inputs, and outputs associated with each step, and the wait times between steps.

Successful streamlining of the processes produces several mutually reinforcing benefits. It increases efficiency, allowing a company to reduce head count and its costs. Streamlining also cuts down on errors and rework. It reduces cycle time, enabling the company to deliver the product or service to the customer significantly faster and enhancing customer loyalty. More-loyal customers are likely to order more, generating growth and increasing the possibilities for still greater economies in production or service delivery.

Many companies try to simplify their processes without simplifying any other aspect of the organization. This is a mistake. Process simplification tends to be undermined by unnecessary complexity in the company's product lines, organization, and decision-making procedures. So gather the data to address complexity on all three fronts and then determine the most fruitful points of attack.

• o o

A diagnostic template such as the one we've described here is powerful not because it contains any single new insight but because it covers the ground a management team needs to cover. By answering the questions we've provided, you can pull together a comprehensive set of data enabling you to understand the gap between your current performance and your full potential. You can then set specific goals and launch initiatives that will drive the company to achieve that potential during your tenure and develop the performance profile that you are shooting for. A company that has worked through such a diagnostic template might aim for objectives such as these:

• Reduce costs by $200 million to move relative cost position from 110% of best competitor to 90%.
• Increase relative market share from 0.9 to 1.2; move share of high-profit segment A from 40% to 60%, with a retention increase of six percentage points.
• Increase share of profit pool from 40% of $2 billion to 70% of $2.8 billion by expanding into a downstream service business in the most profitable product segments.
• Cut SKUs from 100,000 to 2,000; reduce organizational layers in SG&A from five to three; outsource 20% of all G&A costs.

Objectives like these can translate into marching orders for an entire organization. Because they stem from a comprehensive diagnosis, everyone can understand them and see why they are important. Both managers and employees are more likely to buy in and put their shoulders to the wheel.

Diagnosis, of course, is only one part of a performance-improvement program. You still must decide on where you want the company to go, along with the three to five critical initiatives that will get you there. But a thorough, accurate diagnosis is what makes the rest possible. It's an indispensable first step toward breakthrough performance. Questions That Will Lead You to Breakthrough Performance

1. First Principle

Costs and prices almost always decline.

• How does your cost slope compare with your competitors'?
• What is the slope of price change in your industry right now, and how does your cost curve compare?
• What are your costs compared with competitors'?
• Who is most efficient and effective in priority areas?
• Where can you improve most, relative to others?
• Which of your products or services are making money (or not) and why?

2. Second Principle

Your competitive position determines your options.

• How do you and your competitors compare in terms of returns on assets and relative market share?
• How are the leaders making money, and what is their approach?
• What is the full potential of your business position?
• How big is your market?
• Which parts are growing fastest?
• Where are you gaining or losing share?
• What capabilities are creating a competitive advantage for you?
• Which ones need to be strengthened or acquired?

3. Third Principle

Customers and profit pools don't stand still.

• Which are the biggest, fastest-growing, and most profitable customer segments?
• How well do you meet customer needs relative to competitors and substitutes?
• What proportion of customers are you retaining?
• How does your Net Promoter Score track against competitors'?
• How much of the profit pool do you have today?
• How is the pool likely to change in the future?
• What are the opportunities and threats?

4. Fourth Principle

Simplicity gets results.

• How complex are your product or service offerings, and what is that degree of complexity costing you?
• Where is your innovation fulcrum?
• What are the few critical ways your products stand out in customers' minds?
• How complex is your decision making and organization relative to competitors'?
• What is the impact of this complexity?
• Where does complexity reside in your processes?
• What is that costing you? Understanding Experience Curves

Experience curves show how much industry prices and your costs have fallen each time the industry's cumulative experience (total units produced or services delivered) has doubled. They also allow you to predict how much inflation-adjusted prices and costs are likely to decline in the future.

The "slope" is the percentage of original price or cost remaining after each doubling of experience: A 70% slope, for example, means that prices have dropped by 30%.

Mapping your industry's price curve against your own cost curve can help pinpoint cost-reduction objectives. If you can reduce your costs faster than the previous CEO or general manager did, as in the graph below, you may be able to drive industry prices down faster as well, thereby putting pressure on your competitors' margins.

This chart shows the rate of price declines for every doubling of accumulated experience for a sample of both manufacturing and service industries. (The time periods here reflect a wide variety of studies conducted at different times.)

A Map of the Marketplace

One method of assessing your position in the marketplace is to plot the company's relative market share against its return on assets, and to do the same for your competitors. Companies in a well-defined industry typically line up in a fairly narrow band, reflecting the fact that market leaders usually outperform market followers on ROA. But a handful of companies ("overperformers") earn above-band returns while having a midrange or low market share, and others languish below the band with low ROA--often because they have not managed their costs down the experience curve.

Segment Needs and Performance

This SNAP (segment needs and performance) chart displays data for a fitness machine company we're calling FitEquipCo. The company exceeds customers' requirements on innovation and assortment, the attributes that rank fourth and sixth, respectively, in importance to customers. It is thus incurring costs that may not earn a return in the marketplace. Meanwhile, it is slightly underperforming competitors on quality, which is first in importance, and significantly underperforming on customer service, which is third. FitEquipCo needs to take action to close those gaps.

A Map of the Profit Pool

A profit-pool map for FitEquipCo revealed some telling market developments. Although the company was shipping almost 40% of all units in the marketplace, it had only about 20% of the profits. The column widths reflect the proportion of units sold (left) and operating profits earned (right) in each channel.

How Star Women Build Portable Skills

Research has shown that star performers often falter when they move to new companies. Further analysis reveals that's true primarily of men.

by Boris Groysberg

About four years ago, with the war for talent in high gear, my colleagues and I wrote an article in these pages warning managers of the risks in hiring star performers away from competitors. After studying the fortunes of more than 1,000 star stock analysts, we found that when a star switches companies, not only does his performance plunge, but so does the market value of his new company. What's more, these players don't tend to stay with their new organizations for very long, despite the generous pay packages that lured them in. Everybody loses out.

But further analysis of the data, which I've done over the past three years, reveals that it's not that simple. One group of analysts reliably maintained their stardom after changing employers: women. Unlike their male counterparts, female stars (189 star women, 18% of the star analysts in the original study) who switched firms performed just as well, in the aggregate, as those who stayed put. And while investors appear to believe that companies are overpaying for male stars or anticipate a drop in performance for men, this is not so for female stars. Firms acquiring male stars experienced a significant share-price loss of 0.93%, whereas the acquisitions of female stars generated a nonsignificant share-price increase of 0.07%.

Sidebar Icon Research Methodology (Located at the end of this article)

Why the discrepancy? I found two overarching explanations. First, the best female analysts appear to have built their franchises on portable, external relationships with clients and the companies they covered, rather than on relationships within their firms. By contrast, male analysts built up greater firm- and team-specific human capital, investing more in the internal networks and unique capabilities and resources of the firms where they worked.

Second, women took greater care when assessing a prospective employer. They evaluated their options more cautiously and analyzed a wider range of factors than men did before deciding to uproot themselves from a company where they were already successful. Female star analysts, it would seem, take their work environment more seriously yet rely on it less than male stars do. They look for a firm that will allow them to keep building their successful franchises their own way.

This is not to attribute the fortunes of female stars to innate gender characteristics. The portability of their performance seems to be the result of strategic choices they made in response to situations they faced at work. These strategies made them stars--and also made their skills highly effective in other companies. Former Morgan Stanley star Carol Muratore told us, "For a woman in any business, it's easier to focus outward, where you can define and deliver the services required to succeed, than to navigate the internal affiliations and power structure within a male-dominant firm."

Though female stars adopt these career strategies as a way to overcome institutionalized norms that put them at a disadvantage, their strategies are not a second-best alternative. Rather, they constitute a powerful skill set from which any manager would do well to learn. The star performer study focused on one labor market--Wall Street analysts--but the challenges these women face are similar to those in other knowledge-based industries, such as management consulting, health care, public relations, advertising, and the law. Some of the female stars' actions were designed to help them advance within their firms, and only incidentally increased their portability; others were deliberately adopted to ensure that they would be able to succeed elsewhere. Either way, the strategies of star women can help both men and women enhance their ability to shine in any setting.

Building an External Network

Most salespeople, traders, and investment bankers are men, and men tend to spend time with other men. The star women in the study, thwarted in their efforts to integrate themselves into the existing power structure, went to great lengths to cultivate relationships with clients and contacts at the companies they covered. Their decision to maintain an external focus rested on four main factors: uneasy in-house relationships; poor mentorship; neglect by colleagues (notably the sales force and traders); and a vulnerable position in the labor market.

Uneasy in-house relationships.

As a conspicuous minority entering an entrenched culture, women in the study lacked natural alliances when they arrived on Wall Street. Outright malice and deliberate exclusion were rare, but less-than-wholehearted acceptance was not. Firms made few adjustments--either as a result of overt sexism or simply because it never occurred to the men running the business that the corporate culture ought to change. Sara Karlen, a former human resources manager in Merrill Lynch's equity research department, noted that people are most comfortable forging relationships with those most like themselves; in the world of investment banking this meant other men.

Some women also pointed to the risks of cultivating internal relationships--risks that didn't apply to men. "You never want to have someone say, `She got the top vote from that salesman because she's sleeping with him,'" said former star analyst Bonita Austin. "I think you're better served as a woman analyst maintaining a cordial but very professional relationship with all the men in your firm, especially sales force and trading--anybody who can have an impact on your compensation." Female analysts thus faced a double bind. In an industry based largely on relationships and networks, they could not afford to get close to male colleagues for fear of having their relationships misconstrued.

Poor mentorship.

Most female analysts who become stars have had mentors; in fact, the most conspicuous difference between star and nonstar women in equity research is access to a supportive mentor. But star women reported difficulty forging such relationships. They were less likely than their male counterparts to have mentors, and those who did have mentors received less support from them than male stars did.

Moreover, the female analysts in the study reported that even when they were mentored, they tended to be treated as more probationary than their male counterparts. Consequently, they missed out on one of the most valuable services a mentor provides: access to a network of relationships. Karlen related a story about when she joined another firm after leaving Merrill Lynch: "This guy was just brought on board to be the chief risk officer. He has been here for all of three days, and the CEO has started taking him around to the different offices introducing him to people. Whereas I had to figure out for myself: Who do I need to get in front of? I asked the CEO.... He gave me three names. And he goes, `You don't need to meet more than three people.'" One male star acknowledged that he was reluctant to mentor women because of the risk that he would be wasting his time: "Many female analysts leave because it is just so hard to succeed in this business; many leave for personal reasons....

• tend to stay around longer, so the fruit of your mentoring is around."

What's more, men who do mentor women can't offer much in the way of psychosocial support--how to deal with sexism, for instance, or how to balance a career and family--whereas female mentors, when available, may not be in a position to facilitate their protégés' integration into the firm culture. "Women many times don't want to be mentored by a woman, because...it doesn't necessarily help," Karlen said.

Neglectful colleagues.

Analysts' reports and investment ideas are customarily disseminated to buy-side clients by the investment bank's sales force, traditionally men. Their locker-room and sports-bar cultures make it difficult for female analysts to forge strong bonds. A salesman will tell you that he's selling both the product and the person, and when he travels with an analyst, having drinks at the bar is an important part of getting to know and trust each other. Women are less likely to travel, especially if they have families, and they're less likely than men to turn up at the bar. It's not about a lack of information exchange--the salesman could glance at an analyst's résumé or pick up the necessary details in a 10-minute cab ride on the way to visit a client. But the easygoing fellowship isn't there. Former star retail analyst Josie Esquivel put it realistically: "

• go drinking with the sales force....This is the way the world is. You get around it by providing services to the client directly."

Salesmen acknowledge the dilemma. One put it in stark terms: "Say there are two analysts, John and Joanne--equally smart, equally good analysts, both in their late twenties/early thirties, both spend 14 hours a day at work. The day is only 24 hours long, so I have to allocate my time intelligently....Who is most likely to stay at the firm? Based on my experience, I have to say John. Joanne is going to get married...she might decide to have children....Is this not rational? It's just the way the business is."

Vulnerable position in the labor market.

Certain aspects of the choices the women in the study made represented a knowing effort to protect their portability in the event of a layoff. Even female-friendly firms tend to lay off more women than men during economic contractions. Although women accounted for just 21% of Wall Street analysts in 1986, for instance, they represented fully 64% of those who were let go following the 1987 crash.

Women focused on building external relationships with clients to counterbalance these internal disadvantages. This is a highly adaptive and strategically shrewd strategy. Not only does it protect their portability, but it has the added benefit of boosting their reputations with colleagues. Women who proved themselves by achieving Institutional Investor, or II, ranking on the strength of client relationships found that they were taken more seriously in-house. One female star, after being ranked for the first time, began to get calls from colleagues who had previously ignored her. One salesman unapologetically confirmed the reality of this phenomenon from the other side. When clients start to ask about a newly anointed female star, "they force me to learn ," he said.

Scrutinizing Prospective Employers

Women and men overwhelmingly agree that women are more deliberate in changing employers, probably because experience has taught them the importance of environment and culture in both their performance and job satisfaction. While men tend to concentrate on compensation, women are more likely to weigh multiple considerations in making a move, such as the apparent attitudes of the research director and the existence of female colleagues and role models. Recruiter Debra Brown stated that "compensation is not as significant a factor for women as it is for men when making decisions on job moves." Josie Esquivel summed up her male counterparts' focus on compensation versus the overall package like this: "I was a star here, I can be a star there, I just want to make more money." Bonita Austin, who moved from Wertheim Schroeder to Lehman Brothers, acknowledged that while her new boss doubled her compensation, she wouldn't have made the move if she hadn't sensed an overall fit. Women look at the culture of a department, in terms of how women fit in, along with its values, atmosphere, and tone.

Receptivity to women.

When a man makes a move, he doesn't have to wonder whether there will be male role models. Sanford C. Bernstein's Lisa Shalett noted that "for a lot of guys, it just never comes up." The general observations that might be made about a firm's culture--that it is collegial, white-shoe, competitive, open-minded--don't necessarily reflect the experience that women will have at that firm.

Indeed, many of the female stars in the study moved precisely because they believed they would get more internal support in their new companies than they had in their old ones. Strategist Abby Joseph Cohen pointed out that the hiring firm signals interest from the start. "Obviously, if you're being recruited someplace, your new manager has a commitment to you."

Latitude and flexibility.

In addition to receptivity to women generally, women look for organizations that will welcome them as individuals, with distinctive styles, personalities, and methods of distinguishing their franchises. Historically, employees in many firms had to contend with very narrow definitions of acceptable style. Women (and men) were expected to behave and dress in very narrowly defined terms. Such clubbiness has diminished somewhat, but female analysts still find themselves walking a tightrope. They are discouraged from mentioning their personal lives, but refraining from doing so can make them seem standoffish. Their mentors and research directors urge them to stand up for and promote themselves, but aggressiveness among women is still frowned upon. "Strong, aggressive women are still seen as bitchy and irrational and emotional," said Sara Karlen.

Managerial support.

Female stars readily admit that they scrutinize the research director, who sets the tone for the department. Cohen, in explaining her move to Drexel Burnham Lambert, said, "I noticed in Burt Siegel's office a prominently displayed picture of his three daughters in basketball uniforms with Burt, who was the coach of the girls' team. I thought, just as he had provided opportunities for his daughters, he would create opportunities for me....I was further reassured when I looked around the department and saw that he had hired some high-quality women who seemed to be doing well at the firm." Helane Becker arrived at the same conclusion regarding Siegel, reasoning that his evident support for his daughters' achievements might reflect his assumptions about women's potential in the office.

Women know that management can also influence how women analysts are treated by the sales force and by investment bankers. One analyst recalled a meeting at Merrill Lynch with Jack Rivkin and some senior sales executives that she attended with another female analyst. At one point in the discussion, one of the salesmen suggested that "the girls" offer comments. Rivkin objected to the characterization and immediately interceded, telling the women they did not need to respond.

Objectivity in measurement.

Finally, several women spoke of the value of an impartial departmental measurement system as a bulwark against politics and favoritism.

"The expectation of an impartial performance measurement system is quite simply necessary for survival," said Carol Muratore. "Women may naturally select firms where there has already been management effort to enhance analyst efficacy and objective performance standards." Recruiter Debra Brown spelled out the protective function of objective measures: "Women like positions that are transparent...so that their abilities can be validated by objective measures."

Retaining Women, Developing Men

For employees, my findings indicate the value in thinking creatively and strategically about different paths to success. Although the study focused on just one industry, considerable research has shown that women face similar challenges in many male-dominated professions. The fact that unacknowledged sexism persists even in a profession as externally benchmarked as equity research suggests that women may face a steeper uphill climb in more subjective knowledge professions, like consulting. Just as the female Wall Street stars I studied employed creative strategies to succeed, so too can employees in other professions, male or female, who may not precisely fit their company's mold. There is more than one route to stardom.

Another lesson for employees is that the decision to change jobs should be made strategically, not only with an eye toward promotions and raises, but also from an informed awareness of the new firm's resources and culture. The men in the study were far more likely than their female counterparts to be lured away by higher compensation, and they paid the price in diminished performance. The strategies women employ to succeed at their jobs may be born of necessity, but there is no reason that some male analysts could not also benefit from adopting a slightly more external focus. (Skewing too far in this direction can cause problems, as the sidebar "Balancing Internal and External Relationships" shows.)

Sidebar Icon Balancing Internal and External Relationships (Located at the end of this article)

For organizations, the high-level implication of these findings is that companies should focus on building talent from within and take measures to retain the stars they create, male and female alike. A diversity of perspectives on how to become a star is a valuable resource for any organization, not least because it provides a source of learning and best practices. In fact, by paying closer attention to the careers of star women, firms could do a better job not only of attracting and retaining women, but also of developing men. They might, for instance, encourage men to break from the traditional mold and help women develop the internal ties that contribute to men's accomplishments.

In the late 1980s and early 1990s, Lehman Brothers' research department cultivated success by letting a thousand flowers bloom--supporting the different strategies and talents of a diverse group of analysts, male and female. They recognized women as an undervalued resource on Wall Street, brought them in and created an environment where women could succeed--and then incorporated women's strategies into their training so that everyone might benefit. Under Jack Rivkin and Fred Fraenkel, Lehman Brothers' research department encouraged female analysts to participate in the recruiting process and rigorously pursued gender-blind policies in every facet of the department's operation. Meanwhile the department jumped from fifteenth in the II rankings in 1987 to seventh in 1988, fourth in 1989, and first in 1990, 1991, and 1992. In the years that the firm was ranked number one, a higher percentage of female analysts were ranked at Lehman than at any other firm. In fact, many of the best and brightest women left research departments at other investment banks to join the Lehman Brothers research department.

Most of the recruiting committees of Lehman's competitors were composed almost exclusively of men, inadvertently signaling to candidates that there was little room for multiple approaches to career success. To communicate that the firm would evaluate talent in a more open way, Lehman's recruiting process exposed candidates to a broad range of employees. "After meeting with ten very different people, the candidate was bound to find someone with whom he or she could associate," said Rivkin. "Several candidates, even those who didn't receive an offer from us, commended us for showing them that there was more than one path to success." What's more, some male analysts opted out during the recruiting process because they were uncomfortable being interviewed and evaluated by women--women who could possibly become their team leaders, no less. In other words, the process screened out men uncomfortable in a culture in which women could thrive and men could learn from them.

That's important because Lehman sought analysts, male and female, who could not only learn but teach. Fraenkel looked for analysts who had something new to bring to the table, complementary skills that could rub off on other employees. This approach reflected Lehman's refusal to prescribe a best or right way to be an analyst. Fraenkel and Rivkin invited a variety of styles, allowing people to incorporate aspects of their personal identity, including gender, as they saw fit. The teaching and mentoring culture that evolved from this open approach to hiring offers an advantage to all employees, male and female alike.

Another implication for companies is that they would do well to understand--and communicate explicitly--the value they add to their employees' performance. Employees' perceptions of whether or not their skills are portable vary from firm to firm and don't always accord with reality. Perceptions differed strikingly, for example, at Goldman Sachs and Merrill Lynch, two firms that contribute similarly to stars' success. Merrill employees believed in their own portability: "We are free agents" was a typical comment there. Goldman Sachs employees, by contrast, tended to believe in their dependence on the firm: As one analyst said, "We are stars because of the firm we work for." From their first day at the firm, employees are told how much Goldman Sachs invests in their success.

The research shows us the value for employees and firms alike, of diverse and resourceful approaches to career management and development. Employees may want to enhance and protect their portability; employers may want to build and retain firm-specific human capital. Either way, the goal is developing stars who shine brighter, and longer, wherever they are. Research Methodology

The research behind this article is part of a larger study I did with Harvard Business School's Ashish Nanda and Nitin Nohria, documented in "The Risky Business of Hiring Stars" (HBR May 2004), in which we examined Wall Street's jet-setters and the degree to which their star performance followed them from one firm to another. We zoomed in on star stock analysts for several reasons. First, there are reliable data on both the performance of star stock analysts and their movements between companies. (We defined a star analyst as one who was ranked by Institutional Investor magazine as one of the best in the industry. The rankings are accepted both by Wall Street and academics as a reliable proxy for performance.) Second, analysts suffer relatively few distractions when they change jobs: They stay in New York, they stick with the same sectors, and they retain the same customers. And third, their performance is widely believed to be dependent on their talent. Over a nine-year period, my colleagues and I examined 1,052 star analysts who worked for 78 investment banks (4,200 analyst-year combinations). To round off the research, we conducted 167 hours of interviews with 86 stock analysts and their supervisors at 24 investment banks. Over the past three years, I have continued to analyze the data and have conducted additional interviews as part of the star analyst project. By further comparing the rankings of star male and female analysts who stayed in their jobs with those of star female and male analysts who switched companies, controlling for many individual and firm characteristics, I was able to figure out how their performance shifted when they changed companies. This article draws on the frank and detailed interviews my colleagues and I conducted, as well as the hard data we've gathered, to shed light on the complex dimensions of mobility and performance of male and female analysts. Balancing Internal and External Relationships

When it comes to gender differences, the major takeaway from my recent research is that female stars build skills that are more portable than those of their male counterparts, in no small part because they are more focused on external relationships. But employees who focus on external relationships in order to protect their portability should be aware that this choice can sometimes hamper in-house career progression. Whereas star women who moved to new firms but did the same job continued to perform well, some of those who switched from individual contributor roles to management roles within their firms experienced difficult transitions.

A star analyst progresses from being an individual contributor to a manager, spending a significant amount of time working with in-house colleagues, superiors, and direct reports to get the job done. This transition is difficult for women who have focused primarily on building external relationships. A successful manager needs a deep and broad understanding of the in-house culture and a solid set of relationships within the firm. In the words of one female former star analyst, currently a manager, "Your life changes when you become a manager....You really have to start developing peer relationships at the firm. That's how things get done: through relationships. If you are an analyst who built your franchise on your clients and on your companies, you have to refocus and start building in-house relationships. If you don't have relationships, you have no trust, and you will soon not have a job." Thus, it is important that women parlay their success, built on external relationships, into strong internal relationships.

Another side effect of external focus is that it may limit women's opportunities for team moves (known as lift outs). Changing firms as part of a team has a protective effect on performance--stars who move with their team do better than stars who change companies on their own. Female stars, whose internal relationships are not strong enough to lead to a lift out, lack this opportunity. Only 20% of women change employers as members of lift-out teams whereas 29% of male stars do. Furthermore, most teams led by female analysts in the research study consisted of only one or two employees, typically junior analysts or unranked senior analysts. Teams led by star male analysts tended to be larger and often cross-functional; they also included salespeople or traders. So the tendency of women to focus outward may get in the way of their chances to be part of a team move and thus may hinder attempts to increase their portability.

The Existential Necessity of Midlife Change

Roll up your sleeves--midlife is your best and last chance to become the real you.

by Carlo Strenger and Arie Ruttenberg

In a paper published in 1965, Elliott Jaques, then 48 and a relatively unknown Canadian psychoanalyst and organizational consultant, coined the term "midlife crisis." Jaques wrote that during this period, we come face-to-face with our limitations, our restricted possibilities, and our mortality.

In his own midlife and beyond, however, Jaques did not seem to live with a sense of limitations. In the 38 years between the publication of that paper and his death in 2003, at age 86, he wrote 12 books; he consulted to the U.S. Army, the Church of England, and a wide variety of companies; he married Kathryn Cason, who was his wife and collaborator for more than 30 years; and, with Cason, he founded a consulting company devoted to the dissemination of their ideas.

Elliott Jaques, you might say, lived twice. By the end of his first life, in his mid-forties, he had earned two doctorates, one in medicine and another in psychology. He had gone through psychoanalytic training and had gained a lot of experience as both an organizational consultant and a psychoanalyst. In his second life, Jaques became a truly independent thinker. He greatly expanded the range of organizations with which he worked, and he created the concepts and theories for which he is most famous. He formulated some of his most original ideas in the late 1990s, when he was in his late seventies and early eighties.

People tend to react to Jaques's life with amazement: "How can a person stay productive for so long?" In these pages, however, we argue that a life such as Elliott Jaques lived should not be considered unusual. People's conceptions of age are hopelessly out of touch with reality. Life expectancy today in the West is around 80 and continues to rise. This means that at 53--the median age of people in the baby boom generation (those born from 1946 to 1964)--the average baby boomer will live another 30 years. Stop and think about that for a moment: Since few people enter the workforce until they have completed their education--usually when they are in their twenties--the average baby boomer has as many years of productivity ahead of her as she has behind her.

As life expectancy increases, changes in middle age will become an existential necessity for many businesspeople. Some of these changes will be internally driven. Executives may feel that their work is no longer satisfying and that they want new challenges, for instance, or they may decide that it's time to branch out. Other midlife changes will be triggered by external events: A CEO may face an irresolvable conflict with the board of directors; an executive may fear being fired; a manager may have been passed over for promotion and think that his chances of ever reaching the next level are slim.

Whether a person goes willingly--or is pushed out--some midlife change is inevitable. But despite the necessity and frequency of such change, midlife (roughly the ages from 43 to 62) remains a very difficult period and one for which people are, on the whole, lamentably ill prepared.

Two opposing myths underlie many people's fears about midlife, inhibiting successful midlife change. The first, the myth of midlife as the onset of decline, is rooted in historically outdated conceptions. According to this myth, people end their productive lives and retire at age 65. Sixty-five is not a magical number, however. It was introduced as the retirement age in Germany in 1916. Twenty-seven years earlier, Chancellor Otto von Bismarck had established 70 as the age to begin receiving a pension. When asked how the state could afford such largesse, Bismarck replied that almost nobody would reach this age anyway. He was right. According to one source, life expectancy in Germany at the time was 49.

The second myth is the notion of midlife as magical transformation. This myth, the fruit of the past few decades, has been fed by countless self-help books and magazine articles, and by a general cultural atmosphere. The myth tries to sell the illusion that if people have enough vision and willpower, they can be anything or anybody they want to be. Paradoxically, this doesn't make midlife career changes easier--it makes them more frightening. Faced with stories of doctors who get up one morning knowing that they want to become chefs, housewives who have a sudden vision of the business empires they are about to build, and lawyers who one day have crystal clear plans for high-tech businesses, real-life human beings are bound to feel inadequate. They have fears, doubts, and vague ideas at best, so they'd better stick to their knitting.

Our theory that a belief in either of those myths inhibits successful midlife change is based on our decades of work with entrepreneurs and executives in many fields, our qualitative and quantitative studies of the over-50 age-group, and the most important theories of personality in the humanistic and psychoanalytic traditions. In the following pages, we will explore the myths in more detail and demonstrate how they lead to a dysfunctional approach to midlife. What we have learned is that executives who can see past these myths can make very successful life and career changes. The key is that they stay open to the range of possibilities their experience has actually qualified them for--but remain realistic about what they can achieve. Finally, we'll examine ways that cutting-edge companies are starting to help executives make the transition into their second lives.

Debunking the Myth of Midlife Decline

The ideas that midlife marks the onset of decline, and that acceptance of growing limitations is the only mature way to deal with aging, are still generally accepted as good common sense. Common sense, however, may be overrated. Midlife is exciting because it is a time when people have the opportunity to reexamine even their most basic assumptions.

Don't get us wrong: We are in no way trying to play down the objective problems that arise with midlife. There is the inevitable question of how aging citizens will maintain the standard of living most of them are used to without full-time corporate employment. Furthermore, people at midlife face more physical limitations. Health becomes a pervasive concern. As a physician once told us, "If you're 50 and nothing hurts, you're most likely dead!" Particularly in the U.S., which does not offer universal health insurance, a major illness can lead to a financial catastrophe. (See the sidebar "The Risk of Not Managing Midlife.") Add to this the fact that the cultural atmosphere makes it increasingly difficult for people in their fifties to find jobs, and it's not surprising that many middle-aged people experience enormous anxiety.

Sidebar Icon The Risk of Not Managing Midlife (Located at the end of this article)

Our point is that while those problems have become the focus of endless discussion, the advantages that many people gain in midlife have hardly been mentioned. By middle age, most executives have gone through protracted crises that seemed insurmountable at the time; through these crises, they have discovered their strengths. One strength that tends to increase with age is the ability to put emerging problems into perspective, which helps executives deal with the issues at hand much more calmly and with much greater self-assurance. By midlife, most executives have also had at least two decades of professional experience. They have been in many situations that taught them a lot, not only about the business but about themselves. Most executives have learned that they really enjoy motivating people, for instance, or that the opposite is true: They enjoy working on their own and find working with others a drain of energy.

We argue that for a growing number of people, the midlife years can be a period of unprecedented opportunity for inner growth. At best midlife can be a time when people move from what psychologist Abraham Maslow called deficiency motivations to growth motivations. Deficiency motivations are fed by lack. People who have no food, for example, will be consumed by the need to find nourishment. Those who lack self-esteem will be driven to prove their worth. By contrast, growth motivations are fed not by a deficiency but by the human need to realize our full potential. Motivated in this way, we may try listening to ourselves in order to discover who we are and what we want.

For all those reasons, we believe that individuals have more freedom at midlife than they do at any other time. We don't expect this idea to be accepted without resistance. The most deeply seated source of such resistance is the widespread belief that freedom is the absence of limitations and the presence of almost unlimited possibilities. According to this definition, midlife looks less than appealing.

The notion, however, that possibilities slip away with age is based on a false premise. The young do not have endless possibilities--that is an illusion, created by our limited knowledge of ourselves and the world when we are young. Early on, we make decisions on the basis of scant evidence of our true abilities; after all, in our late teens and early twenties, we know little about what we are good at and what we enjoy. Many careers evolve through a process of trial and error governed partially by external circumstances (company A rather than company B gave me a job) and by our images of success ("I must become a Wall Street executive!"). The illusion of the freedom of youth is also based on a retroactive idealization. We forget the pressures we faced: We had to get into a good school, get high grades, land a great first job, arrive at such-and-such a position by age 30, and so on. And in the middle of those demands, we had to shape our identities, develop our abilities, and establish our self-esteem.

By midlife, for many people, the pressures have lost much of their urgency. No longer riddled by the anxiety that they may not be good at anything, or by the need to prove that they are good at everything, they have the freedom that only self-knowledge can impart. They are also generally in less of a hurry. Most executives considering career changes do not need to act immediately. They have the time to listen to themselves, map their possibilities in the world, and create their new lives with care. The journey can take odd twists and turns before they end up in a satisfying place.

Consider Judith, an Israeli woman in her mid-fifties. She had done well for herself by most measures: She was a partner in one of the largest international accounting firms; she had a nice house; the youngest of her three children was about to graduate from a prestigious college. But there was one big problem: For the past year, Judith had found it increasingly difficult to go to work in the morning. She dreaded getting through her list of things to do; every time the phone rang, she was overcome by the temptation to tell her assistant to inform the caller that she was in a meeting. There was nothing at work that she was looking forward to: neither meetings with clients nor strategy interactions with her peers nor videoconferences with the firm's overseas bureaus.

Judith was going through a midlife crisis. Although she felt that she needed a career change, she simply didn't know where to start. Judith had lived her life along well-defined lines. She had married early; by becoming an accountant she had made a choice her family could accept easily; and she had suffered no major disruptions in the execution of her life plan. Her family had instilled in her a strong work ethic--time not accounted for was time wasted. "No wonder I became an accountant," she joked.

The first step in Judith's midlife transition was surprising, and it had little to do with career change. For Judith, an observant Jew, religion had always been important. But at some point she began to feel that her practice of Judaism had become a deadening routine. "For a long time I felt that there was no use rocking the boat," she said. "There were children to educate, and I didn't have an alternative to the set ways of our congregation. A secular lifestyle never appealed to me."

With prompting from a personal consultant, Judith started to read up on various strands of Judaism. Though highly intelligent, she had never truly considered the option of actively thinking about religion. After a few months of reading a variety of works by religious thinkers, she began to have a gleam in her eye. "These people are opening my mind! I can't believe I missed out on this!" Judith soon started to organize reading groups of like-minded people, and her husband became an enthusiastic partner in the search for new ways of experiencing Judaism.

It wasn't that Judith's religious expansion turned into a new career for her. Instead, it served as a catalyst for further change. She talked more to people. She realized that her view of herself as a creature of habit who couldn't do anything new was very limiting.

One of her responsibilities at work was advising companies in mergers and acquisitions. She had acquired a lot of expertise in this field but was finding the work repetitive and tiresome. However, the thought of crossing over to the investors' side--"to enemy territory," as she put it--was immensely threatening to her. Indeed, she was apprehensive when an acquaintance suggested that Judith talk to a venture capital fund. "I'm too old," she said. "None of the venture capital funds would be interested in me."

In fact, the first fund she talked to didn't have a suitable opening, but people there reacted very favorably to the idea of her moving into the field and even offered to help her find a position. It took about half a year before Judith got an offer and started to work for a venture capital fund. The condition was that she'd come in as a senior analyst. If there was a fit between her and the partners by the end of her first year, she would be offered a partnership. The fit was excellent, and within two years, Judith had made a successful midlife transition.

Judith's story exemplifies a ubiquitous pattern. She made use of a midlife transition not just for a career change but also to connect to her desires and become a more independent, self-directed woman. For people like Judith, midlife can be a particularly valuable period. Their lives can become enriched beyond recognition as they take steps toward what Carl Jung called individuation: the process of becoming your true self. Like Judith, many executives who successfully negotiate midlife changes finally have the freedom to ask themselves what they want and believe.

Debunking the Myth of Magical Transformations

What Judith did particularly well was to aspire to a realistic change. But that's not always the path that people take in midlife. An opposing myth about midlife transitions has flooded our culture in recent years, partly, we suspect, in reaction to the long-held view that midlife inevitably brings a loss of freedom. This new myth says that where there's a will, there's a way. Nike's immortal "Just do it!" sums up well the message disseminated by innumerable self-help books, inspirational workshops, and business talks that bill themselves as "electrifying," "uplifting," and "motivating." Take a closer look, and you'll find ideas from Eastern philosophies mixed up with slogans that are completely incoherent. Nevertheless, we have seen serious, experienced, and intelligent businesspeople poring over texts to find some unfathomable truths that are just not there.

One problem is that this myth of magical transformation conflicts with science. Our brains are composed of billions of neurons connected to one another through myriad pathways. Changing basic patterns of thought, feeling, and action requires that billions of new connections be formed. Such a process must be fed by constant experiential input and is therefore inevitably gradual. Our brains are organic structures, not computers onto which new programs can simply be downloaded. We accept that fact when it comes to sensorimotor skills like playing squash but tend to forget it when it comes to engrained psychological patterns, which are no less complex.

The myth of magical transformation through vision and willpower also fails the test of everyday experience. Magical transformations do not happen. We have never met anybody who got up in the morning with a full-fledged vision in his mind and then followed a straight path to realize it. The flesh-and-blood human beings we work with go through a lot of fear, confusion, and trial and error on the road to transformation, and the serious coaches we have spoken with over the years confirm this.

At some point, most people come to recognize that radical transformation is unrealistic. But the disappointment of that realization can be debilitating. We have seen hundreds of people come back from uplifting talks and intensive workshops believing that their lives were about to change forever. But the pattern is always the same: The magic lasts for several days, and within a couple of weeks the overwhelming majority of participants no longer understand why they thought the pep talks they heard would transform them. Subsequently, they feel confused--they don't quite know in which direction they would like to evolve, so they abandon their efforts to change. Paradoxically, therefore, the very doctrine that aims to encourage change in people serves to stifle it.

The myth of magical transformation has become pervasive because it feeds the all-too-human tendency toward wishful thinking. We all have fantasies about what we could have been in a different life: actors, singers, writers, tycoons, political leaders. Although most of us don't talk about these fantasies, they can have a strong hold on our psychology, as Freud convincingly showed. We often feel like butterflies confined by the cocoon of our real lives, waiting to be released. This fantasy is expressed in fairy tales and movies, and as long as it remains clearly understood as a fairy tale it presents no problems. But when people buy into the message that fantasy is a potential reality, they get into trouble.

To understand this problem, one has to acknowledge the difference between dream and fantasy. The British psychoanalyst Donald W. Winnicott characterized dreaming as the use of the imagination to create possible scenarios in which our potential can come to fruition. But to be productive, dreams must be connected to our potential. Otherwise, they are idle fantasies. Hence the ability to differentiate between dreams and fantasies is crucial: Without dreams, we are unlikely to make any changes, but getting lost in fantasies is not only a waste of energy but can also become an impediment to actual change.

Consider Albert. He was a senior vice president of marketing at a large bank and had recently found a tremendously successful new way to promote the bank's latest financial instrument. The grapevine was buzzing with rumors that Albert would become the bank's next CEO. Suddenly, he began to have chest pains. After numerous checkups, his physician suspected that Albert's pains were psychosomatic in origin and referred him to one of the authors, Carlo Strenger, for counseling.

Albert accepted that his symptoms might be partly psychological and related to his age (he was approaching 50), but he kept wondering why he should be in trouble now when his career was going so well. If his body was telling him that the corporate game was no longer for him, what should he do? Just thinking about leaving the bank made Albert shiver and sweat. "I've been a banker all my life! It would be nuts to throw it all away now," he said.

Albert's fears were natural. It is never easy for people to leave a home base that has given them status, income, and security. After a period of intense anxiety about the future, there followed a couple of months in which Albert talked incessantly about becoming a screenwriter and film director. Prompted by self-help books promising he could be anything he wanted, Albert planned to enter the highly competitive world of filmmaking. He even sat down one weekend and tried to write a script. But after thinking things through in counseling, Albert realized that this was not a realistic field for him. He had always loved movies, and his knowledge of film history was remarkable, but when pushed he admitted that the closest he had ever come to directing had been taking videos of his kids: "When I wanted to turn the videos of a vacation into something more, I gave it to a film student to edit; it didn't even cross my mind to do it myself," he said. Albert was realizing that becoming a director or screenwriter was more a fantasy than a dream.

At this point, Albert became visibly depressed. Not surprisingly, the myth of magical transformation had a paralyzing effect on him. He felt he lacked the gusto and traction of the people described in the inspirational, self-help literature. "They must be really special, and I'm not. I'd better hang on at the bank until retirement age," he said.

This was the stage at which Albert needed input from the external world in order to crystallize a new vision. The personal consultant pushed Albert to wonder what attracted him to movies. First, he loved the medium. Second, he thought that being in film would give him an opportunity to work with different types of people. "I'm not sure I can stand the idea of seeing pinstriped suits around me for much longer!" he complained. But he had a deeper motivation as well. Albert had felt at crucial junctures in his adult life that certain movies helped him understand what he was going through. His intense interest in this art form was driven in part by the desire to make movies that could help others in the same way.

After some hard-hitting reality testing, Albert realized that although he couldn't do everything he fantasized about, by putting his mind to it he could still do quite a lot. He loved motivating people; he loved generating ideas, and he was good at it; he liked devising strategies and had a proven record for that. Eventually, after a lot of networking and some counseling, Albert met a group of people who had decided to break off from a large corporation in the media industry. They wanted a smaller operation and more direct contact with the creative people. But they needed funding, and none of them was up to heading a company.

Albert had what they needed. He was good at strategy and had connections to funding sources. Most of all, he enjoyed the process of sifting through scripts, generating ideas, and bringing them to fruition. It took Albert some time to accept that there was financial risk involved in teaming up with this group. He feared that he would feel humiliated if he drove a less luxurious car than his peers did or skied at less exclusive vacation places. But because his self-esteem was sufficiently stable, Albert, with his wife's support, was able to work out a detailed cost-cutting plan. To his surprise, when he gave up his big corner office overlooking the city and the company car, he felt far less loss than he had thought he would. Several years later, he reported, not only was his new life more creative than his life at the bank had been, but his chest pains had disappeared as well.

Albert's transition was possible because ultimately he could distinguish between dreams and fantasies. Nobody would think that at age 50 it is realistic to start playing the piano with the goal of becoming an international concert pianist. It's also very rare for midlife career changes to entail a move from banking to writing scripts in Hollywood. People can rid themselves of the illusion of omnipotence by concentrating on the connection between their skills and aspirations. You might not become a professional pianist, but you could become an orchestra manager.

Managing the Career Change

The good news for executives approaching midlife is that changes in the work market in the past few decades have increased the opportunities for midlife career moves. For example, many professions and functions have emerged that didn't even exist 30 years ago. Moreover, large companies tend to outsource more and more tasks and functions, creating opportunities for professionals from various fields to market their services. The more executives are aware of the skills they have developed in the course of their work lives, the more they can take advantage of these opportunities.

Of course, as the examples we have described show, coming to a realization of possibilities is a challenging task, one that often requires the help of a personal consultant, coach, or therapist with some understanding of career development. Achieving self-awareness can also be a lengthy process. It took Albert more than a year even to admit that he should contemplate a career change, and he had the impetus of growing health concerns to signal the problem. Frequently the process will, as Judith found, require embarking on some nonprofessional project that serves as a catalyst. Executives can, perhaps, find such projects in their home communities or in the CSR projects their firms sponsor. Many executives may respond that the demands of their jobs at this stage of their lives preclude an investment of time in activities unrelated to their jobs. We strongly believe, however, that such activities can help executives discern the need for a transition; they can also highlight the direction that transition might take.

Midlife transitions are not just an exercise in self-management, however. Companies and their investors need to prepare themselves for the possibility that senior executives seemingly on track to become CEO (like Albert) may in fact be contemplating a very different path. Conversely, midlife transitions offer corporations an opportunity to import perspectives and skills from people looking to move into new areas of business, as Judith did. Because midlife transition is a problem (and an opportunity) facing companies for the first time on such a large scale, there are as yet no best practices. Nonetheless, some companies are trying to address the situation. Most limit themselves to sending managers to short seminars and programs that sell some simple message, such as "keep moving," "find the untapped potential inside yourself," or "think outside the box."

Those events can be useful, but companies that want to be serious about managing executives' midlife changes need to realize that it will require time. A three-day workshop can at best spur executives to initiate change, but it can never complete the job for them. Organizations need to take radical steps to help their executives understand that given current life expectancy, everybody in the company will leave at some point and begin a second life. The only question is at what age.

To create this mind-set, companies must help executives prepare for a second life as a matter of policy. We believe that everyone above middle management and over the age of 45 should have periodic meetings with coaches or consultants to help plan their second careers. Companies should also establish a continuing-education fund that executives can draw on to develop knowledge, skills, and interests that serve their personal development, not just their performance in their current jobs. As Rosabeth Moss Kanter, Rakesh Khurana, and Nitin Nohria have suggested, the business world must collaborate with institutions of higher education to develop programs and courses geared toward that end.

Companies may also find it helpful to establish links with business and nonbusiness organizations that offer opportunities for executives to collaborate on specific projects. Of course, such investments cost money, but the return is invaluable for as long as the executives stay at the company. Through various developmental activities, executives will become well-rounded professionals, which is a competitive asset in itself. More important, perhaps, encouraging people to think about their lives after they leave the organization may help them stop equating the end of employment with death--a belief that can cause panic to seep into the organization's culture. If people have developed other interests, knowledge bases, and skills, they will have greater self-confidence and feel less paranoia, and the organization will be more productive.

Companies also need to learn how to deal with an influx of talent from the baby boom generation. While many executives at midlife will discover that they need to find venues outside the corporate world, others will want to get in. Organizations that are willing to be creative in finding ways to use the skills and experience of the midlife executive can gain a competitive edge in the marketplace. One large financial company, for example, understood that baby boomers constituted a highly lucrative segment of its market. Many people in this generation have accumulated substantial assets and seek good management for their money. To attract this cohort, the company built a new midlife-oriented venture around a group of executives who were themselves in their fifties. These executives understood the specific needs of the target customers, knew what services they wanted, and were able to earn their trust in marketing efforts.

Because it is still so early in the game, few of the corporate responsibilities and opportunities for midlife transitions have been fully thought out. But this much is certain: Solutions such as therapy and coaching are at best stopgap measures. Realistic programs will have to be developed to help the growing numbers of midlife senior executives go through the long process of finding a vocation for the second half of their adult lives.

• o o

The baby boom generation is getting older, but its work is far from finished. Many people can anticipate and enjoy a second life, if not a second career. The task at hand is not as easy as the "just do it" culture of self-help promises, however. True transformation at midlife does not reside in us, waiting to emerge like the butterfly from the cocoon. Self-actualization is a work of art. It must be achieved through effort and stamina and skill. Fortunately, the life force does not just extinguish itself at age 65. Indeed, there is no period better suited to inner growth and development than midlife, when many people learn to listen to their inner selves--the necessary first step on the journey of self-realization. The Risk of Not Managing Midlife

Some readers will no doubt feel that despite the potential advantages, making drastic changes in midlife is simply too risky. First, it may seem dangerous to forgo pension benefits. Second, particularly in the U.S. (where there is no universal health coverage), it may be foolish to walk away from the company health plan. Given the high cost of private health insurance, it might seem preferable to stick to the protective environment of the corporate world.

Those fears are certainly understandable. The generation currently in midlife was born into a world in which corporations inspired trust and made workers feel secure. Most people's instincts told them that to stay within a large organization was to play it safe.

But increasing life expectancy, the rising costs of health care, and global competition have made it much harder for companies to meet their health care and pension obligations. Remember when GM was the largest company in the world and seemed unassailable? Now the union of automotive workers, generally intransigent in standing up for their members' rights, has renegotiated the terms of GM's health insurance benefits because the company has no way of meeting its actuarial debt of $55 billion. The company could collapse under this weight.

The facts no longer support the strategy of sitting tight within a large organization. In fact, that's bad risk management. Psychologically, we all prefer the status quo when it feels secure. But staking the future on corporate safety is a bet, not a no-risk strategy. People need to take their destinies into their own hands by thinking in terms not of safety nets but of active risk management.

Such a shift in mind-set has serious implications. Many people know quite early in midlife that there may be good reasons for a career change. Some may be in danger of losing their jobs; others may realize that their hearts are no longer in what they do. Hanging on for dear life is usually the wrong strategy. In terms of long-term risk management, it might be much better to start a new career at a relatively young age. Many people need to start thinking about alternatives that suit their abilities and personalities when they still have two or three productive decades ahead of them. In this way, they can discover the possibilities that will allow them to work much longer and thus ensure their financial well-being.

The Experience Trap

As projects get more complicated, managers stop learning from their experience. It is important to understand how that happens and how to change it.

by Kishore Sengupta, Tarek K. Abdel-Hamid, and Luk N. Van Wassenhove

If you were looking for an experienced manager to head up a software development team, Alex would be at the top of your short list. A senior manager, Alex has spent most of his career running software projects. His first responsibility was developing scientific software for NASA, and since then, he has overseen ever more complex projects for commercial enterprises and government agencies.

Alex was typical of the several hundred project managers who participated in our research initiative on experience-based learning in complex environments. We invited him to test his skills by playing a computer-based game that entails managing a simulated software