Harvard Business Review

Executive Summaries

Forethought

Leaders in Denial

Richard S. Tedlow Reprint: F0807A

Henry Ford's stubborn refusal to admit the changeability of consumer demand allowed Chrysler and GM to horn in on his market. Half a century later the whole U.S. auto industry made the same mistake: Enter the Japanese. But denial comes in many forms, as Sears, Digital Equipment, and Bear Stearns can attest.

Unmasking Manly Men

Robin J. Ely and Debra Meyerson Reprint: F0807B

Living alongside the roughnecks and roustabouts on two offshore oil platforms, the authors learned that when the men abandoned their macho behavior, they maximized the safety of their coworkers and did their jobs more effectively.

Making Diverse Teams Click

Jeffrey T. Polzer Reprint: F0807C

High interpersonal congruence--meaning alignment between team members' self-assessments and their appraisals of one another--improves the performance of diverse teams. And 360-degree feedback can help.

When Virtue Is a Vice

Anat Keinan and Ran Kivetz Reprint: F0807D

Choosing duty over pleasure today can cause regret down the road--whereas regret over the reverse is fleeting. Marketers of luxury products and services should consider prompting customers to predict their future feelings about choices made now.

Tap Consumers' Desire for "Shoulds"

Katherine L. Milkman Reprint: F0807E

Research shows that people favor pleasurable "want" options if the consequences are immediate, and good-for-you "should" options if the consequences will occur in the future. That finding offers potentially profitable opportunities.

Can You Hear Me Now?

Katharina Pick Reprint: F0807F

Because board meetings involve two groups--directors and managers--and because directors play a difficult dual role as both cops and advisers, boardroom communication can suffer. Executive sessions and active in-meeting leadership will help.

Reduce the Risk of Failed Financial Judgments

Robert G. Eccles and Edward J. Riedl Reprint: F0807G

When crucial financial estimates rely on judgment, companies can minimize their risk by turning to appraisers, actuaries, and evaluators, whether internal, external, or a combination.

A Conversation with Geoffrey Jones Reprint: F0807H

A business historian reminds us that since the nineteenth century, predictions about globalization have been reliably wrong. Despite technology for the fast diffusion of knowledge, information--like wealth--seems to be concentrating even further.

Managing Corporate Social Networks

Adam M. Kleinbaum and Michael L. Tushman Reprint: F0807J

Idea brokers are good at sparking cross-divisional innovation through their broad social networks. But implementation--marshaling resources and getting various stakeholders on board--requires dense webs of strong interpersonal relationships.

Help Employees Give Away Some of That Bonus

Michael I. Norton and Elizabeth W. Dunn Reprint: F0807K

Employees who spend some or all of their bonuses on others--thereby creating what the authors call a "prosocial" workplace--are happier as a result. Managers can enhance that effect by providing opportunities to share the wealth. HBR Case Study

The Sure Thing That Flopped

Gerald Zaltman and Lindsay Zaltman Reprint: R0807A

Tibal Fisher made a fortune selling trendy, inexpensive home furnishings to baby boomers. With that generation beginning to enter its sixties, he sees a huge opportunity in products for aging consumers. Focus groups and surveys confirm strong market demand for such items, and the media love the idea. So why is TF's NextStage, his new line of stores for older consumers, a disaster?

Donna J. Sturgess, global head of innovation for GlaxoSmithKline, thinks Tibal's research missed the subconscious associations in customers' minds--the deep metaphors that reveal people's true feelings about products. The solution: Find ways to generate positive emotional associations, as GSK has done with its weight-loss product.

Alex Lee, president of household-products maker OXO International, says consumers are attracted by brands they associate with the type of people they'd like to be--not the type they are. TF's NextStage must avoid trying to get customers to "act their age" and using labels and positioning that call attention to their senior status.

Yoshinori Fujikawa, a professor at Hitotsubashi University in Tokyo, says certain businesses--those led by executives with a talent for sensing what their customers want--can forgo deep research into customers' feelings, at least in the short term. But over the long term, firms need to have an organizational capability to create a systematic method for discovering what's going on in customers' minds.

Lewis Carbone, CEO of market research firm Experience Engineering, points out that customers often are unable to articulate their deepest feelings. That's why companies need to go to the trouble to work with them one-on-one to find out what's driving them toward--or away from--a brand. The HBR Interview

Finding a Higher Gear

Anand G. Mahindra Reprint: R0807F

Interviewed by Thomas A. Stewart and Anand P. Raman

The Mahindra & Mahindra Group, one of India's best-known business houses, is trying to become bigger, more global, and more innovative--all at the same time. In India's post-economic-reforms gold rush, the group, whose 2007 sales were $6.6 billion, has invested in a slew of unrelated businesses, from aircraft manufacture to film production. The flagship tractor and SUV businesses are readying to make big bets in, respectively, the Chinese and U.S. markets.

Anand G. Mahindra, the group's chief executive, warns that M&M will survive only by creating a culture of innovation. "Indian companies have almost caught up with the productivity frontier," he says. "What's going to distinguish us in the future is our ability to make products and services that capture the customer's imagination."

He says that in emerging markets, businesses structured as groups of companies have an edge over rivals. "I believe that business families should behave like aggressive private equity companies. They must allocate capital, demand performance, create synergies, sustain value systems, and implement good governance practices, but they should let professional managers run the companies." That's why he won't mandate change, globalization, or innovation; he believes in giving the CEOs of the group's divisions tremendous autonomy.

In this interview, conducted by two HBR editors, Harvard Business School graduate Mahindra discusses the advantages of creating a federation of companies rather than a conglomerate; the real role of the corporate center in today's world; and his personal formula for organizational transformation. Best of HBR

Putting the Service-Profit Chain to Work

James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Jr., and Leonard A. Schlesinger Reprint: R0807L

In exemplary service organizations, executives understand that they need to put customers and frontline workers at the center of their focus. Those managers heed the factors that drive profitability in this service paradigm: investment in people, technology that supports frontline workers, revamped recruiting and training practices, and compensation linked to performance. They also express a vision of leadership in somewhat unconventional terms, referring to an organization's "patina of spirituality" and the "importance of the mundane."

In this article, Heskett, Jones, Loveman, Sasser, and Schlesinger take a close look at the links in the service-profit chain, which puts hard values on soft measures so that managers can calibrate the impact of employee satisfaction, loyalty, and productivity on the value of products and services delivered. Managers can then use this information to build customer satisfaction and loyalty and assess the corresponding impact on profitability and growth. Describing the links in the service-profit chain, the authors explain that profit and growth are stimulated by customer loyalty; loyalty is a direct result of customer satisfaction; satisfaction is largely influenced by the value of services provided to customers; value is created by satisfied, loyal, and productive employees; and employee satisfaction, in turn, results from high-quality support services and policies that enable employees to deliver results to customers.

By completing the authors' service-profit chain audit, companies can determine not only what drives their profit but how they can sustain it in the long term. Best of HBR

Choosing Strategies for Change

John P. Kotter and Leonard A. Schlesinger Reprint: R0807M

The rapid rate of change in the world of management continues to escalate. New government regulations, new products, growth, increased competition, technological developments, and an evolving workforce compel organizations to undertake at least moderate change on a regular basis. Yet few major changes are greeted with open arms by employers and employees; they often result in protracted transitions, deadened morale, emotional upheaval, and the costly dedication of managerial time. Kotter and Schlesinger help calm the chaos by identifying four basic reasons why people resist change and offering various methods for overcoming resistance.

Managers, the authors say, should recognize the most common reasons for resistance: a desire not to lose something of value, a misunderstanding of the change and its complications, a belief that the change does not make sense for the organization, and a low tolerance for change in general.

Once they have diagnosed which form of resistance they are facing, managers can choose from an array of techniques for overcoming it: education and communication, participation and involvement, facilitation and support, negotiation and agreement, manipulation and co-optation, and both explicit and implicit coercion. According to the authors, successful organizational change efforts are characterized by the skillful application of a number of these approaches, with a sensitivity to their strengths and limitations and a realistic appraisal of the situation at hand. In addition, the authors found that successful strategic choices for change are both internally consistent and fit at least some key situational variables. Best of HBR

Competing on Resources

David J. Collis and Cynthia A. Montgomery Reprint: R0807N

How do you create and sustain a profitable strategy? Many approaches have focused managers' attention inward, urging them to build a unique set of corporate resources and capabilities. In practice, however, identifying and developing core competence too often becomes a feel-good exercise that no one fails. Collis and Montgomery, of Harvard Business School, explain how a company's resources drive its performance in a dynamic competitive environment, and they offer a framework that moves strategic thinking forward in two ways. The resource-based view of the firm comprises a pragmatic and rigorous set of market tests to determine whether a company's resources are truly valuable enough to serve as the basis for strategy and integrates that market view with earlier insights about competition and industry structure. Where a company chooses to play will determine its profitability as much as its resources do.

The authors spell out in clear managerial terms why some competitors are more profitable than others, how to put the idea of core competence into practice, and how to develop diversification strategies that make sense. To illustrate the power of resource-based strategies, the authors provide many examples of organizations--including Disney, Cooper, Sharp, and Newell--that have been able to use corporate resources to establish and maintain competitive advantage at the business-unit level and also to benefit from the attractiveness of the markets in which they compete. Features

The Uncompromising Leader

Russell A. Eisenstat, Michael Beer, Nathaniel Foote, Tobias Fredberg, and Flemming Norrgren Reprint: R0807D

Managing the tension between performance and people is at the heart of the CEO's job. But CEOs under fierce pressure from capital markets often focus solely on the shareholder, which can lead to employee disenchantment. Others put so much stock in their firms' heritage that they don't notice as their organizations slide into complacency. Some leaders, though, manage to avoid those traps and create high-commitment, high-performance (HCHP) companies.

The authors' in-depth research of HCHP CEOs reveals several shared traits: These CEOs earn the trust of their organizations through their openness to the unvarnished truth. They are deeply engaged with their people, and their exchanges are direct and personal. They mobilize employees around a focused agenda, concentrating on only one or two initiatives. And they work to build collective leadership capabilities.

These leaders also forge an emotionally resonant shared purpose across their companies. That consists of a three-part promise: The company will help employees build a better world and deliver performance they can be proud of, and will provide an environment in which they can grow.

HCHP CEOs approach finding a firm's moral and strategic center in a competitive market as a calling, not an engineering problem. They drive their firms to be strongly market focused while at the same time reinforcing their firms' core values. They are committed to short-term performance while also investing in long-term leadership and organizational capabilities. By refusing to compromise on any of these terms, they build great companies.

Why Did We Ever Go Into HR?

Matthew D. Breitfelder and Daisy Wademan Dowling Reprint: R0807B

Breitfelder and Dowling are two recent Harvard MBAs who have worked in fields typically chosen by alumni of esteemed business schools: strategy consulting, investment banking, you know the score. Ultimately, however, these promising young professionals decided to do the unexpected and enter human resources. They switched gears not to achieve work/life balance or avoid tough challenges but to get in early on a good thing, as any smart value investor would.

HR sits, according to the authors, in the middle of the most important competitive battleground in business. Finding and retaining the best talent has become an increasingly vital competitive advantage, making HR a truly strategic function for any company today. Breitfelder and Dowling have seen this shift firsthand in their work at Goldman Sachs, Lehman Brothers, PricewaterhouseCoopers, and MasterCard--and have had it confirmed by their colleagues and former classmates at other top-tier firms. Such companies recognize the real value of excellent, motivated employees and are investing time and energy accordingly; in the process, they are defining what the authors call "the New HR."

This HR of the future has five characteristics: It, like a business school, promotes active learning; it serves as an engine for both savings and revenue; it hatches and harvests ideas across organizational boundaries; it makes big places smaller by connecting people intimately and often; and it focuses on the positive, moving beyond fixing problems and enforcing rules to enhancing employee engagement and capitalizing on people's strengths. If that's what HR is becoming, why wouldn't you go into it?

Reaching Your Potential

Robert S. Kaplan Reprint: R0807C

Despite their lofty job titles and impressive pay, many high-achieving executives feel professionally dissatisfied and unfulfilled. Looking back, they wish they'd accomplished more or even chosen a different career altogether. Often they feel trapped in their jobs.

In this article, Kaplan, a Harvard Business School professor, examines why people arrive at this impasse--and offers them guidance on how to break through it and reach their full potential. That goal isn't about getting to the top, he says. Rather, it's about taking a very personal look at how you define success in your heart of hearts, and then finding your own path there.

To discover your way, you need to step back and reassess your career, recognizing that managing it is your responsibility. Many people feel like victims when, in fact, most career wounds are self-inflicted. Taking control begins with understanding yourself: seeking frank feedback about your strengths and weaknesses from colleagues above and below you, and figuring out what you truly enjoy doing. That understanding--not other people's definition of success--should guide your career choices and goals. Next, it's critical to identify the three or four tasks central to your business and make sure you excel at them; otherwise, success is likely to elude you.

Once you've chosen the right enterprise, you must show character and leadership. Great executives put the interests of their company and colleagues ahead of their own. They're willing to speak up, even to voice unpopular views. Many managers hit a plateau because they play it too safe. But those that identify their dreams, develop the skills to realize them, and demonstrate courage will find fulfillment--even if they hit bumps along the way.

The Competitive Imperative of Learning

Amy C. Edmondson Reprint: R0807E

Most executives believe that relentless execution--efficient, timely, consistent production and delivery of goods or services--is the surefire path to customer satisfaction and positive financial results. But this is a myth in the knowledge economy, argues Edmondson, a Harvard Business School professor. She points to General Motors, which for years has remained wedded to a well-developed competency in centralized controls and efficient execution but has steadily lost ground, posting a record $38.7 billion loss in 2007. Such an execution-as-efficiency model results in employees who are exceedingly reluctant to offer ideas or voice questions and concerns. Placing value only on getting things right the first time, organizations are unable to take the risks necessary to improve and evolve.

By contrast, firms that put a premium on what Edmondson calls execution-as-learning focus not so much on how a process should be carried out as on how it should evolve. Since 1980 General Electric, for instance, has continued to reinvent itself in every field from wind energy to medical diagnostics; and it enjoyed a $22.5 billion profit in 2007.

Organizations that foster execution-as-learning provide employees with psychological safety. No one is penalized for asking for help or making a mistake. These companies also employ four distinct approaches to day-to-day work: They use the best available knowledge (which is understood to be a moving target) to inform the design of specific process guidelines. They encourage employee collaboration by making information available when and where it's needed. They routinely capture data on processes to discover how work really happens. Finally, they study these data in an effort to find ways to improve execution. Taken together, these practices form the basis of a learning infrastructure that makes continual learning part of business as usual.

Employee Motivation: A Powerful New Model

Nitin Nohria, Boris Groysberg, and Linda-Eling Lee Reprint: R0807G

Motivating employees begins with recognizing that to do their best work, people must be in an environment that meets their basic emotional drives to acquire, bond, comprehend, and defend. So say Nohria and Groysberg, of Harvard Business School, and Lee, of the Center for Research on Corporate Performance. Using the results of surveys they conducted with employees at a wide range of Fortune 500 and other companies, they developed a model for how to increase workplace motivation dramatically.

The authors identify the organizational levers that companies and frontline managers have at their disposal as they try to meet workers' deep needs. Reward systems that truly value good performance fulfill the drive to acquire. The drive to bond is best met by a culture that promotes collaboration and openness. Jobs that are designed to be meaningful and challenging meet the need to comprehend. Processes for performance management and resource allocation that are fair, trustworthy, and transparent address the drive to defend. Equipped with real-world company examples, the authors articulate how to apply these levers in productive ways.

That application should not be selective, they argue, because a holistic approach gets you more than a piecemeal one. By using all four levers simultaneously, and thereby tackling all four drives, organizations can improve motivation levels by leaps and bounds. For example, a company that falls in the 50th percentile on employee motivation improves only to the 56th by boosting performance on one drive, but way up to the 88th percentile by doing better on all four drives. That's a powerful gain in competitive advantage that any business would relish.

Should You Invest in the Long Tail?

Anita Elberse Reprint: R0807H

The blockbuster strategy is a time-honored approach, particularly in media and entertainment. When space is limited on store shelves and in traditional distribution channels, producers tend to focus on a few likely best sellers, hoping that one or two big hits will carry the rest of their lists. But online retailing and the digitization of information goods have changed the commercial landscape: Virtual shelf space is infinite, consumers can search through innumerable options, and the marginal cost of reproducing and distributing products is low. What does that mean for the blockbuster strategy?

In his 2006 book, The Long Tail: Why the Future of Business Is Selling Less of More, Chris Anderson, editor of Wired magazine, argues that the sudden availability of niche offerings more closely tailored to their tastes will lure consumers away from homogenized hits. The "tail" of the sales distribution curve, he says, will become longer, fatter, and more profitable.

Elberse, a professor at Harvard Business School, set out to investigate whether Anderson's long-tail theory is actually playing out in today's markets. She focused on the music and home-video industries--two markets that Anderson and others frequently hold up as examples of the long tail in action--reviewing sales data from Nielsen SoundScan, Nielsen VideoScan, the online music service Rhapsody, and the Australian DVD-by-mail service Quickflix. What she found may surprise you: Blockbusters are capturing even more of the market than they used to, and consumers in the tail don't really like niche products much. Elberse outlines the implications of her research for producers and retailers, and offers strategic advice to both groups.

Investing in the IT That Makes a Competitive Difference

Andrew McAfee and Erik Brynjolfsson Reprint: R0807J

Investments in certain technologies do confer a competitive edge--one that has to be constantly renewed, as rivals don't merely match your moves but use technology to develop more potent ones and leapfrog over you.

That's the conclusion of a comprehensive analysis that Harvard Business School professor McAfee and MIT professor Brynjolfsson conducted of all publicly traded U.S. companies in all industries over the past few decades. They found a clear correlation between levels of IT spending and a new competitive dynamic: Since the mid-1990s, when the rate of spending on IT began to rise sharply, the spread between the leaders and laggards in an industry has widened. There are more winner-take-all markets. But the increased concentration has ramped up, rather than dampened, churn among the remaining players. And these dynamics are greatest in those industries that are more IT intensive.

This pattern is already familiar to the makers of digital products, but it has now spread to traditional industries, the authors contend, not because more products are becoming digital but because more processes are. Enterprise software like ERP and CRM systems, coupled with cheap networks, is allowing companies to replicate their unique business processes quickly, widely, and faithfully, in the same way that a digital photo can be endlessly reproduced.

In this new environment, top managers must pay careful attention to which processes to make consistent and which to vary locally. And while standardizing some ways of working, they must also encourage employees to come up with creative process improvements to outdo competitors' innovations.

Competing at such high speeds isn't easy, and not everyone will be able to keep up--but the companies that do may realize vastly improved business processes as well as higher market share and increased market value.

The Finance Function in a Global Corporation

Mihir A. Desai Reprint: R0807K

As corporations go global, capital markets open up within them, giving companies a powerful mechanism for arbitrage across national financial markets. But in managing their internal markets to build an advantage, CFOs must balance the opportunities with the challenges of operating in multiple environments.

By exploiting their internal capital markets, CFOs can create value in three functions:

Financing. A CFO can reduce a group's tax bill by, for example, borrowing in countries with high tax rates and lending to operations in countries with lower rates. But the global CFO needs to be aware of the downsides of strategic financing. Saddling the managers of subsidiaries with debt, for instance, can cloud their profit performance.

Risk management. Instead of managing currency exposures through the financial market, global firms can offset natural currency exposures through their worldwide operations. Doing so, however, can obscure the performance of local units, making it harder for headquarters to assess local managers and easier for financial managers to take purely speculative positions.

Capital budgeting. CFOs can add value by getting smarter about valuing investment opportunities. But adopting an overly formal approach may tempt managers to game the system and can lead to an outcome at odds with the company's objectives.

CFOs can help their global finance operations make the most of their opportunities by inventorying their capabilities and ensuring their adaptation to institutional variation and their alignment with organizational goals. To achieve this, a global finance function must locate decision making at a geographic level where other strategic decisions are made, rotate finance professionals through various institutional environments, and codify practices that can be adjusted to suit local conditions.

The Uncompromising Leader

Leaders of high-commitment, high-performance organizations refuse to choose between people and profits.

by Russell A. Eisenstat, Michael Beer, Nathaniel Foote, Tobias Fredberg, and Flemming Norrgren

Managing the tension between performance and people is at the heart of the CEO's job. Firms are at once economic organizations whose survival and prosperity depends on the delivery of superior value in an unforgiving global marketplace and social institutions that profoundly shape the lives of their employees. Too many leaders view their organizations primarily through one lens or the other. For many CEOs under fierce pressure from capital markets, the focus is entirely on the shareholder, with a single-mindedness that can lead to employee disenchantment and loss of capacity to deliver long-term value. For others, who perhaps have a commanding market share or are operating in protected markets, concern for the firm's people, culture, and heritage can all too easily slide into complacency, inward focus, and loss of competitive vitality.

Some CEOs, however, do manage to resolve the tension between performance and people without sacrificing either. They succeed in harnessing the energy and commitment of their people to implement change that may be wrenching and dramatic but which creates a platform for future success. Consider Tim Solso of diesel engine maker Cummins. One of his first moves when he became CEO in 2000 was to launch a global program to rearticulate Cummins's mission and reaffirm its values. Six months into his tenure, the company, which was highly leveraged, hit a recession that lasted through the first half of 2003. Demand in its core markets dropped by some 72%. To ensure the company's survival, Solso and his team decided that they needed to perform radical surgery: They closed Cummins's original manufacturing plant in its hometown of Columbus, Indiana, restructured its truck engine business, and laid off a significant portion of its workforce.

Accepting layoffs of long-term colleagues is difficult for the employees of any company, Cummins included. But because Solso had created energy around the company's mission and values, employees were prepared to invest in learning new skills and leading the development of new products and services even as the layoffs took place. He and his team mobilized the remaining workforce to support the company's strategic shift to focus on the less cyclical areas of distribution and service--making future layoffs less likely. Solso capitalized on Cummins's long-standing commitment to the environment and its resulting expertise in pollution-control devices to build a distinctive source of competitive advantage. As a result, by the end of 2007 Cummins had more than doubled its sales, and its net earnings and stock price had increased more than fivefold. Total employment had increased by more than a third, and the workforce was strongly committed to the new strategy.

Solso is not alone. Over the past year we have conducted extensive research into the strategies and practices of leaders who are building organizations characterized by high levels of commitment from and to their people and by high levels of performance--what we call high-commitment and high-performance (HCHP) firms. To find them, we interviewed people at executive search firms; reviewed academic papers, business school cases, and the press; read the public communications of companies; looked at rankings such as the "Best Companies to Work For" lists; and interviewed people in our international networks of academics and industry partners. We accepted companies only when several sources confirmed their high levels of commitment from and to their people. We then checked financial data and narrowed the group down to those companies that outperformed their peer group during the CEO's tenure. In the end, we interviewed the current or former CEOs of 22 organizations in Europe and North America. They are listed in the exhibit "High-Commitment, High-Performance CEOs."

Sidebar Icon High-Commitment, High-Performance CEOs (Located at the end of this article)

This article focuses on two questions that were central to our research: How were these leaders able to successfully reconcile the inevitable tensions between their quest for high performance and their desire to build a sustainable high-commitment institution? What allowed them to introduce the often drastic changes their companies needed but also win acceptance and commitment from the people most affected?

Resolving the Tension Between People and Performance

The CEOs we spoke with understood that their companies had to meet the intense performance demands of investors. If you are unsuccessful with investors, "then the rest of the constituencies are really not relevant because you're dying," one CEO said. "It's just a question of how fast."

Yet these CEOs were motivated by far more than financial success. Many had spent the better part of their managerial careers within the firms they had come to lead. All, whether promoted internally or hired externally, felt personal responsibility as stewards of their firms' future. As Leif Johansson of Volvo explained, "For me, the work in the organization has a soul and values and a purpose that transcends only making money. That soul does not end with me; it will be passed on to the next generation." Ed Ludwig of Becton, Dickinson captured the more-personal motivators that drive this type of CEO to build great firms. "Being a CEO is like answering a call to bring the organization to a better place than where you found it," he said. "Maybe it was my conservative Catholic upbringing....You can never try hard enough. Your mom is always there telling you, you can do better."

Pushing for superior performance was not always easy. In many cases it required these leaders to make extraordinarily bold and unconventional moves. Nokia's Jorma Ollila placed all his bets on mobile phones, selling off the firm's other businesses. Whitbread CEO Alan Parker sold the Marriott Hotel chain, a business he had built, in order to focus on two core growth businesses--Premier Inn and Costa Coffee. At Volvo, Johansson sold off one of the jewels in the crown of Swedish industry when he sold the car division to Ford.

Virtually every CEO we studied faced the challenge of driving major strategic and cultural change. Unlike many of the North American and UK firms, however, those on the European continent and in Scandinavia--whether because of better management or because of less intense pressures from shareholders--were generally able to avoid major downsizing.

These CEOs believed that their moves were an affirmation--not a rejection--of their firms' fundamental capabilities and values. As Nokia's Ollila explained, "My job was twofold: to make sure that people had an opportunity to realize the potential of what there was in this business, number one. And number two, we needed to get rid of the no-growth business--the cable, the televisions, etc."

One CEO, while reflecting on the wrenching task of eliminating thousands of jobs in Europe and the United States, observed that the move ensured the firm's future competitiveness and created thousands of job opportunities for people in developing countries. Although this CEO struggled with his decision, he came to believe that it was consistent with his own and the firm's core values because "the people who we're hiring today in India have the same value in God's eyes as the people who work in our hometown."

Holding the Center

The legitimacy to chart such a radical path forward is not conferred by title alone; it must be earned. CEOs who take the commitment of their employees for granted risk destroying the social fabric of their organizations: While they move in one direction, the rest of the organization stays stuck or, worse, heads the opposite way. HCHP leaders, however--through intense, focused, and dogged day-to-day involvement with their people and operations--manage to hold the center. They almost personally create the link between the people who do the work and the performance they must deliver.

The CEOs we studied did so by combining four strategies. First, they earned the trust of their organizations through their openness to the unvarnished truth. Second, they were deeply engaged with their people, and their exchanges were direct and personal; employees in the companies we studied had a particularly close connection with the CEO and were seldom surprised to meet him or her. Third, having earned legitimacy and trust, these CEOs were able to mobilize their people around a focused agenda. Finally, while they were all strong individuals, these senior leaders realized that they could succeed only as part of a committed leadership team, and they devoted considerable efforts to building their firm's collective leadership capabilities. Let's look at each of these in more detail.

Earning trust.

The CEOs we spoke with were remarkably open in sharing information with, and receiving feedback from, all stakeholders--from their boards of directors to their frontline employees. This openness led to a sense of shared reality and trust that allowed these leaders to build alignment around a new path forward. When Allan Leighton was asked how he built trust in the workforce at Britain's Royal Mail Group, he answered simply, "Tell the truth. I never mislead people. If I say `It's rubbish,' then they know it's bad. If I say `30,000 jobs are going,' they know 30,000 jobs are going." The advantage of such honesty, of course, is that people are more likely to believe you when you are trying to communicate positives. Leighton continued: "If I say `It's working,' they know it's working."

This honesty extended to acknowledgment of the CEOs' own imperfections. When Ludwig took over as CEO of Becton, Dickinson, he commissioned a task force of trusted managers to conduct open-ended interviews with key executives about the challenges the firm faced. Ludwig said that he and his senior team wanted "to marshal some energy around the brutal facts." Near the top of the list of strategic barriers was a breakdown in the implementation of a major SAP project that Ludwig had launched in his previous position as CFO. "That was the first and most brutal thing I had to confront myself," he said. "We had already

• a hundred million bucks into this thing. And my name was all over it." Ludwig publicly acknowledged that the program was broken and that he bore significant responsibility. He and his team shut the program down for nine months to fix the identified problems. The relaunched program is now a foundation of the company's success.

Engaging with the organization.

While a central part of any CEO's job is communication, these leaders went to extraordinary lengths to ensure that their communications with their people were direct and unmediated. Leighton of Britain's Royal Mail is a case in point. He has personally visited more than half the country's 1,600 delivery offices. Every time he sees a mail carrier on his rounds, he stops to talk. Leighton and his staff also maintain an e-mail account called Ask Allan, which gets about 200 messages a day, each of which receives an acknowledgment within 15 minutes of receipt and a full response within seven days. Finally, every 12 weeks, he sets aside three days for meetings with all the delivery office managers. The managers come in groups of about 350, and there is no prescribed agenda. Leighton told us, "If you believe, as I do, that the operators know best, then spend your time with the operators. Don't spend your time with all the treacle in the middle."

For leaders to establish trust with employees, though, they need to display an authentic concern for them. Russ Fradin of Hewitt Associates was particularly insistent that managers share in any personnel reductions inflicted on the workforce. If he trimmed frontline employees by 5%, then he looked to trim management ranks--from the ground up to the executive suite--by at least as much. Having the officers share the pain made it clear that everyone was in the same boat. Said Fradin, "The people in the call center are just as important as the people in the executive suite." In other words, he demonstrated a real respect for all employees as people with important lives and rights.

Maintaining focus and consistency of purpose.

Establishing relationships of trust and direct connection was a necessary precondition, but it was not sufficient to transform these firms into high-commitment, high-performance institutions. In many cases CEOs had to overcome years of institutional inertia and limited organizational capabilities to successfully compete in a changing market. Doug Conant of Campbell Soup told us, "You can't talk your way out of something you behaved your way into. You have to behave your way out of it." Shifting the behavior of thousands of people to align with new competitive requirements demands extraordinary focus and consistency of purpose. Tim Solso of Cummins realized early in his turnaround that he could spearhead at most two major change initiatives at a time. He came to understand the need to "pick one or two things and drive it for four or five years, and good things will happen."

Moreover, these CEOs discovered that once you have selected your areas of focus, you must not let up. Val Gooding, CEO of BUPA explained, "You have to bore yourself to death. The customer is the most important thing. I've said it hundreds of times. The reinforcement and continuity of direction is the real job of the CEO." Relentlessly focusing on a few key messages helps employees keep their bearings in large, complex organizations in rapidly changing markets.

Creating collective leadership capability.

HCHP chief executives manage to strike a delicate leadership balance. On the one hand, these CEOs play a strong personal role in focusing their firms' agendas. On the other, they understand that they need to build leadership capacity. Many of the CEOs we interviewed became positively cranky when we focused our questions on them personally. A belief in collective leadership was particularly apparent in our interviews with CEOs outside the United Kingdom and North America. (A content analysis of our interviews revealed that "I" was used more in British and North American interviews; "we" was used more in those conducted in the rest of Europe.) However, every CEO interviewed tended to underplay his or her personal contributions to the firm's progress.

These CEOs also highlighted the ways others' leadership styles and approaches complemented their own. For example, one CEO explained that his natural tendency was to move too slowly in addressing individual performance problems, and so he had learned to trust his core team's appraisals of key personnel decisions. Another described how his long-term colleagues had helped him to realize and correct a strategic blind spot.

Developing Shared Purpose

Holding the center, even with all the focus in the world from the CEO, won't work unless purpose is shared across the company. Achieving this collective vision is especially challenging in complex, diverse global firms. It's much easier to build unity of purpose when your company has a small geographic base and a homogeneous workforce. Indeed, many HCHP firms--Bang & Olufsen, Cummins, Herman Miller, IKEA, Nokia, and Timken--were founded in rural areas and have long histories as firms deeply committed to their employees and local communities. But their CEOs understood that in a hypercompetitive global marketplace, the old formula of building commitment, community, and common purpose based on lifetime employment and ethnic and cultural similarities was no longer sufficient.

To align their increasingly diverse and global enterprises effectively, HCHP leaders invested considerable effort in forging an emotionally resonant shared purpose for their people. At the heart of this shared purpose was a three-part promise: The company would help employees build a better world, deliver a performance they could be proud of, and provide an environment in which they could grow. HCHP executives worked hard to deliver on this promise because they understood that each part added value to the firm as a whole while also serving as a powerful motivator for the individuals within it.

Building a better world.

Serving as a good corporate citizen helps build a firm's brand and reputation and often makes it easier to do business in a range of countries and cultures. That said, the commitment of HCHP CEOs to corporate citizenship was driven by much more than an interest in enhancing external reputation. HCHP CEOs understand that being part of an enterprise that is helping to create a better world unleashes the commitment and energy of their people. At Herman Miller, Brian Walker discovered that the stories employees told about their work in the community--such as 20 colleagues building a school in India with vacation time that had been donated by others, or a joint effort with a creative partner to build a textile that could gather and store solar power for use in the developing world--both energized current employees and served as a powerful recruiting beacon for talented professionals looking for a larger sense of purpose and contribution in their work. At Standard Chartered Bank, chief executive Peter Sands found that mobilizing the whole bank around a blindness prevention initiative to help more than 1 million people has helped raise the firm's overall level of ambition. According to Sands, people throughout the organization have come to learn that "by concentrating resources, by being focused, and also just by being ambitious...we can do the same sort of thing in our businesses."

Delivering a performance to be proud of.

Most HCHP leaders found that, as Herman Miller's Walker explained, "people won't get fulfillment from an organization that isn't recognized as being high performance." The best employees want to work with other stellar employees. HCHP CEOs also realized that performance accountability up and down the line was essential if they were going to reliably deliver on their commitments to the financial markets and to their boards. In this spirit a number of them put significant energy into strengthening their performance and talent-management systems. The challenge of strengthening performance focus was greatest in some of the firms with the longest history as values-driven organizations. At Cummins, for example, Solso had to find a way to shift the culture from a "best-efforts company," where people felt that it was good enough to be smart and work hard and do the best they could, to "believing that they actually had to deliver on their performance commitments." But in moving toward meritocracy, what mattered to these CEOs was delivery on the full set of indicators required to build a great firm, not just financial performance. For example, at IKEA every leader in the 110,000-person company--from the CEO to the front lines--receives upward feedback about whether he or she is living up to the company's values and management principles.

Providing opportunities for growth.

At the heart of the high-commitment high-performance value proposition is the opportunity for employees to realize their personal and professional potential. According to Russ Fradin of Hewitt Associates, "People don't get excited by cost reduction or capital efficiency or share buybacks. People want to go to a job that is fulfilling and that they get excited about. They get excited because we've got the right growth initiatives for them." Most of the leaders we interviewed regarded the creation of opportunities for their people as one of their most important jobs. In many cases these CEOs directly taught and mentored the next generation of leaders in development programs that they had personally designed. They also spent days in personnel review meetings so that they knew where the talent was hidden at all levels of the organization. They were willing to cut through the hierarchy to use high-potential employees as a resource to drive change and lead growth initiatives. Standard Chartered's Peter Sands said, "We have so many opportunities, the single biggest constraint is, Who's going to pick up that ball and run with it?" Every year at the firm, each operating unit conducts a strategic people review, checking the health and diversity of its talent pipeline and updating succession plans for key positions. Sands himself monitors the group's senior executives. He keeps a log of the team's birthdays in his diary, and he sends each member an e-mail on that day. He might ask them how they're settling into a new position or whether they feel they need a new challenge.

Keeping Perspective

HCHP CEOs somehow seem to comfortably bear the tension of reconciling the relentless demands of the market with their role as steward of their people. These leaders are clearly energized by delivering on their larger mission, by soundly thrashing their competitors in the marketplace, and by directly connecting with the people in their firms. These traits, of course, are shared by most CEOs. What sets HCHP leaders apart is their ability to keep their work in perspective. How did they do this?

First, while many reported great camaraderie with the members of their senior leadership teams, they were also careful to maintain enough personal distance to avoid favoritism. The challenge of keeping a distance was particularly strong for CEOs who had been promoted from within. These CEOs realized that they might have to make tough personnel decisions for the good of the institution concerning colleagues with whom they shared decades of experience.

Second, despite long hours on the job, HCHP leaders devoted considerable energy to maintaining full lives outside work. Many of the CEOs were deeply involved with their families and their communities and credited these activities with giving them perspective on their work. For example, Hewitt Associates' Russ Fradin has worked actively to maintain a close relationship with his wife and children, despite his long hours and travel. He explained, "You find a way to integrate it," even if it means getting up at 4:30 on the East Coast to talk with his night-owl college-aged son, who's just ending his day on the West Coast. He joked, "There's always a Fradin up somewhere in the world." Another CEO described the importance of passing the "Saturday morning breakfast test"--being able to explain to his wife and children during these weekly meals what he was achieving at work in a way they would find both sensible and inspiring.

Finally, it helps to have a sense of humor. HCHP leaders tended not to take themselves or their positions too seriously. Allan Leighton explained, "I'm just an ordinary bloke who didn't set out to be the chairman of the Royal Mail or be a successful businessman. I think I'm exactly the same as when I was 17, in terms of what goes on in my head and the way I think about people and how I can talk to people. But clearly, people's perception of you is different. Nobody ever says, `Hi, Allan, how are you?' The standard response when I turn up is for people to say, `Uh-oh, it's the chairman.' So I'll go and talk to them. They'll give me a bit of banter, and I'll give them a bit back."

• o o

How do HCHP leaders successfully manage the tension between people and performance? In the end, the answer lies not just in what these leaders do but in how they go about their work. These CEOs approach finding and holding a firm's moral and strategic center in a competitive market as a calling and an art, not an engineering problem. Because of their passionate commitment both to their people and to achieving superior performance, they do not make the trade-offs that most CEOs make. They drive their firms to be more strongly market and reality focused than their competition while at the same time reinforcing their firms' core values. They are committed to delivering short-term performance while also heavily investing in longer-term leadership and organizational capabilities. They push to increase the diversity of their firm's people, even as they reaffirm the common ground of the firms' shared purpose. These executives build the future one quarter at a time. Because they refuse to compromise on any of these goals, they discover powerful and integrative solutions to fundamental management tensions that other leaders too often avoid. In this way, they build great firms. High-Commitment, High-Performance CEOs

Bang & Olufsen

Torben Ballegaard Sørensen (former CEO)

Struer, Denmark

Audio and video products

Becton, Dickinson

Ed Ludwig

Franklin Lakes, New Jersey

Medical supplies, devices, and diagnostics

BUPA

Val Gooding

London

Health care insurance and services

Campbell Soup

Doug Conant

Camden, New Jersey

Food products

Cummins

Tim Solso

Columbus, Indiana

Engines and related technologies

Getinge AB

Carl Bennet (former CEO)

Getinge, Sweden

Health care cleaning, disinfecting, and sterilization solutions

H&M

Stefan Persson (former CEO)

Stockholm

Designer clothing and apparel

Herman Miller

Brian Walker

Zeeland, Michigan

Office furniture

Hewitt Associates

Russ Fradin

Lincolnshire, Illinois

Human resources services

Husqvarna

Bengt Andersson

Jönköping, Sweden

Outdoor power products

IKEA

Anders Dahlvig

Älmhult, Sweden

Furniture and housewares

Infinity Pharmaceuticals

Steven H. Holtzman

Cambridge, Massachusetts

Oncology drug research and development

Italcementi

Carlo Pesenti

Bergamo, Italy

Cement, concrete, and related construction materials

Lafarge

Bertrand Collomb (former CEO)

Paris

Cement, aggregates, and other building materials

McCain Foods

Dale Morrison

Florenceville, New Brunswick, Canada

Potato products, frozen foods, and juices

Nokia

Jorma Ollila (former CEO)

Espoo, Finland

Cell phones and related technologies

Quest Diagnostics

Kenneth W. Freeman (former CEO)

Madison, New Jersey

Medical testing, information, and services

Royal Mail Group

Allan Leighton (chairman)

London

Postal and distribution services

Standard Chartered Bank

Peter Sands

London

International banking

Timken

James W. Griffith

Canton, Ohio

Antifriction products, power transmissions, and specialty steels

Whitbread

Alan Parker

Luton, United Kingdom

Hospitality and leisure services

Volvo

Leif Johansson

Gothenburg, Sweden

Trucks, buses, construction vehicles, and industrial engines

The Competitive Imperative of Learning

Today's central managerial challenge is to inspire and enable knowledge workers to solve, day in and day out, problems that cannot be anticipated.

by Amy C. Edmondson

Most executives believe that relentless execution--the efficient, timely, consistent production and delivery of goods or services--is the surefire path to customer satisfaction and financial results. Managers who let up on execution even briefly, the assumption goes, do so at their peril.

In fact, even flawless execution cannot guarantee enduring success in the knowledge economy. The influx of new knowledge in most fields makes it easy to fall behind. Consider General Motors--the largest, most profitable company in the world in the early 1970s. Confident of the wisdom of its approach, GM remained wedded to a well-developed competency in centralized control and high-volume execution. Despite this, the firm steadily lost ground in subsequent decades and posted a record $38.7 billion loss in 2007. Like many dominant companies in the industrial era, General Motors was slow to understand that great execution is difficult to sustain--not because people get tired of working hard, but because the managerial mind-set that enables efficient execution inhibits employees' ability to learn and innovate. A focus on getting things done, and done right, crowds out the experimentation and reflection vital to sustainable success.

My research identifies a different approach to execution--what I call execution-as-learning--that promotes success over the long haul. Think of General Electric, another powerhouse born in the industrial era. Since the 1980s, the company has constantly evaluated its activities, found ways to improve, and built the expectation that learning will be ongoing into management practices. As a result, GE has continued to reinvent itself with operations in every field from wind energy to medical diagnostics, and it posted a $22.5 billion profit in 2007.

From a distance, execution-as-learning looks a lot like execution-as-efficiency. There's the same discipline, respect for systems, and attention to detail. Look closer, however, and you find a radically different organizational mind-set, one that focuses not so much on making sure a process is carried out as on helping it evolve, building four unique approaches into day-to-day work.

First, organizations that focus on execution-as-learning use the best knowledge obtainable (which is understood to be a moving target) to inform the design of specific process guidelines. Second, they enable their employees to collaborate by making information available when and where it's needed. Third, they routinely capture process data to discover how work is really being done. Finally, they study these data in an effort to find ways to improve. These four practices form the basis of a learning infrastructure that runs through the fabric of the organization, making continual learning part of business as usual.

Having studied knowledge organizations--hospitals, in particular--for nearly 20 years, I'd like to offer a new definition of what successful execution looks like in the knowledge economy: The best organizations have figured out how to learn quickly while maintaining high quality standards.

What's Wrong with Execution?

Most management systems in use today date back to a manufacturing-dominated era in which firms were organized to execute as efficiently as possible. Throughout the twentieth century, the core challenge factory managers faced was controlling variability. In their approach to large-scale auto manufacturing, for example, pioneering thinkers like Henry Ford and Frederick Taylor sought to parcel out simple, repetitive tasks to people on an assembly line to reduce the likelihood of human error while producing as many cars as possible. Later, manufacturing managers adopted tools such as statistical process control to help make sure the job got done right, every time. For a long while and in many circumstances, management systems that were focused on execution-as-efficiency worked brilliantly, transforming unpredictable and expensive customized work into uniform, economical modes of mass production.

Underlying the notion of a simple, controllable production system was the notion of the simple, controllable employee. In the factory model of management, it was easy to monitor workers and measure their output. Because the work itself was not terribly interesting or motivating in its own right, managers intuitively relied on what Freud called "the pleasure principle," the idea that human beings are motivated to seek pleasure and avoid pain. Thus supervisors used a combination of carrots (more pay for more tasks completed) and sticks (reprimands or the threat of job loss) to motivate employees. These behavioral strategies were very successful, but they produced an unfortunate legacy that still characterizes many workplaces today--an undercurrent of fear.

With the rise of knowledge-based organizations in the information age, the old model no longer works, for a number of reasons. In such organizations, it's difficult, if not impossible, to monitor employee productivity or measure individual performance in simple ways, such as by hours worked. Performance is increasingly determined by factors that can't be overseen: intelligent experimentation, ingenuity, interpersonal skills, resilience in the face of adversity, for instance. Consider a hospital emergency room. At any moment, a patient with a previously unheard-of set of symptoms might walk in, and specialists from several departments--reception, nursing, medicine, laboratory, surgery, pharmacy--need to coordinate their efforts if the patient is to receive effective care. These people must resolve conflicting priorities and opinions quickly. As in most knowledge organizations, room to maneuver is extraordinarily high. People rely on their own and their colleagues' judgment and expertise, rather than on management direction, to decide what to do. When work is interdependent and in flux, as it is in this situation, interpersonal fear is not only unhelpful--it's downright counterproductive.

By continuing to think of execution in the old-fashioned, narrow sense, companies fall into predictable self-sabotaging traps:

Critical information and ideas fail to rise to the top.

When people get the message that speed, efficiency, and results are what matter, they become exceedingly reluctant to risk taking up managers' time with any but the most certain and positive of inputs. They don't offer ideas, concerns, or even questions. One study at a high-tech multinational found that over half the employees believed it was unsafe to say what was on their minds. Subsequent interviews revealed that employees withheld not only bad news but also new ideas; both seemed risky because of higher-ups' emphasis on superb and timely performance.

Consider the example of a team leader who tried to stimulate honest reflection about a large software-development project. He opened a post-project review by stating what he believed he himself could have done better. To his surprise, this honest self-assessment came back to haunt him when, during his next performance review, his manager noted, "I see you have made some mistakes this year," and used the data to lower his ratings. When employees feel they can't speak up about small failures, their organizations are at increased risk for large ones.

People don't have enough time to learn.

An exclusive focus on execution-as-efficiency leads companies to delay, discourage, or understaff investments in areas where learning is critical. It's a given that switching to a new approach can lower performance in the short run. The fastest hunt-and-peck typist must endure a short-term hit to performance while learning to touch-type, just as the tennis player suffers initially when shifting to a new, better serve. These are the costs of learning, which has its payoff in future performance. Managers who overemphasize results can subtly discourage technologies, skills, or practices that make new approaches viable.

When a major telecommunications firm launched the technologically new digital subscriber line (DSL) internet service in the late 1990s, it set ambitious production targets that failed to take the need for learning into account. The staff did not have sufficient time to work out how to implement new software and hardware that had to operate with customers' not always up-to-date personal computer equipment: The result was a customer service nightmare.

Unhealthy internal competition arises.

To motivate people to execute well, companies often reward those divisions or plants with the best performance. This can make people reluctant to share ideas or best practices with their colleagues in other groups. Following his successful turnaround of the Simmons Bedding Company in 2003, CEO Charlie Eitel said in an interview that the firm's 18 manufacturing plants--formerly competitors for a single annual award for best producer--had been individually hoarding successful practices for years. By adding incentives for absolute, rather than relative, quality and productivity, the company shifted its culture, encouraging people in different plants to share information--and saved $21 million through process improvements in the first year.

Companies think they can do no wrong.

When a successful business is wedded to its execution-as-efficiency approach, managers can fall prey to a classic attribution error: the conclusion that the company's success is evidence of its wisdom. General Motors' confidence in its centralized control systems blinded the company to major shifts in the automotive market, including customers' preference for smaller, fuel-efficient cars and the growing presence of foreign competitors in the U.S. market. Similarly, HBS professor Mary Tripsas has shown, Polaroid's confidence in its instant-film business model blocked senior executives' ability to appreciate the opportunities presented by digital imaging.

First, Make It Safe

While General Motors was placing its faith in its execution efficiencies, Toyota was taking a different route, focusing on bottom-up process improvements of much the sort we're discussing here, famously allowing any employee who saw a problem--small or large--to stop the line. Toyota has made no secret of its approach and invites executives the world over to come to its factories and see for themselves. And yet when visitors return to their own companies and try to put Toyota-like systems in place, many are disappointed, having failed to import the mind-set and culture that make the system work.

My research on why people withhold constructive ideas in the workplace suggests that before execution-as-learning can occur, organizations must fulfill one big prerequisite: They need to foster psychological safety. This means ensuring that no one is penalized if they ask for help or admit a mistake. Psychological safety is crucial, especially in organizations where knowledge constantly changes, where workers need to collaborate, and where those workers must make wise decisions without management intervention. It's built on the premise that no one can perform perfectly in every situation when knowledge and best practice are moving targets.

In her research on individual mind-set differences, Stanford psychologist Carol Dweck has shown that the way children view a task affects their persistence and performance over time. Some children think of human ability or intelligence as fixed and, consequently, think of school tasks as performance opportunities--moments of truth that prove whether or not they're smart. For these children, performing poorly on an assignment or a test would demonstrate that they lacked intelligence rather than indicating that they had more to learn. Believing that the point of execution is to demonstrate competence, they go out of their way to pick easier tasks. Of course, this means they lose out when it comes to learning. This same mind-set encourages managers to admire and expect to be rewarded for decisiveness, efficiency, and action rather than for reflection, inquiry, and collaboration, the uncertainty of which makes them uncomfortable. Like the children who have learned to shun new challenges, these managers avoid, and help others avoid, the risks of questions and experiments.

In psychologically safe environments, people are willing to offer up ideas, questions, concerns--they are even willing to fail--and when they do, they learn. In her studies, Dweck found that some children--those who early on were rewarded for effort and creativity more than for simply giving the right answer--see intelligence as something malleable that improves with attention and effort. Tasks are opportunities for learning; failure is just evidence that they haven't mastered the task yet. Driven by curiosity about what will and will not work, they experiment. When things don't pan out, they don't give up or see themselves as inadequate. They pay attention to what went wrong and try something different next time. In adults, such a mind-set allows managers to strike the right tone of openness, humility, curiosity, and humor in ways that encourage their teams to learn.

Some managers might argue that fostering psychological safety can make it difficult to hold people accountable. Certainly, if employees feel particularly close to one another and the managerial hand is relatively weak, performance standards can slip. But in general, psychological safety is independent from employee accountability, and healthy organizations foster both by setting high performance aspirations while acknowledging areas of uncertainty that require continued exploration or debate. Setting ambitious goals while conceding the limits of current knowledge encourages striving without shutting down inquiry. On the other hand, an undue focus on accountability without psychological safety can produce a variety of organizational dysfunctions. (For more on this, see the exhibit "Does Psychological Safety Hinder Performance?")

Sidebar Icon Does Psychological Safety Hinder Performance? (Located at the end of this article)

Psychological safety is not about being nice--or about lowering performance standards. Quite the opposite: It's about recognizing that high performance requires the openness, flexibility, and interdependence that can develop only in a psychologically safe environment, especially when the situation is changing or complex. Psychological safety makes it possible to give tough feedback and have difficult conversations--which demand trust and respect--without the need to tiptoe around the truth.

Not surprisingly, the most important influence on psychological safety is the nearest boss. Signals sent by people in power are critical to employees' ability and willingness to offer their ideas and observations. This means that levels of psychological safety vary strikingly from department to department and work group to work group, even in organizations known for having a powerful corporate culture. In a study of eight units in two teaching hospitals, for example, I found large differences in employees' beliefs about whether it was safe to report medication errors--and differences in error-reporting rates as high as tenfold. As a result, some units were identifying risks and coming up with ways to avoid future problems, while others were not because the people in them were terrified to speak up.

Such findings shine the spotlight, for better or worse, on middle managers. How can they help create psychological safety in the groups they lead? A couple of simple, if not always intuitive, steps appear to make an enormous difference.

The first is to explicitly acknowledge the lack of answers to the tough problems groups face. (Strange as it may seem, very few managers do this. It's not that they don't recognize the imperfect state of knowledge; they just fail to mention it.) Acknowledging uncertainty may seem like a weakness, but in fact it's usually an intelligent and accurate diagnosis of a murky situation. When supervisors admit that they don't know something or made a mistake, their genuine display of humility encourages others to do the same.

The second is to ask questions--real questions, not leading or rhetorical ones. Simply put, when people believe that their managers want to hear from them and value their input, they respond more. Indeed, one could feel awkward or foolish not speaking in response to a question.

This is especially so when lives are on the line. In one study of quality-improvement projects in intensive-care units at 23 hospitals, my colleagues and I showed that when medical directors asked questions, acknowledged their own fallibility or lack of knowledge, and appreciated others' contributions, the people in their units felt a higher degree of psychological safety than those in units whose leaders did not do so. As a result, these units more quickly adopted new practices that could reduce infection rates and lead to other improvements in patient care.

Senior executives, too, play an important role in building psychological safety. For instance, as CEO of Prudential Financial, Art Ryan instituted a series of training initiatives called "Safe to Say" to let employees know that their voices were not only welcome but required for success. Eli Lilly's chief science officer introduced "failure parties" to honor intelligent experiments that failed. Policy interventions like these work best when accompanied by a clear and credible rationale for why openness and directness are needed to achieve superb performance. Senior executives may be best positioned to convey this message.

Execution-as-Learning: Four Steps

Organizations that adopt an execution-as-learning model don't focus on getting things done more efficiently than competitors do. Instead, they focus on learning faster. The goal is to find out what works and what doesn't; employees must absorb new knowledge while executing, often sacrificing short-term efficiency to gain insight into and respond to novel problems. My research has revealed four steps for making this happen.

Step 1: Provide process guidelines.

Figuring out the best ways to accomplish different kinds of work in a rapidly changing environment starts with seeking out best practices gathered from experts, publications, and even competitors. The path to execution-as-learning is thus similar to the path to efficiency--it starts with establishing standard processes. But the goal of these processes is not so much to produce efficiency as to facilitate learning, because effective knowledge organizations recognize that today's best practices won't be tomorrow's and won't work in every situation.

For example, the renowned design firm IDEO adheres faithfully to a standard process for developing its many innovative products. Similarly, in a hospital, even though each patient is unique, standard protocols make it easier for medical specialists to think in real time about the individual features of the case because the steps common to all patients with a particular condition are prescribed in advance. Standard processes both simplify routine action and highlight discrepancies in specific cases that suggest the need for process innovation or refinement.

To understand how this works, let's look at an extraordinary health care organization called Intermountain Healthcare (IHC), an integrated system of over 100 facilities--including 21 hospitals, and numerous health centers, outpatient clinics, counseling centers, and group practices--located across Utah and southeastern Idaho. To increase employees' chances of making good decisions under pressure and reduce unwanted variability in patient care, senior management put together 60 teams of experts on different diseases to develop detailed process guidelines for treating patients with those conditions. The high quality of these guidelines--designed to reflect the current best practices in the medical literature--was the result of analysis and debate by professionals in nursing and medicine who held diverse points of view. Each team worked hard to develop a set of clinical-care processes outlining the way patient care should unfold on the front lines. Similarly, Children's Hospitals and Clinics of Minnesota convenes teams to review and standardize different types of care, using principles of lean manufacturing.

Step 2: Provide tools that enable employees to collaborate in real time.

No matter how much thought goes into advance planning, knowledge work often requires people to make concurrent collaborative decisions in response to unforeseen, novel, or complex problems. That is why another leading medical center, the Cleveland Clinic, developed its own state-of-the-art information technology systems that enable dispersed individuals participating in a particular patient's care to work together virtually. Dr. Martin Harris, the clinic's chief information officer, explains that the IT infrastructure "connects every caregiver in all of our facilities throughout Ohio and Florida into what is essentially a single medical practice. That means that all the vital medical information related to each patient is available to any caregiver in our health system whenever and wherever it is needed." When a patient sees several physicians, as is often the case, caregivers working in different locations at different times can coordinate effectively. For example, through an automated alert function, physicians learn of drugs others have prescribed, thereby ensuring that medication decisions with interdependent consequences are made safely.

Fostering face-to-face collaboration is also critical in the knowledge economy. The most effective organizations I studied provided forums to build networks and training in team skills, both of which bring critical areas of expertise and responsibility together. For example, Groupe Danone, the global food company, uses knowledge "marketplaces"--lively events that occur during company conferences--to encourage frontline managers to share best practices and to innovate by suggesting new processes and products. Simmons Bedding developed an extensive training system to develop employees' team skills, which helps them build relationships that foster collaboration within and across all of its plants.

Step 3: Collect process data.

Execution-as-efficiency focuses on performance data, which capture what happened. Execution-as-learning pays just as much attention to process data, which describe how work unfolds. IHC, for example, recognized that physicians, as highly educated experts, might resist process guidelines developed by a committee. For that reason and others, IHC does not discourage doctors from deviating from the guidelines. In fact, the organization invites them to, anytime they judge that good patient care requires it. The only condition: They have to help IHC learn by entering into the computer what they did differently--and why. This valuable feedback is captured in the system and periodically used by the expert teams to make updates or refinements. Most of the time, the deviations help identify ways the guidelines could be made more precise by taking relevant patient differences into account. The fact that protocols are not hard-and-fast rules but are instead flexible made them acceptable to physicians. Likewise, the Cleveland Clinic created a formal Quality Institute to standardize measures and supervise the collection and analysis of both process and outcome data to help identify and then spread best practices. At Minnesota Children's Hospitals, data on both adverse events and close calls are captured as inputs to the next stage of the learning process.

Step 4: Institutionalize disciplined reflection.

The goal of collecting process data is to understand what goes right and what goes wrong, and to prevent failures from recurring. At IHC, teams of experts periodically analyze data collected during clinical activities. Often, these analyses suggest improvements to the guidelines, which are then integrated into the design of future processes. At the Cleveland Clinic, teams of physicians drawn from hospitals all over the system study process data and identify areas for improvement throughout the organization's many sites. By 2006, the Clinic had seven such teams, including heart failure, stroke, diabetes, and orthopedic surgery. Process data showed, for instance, that stroke patients treated at various sites at the Clinic had not always received a blood thinner within the three-hour window that research identified as the standard of care. An analysis of patient outcomes helped to make the blood-thinner treatment the standard of stroke care for all Cleveland Clinic hospitals. As a result of this disciplined reflection, the hospitals doubled their use of the blood thinner and reduced complications from stroke by 50%. Similarly, at Children's, unit-based safety action teams meet regularly to reflect on what they are learning about identifying hazards that can pose risks to their vulnerable young patients.

It's not easy for a hospital, or any other organization facing cost constraints, to do this. Disciplined reflection takes productive resources off-line, and conventional management wisdom can't help but see this as lost productivity. Nonetheless, the only way to achieve and sustain excellence is for leaders to insist that their organizations invest in the slack time and resources that support this step.

• o o

I do not mean to imply that old-style execution-as-efficiency must always go by the wayside. Obviously, there are workplaces--call centers, fast-food restaurants, manufacturing plants--where doing things better and faster than the competition is critical. But even in such organizations, employees must learn if they are to improve. In work environments characterized by fear, the four steps described above become difficult, if not impossible, to follow.

Fostering an atmosphere in which trust and respect thrive, and flexibility and innovation flourish, pays off in most settings, even the most deadline driven. When managers empower, rather than control; when they ask the right questions, rather than provide the right answers; and when they focus on flexibility, rather than insist on adherence, they move to a higher form of execution. And when people know their ideas are welcome, they will offer innovative ways to lower costs and improve quality--thus laying a more solid foundation for their organization's success. Does Psychological Safety Hinder Performance?

Psychological safety does not operate at the expense of employee accountability; the most effective organizations achieve high levels of both, as this matrix shows.

Employee Motivation: A Powerful New Model

by Nitin Nohria, Boris Groysberg, and Linda-Eling Lee

Getting people to do their best work, even in trying circumstances, is one of managers' most enduring and slippery challenges. Indeed, deciphering what motivates us as human beings is a centuries-old puzzle. Some of history's most influential thinkers about human behavior--among them Aristotle, Adam Smith, Sigmund Freud, and Abraham Maslow--have struggled to understand its nuances and have taught us a tremendous amount about why people do the things they do.

Such luminaries, however, didn't have the advantage of knowledge gleaned from modern brain science. Their theories were based on careful and educated investigation, to be sure, but also exclusively on direct observation. Imagine trying to infer how a car works by examining its movements (starting, stopping, accelerating, turning) without being able to take apart the engine.

Fortunately, new cross-disciplinary research in fields like neuroscience, biology, and evolutionary psychology has allowed us to peek under the hood, so to speak--to learn more about the human brain. Our synthesis of the research suggests that people are guided by four basic emotional needs, or drives, that are the product of our common evolutionary heritage. As set out by Paul R. Lawrence and Nitin Nohria in their 2002 book Driven: How Human Nature Shapes Our Choices, they are the drives to acquire (obtain scarce goods, including intangibles such as social status); bond (form connections with individuals and groups); comprehend (satisfy our curiosity and master the world around us); and defend (protect against external threats and promote justice). These drives underlie everything we do.

Managers attempting to boost motivation should take note. It's hard to argue with the accepted wisdom--backed by empirical evidence--that a motivated workforce means better corporate performance. But what actions, precisely, can managers take to satisfy the four drives and, thereby, increase their employees' overall motivation?

We recently completed two major studies aimed at answering that question. In one, we surveyed 385 employees of two global businesses--a financial services giant and a leading IT services firm. In the other, we surveyed employees from 300 Fortune 500 companies. To define overall motivation, we focused on four commonly measured workplace indicators of it: engagement, satisfaction, commitment, and intention to quit. Engagement represents the energy, effort, and initiative employees bring to their jobs. Satisfaction reflects the extent to which they feel that the company meets their expectations at work and satisfies its implicit and explicit contracts with them. Commitment captures the extent to which employees engage in corporate citizenship. Intention to quit is the best proxy for employee turnover.

Both studies showed, strikingly, that an organization's ability to meet the four fundamental drives explains, on average, about 60% of employees' variance on motivational indicators (previous models have explained about 30%). We also found that certain drives influence some motivational indicators more than others. Fulfilling the drive to bond has the greatest effect on employee commitment, for example, whereas meeting the drive to comprehend is most closely linked with employee engagement. But a company can best improve overall motivational scores by satisfying all four drives in concert. The whole is more than the sum of its parts; a poor showing on one drive substantially diminishes the impact of high scores on the other three.

When it comes to practical implications for managers, the consequences of neglecting any particular drive are clear. Bob Nardelli's lackluster performance at Home Depot, for instance, can be explained in part by his relentless focus on the drive to acquire at the expense of other drives. By emphasizing individual and store performance, he squelched the spirit of camaraderie among employees (their drive to bond) and their dedication to technical expertise (a manifestation of the need to comprehend and do meaningful work). He also created, as widely reported, a hostile environment that interfered with the drive to defend: Employees no longer felt they were being treated justly. When Nardelli left the company, Home Depot's stock price was essentially no better than when he had arrived six years earlier. Meanwhile Lowe's, a direct competitor, gained ground by taking a holistic approach to satisfying employees' emotional needs through its reward system, culture, management systems, and design of jobs.

An organization as a whole clearly has to attend to the four fundamental emotional drives, but so must individual managers. They may be restricted by organizational norms, but employees are clever enough to know that their immediate superiors have some wiggle room. In fact, our research shows that individual managers influence overall motivation as much as any organizational policy does. In this article we'll look more closely at the drivers of employee motivation, the levers managers can pull to address them, and the "local" strategies that can boost motivation despite organizational constraints.

The Four Drives That Underlie Motivation

Because the four drives are hardwired into our brains, the degree to which they are satisfied directly affects our emotions and, by extension, our behavior. Let's look at how each one operates.

1. The drive to acquire.

We are all driven to acquire scarce goods that bolster our sense of well-being. We experience delight when this drive is fulfilled, discontentment when it is thwarted. This phenomenon applies not only to physical goods like food, clothing, housing, and money, but also to experiences like travel and entertainment--not to mention events that improve social status, such as being promoted and getting a corner office or a place on the corporate board. The drive to acquire tends to be relative (we always compare what we have with what others possess) and insatiable (we always want more). That explains why people always care not just about their own compensation packages but about others' as well. It also illuminates why salary caps are hard to impose.

2. The drive to bond.

Many animals bond with their parents, kinship group, or tribe, but only humans extend that connection to larger collectives such as organizations, associations, and nations. The drive to bond, when met, is associated with strong positive emotions like love and caring and, when not, with negative ones like loneliness and anomie. At work, the drive to bond accounts for the enormous boost in motivation when employees feel proud of belonging to the organization and for their loss of morale when the institution betrays them. It also explains why employees find it hard to break out of divisional or functional silos: People become attached to their closest cohorts. But it's true that the ability to form attachments to larger collectives sometimes leads employees to care more about the organization than about their local group within it.

3. The drive to comprehend.

We want very much to make sense of the world around us, to produce theories and accounts--scientific, religious, and cultural--that make events comprehensible and suggest reasonable actions and responses. We are frustrated when things seem senseless, and we are invigorated, typically, by the challenge of working out answers. In the workplace, the drive to comprehend accounts for the desire to make a meaningful contribution. Employees are motivated by jobs that challenge them and enable them to grow and learn, and they are demoralized by those that seem to be monotonous or to lead to a dead end. Talented employees who feel trapped often leave their companies to find new challenges elsewhere.

4. The drive to defend.

We all naturally defend ourselves, our property and accomplishments, our family and friends, and our ideas and beliefs against external threats. This drive is rooted in the basic fight-or-flight response common to most animals. In humans, it manifests itself not just as aggressive or defensive behavior, but also as a quest to create institutions that promote justice, that have clear goals and intentions, and that allow people to express their ideas and opinions. Fulfilling the drive to defend leads to feelings of security and confidence; not fulfilling it produces strong negative emotions like fear and resentment. The drive to defend tells us a lot about people's resistance to change; it's one reason employees can be devastated by the prospect of a merger or acquisition--an especially significant change--even if the deal represents the only hope for an organization's survival. So, for example, one day you might be told you're a high performer and indispensable to the company's success, and the next that you may be let go owing to a restructuring--a direct challenge, in its capriciousness, to your drive to defend. Little wonder that headhunters so frequently target employees during such transitions, when they know that people feel vulnerable and at the mercy of managers who seem to be making arbitrary personnel decisions.

Each of the four drives we have described is independent; they cannot be ordered hierarchically or substituted one for another. You can't just pay your employees a lot and hope they'll feel enthusiastic about their work in an organization where bonding is not fostered, or work seems meaningless, or people feel defenseless. Nor is it enough to help people bond as a tight-knit team when they are underpaid or toiling away at deathly boring jobs. You can certainly get people to work under such circumstances--they may need the money or have no other current prospects--but you won't get the most out of them, and you risk losing them altogether when a better deal comes along. To fully motivate your employees, you must address all four drives.

The Organizational Levers of Motivation

Although fulfilling all four of employees' basic emotional drives is essential for any company, our research suggests that each drive is best met by a distinct organizational lever.

Sidebar Icon How to Fulfill the Drives That Motivate Employees (Located at the end of this article)

The reward system.

The drive to acquire is most easily satisfied by an organization's reward system--how effectively it discriminates between good and poor performers, ties rewards to performance, and gives the best people opportunities for advancement. When the Royal Bank of Scotland acquired NatWest, it inherited a company in which the reward system was dominated by politics, status, and employee tenure. RBS introduced a new system that held managers responsible for specific goals and rewarded good performance over average performance. Former NatWest employees embraced their new company--to an unusual extent in the aftermath of an acquisition--in part because the reward system was tough but recognized individual achievement.

Sonoco, a manufacturer of packaging for industrial and consumer goods, transformed itself in part by making a concerted effort to better meet the drive to acquire--that is, by establishing very clear links between performance and rewards. Historically, the company had set high business-performance targets, but incentives had done little to reward the achievement of them. In 1995, under Cynthia Hartley, then the new vice president of human resources, Sonoco instituted a pay-for-performance system, based on individual and group metrics. Employee satisfaction and engagement improved, according to results from a regularly administered internal survey. In 2005, Hewitt Associates named Sonoco one of the top 20 talent-management organizations in the United States. It was one of the few midcap companies on the list, which also included big players like 3M, GE, Johnson & Johnson, Dell, and IBM.

Culture.

The most effective way to fulfill the drive to bond--to engender a strong sense of camaraderie--is to create a culture that promotes teamwork, collaboration, openness, and friendship. RBS broke through NatWest's silo mentality by bringing together people from the two firms to work on well-defined cost-savings and revenue-growth projects. A departure for both companies, the new structure encouraged people to break old attachments and form new bonds. To set a good example, the executive committee (comprising both RBS and ex-NatWest executives) meets every Monday morning to discuss and resolve any outstanding issues--cutting through the bureaucratic and political processes that can slow decision making at the top.

Another business with an exemplary culture is the Wegmans supermarket chain, which has appeared for a decade on Fortune's list of "100 Best Companies to Work For." The family that owns the business makes a point of setting a familial tone for the companywide culture. Employees routinely report that management cares about them and that they care about one another, evidence of a sense of teamwork and belonging.

Job design.

The drive to comprehend is best addressed by designing jobs that are meaningful, interesting, and challenging. For instance, although RBS took a hard-nosed attitude toward expenses during its integration of NatWest, it nonetheless invested heavily in a state-of-the-art business school facility, adjacent to its corporate campus, to which employees had access. This move not only advanced the company's success in fulfilling the drive to bond, but also challenged employees to think more broadly about how they could contribute to making a difference for coworkers, customers, and investors.

Cirque du Soleil, too, is committed to making jobs challenging and fulfilling. Despite grueling rehearsal and performance schedules, it attracts and retains performers by accommodating their creativity and pushing them to perfect their craft. Its employees also get to say a lot about how performances are staged, and they are allowed to move from show to show to learn new skills. In addition, they get constant collegial exposure to the world's top artists in the field.

Performance-management and resource-allocation processes.

Fair, trustworthy, and transparent processes for performance management and resource allocation help to meet people's drive to defend. RBS, for instance, has worked hard to make its decision processes very clear. Employees may disagree with a particular outcome, such as the nixing of a pet project, but they are able to understand the rationale behind the decision. New technology endeavors at RBS are reviewed by cross-business unit teams that make decisions using clear criteria, such as the impact on company financial performance. In surveys, employees report that the process is fair and that funding criteria are transparent. Although RBS is a demanding organization, employees also see it as a just one.

Aflac, another perennial favorite on Fortune's "100 Best Companies to Work For," exemplifies how to match organizational levers with emotional drives on multiple fronts. (For concrete ways your company can use its motivational levers, see the exhibit "How to Fulfill the Drives That Motivate Employees.") Stellar individual performance is recognized and rewarded in highly visible ways at Aflac, thereby targeting people's drive to acquire. Culture-building efforts, such as Employee Appreciation Week, are clearly aimed at creating a sense of bonding. The company meets the drive to comprehend by investing significantly in training and development. Sales agents don't just sell; they have opportunities to develop new skills through managing, recruiting, and designing curricula for training new agents. As for the drive to defend, the company takes action to improve employees' quality of life. Beyond training and scholarships, it offers benefits, such as on-site child care, that enhance work/life balance. It also fosters trust through a no-layoff policy. The company's stated philosophy is to be employee-centric--to take care of its people first. In turn, the firm believes that employees will take care of customers.

The company examples we chose for this article illustrate how particular organizational levers influence overall motivation, but Aflac's is a model case of taking actions that, in concert, fulfill all four employee drives. Our data show that a comprehensive approach like this is best. When employees report even a slight enhancement in the fulfillment of any of the four drives, their overall motivation shows a corresponding improvement; however, major advances relative to other companies come from the aggregate effect on all four drives. This effect occurs not just because more drives are being met but because actions taken on several fronts seem to reinforce one another--the holistic approach is worth more than the sum of its constituent parts, even though working on each part adds something. Take a firm that ranks in the 50th percentile on employee motivation. When workers rate that company's job design (the lever that most influences the drive to comprehend) on a scale of zero to five, a one-point increase yields a 5% raw improvement in motivation and a correspondingly modest jump from the 50th to the 56th percentile. But enhance performance on all four drives, and the yield is a 21% raw improvement in motivation and big jump to the 88th percentile. (The percentile gains are shown in the exhibit "How to Make Big Strides in Employee Motivation.") That's a major competitive advantage for a company in terms of employee satisfaction, engagement, commitment, and reluctance to quit.

Sidebar Icon How to Make Big Strides in Employee Motivation (Located at the end of this article)

The Role of the Direct Manager

Our research also revealed that organizations don't have an absolute monopoly on employee motivation or on fulfilling people's emotional drives. Employees' perceptions of their immediate managers matter just as much. People recognize that a multitude of organizational factors, some outside their supervisor's control, influence their motivation, but they are discriminating when it comes to evaluating that supervisor's ability to keep them motivated. Employees in our study attributed as much importance to their boss's meeting their four drives as to the organization's policies. In other words, they recognized that a manager has some control over how company processes and policies are implemented. (See the exhibit "Direct Managers Matter, Too.")

Sidebar Icon Direct Managers Matter, Too (Located at the end of this article)

Employees don't expect their supervisors to be able to substantially affect the company's overall reward systems, culture, job design, or management systems. Yet managers do have some discretion within their spheres of influence; some hide behind ineffective systems, whereas others make the most of an imperfect model. Managers can, for example, link rewards and performance in areas such as praise, recognition, and choice assignments. They can also allocate a bonus pool in ways that distinguish between top and bottom performers. Similarly, even in a cutthroat culture that doesn't promote camaraderie, a manager can take actions that encourage teamwork and make jobs more meaningful and interesting. Many supervisors are regarded well by their employees precisely because they foster a highly motivating local environment, even if the organization as a whole falls short. On the other hand, some managers create a toxic local climate within a highly motivated organization.

Although employees look to different elements of their organization to satisfy different drives, they expect their managers to do their best to address all four within the constraints that the institution imposes. Our surveys showed that if employees detected that a manager was substantially worse than her peers in fulfilling even just one drive, they rated that manager poorly, even if the organization as a whole had significant limitations. Employees are indeed very fair about taking a big-picture view and seeing a manager in the context of a larger institution, but they do some pretty fine-grained evaluation beyond those organizational caveats. In short, they are realistic about what managers cannot do, but also about what managers should be able to do in meeting all the basic needs of their subordinates.

At the financial services firm we studied, for example, one manager outperformed his peers on fulfilling subordinates' drives to acquire, bond, and comprehend. However, his subordinates indicated that his ability to meet their drive to defend was below the average of other managers in the company. Consequently, levels of work engagement and organizational commitment were lower in his group than in the company as a whole. Despite this manager's superior ability to fulfill three of the four drives, his relative weakness on the one dimension damaged the overall motivational profile of his group.

• o o

Our model posits that employee motivation is influenced by a complex system of managerial and organizational factors. If we take as a given that a motivated workforce can boost company performance, then the insights into human behavior that our article has laid out will help companies and executives get the best out of employees by fulfilling their most fundamental needs. How to Fulfill the Drives That Motivate Employees

For each of the four emotional drives that employees need to fulfill, companies have a primary organizational lever to use. This table matches each drive with its corresponding lever and lists specific actions your company can take to make the most of the tools at its disposal.

How to Make Big Strides in Employee Motivation

The secret to catapulting your company into a leading position in terms of employee motivation is to improve its effectiveness in fulfilling all four basic emotional drives, not just one. Take a firm that, relative to other firms, ranks in the 50th percentile on employee motivation. An improvement in job design alone (the lever that most influences the drive to comprehend) would move that company only up to the 56th percentile--but an improvement on all four drives would blast it up to the 88th percentile.

Direct Managers Matter, Too

At the companies we surveyed whose employee motivation scores were in the top fifth, workers rated their managers' ability to motivate them as highly, on average, as they rated the organization's ability to fulfill their four drives. The same pattern was evident within the bottom fifth of companies, even though their average ratings on all five dimensions were, of course, much lower than those of companies in the top fifth.

Should You Invest in the Long Tail?

It was a compelling idea: In the digitized world, there's more money to be made in niche offerings than in blockbusters. The data tell a different story.

by Anita Elberse

cD- BLOG: Read a response from Chris Anderson, author of The Long Tail, and participate in this online discussion.

cD- BLOG: Read Anita Elberse's response to Chris Anderson and participate in this online discussion.

In a typical year, Grand Central Publishing (formerly Warner Books) goes to market with 275 to 300 book titles spread across two catalogs--its fall and winter lists. For each list the company identifies the handful of books it believes have the greatest sales potential and gives them the full benefit of its marketing capabilities. Of those, it spotlights just two "make" books, one fiction and one nonfiction, for which the company's publisher is willing, in her words, to "pull out all the stops." In the fall of 2007 those books were David Baldacci's Stone Cold and Stephen Colbert's I Am America (and So Can You!). The effects of this strategy show up in sales figures and profits. Whereas the 61 hardcover titles Grand Central put on its 2006 front list, on average, incurred costs of $650,000 and earned gross profits of just under $100,000, a wide range of numbers contributed to those averages. Grand Central's most heavily marketed title incurred costs of $7 million and achieved net sales of just under $12 million, for a gross profit of nearly $5 million--50 times the average.

Grand Central is pursuing what is known as a blockbuster strategy--a time-honored approach, particularly in the media and entertainment sector. With limited space on store shelves and in traditional distribution channels, and with retailers and distributors seeking to maximize their returns, producers have tended to focus their marketing resources on a small number of likely best sellers. Although such an approach involves substantial risk, they expect that the occasional hit's huge pay-off will cover the losses of many misses, and that a few big sellers will bring in the lion's share of revenues and profits. In 2006 just 20% of Grand Central's titles accounted for roughly 80% of its sales and an even larger share of its profits.

Much has changed in commerce, however, in the decades since the blockbuster strategy first took hold. Today we live in a world of ubiquitous information and communication technology, where retailers have virtually infinite shelf space and consumers can search through innumerable options. When books, movies, and music are digitized and therefore cheap to replicate, the question arises: Is a blockbuster strategy still effective?

One school of thought says yes. Well represented by the economists Robert Frank and Philip Cook, in their 1995 book The Winner-Take-All Society, that school argues that broad, fast communication and easy replication create dynamics whereby popular products become disproportionately profitable for suppliers, and customers become even likelier to converge in their tastes and buying habits. The authors offer three reasons for their view: First and foremost, lesser talent is a poor substitute for greater talent. Why, for example, would people listen to the world's second-best recording of Carmen when the best is readily available? Thus even a tiny advantage over competitors can be rewarded by an avalanche of market share. Second, people are inherently social, and therefore find value in listening to the same music and watching the same movies that others do. Third, when the marginal cost of reproducing and distributing products is low--as it certainly is with goods that can be digitized--the cost advantage of a brisk seller is huge. Frank and Cook were elaborating on the economist Sherwin Rosen's earlier work describing the "superstars" effect, in which a field's few top performers pull ever further away from the pack. According to this line of thought, hits will keep coming--to the increasing detriment of also-rans.

Although that thesis continues to hold sway, another idea has emerged in recent years--presented just as persuasively, and proposing the opposite. The "long tail" theory took shape in an article by Chris Anderson, editor of Wired magazine, which grew into the 2006 book The Long Tail: Why the Future of Business Is Selling Less of More. The book's subtitle puts the strategic implications in a nutshell. Now that consumers can find and afford products more closely tailored to their individual tastes, Anderson believes, they will migrate away from homogenized hits. The wise company, therefore, will stop relying on blockbusters and focus on the profits to be made from the long tail--niche offerings that cannot profitably be provided through brick-and-mortar channels. (See the sidebar "The Long-Tail Theory in Short.")

Sidebar Icon The Long-Tail Theory in Short (Located at the end of this article)

Which phenomenon is actually playing out in today's markets? To find out, I investigated sales patterns in the music and home-video industries--two markets that Anderson and others frequently hold up as examples of the long-tail theory in action. Specifically, I reviewed sales data obtained from Nielsen VideoScan and Nielsen SoundScan, which monitor weekly purchases of videos and music through online and off-line retailers; from Quickflix, an Australian DVD-by-mail rental service; and from Rhapsody, an online music service that allows subscribers to choose from a large database of songs for a fixed monthly fee (and which Anderson cites often in The Long Tail).

What I discovered may be of intellectual interest to readers who can relate both theories to their own consumption experience and appreciate the tension between them. But for managers whose job it is to navigate the digital landscape, the interest will be far more than academic. If you are a producer, you have pressing decisions to make about product development and marketing investments. If you are a retailer, you must decide how broad an assortment to stock and whether to guide customers toward obscure selections that may yield higher margins. In either case, your choices will vary dramatically depending on which theory you subscribe to. You won't make the right calls unless you understand how online channels are actually changing markets.

The Shape of Consumption

When selection is vast and search easy, how do sales volumes stack up? Do they skew toward the head of the distribution curve or toward the tail? Rhapsody's transaction record is a good place to find out. The first chart below depicts the aggregate selections of more than 60,000 subscribers who had more than 1 million tracks to choose from. In the three-month period of 2006 portrayed here, those customers engaged in more than 32 million transactions, or "plays." And what do we see? Clearly, a high level of concentration. The data underlying the graph reveal that the top 10% of titles accounted for 78% of all plays, and the top 1% of titles for 32% of all plays. Pause for a moment, though, to reflect on those numbers. One percent of a million is still 10,000--far more than the number of titles most U.S. radio stations play in a given year, and when translated into album terms, equal to the entire music inventory of a typical Wal-Mart store.

The second chart shows the sales distribution during a six-month period in 2006 at Quickflix, which offers just under 16,000 titles. Here the top 10% of DVDs accounted for 48% of all rentals, and the top 1% for 18% of all rentals. In other words, some 150 titles (roughly the number of movies released annually to theaters by major Hollywood studios) accounted for nearly a fifth of all rentals. The concentration is not as strong as with Rhapsody, but it's still substantial.

The charts provide a snapshot of the value of niche products. Strategists, however, need to understand how the picture is changing. As demand shifts from off-line retailers with limited shelf space to online channels with much larger assortments, is the tail of the sales distribution getting longer and fatter?

My colleague Felix Oberholzer-Gee and I studied this question. In particular, we looked at weekly sales of home videos as reported by Nielsen VideoScan from January 2000 to August 2005, focusing on a random sample of nearly 5,500 titles. Using econometric models that control for a number of possible concomitant trends, we found that sales did shift measurably into the tail: The number of titles that sold only a few copies almost doubled for any given week from 2000 to 2005. In the same period, however, the number of titles with no sales at all in a given week quadrupled. Thus the tail represents a rapidly increasing number of titles that sell very rarely or never. Rather than bulking up, the tail is becoming much longer and flatter. Moreover, we determined that this is not simply a function of the sharp increase in the number of titles that have come onto the market in recent years, or of the transition from VHS to DVD; it is the truth of the long tail.

Meanwhile, our research also showed that success is concentrated in ever fewer best-selling titles at the head of the distribution curve. From 2000 to 2005 the number of titles in the top 10% of weekly sales dropped by more than 50%--an increase in concentration that is common in winner-take-all markets. The importance of individual best sellers is not diminishing over time. It is growing.

Similar trends are obvious in the recorded-music industry. Here I have done research on physical and digital music sales from January 2005 to April 2007 for a random sample of 3,300 artists, including the pop sensations Justin Timberlake and Maroon 5 but also the far less widely known jazz saxophonist Kirk Whalum and the indie rock band The Dears. The data, collected by Nielsen SoundScan, show a period of rapid change, as digital units jumped from one-third to nearly two-thirds of the total sold. My research reveals a shift toward the tail of the sales distribution, and not surprisingly, the change is more pronounced for digital tracks and albums than for physical ones. However, the concentration in digital-track sales is significantly stronger than that in physical-album sales, as we see in the chart below; and as the share of digital units grows month by month, so does the degree of concentration in sales. The tail again lengthens but flattens, and although today's hits may no longer reach the sales volumes typical of the pre-piracy era, an ever smaller set of top titles continues to account for a large chunk of the overall demand for music.

When I differentiate between artists on smaller, independent labels and those on major labels, I find that the former gain some market share at the tail end of the curve as a result of the shift to digital markets. However, that advantage quickly disappears as we move up the curve: A more significant trend is that independent artists have actually lost share among the more popular titles to superstar artists on the major labels. (These results hold when I control for the number and type of titles that artists brought to market.) Thus digital channels may be further strengthening the position of a select group of winners.

A Taste for Obscurity?

When we look at customer-transactions data, the trends noted above take on greater meaning. It's vital for marketers to understand who is responsible for the growing volume of business we see in the tail. Is just a small group of fanatics driving the demand for obscure products? If so, it is unlikely that a truly significant shift in media consumption will take place. Or are large numbers of consumers regularly venturing into the long tail? If so, it's important to gauge the size of their appetite for those products and the degree of their satisfaction with them.

The patterns that emerge in my research suggest that we won't soon leave what Anderson calls "the water cooler era." These patterns are far from new: They were described by William McPhee in the early 1960s, in Formal Theories of Mass Behavior. McPhee's "theory of exposure" (see the sidebar "Consumers in the Head and Tail") offers two relevant empirical generalizations: First, that a disproportionately large share of the audience for popular products consists of relatively light consumers, whereas a disproportionately large share of the audience for obscure products consists of relatively heavy consumers; and second, that consumers of obscure products generally appreciate them less than they do popular products. McPhee explored his theories in settings that typically provided fewer than a dozen alternatives. But my research reveals that his findings also hold true for the enormous assortments found online, even when sophisticated recommendation engines aim to stimulate demand for long-tail products.

Sidebar Icon Consumers in the Head and Tail: McPhee's Theory of Exposure (Located at the end of this article)

Is most of the business in the long tail being generated by a bunch of iconoclasts determined to march to different drummers? The answer is a definite no. My results show that a large number of customers occasionally select obscure offerings that, given their consumption rank and the average assortment size of off-line retailers, are probably not available in brick-and-mortar stores. Meanwhile, consumers of the most obscure content are also buying the hits. Although they choose products of widely varying popularity, top titles generally form the largest share of their choices. (The wide appeal of these top titles is, of course, what makes them popular in the first place.)

The exhibit "The Shopping Carts of Quickflix Video Customers" depicts this finding in greater detail. First, look at the bar farthest to the right. This is the breakdown of selections made by the large group of Quickflix customers who each rented at least one of the company's most popular (top decile) DVD titles over a six-month period. On average, 61% of these customers' rentals came from the highest decile, and another 13% from the second highest. Less than 1% of their choices came from the lowest decile--the most obscure titles.

Sidebar Icon The Shopping Carts of Quickflix Video Customers (Located at the end of this article)

Now look at the bar farthest to the left, which represents the much smaller group of customers who rented at least one of the most obscure titles. On average, 8% of this group's rentals came from this decile. But still, the biggest share--more than a third--came from the top decile.

Another finding from the transaction data is that customers who rent obscure movies are in general the heaviest users of the service. On average, customers who chose a popular title rented 20 videos in the six-month period under review. However, customers who dipped into the most obscure offerings rented an average of 50. The implication is that there is no segment with a particular taste for the obscure; rather, customers with a large capacity for content venture into the tail. Meanwhile, also in line with McPhee's theory, light consumers concentrate largely on the hit products.

My research also answers the question, How much enjoyment is derived from obscure versus blockbuster products? We can all easily imagine the extreme delight that comes from discovering a rare gem, perfectly tailored to our interests and ours to bestow on likeminded friends. This is perhaps the most romanticized aspect of long-tail thinking. Many of us have experienced just such moments; they are what give Chris Anderson's claims such resonance. The problem i