strategy+business spring 2014

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Change lives. Change organizations. Change the world.

In the high-stakes game of global business, the companies

that win are the ones that can successfully navigate a

constantly changing and complex environment. Learn

how to align your organizations strategy and structure

with this environment, identify and evaluate your firms

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Less is more. Keep your eyes on the prize. Know what matters. Few or-ganizational truisms are more given to aphorism than focus is critical. Executives are ooded by choice. There are always too many matters that require attention and too many possible paths to the same intended outcome. The temptations of choice can be so overwhelming that a score of platitudes cannot keep us from committing the same sin time and again: We dont choose at all.

We try multiple options. We pursue every initiative that seems promising. We throw it all at the wall and see what doesnt bounce off. The problem, as we know intellectu-ally but cannot accept emotionally, is that when you try to do too much, rarely does any one thing succeed.

Consider the struggles com-panies face in managing cultural change. Organizational culture can be a vexing issue for leaders even in the calmest of timesand when they try to transform those cultures, their consternation only increases. With no clear path to follow, execu-tives mix top-down directives with multiphased change management programs and medleys of new pro-cedures. Whats missing is focus

and, more specically, focus on the factors that Jon Katzenbach, Rut-ger von Post, and James Thomas argue really matter in culture change: the core behaviors, existing cultural traits, and key individuals that make a cultural shift meaningful, tangible, and lasting. The authors call these the critical few (page 50).

A focus on the few is equally important when it comes to manag-ing people. As Susan Cramm writes in Align with Your Stars (page 28), the best managers of talent know how to identify and effectively de-velop their organizations true, and relatively few, star employees. And they make time to do so at the ex-pense of less impactful tasks.

We also request your attention on several other topics of conse-quence. Siemens Corporation leaders Helmuth Ludwig and Eric Spiegel make a powerful case for the re-shor-ing of industry in Americas Real Manufacturing Advantage (page 38). Their optimism stems from the United States sustainable strengths in the three areas that underlie a technology-guided manufacturing sector: innovation, software develop-ment, and university education.

Please then shift your focus to

page 22, where Ramez T. Shehadi and Mounira Jamjoom describe CSRs emergence as a driver of en-trepreneurship, economic develop-ment, and job growth in Corporate Social Responsibilitys New Role in the Middle East. By turning tradi-tional CSR on its ear, organizations stand to provide both the region and themselves with a new source of ad-vantage: vibrant economies.

And speaking of advantage, Columbia Business School professor Rita Gunther McGrath has some news for you on page 72: It doesnt last as long as it used to, and prob-ably not as long as you think.

A wealth of other great material awaits you in these pages. And, thus, the exception to a rule: We advise you to focus on it all.

On behalf of everyone at strategy+business, I hope you nd this issue to be a good use of your valuable time.

Paul MichelmanExecutive Editorpaul.michelman@ strategy-business.com

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Cut the Fat but Keep Some Slack Sendhil Mullainathan and Eldar Shar Why excess capacity leads to greater efciency.

How to Break the Cycle of CIO TurnoverRichard Bhanap, Nicolai Bieber, and Martin Roets Companies benet from strong IT leaders. The trick is developing and retaining them.

Achieving Growth in a Lean Europe Richard RawlinsonWith consumer spending down and investment drying up, whats an E.U. rm to do?

Angela Duckworths Gritty View of SuccessLaura W. Geller A psychologist and new MacArthur Fellow says you need employees with stamina and tenacity above all else.

Scale Your Innovation InitiativesRobert C. Wolcott and Jrn Bang AndersenFive ways to boost the impact of new endeavors without adding bureaucracy or cost.

s+b Trend WatchAlternative Powertrains

GLOBAL PERSPECTIVE

Corporate Social Responsibilitys New Role in the Middle EastRamez T. Shehadi and Mounira Jamjoom An urgent need for job growth is spurring an innovative trend in CSR and high-minded commercial initiatives.

ORGANIZATIONS & PEOPLE

Align with Your Stars Susan Cramm When you connect the development of your top talent with the needs of your organization, everyone winsand your best people stay.

FINANCE

Four Strategies for Wealth Managers Alan Gemes and Andreas Lenzhofer How to help close the gap between assets under management and prots.

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OPERATIONS & MANUFACTURING

Americas Real Manufacturing AdvantageHelmuth Ludwig and Eric Spiegel A new wave of software innovation is about to transform industryand give the United States the chance for a lasting edge.

ORGANIZATIONS & PEOPLE

The Critical Few: Components of a Truly Effective Culture Jon Katzenbach, Rutger von Post, and James ThomasForget the monolithic change management programs and focus on the elements of your culture that drive performance.

Four Signs That Your Critical Few Behaviors Are Working

MARKETING, MEDIA & SALES

A Step-by-Step Guide to Winning the CustomerNiraj Dawar Companies that understand the stages of consumer purchasing decisions have an outsized inuence on their outcome.

Competing for Low-Involvement Purchases

Best of the s+b BlogsStrategy Matters in Emerging Markets After AllJohn Jullens

Why We Should Deregulate the GovernmentArt Kleiner

The Three Habits of Highly Effective DemotivatorsSally Helgesen

THE THOUGHT LEADER

INTERVIEW

Rita Gunther McGrathTheodore Kinni The Columbia Business School professor says the era of sustainable competitive advantage is being replaced by an age of exibility. Are you ready?

BOOKS IN BRIEF

Working Together Apart Jon Gertner

The Big Promise of Open Data Nancy Scola

The Rise and Fall of Western InnovationMarc Levinson

The Lion versus the FoxDavid K. Hurst

The Trouble with Sunspots George S. Oldeld

END PAGE: RECENT RESEARCH

The Vicious Cycle of CEO Pet ProjectsMatt PalmquistIncoming leaders follow a predictable pattern of disinvesting from their predecessors ops and eventually investing just as unwisely.

Cover illustration by Foreal

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surgeries performed after 3 p.m. fell by 45 percent, and revenue in-creased. And in the two years that followed, the hospital experienced a 7 and 11 percent annual increase in surgical volume.

We All Need Breathing RoomMany systems require slack in order to run smoothly. Old reel-to-reel tape recorders needed an extra bit of tape fed into the mechanism to en-sure that it wouldnt rip. Your coffee grinder wont grind if you overstuff it. And consider roadways: In prin-ciple, if a road is 85 percent full and everybody goes at the same speed, all cars can easily t with some room between them. But if one driver speeds up just a bit and then needs to brake, everyone behind that car has to brake as well. Thus, at 85 per-cent there is enough road but not enough slack to absorb small shocks, and trafc grinds to a halt.

Still, slack is routinely under-valued. Perhaps you used to have an amazing administrative assistant al-ways ready to do the tasks you need-ed on short notice. But he wasnt always busy. In the interest of ef-ciency, the department was reorga-nized, and now you share the assis-

Cut the Fat but Keep Some Slack Why excess capacity leads to greater efciency.

by Sendhil Mullainathan and

Eldar Shar

I n 2002, the operating rooms at St. Johns Regional Health Cen-ter, an acute-care hospital in Missouri, were at 100 percent capac-ity. When emergency caseswhich made up about 20 percent of the full loadarose, the hospital was forced to bump long-scheduled surgeries. As a result, according to one study, doctors often waited several hours to perform two-hour procedures and sometimes operated at 2 a.m., and staff members regularly worked un-planned overtime. The hospital was constantly behind.

Administrators brought in an outside advisor, who came up with a rather surprising solution: Leave one

room unused. To many, this seemed crazy. The facility was already being squeezed, and now comes a recom-mendation to take away even more capacity? Yet there was a profound logic to this recommendation, a log-ic that is instructive for the manage-ment of scarcity.

On the surface, St. Johns lacked operating rooms. But what it actually lacked was the ability to ac-commodate emergencies. Because planned procedures were taking up all the rooms, unplanned surgeries required a continual rearranging of the schedulewhich had serious re-percussions for costs and even qual-ity of care. The key to nding a so-lution was the fact that the term unplanned surgery is a bit mislead-ing. The hospital cant predict each individual procedure, but it knows that there will always be emergen-cies. Once a room was set aside spe-cically for unscheduled cases, all the other operating rooms could be packed well and proceed unencum-bered by surprises. The empty room thus added much-needed slack to the system. Soon after implement-ing this plan, the hospital was able to accommodate 5.1 percent more surgical cases overall, the number of

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obligations to tomorrow, except, of course, that tomorrows schedule is packed too, and the cost of that de-ferral ends up being high.

We fail to build in slack because we focus on what must be done now with too little consideration of all the things that may arise in the fu-ture, even in the near term. When the intangible future comes face to

face with the palpable present, slack feels like a luxury. What should you do? Should you leave spaces open in your schedule just in case something unexpected comes up, despite the fact that there is already so much youd like to do in so little time? The simple answer is yes. Its similar to al-locating 40 minutes to drive some-where a half hour away, or salting away some money from your monthly household budget for a rainy day.

Cut the Fat CarefullyNow, lets look at slack through a different lens. During the 1970s and the early 1980s, there was a wide-spread perception that many corpo-rations were bloated. Some indus-tries were so awash with cash that executives spent carelessly. Because of poor cash management, in fact, several oil companies were worth

less than the oil they owned; the market anticipated they would sim-ply waste their assets. The leveraged buyout wave in the 1980s was an at-tempt to solve this problem.

The logic was simple: Buy these companies and impose pressure by placing them in debt. Move them from abundance to scarcity. The dis-cipline of debtin our parlance, the focus that comes from scarcitywould improve performance. And a raft of empirical studies showed that, whatever their other conse-quences, leveraged buyouts did just that. One reason was that corporate fat gives some managers added incentive to spend poorlyeven spend in ways that run counter to shareholders interests. After all, its someone elses money. By increasing leverage and reducing what is effec-tively free money, managers spend more wisely.

Leverage also had an effect be-cause of the psychology of scarcity. Companies became lean and mean, in part, for the same reason deadlines produce greater produc-tivity. Being a hypervigilant manag-er who keeps costs low can require a great deal of cognitive effort. Such managers must negotiate diligently

tant with two other people. The ofces time-use data revealed this new system to be a success; now the assistants schedule is packed as tightly as yours. However, your last-minute requests can no longer be handled immediately. This means that with your heavy schedule, even the smallest shock sets you back. So you start to juggle, and fall further and further behind. The assistant had been an important source of slack. The fact that he was under-used, like that room at St. Johns, is what made his role valuable.

When you have a lot to do, the standard impulse is to pack tightly to t everything in. Otherwise, you are left feeling that youre not doing enoughthat you could be more efcient. But its a vicious circle. When your schedule is crammed, getting stuck in a trafc jam throws you into disarray. You are late to meeting number one, and with no time in between meetings, that de-lay pushes into meeting number two, and so on. You nally have no choice but to defer one of todays

On the surface, the hospital lacked operating rooms. But what it actually lacked was the ability to accommodate emergencies.

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scarcity and slack can reduce the reghting mentality. Consider the lesson of how banks have tried to manage risk. Banks have long recog-nized that managers, tunneling on the bottom line, do not sufciently take risk into account (perhaps best demonstrated by the 2008 nancial crisis). Many banks have introduced chief risk ofcers, who sit apart from the rest of the management team and report directly to the CEO. They must approve nancial products, loans, and other transac-tions, viewing them through the lens of risk.

Other organizations can take a similar approach to slack manage-ment. Designate someone (or a team) to focus not on what needs to be done today but on the possible events that could disrupt your busi-ness tomorrow. This person or group can ensure that those who are focused on meeting immediate proj-ect targets are not borrowing from future projects, digging the organi-zation deeper into a bandwidth hole. It is no coincidence that the advisor who proposed the shakeup at St. Johns was an outsider, removed from the struggle for the next oper-ating room. +

Reprint No. 00229

Sendhil Mullainathan [email protected] a professor of economics at Harvard University. He is a recipient of a MacArthur Foundation genius grant.

Eldar Shar [email protected] the William Stewart Tod Professor of Psychology and Public Affairs at Princeton University.

This article was adapted from Mullainathan and Shars new book, Scarcity: Why Having Too Little Means So Much (Times Books, 2013).

How to Break the Cycle of CIO TurnoverCompanies benet from strong IT leaders. The trick is developing and retaining them.

by Richard Bhanap, Nicolai Bieber,

and Martin Roets

I n organizations around the world, new digital tools and technologies are adding efcien-cies and enabling new business models. Chief information ofcers stand at the epicenter of this activity: As keepers of the IT wallet and managers of the rms tech-savvy talent, they stand to unlock the competitive advantage of digitiza-tion. But with digitizations promise come challenges for those who man-age how it is deployed and used.

To better understand the changing role of the chief infor-mation ofcer, Booz & Company surveyed 60 CIOs of large multi-national corporations in a variety of sectors as part of its inaugural CIO Success(ion) Study in late 2013. These CIOs must coordinate an increasingly complicated set of internal and external resources and capabilities; oversee the develop-ment of complex new IT-enabled projects on time, on budget, and in a way that delivers the promised business value; and continually as-

with suppliers and scrutinize every line item to decide whether an ex-pense is truly necessary. This kind of focus is easier to come by under scarcity and harder to come by un-der abundance. Even private com-panies, whose managers are spend-ing their own money, start acting fat when awash in cash.

As we have seen, slack can rep-resent a source of great (though of-ten hidden) value or it can represent waste. When slashing costs and re-organizing for efciency, it can be hard to separate useful slack from true waste, and indeed, many of the leveraged companies of three de-cades ago were left at the brink of bankruptcy. Faced with that reality, they tunneledthey neglected ev-erything besides the emergency at hand. Cut too much fat, remove too much slack, and you are left with managers who will mortgage the fu-ture to make ends meet today.

Fighting Fire with SlackWhen organizations nd themselves facing scarcity, executives become reghters, focused on battling the immediate threat. Meanwhile, new res are constantly popping up be-cause nothing is being done to pre-vent them. As a result, structural problemsimportant, but they can waitdont get xed. When the Microsoft Corporation shipped its Windows 2000 software, it went out with 28,000 known bugs. The project team knew they were ship-ping a product with lots of prob-lems, but they had already missed the deadline. As a result, they im-mediately began working on a rst patch, which was intended to x all the bugs they knew they had shipped out. Not a good place to be when reports of new bugs start coming in.

Understanding the logic of

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talent is ignored to a certain extent at many companies.

Why They Leave For those who make it to the top, the situation doesnt always im-prove. Our survey shows that many CIOs move from company to com-pany, seemingly more frequently than other top executives, a trend we refer to as the serial CIO. About 33 percent of our survey par-ticipants were in their rst CIO role, 25 percent were in their second, and

more than 40 percent had held three or more CIO roles. This suggests that many CIOs dont see room for advancement (for example, to chief operating ofcer) at their current or-ganization, and they move on. In-deed, although almost half of our respondents have been in their cur-

sess emerging technologies and solu-tions. Most important, they need to juggle all this while shaping and pursuing a strategic IT agenda for the business and balancing the in-exorable demand for new services and solutions from every part of the organization.

For chief executive ofcers, the selection and retention of a skilled CIO has never been more critical. At many companies, however, a number of factorsincluding lim-ited succession planning, the choice of reporting lines, and a lack of buy-in from key stakeholders for major IT projectscan make it dif-cult for the CIO to perform effec-tively, leading to a tenure shorter than those of other C-suite execu-tives. Our study results reveal some steps chief executives can take to en-sure that their information ofcers and IT professionals are set up to succeed.

The CIOs we surveyed identi-ed certain constraints on their per-formance, starting with how the role itself is typically lled. About 60 percent of CIOs are recruited ex-ternally, the implications of which are unfortunate for ambitious and talented members of any current IT leadership team. Only a third of the

CIOs we surveyed reached that po-sition from within their own organi-zation. Worse yet, a number of to-days CIOs who were promoted from within had switched organiza-tions at the level just below CIO in order to be groomed as a successor. This implies that homegrown IT

rent CIO position for three to ve years, more than 40 percent said they dont expect to be there beyond another year or two.

Our survey also found that one-third of CIOs are forced out of their jobs. CIO folklore would suggest that the most obvious cause was a failure to deliver day-to-day IT ser-vices such as processing transactions and sending email. But in reality, few CIOs have been let go for this reason, perhaps because advances in technology and service management have made major service failures far less common.

According to 70 percent of our respondents, the failure of a major IT project is one of the primary rea-sons that the tide turns against the CIO. And although failure doesnt always lead directly to dismissal, the interviews we conducted show that it is often a contributing factor. These projects are typically big-ticket, multiyear, enterprise-wide programs involving new ERP, CRM, or core industry-specic so-lutions that promise to fundamen-

Our survey shows that many information chiefs move from company to company, seemingly more frequently than other top executives, a trend we refer to as the serial CIO.

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tioned to create a high-functioning team that coordinates well with key stakeholders throughout the com-pany. And this will help avoid the large project failure trap. CIOs need to instill a strong sense of joint ownership and work in genuine partnership with these stakeholders to ensure the successful delivery of complex IT-enabled business

change. As the CIO of a global energy company told us, If the CIO is credible and accepted by the top team, and has the IT manage-ment basics like service and cost under tight control, the fact that they report to the CFO...doesnt have to make a lot of difference.

Its also important to clearly de-ne the CIOs job, and to make sure he or she has opportunities for ad-vancement. Many of the CIOs we spoke with pointed to shared- services operations and other sup-port functions as being areas that could be put under their responsibil-ity. Those departments would bene-t from the IT functions service management capabilities, and would give the CIOs role wider scope.

Indeed, some of our partici-pants had already been put in charge of such activities. The CIO is among the few roles with a cross-functional, cross-organizational per-spective. This, in conjunction with running large programs and driving change, should prepare them to become COOs, said the CIO at an international retailer. Uncovering new business and technological problems, and having the support needed to solve them efciently, will

also look within their organization to identify what allowed such a situ-ation to develop in the rst place, whether on the business side or within IT itself.

Our survey also revealed the importance of the CIOs reporting relationship. This relationship has a direct impact on how the CIO fo-cuses the IT organizations energies

and resources. The reporting rela-tionship wont be the same at every company, but it needs to be clearly dened and aligned to the companys overall strategic goals.

Although a small number of CIOs reported to a COO or other operational executive, the majority had a direct line to the CFO or CEO, in roughly equal proportion. Those reporting to the CEO said they were typically encouraged to prioritize enterprise-wide business valuehow much the IT depart-ment delivers to the businesswhereas those reporting to the CFO may have been asked to emphasize the cost agenda and automation of operations. Both roles are impor-tant, although the latter is often connected to an older way of think-ing about IT, as a cost center to be managed efciently. Cost manage-ment is a critical concern in an age when IT absorbs a large portion of companies budgets, but its not nec-essarily the way to get the most busi-ness value out of new technologies.

Still, no matter what the report-ing line, CIOs who have a strong sense of how their job duties and their IT strategy t into the overall corporate strategy will be best posi-

tally change business performance and improve competitiveness. Un-fortunately, such complex projects are often allowed to deteriorate into costly IT-driven systems implemen-tation and replacement initiatives, which lack genuine ownership and buy-in from the business units in-volved. Seventy percent of our re-spondents said they inherited these types of programs when they be-came CIO; they also said that 60 percent of these programs were doomed to fail.

According to the CIO of a glob-al consumer products company, If youre not extremely careful with these programs, business stamina and patience run out. Just get the #@*%$!! system in once and for all so that we can pick ourselves up again and move on becomes the dominant refrain. Thats of course assuming that you can get to a work-ing system at all. The result, fre-quently, is an expensive IT solution that doesnt quite do what was promised and ultimately doesnt have much tangible impact on busi-ness performance.

Think Big to Succeed Given the number of institutional challenges CIOs face, CEOs have to play a direct role in creating a more favorable work environment.

The rst step is knowing where to look for the next CIO. We offer a simple rule of thumb: If a CEO believes that IT and digitization are currently on the right path in the company, and there is broad condence in the strategy and road map laid out by the CIO and the IT team, looking internally for a successor should be the default plan. If, however, these conditions do not exist, the CEO should consider ex-ternal successors. He or she should

Almost 90 percent of CIOs we surveyed said the top reason for moving to their current position was the professional challenges involved.

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help keep the CIO engaged. In the end, CIOs need to be en-

couraged to have a vision of how technology can help their company achieve its strategic goals. And they need to feel supported by the rms executive leadership to act on this vision. Almost 90 percent of the CIOs we surveyed said the top rea-son for moving to their current posi-tion was the new professional chal-lenges involved. Right now, it seems that too many nd that their actual work environment may not meet their expectations. Its time to x that, because an engaged and em-powered CIO is essential in carrying a company into the digital age. +

Reprint No. 00230

Richard Bhanap [email protected] a partner with Booz & Company based in London. As part of the rms digital business and technology practice, he specializes in working with large, complex multinational corporations on major IT-enabled business transformations.

Nicolai Bieber [email protected] a principal with Booz & Company based in Munich. He specializes in IT strategies, application architectures, and large transformation programs, with a focus on the public sector, nancial services, and telecommunications.

Martin Roets [email protected] a principal with Booz & Company based in London. He focuses primarily on the nancial-services industry, specializing in IT strategy, operating model design, and IT and business transformation.

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leading your company.

Learn more about Executive Educationgsb.columbia.edu/execed

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fresh eyes, and determine whether consumers are using them in unin-tended ways. For example, Procter & Gamble learned that people were using its cold medicine NyQuil, which comes with a warning that it can cause drowsiness, as a sleep aid. In response, the company start-ed marketing ZzzQuil, a product that uses the same active ingredient, but with a modied formulationobviating the need for a major R&D effort. And P&G already had strong distribution and marketing net-works in place. With minimal in-vestment, it was able to create an entirely new growth segment.

Reckitt Benckiser (RB) has also had great success in developing product variants. The company starts by paying careful attention to

consumer interests and gaps in con-sumer needs, closely connecting its R&D and consumer insightgath-ering capabilities. RB realized that it could create versions of Nurofen, its popular pain relief medication, that were targeted to specic ailments such as migraines, muscle pain, and colds, among others. The basic in-gredientibuprofenremains the same. And like P&G, the company could leverage its superior distribu-tion and marketing capabilities to

Achieving Growth in a Lean EuropeWith consumer spending down and investment drying up, whats an E.U. rm to do?

by Richard Rawlinson

E xecutives of consumer prod-ucts and retail companies in Europe responded to the re-cent global economic crisis the best way they knew how. As demand shrank, they cut costs across the board. And initially, these measures worked: Between 2009 and 2012, even as revenues fell, many compa-nies posted increased earnings and relatively strong stock market per-formance. But today this strategy has run out of steam. Theres only so much excess to remove and overhead to reduce.

Thats left these executives fac-ing a signicant challenge. They need to nd ways to grow in Europe, but the market is working against them. The social safety net that sup-ported European consumers early on has been worn thin by continu-ing economic pressures and rising taxes. Since 2011, disposable income in Europe has been contracting in real terms. This decline in consumer spending power makes it hard to ar-gue for increased investment in the region. At the same time, other re-gions are attracting more investment away from Europe. In countries

such as Brazil, Russia, India, and China, even though disposable in-come growth has leveled off at around 6 percent per year from a high of 10 percent in 2007, the mid-dle class is large and growing, and has cash to spend on products that had long been out of reach. Mean-while, North Americas personal in-come growth rate has rebounded to about 2 percent per year, supporting reinvestment in the North Ameri-can market.

Its a forbidding picture of Eu-rope: consumers with less cash to spend in a market that most compa-nies arent eager to invest in. Fortu-nately, there is a way to grow even in todays lean times. Executives con-fronting these pressures will need to look withinat the markets and

customers their companies already haveand nd new ways to reach them by using the capabilities and strengths that make their companies distinctive.

A New Approach For many companies, growth op-portunities hide in plain sightand nding and seizing them doesnt al-ways require signicant investment. Executives should look at the prod-ucts in their current portfolio with

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sell each of the variants at a premi-um over regular Nurofen.

In rethinking their product portfolio, established consumer and retail companies can take a page from their upstart competitors. In early 2013, Booz & Company found that smaller companiesthose with less than US$1 billion in saleswere prospering, growing their mar-ket share more rapidly than larger competitors in 18 of the top 25 food and beverage categories. Some re-cent market developments favor these smaller players. For one, se-lectionist consumers seek out brands that match their own needs and sense of differentiation, and of-ten turn to products from local sources. And, with extensive out-sourcing, smaller players can now offset scale disadvantages in admin-istrative and support functions (see The Big Bite of Small Brands, by Elisabeth Hartley, Steffen Lauster, and J. Neely, s+b, Autumn 2013).

Whats driving this trend is the fact that smaller players know that coherence beats scale. In Scotland, Irn-Bru (Iron Brew), a carbonat-ed soft drink owned by British manufacturer A.G. Barr, outsells all of its competitorseven Coca-Cola. A.G. Barr has achieved 9 per-cent CAGR for the past six years by focusing on the Scottish market and a narrow product lineup. Its a strategy that traditional retailers can adopt. Heineken, for example, markets dozens of beer brands by emulating its microbrewery com-petitorsbut its brands all bene t from the companys pro ciency and scale in innovation, marketing, and distribution.

Smaller players can also serve as testing grounds for innovation, and acquiring or partnering with them can bring those innovations to scale.

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your existing assets. Ruthlessly di-minish or discard your investments in other areas. They are extraneous; you cant afford the baggage now.

Most consumer products and retail companies wont take these steps. They will continue to seek out new growth market opportunities anywhere they can nd them. The trouble is, there just arent many around in a time of declining con-sumer spending. And even if they do nd those opportunities, com-panies cant necessarily exploit them, because they may not have the capabilities needed to do so or the investment needed to develop those capabilities. Thats why execu-tives in Europe need to start with what they have and what theyre good at, and work from there. When the market itself isnt creating op-portunities, this is how companies make their own. +

Reprint No. 00231

Richard [email protected] is a partner with Booz & Companys consumer and retail practice, and is based in London.

to the store and picking out, check-ing out, and bringing home the merchandise. By adding online and delivery options, grocers have in-creased their activities, assets, and operating costs. Meanwhile, they have carried many existing pricing and assortment policies into their online operations.

More effective digital strategies often use more of a companys exist-ing asset base and capabilities sys-tem, but less of the inherited pricing and assortment policies. Retailers that nd new uses for their existing

stores will benet most. Burberry Group used social media to make its luxury brand feel accessible to peo-ple around the world with live feeds of its fashion shows, but it also uses its brick-and-mortar stores as high-tech experience centers. Burberrys agship store in London began us-ing RFID tags and mobile technol-ogy to enable customers to engage with products and salespeople on the oor. The effort, led by then CEO Angela Ahrendts, was so suc-cessful that in October 2013, Apple tapped Ahrendts to transform and streamline its physical and online retail stores.

Make Your Own SuccessSuccess in todays Europe comes down to the overlap between market opportunities and a companys capa-bilities. The best advice: Seek out those opportunities that match the few things you do extremely well. Double your investments in those growth areas that align with your strengths and take advantage of

Although such ventures obviously require investment, they are capital-ized investments that would be more palatable and justiable to company leaders than operating investments. Aviss acquisition of Zipcar in early 2013 followed this model. Zipcar had reframed urban car rental by al-lowing customers to subscribe to its service with hour-by-hour pricing. To make the integration work over the long term, Avis will need to take advantage of Zipcars well-known brand and marketing prowess, but apply its economies of scale at the

back end, in car purchasing, eet management, and information tech-nology. Johnson & Johnson has used a similar strategy to expand in both pharmaceuticals and consumer healthcare.

If there is a common enabler for many of the strategies discussed thus far, it is digitization. Digital tech-nologies hold immense promise for revitalizing the retail and consumer products industries. They bring consumers and retailers closer, re-duce costs, and enable a variety of lucrative new services and market-ing tools. But the rule of economy applies even to digitization: You have to manage investment and cost as you seek growth.

Recent developments in the U.K. grocery industry illustrate the risks of ignoring this rule. Every ma-jor supermarket has committed to developing a digitally enabled busi-ness. But in so doing, they have had to move away from the magic of the supermarket model, in which the customer does the work of coming

Double your investments in those growth areas that align with your strengths and take advantage of your existing assets.

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uping education by understanding how grit affects a childs trajectory, and is developing new teaching methods and interventions based on her nd-ings. But as we learned during a re-cent interview, her research also has implications for managers looking to cultivate a more capable workforce.

S+B: What attracted you to the concept of grit? DUCKWORTH: In my rst couple years of graduate school, I started asking the perennial question: Why are some people more successful than others? Obviously, Im not the rst to think about thatalmost every ma-jor philosopher and many prominent psychologists have addressed this question.

Talent is a common answer, but I wasnt convinced that that was the whole story. I talked to promi-nent peoplepartners at successful investment banking rms, and indi-viduals who had achieved elected of-ce at relatively high levels of govern-mentand I asked them: Which people are really the best in your eld, and what are these outliers like?

They would rattle off a series of adjectives, but one theme emerged. In addition to talent, those highly successful people had a kind of stay-

Angela Duckworths Gritty View of SuccessA psychologist and new MacArthur Fellow says you need employees with stamina and tenacity above all else.

by Laura W. Geller

I f someone asked you to dene grit, what images would come to mind? Windburned cowboys? Pioneers on the open plain? Grit has long been used in describing those who dig in their heels in the face of hardship, who persevere in even the most challenging circumstances and emerge victorious.

Angela Lee Duckworth, an as-sociate professor of psychology at the University of Pennsylvania, believes this same tenacious spirit can be found in those who achieve excel-lence in school, on the playing eld, and in business. Talent and intelli-gence will get you only so far. The key ingredient to success, says Duck-worth, is grit. Its that special some-thing that keeps certain people dedi-cated to their goal (whether it involves their studies, their projects, their cli-ents, or something else) for the long haul, determined to accomplish what they set out to do. Its a fascinating conceptone that recently won Duckworth a MacArthur Founda-tion genius grant.

A former public school teacher, Duckworth has a passion for improv-

ing power. They were working not only with intensity, but also with stamina over long periods of time, incrementally chipping away at some goal. That led me to grit.

S+B: Is grit teachable? DUCKWORTH: I think so, yes, but its not easy. Were in the nascent stages of research on behavioral change, not just about grit, but about other things too. For example, look at the percentage of dollars spent on health problems that would be preventable if people ate right, ex-ercised, and took their medication. It should be easy to get people to do things like save their own lives, but thats not always the case.

I do think that theres room for optimism, though. I start from the assumption that people are trying to do well by themselves, which is actu-ally the premise of the whole eco-nomic model of behavior. They are trying to optimize their outcomes and avoid mistakes. Im not trying to sell the idea that you can move peo-ple from the bottom 1 percent of the distribution in grit to the highest 1 percent. This isnt a lose 10 pounds in two days kind of idea. But I do think you can nudge people further to the right end of the grit spectrum.

S+B: How would that happen in a corporate environment? How can leaders encourage grittiness among their employees?DUCKWORTH: The rst thing man-agers should understand is that peo-ple who are gritty will doggedly pur-sue things that they really value. Its sort of like love: You cant be in love unless theres something or someone that youre in love with. Similarly, employees with grit are deeply and enduringly motivated by work they nd meaningful. Top performers

Angela Duckworth

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people. Through their explicit prac-tices and their implicit culture, these companies encourage doing things for a long time, being loyal, going deep into problems, and working at the edgewhere an employees challenges exceed their current skill levels. Some of the best managers are the ones who create environ-ments where its easier for people to be gritty.

You can create a culture in which employees genuinely believe that the future could be different from the past, and that the problems that were here yesterday and today could in fact be solved. Mentorship is an im-portant part of this process. Encour-age people to have a trusted othera friend, colleague, manager, some-body who can maintain some psy-chological distance from them when theyre having that bad day, when things do go wrong (as they will),

and who can be their emotional bal-last. In a way, then, you should en-courage people not only to expect themselves to be gritty, but to recruit someone to be gritty for them in times of crisis, when they have doubts or theyre discouraged.

S+B: How does the pursuit of grittiness affect hiring practices? DUCKWORTH: You cannot guaran-tee grittiness by hiring someone who has high GRE scores or SAT scores. Thats not to say you shouldnt wor-ry at all about these metrics. I dont ignore the grades of students who apply to work with me. But I also dont simply assume that if they have a perfect academic record that

theyre also going to be gritty people.It suggests that we need some-

thing else in the selection process that gets at this element of persever-ance and sustained commitment. An approach that I nd promising is looking at peoples resumes for evi-dence that theyve been gritty prior to coming to your organization. Has a candidate worked at the same place for a sustained amount of time, and have they been promoted to greater levels of responsibility? The more that people have opped around, the less gritty they are likely to be.

Of course today, culturally, we have a shift. The norm, the expecta-tion, is that people are going to nip around from one company to anoth-er, even from one industry to anoth-er. But if people are very successful, oftentimes an underlying theme or a narrative emerges. You might look at their experience and realize, oh, this

is all about managingmaking de-cisions under conditions of uncer-tainty and complexity with large teams. Despite all the movement, there is a skill set that they have been honing over time.

S+B: Whats the next frontier of research on grit? DUCKWORTH: Right now Im think-ing about the difference between work and play. A lot of grit is about working hard and having the capac-ity to sustain that over timeand that all sounds pretty grim. Theres this expression, hard play. Its when something is really effortful and youre engaged in it, but theres something else about it. Its not the

are genuinely driven to solve prob-lems for clients, or to create tastier, healthier food for more people, and so on. Managers need to ensure that people have a goal or outcome that they hold in this high regard.

The second thing that I think is very important, from an economic point of view, is that people dont do things they perceive to be costly. When people are either keeping at something or walking away from it, its usually a result of having done a cost-benet analysis. For people to put in the effort to work on some dis-tant goal, day in and day out, they have to perceive that the benets are at least worth the cost. Managers can inuence that by increasing the value of the reward or decreasing the per-ceived cost. Part of the cost element is communication, and getting across the idea that theres no easy job wait-ing for employees somewhere else. All jobs, if you do them well, require huge amounts of effort.

Finally, and I think maybe most relevant for managers, are expecta-tions. People need to believe that suc-cess is possible. But they also need to be realistic. A lot of people start working hard and expect immediate results. Yet the idea of improving in just a short time period is naive. If you look at world-class performers in any domainballet or math or chessthose people have not logged ve really good hours or 10 really good hours. Theyve spent thousands and thousands of hours, spread over years and years of work. People need to know going in that the payoff from their effort may not be obvious for a long time.

S+B: How does corporate culture play into this?DUCKWORTH: I do think there are companies that bring out the best in

For people to put in the effort to work on some distant goal, day in and day out, they have to perceive that the benets are worth the cost.

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though leaders want more innova-tion, they are often unwilling to pro-vide sufcient fundingeven for those initiatives that have already proved successful. Defending non-core innovation budgets is always difcult.

Over the past decade of explor-ing innovation initiatives across many industries, we have seen nu-merous promising initiatives falter in the face of one or both of these obstacles.

How, then, can you take suc-cessful models for innovating, typi-cally tested at a smaller scale within special-purpose teams, and expand their impact? How can you do so with limited additional personnel and funds? Over the past few years, weve discovered ve reliable ways to overcome this challenge.

1. Replicate proven models. With all due respect to Kafka, human-sized insects dont work. An insects living systems cant function at that size. Insects can, however, scale up through replication. Inno-vation teams can do the same, though some models replicate better than others. For example, compli-cated initiatives or those dependent on a few key individuals or assets tend to be difcult to scale by repli-cation. If you decide to replicate an initiative, dene a model based on core principles and ensure that lead-ership and mentorship are readily available.

Replication is how BP CTO Darukhanavala met the challenge referred to earlier: Instead of ex-panding his small innovation team, he sent one of his core team mem-bers to help another businessre-newable energiescreate its own version of his program. They have applied the core principles and be-haviors of the original program, but

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same thing as play play. Im inter-ested in understanding that ne line between something that feels effort-ful and engaging yet aversive, but you do it anyway, and something that is effortful and engaging and just all whipped cream. Kids can play video games for hours, and thats a pretty high cognitive-load activity. But they dont want to work on their algebra for hours.

Is it that gritty people are able to turn work into play? Or are they just able to do the work anyway? Ive heard [game designer] Jane McGoni-gal describe play as the voluntary overcoming of unnecessary obsta-cles. Is work the voluntary overcom-ing of necessary obstacles? Or is it that play is when youre succeeding 90 percent of the time, and work is when youre succeeding only 70 per-cent of the time? Theres also the question of consequences. If people are playing World of Warcraft, and you tell them that every time they lose a point youll take a dollar out of their bank account, but every time their points go up youll add a dollar, would that make it less fun? Maybe. Then again, perhaps the best we can do is nd a mix between work and play thats sustainable. At this stage, what we know conclusively is far less than what we dont know. But were gritty at our research lab, so well keep working on it. +

Reprint No. 00232

Laura W. Geller [email protected] senior editor of strategy+business. Shes @lwgeller on Twitter.

Scale Your Innovation InitiativesFive ways to boost the impact of new endeavors without adding bureaucracy or cost.

by Robert C. Wolcott and

Jrn Bang Andersen

W hen innovation initia-tives succeed, company leaders typically re-spond, Great. Now do more! This provides afrmation, but it also presents the innovation team with two challenges: scalability and fund-ing. First, many innovation initia-tives cannot be scaled in a linear fashion. Adding more people often adds complexity and bureaucracy, and often impairs the communica-tion and creativity of the original successful innovation initiative.

At BP, for example, Daru Da-rukhanavala, the companys chief technology ofcer for digital and communications technologies, cre-ated an innovation team in 1999 with just 18 people and a modest budget. It has returned between US$100 million and $200 million per year in cost savings to BP, as documented by the business units assisted. Darukhanavala has resisted pressure to expand his group be-cause he knows part of the magic comes from its size. The company keeps the team small to replicate the nimble, no-bureaucracy approach of venture capital rms.

The second challenge is that al-

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pharmaceutical trials, for example, IBM would invest in broader capa-bilities like healthcare informatics, applicable across the life sciences.

Only gradually did IBM nd a way to replicate the program more broadly. It went further with its Smarter Planet initiatives, bringing together capabilities, technologies, and people from across the com-pany to address larger, more com-plex challenges faced by enterprises, municipalities, and national gov-ernments. Martin Jetter, vice presi-dent of strategy at IBM, described it this way: The point is to organize IBM around critical challenges faced by wide groups of customers and stakeholders, applying IBMs capabilities across the company to their solution.

3. Recruit and support evange-lists. Given the power of social me-dia, customer evangelists are becom-ing increasingly potent forces for growth. The same can be true for innovation initiatives. Evangelists

new capabilities does this invest-ment create for the company, and to what else can they be applied?

In 1999, IBM launched its emerging business opportunities (EBO) program, an initiative within the corporate strategy group created to dene and build new businesses that would later be transitioned to IBM business units. After the pro-gram proved its value, which then CEO Sam Palmisano credited with more than $15 billion in new reve-nues as of 2006, company leaders considered replicating the EBO pro-gram widely. IBM instead opted to concentrate on a smaller number of opportunity areas, shifting its focus to pursuing new businesses as plat-forms, so that multiple businesses could be spawned from the original startup. Even if the original concept fails, the capabilities and insight generated could lead to many other opportunities. Rather than seeking individual innovation opportunities in an area like analytics support for

in the pursuit of different objectives: discovering and piloting alternative energy solutions for BPs long-term growth. Darukhanavalas team con-tinues to be available for consulta-tions as the new group grows. The team has since helped to implement similar methodologies with other BP businesses, such as Castrol.

The TED Conference, an invi-tation-only confab hosted in Cali-fornia each year to share ideas worth spreading, provides another example. As the program grew in popularity, the TED team recog-nized that the conference could scale through leveraging the global com-munity of TEDizens, as theyre called. They realized that creating more and more TED events them-selves would require radical scaling of the organization, as well as a far greater commitment of the scarcest resource: expert facilitation provid-ed by curator Chris Anderson and his team. By launching TEDx, a li-censing platform offering individu-als and organizations access to the TED brand, methodology, and global community, TED was able to proliferate its experience to thou-sands of events worldwide, curated by individual licensees. TED does not retain editorial or production control of TEDx events, so quality varies. But the core team maintains basic standards for all TEDx licens-ing, and selects a small subset of high-performing TEDx programs to support with advice and exposure within the global TED community.

2. Invest in areas with broad potential that provide options. When considering where to invest, leaders should ask, If my core hypothesis fails, does this investment still pro-vide other paths? To how wide a range of industries or applications might this investment apply? What

can be employees who have been part of, or who have engaged with, the innovation team, or people from outside the company.

Consider Lego, the iconic Dan-ish toy company. For many years,

Lego focused its new product devel-opment on serving an ever-wider group of consumers. But as the com-pany searched for mass appeal, the enthusiasm of its lead users waned, which led to a lull in sales. In re-sponse, Lego engaged its lead users in a complete reenvisioning of its Mindstorms robot kit in 2006. To-day, Lego engineers regularly work directly with Mindstorms evange-lists, often engineers themselves. Giving customers such access sig-nicantly enhances their input and brand advocacy. Members of the Lego evangelist community ac-tively promote Legos products on-line and off.

Evangelists can also expand an innovation initiatives impact inside the corporation. In 2009, Kraft Foods established the Global Tech-nology Council (GTC), a cross-company group, to identify and in-vest in technologies with the poten-tial to create competitive advantage four-plus years out. Over two years, the GTC created a portfolio of in-vestments ranging from affordable products for developing markets to cutting-edge packaging. The GTC members came from various prod-uct categories and geographies and were selected for their acumen and interest in enhancing innovation at Kraft. In addition to contributing insights, this diverse group built a

sense of ownership for the GTCs decisions, advocating for these long-term investments within their mar-kets and functions. The group helped ensure that long-term R&D investment was protected when

Kraft split into two companies in 2011.

4. Nurture internal and external ecosystems. Innovation initiatives require resources, people, and orga-nizations in order to grow. Unfortu-nately, many innovation teams oper-ate in relative isolation, removed from potentially rich environments of engaged partners. They seek in-put from both inside and outside the company, but they do so on an ad hoc basis. The people with whom they interact often dont have an ac-tive interest in the teams success.

The startup world understands the power of ecosystems. Proven models like Techstars and Y Combi-nator select startups through a com-petitive process, then connect them with mentors, potential partners, investors, and team members during an intensive, facilitated process. The startups become part of a set of dense relationships among players who were critical to their success.

GEs Innovation Accelerator, led by chief marketing ofcer Beth Comstock and her team, adapts this ecosystem notion for a corporate en-vironment. In 2011, GE selected six teams tackling major innovation op-portunities for GE businesses. The CMOs ofce gathered experts from a range of backgrounds over a nine-month period to challenge the teams assumptions and conduct a

series of working sessions. Comstock and her group also recruited external coaches for each team and created an advisory panel of ve external ex-perts who review plans, challenge assumptions, and provide guidance. The coaches and panelists have no executive authority, but their per-spectives play critical roles in shap-ing thinking and action plans. Inno-vation Accelerator director Viv Goldstein says, The coaches and advisory panel help us build an eco-system of partners into our process. They challenge our GE assumptions and offer our innovation teams ac-cess to a wider world.

5. Activate broad networks. Whereas ecosystems involve rela-tionship depth and active commit-ment, more general networks pro-vide breadth of access to diverse knowledge and capabilities. Social-izing your teams objectives and challenges with broad networks en-hances the potential for others to of-fer opportunities and solutions.

Over the past decade, new or-ganizations have arisen to create communities of innovation leaders. The online platform Innovation Excellence includes a network of more than 5,000 innovation practi-tioners and thought leaders, a num-ber that has grown rapidly since the sites founding in late 2010. Partici-pants can register and browse, or take active roles within the com-munity. Innovation Excellence of-fers broad access to the innovation arena, but as an open community, it applies only limited efforts to screening members.

In 2003, the Kellogg School of Management at Northwestern Uni-versity founded the Kellogg Innova-tion Network (KIN) to create a community of corporate innovation and growth leaders. It has since

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evolved into an invitation-only group of leaders from business, gov-ernment, academia, the nonpro t sector, and the arts. The KIN is -nancially supported by its members and leverages the neutral platform and intellectual rigor of the univer-sity. The KINs diversity enhances the likelihood that participants will connect with people they dont nor-mally meet, offering new perspec-tives, insights, and opportunities. Building on regular in-person events, KIN membersor KIN-ians, as they call themselvescreate relationships and collaborate on their own agendas.

These ve approaches can ex-pand the scale and reach of innova-tion initiatives, even in situations in which adding people or funding may be neither optimal nor practi-cal. They require varying degrees of investment and can be applied by companies of all sizes; however, in this arena, large companies have the advantage. Although successful startups might win more admirers, larger companies can seed more rep-lication, build broader and deeper ecosystems, engage more networks, support more evangelists, and invest in more growth platforms. But en-terprises will achieve their potential only if they have the guts, commit-ment, and patience to make mean-ingful change happen at scale. +

Reprint No. 00233

Robert C. [email protected] is a senior lecturer at Northwestern Uni-versitys Kellogg School of Management and the cofounder and executive director of the Kellogg Innovation Network (KIN).

Jrn Bang Andersen [email protected] European director of Clareo Partners and a Kellogg Innovation Network advisory board member.

22% 49%

BATTERYELECTRIC

FULLHYBRID DIESEL

69%

vs. Traditional Gasolinein Five-Year Total Costof Ownership

RELATIVE COST

$2,100

+$5,400

$5,500

AutomakerConfidence

Diesel automotive technology has greatly improved since the loud, sluggish engines of decades past. In Booz & Companys 2013 survey of executives at auto manufacturers and suppliers, 69 percent of respondents said they are more con dent in diesels prospects in the U.S. than they were a year ago. Theyre also far more upbeat about diesel than they about hybrids or electric cars. Diesel-powered cars today are zippier and more fun to drive than earlier versions, but what really spurs industry con dence is that they are more economical: Diesel-powered cars have a far lower cost of ownership than other models.

Diesel Is the Most Promising Alternative Powertrain

Note: The numbers for ve-year total cost of ownership are average estimates for a four-door, midsized passenger car.

Source: 2013 Booz & Company/Bloomberg U.S. Automotive Industry Survey and Con dence Index, Oct. 2013, booz.com/auto-industry-survey-index; Total Cost of Ownership: A Gas versus Diesel Comparison, University of Michigan Transportation Research Institute, Mar. 2013; Kelley Blue Book st

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by Ramez T. Shehadi and

Mounira Jamjoom

I n most developed nations, corporate social responsibil-ity (CSR) initiatives center on issues such as environmental sus-tainability, alternative energy, clean technology, and social welfare. Driv-ing these activities, more often than not, is a companys desire to appeal to strong consumer sentiment.

But in the Middle East and North Africa (MENA), CSR is be-coming something fundamentally different. It is focusing less on cater-ing to consumer attitudes, and more on addressing social and economic challenges that are hindering devel-

opment, most notably the shortage of jobs.

The scale of unemployment is enormous in the region (as it is in other developing regions with young populations). The Middle East alone must create 75 million jobs by 2020a 43 percent increase from 2011, according to the World Economic Forum (WEF). Failure to put large numbers of people to work, particularly young people, could have severe consequences in terms of social unrest and lost eco-nomic activity, the WEF has said. By contrast, strong and sustained job creation begets more robust eco-nomic activity and political stability, creating a virtuous circle of growth.

However, the responsibility for all this job growth should not and cannot be laid at the feet of tradi-tional employerslarge private and state-owned companies. Indeed, one structural weakness of many developing countries is their over-reliance on relatively few companies to drive the economy and soak up labor. To diversify their economies, make them more resilient, and put more people to work, these countries need more robust activity among small and medium-sized enterprises (SMEs), which form the backbone of economic stability and job cre-ation in the developed world (see Exhibit). In Germany and France, for instance, SMEs account for 60 percent and 61 percent of employ-ment, respectively. Yet in Saudi Arabia and Egypt, SMEs account for only 25 percent and 38 percent of jobs, respectively. In the U.K., U.S., Germany, and France, SMEs contribute a little more than half of GDP, whereas in Saudi Arabia and Egypt the contribution is just 25 percent and 33 percent, respectively.

How Companies Can HelpBoth local governments and the private sector in the Middle East increasingly realize they have vested interests in clearing a path for SME creation, and they are beginning to act on those interests. For instance, the Ministry of Labor in Saudi Arabia has identied 36 initiatives, seven under development, as part of its SME Ecosystem project. These initiatives include a digital gateway that provides information on re-quirements for startups in different industries, restructuring the SME funding process, and encouraging the creation of accelerators.

Accelerators, which are becom-ing more popular in the Middle

GLOBAL PERSPECTIVE

Corporate Social Responsibilitys New Role in the Middle EastAn urgent need for job growth is spurring an innovative trend in CSR and high-minded commercial initiatives.

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East, are short-term programs that usually involve some funding, for-mal training in a managed of ce space, and access to experts and mentors to help develop ideas.

In recent years, nearly half the governments in the MENA region have implemented regulatory re-forms that make it easier to do busi-ness, according to the World Bank. These initiatives, and others like

them, have yielded some early suc-cesses. A report issued by Dubai In-ternet City and Frost & Sullivan, for example, states that from 2005 to 2011, the number of startups in the MENA region grew eightfold.

Still, the pace of change re-mains too slow given the scale of the economic and employment challenges facing the region in the coming yearsand some large

established companies are waking up to this fact. They are starting to design CSR initiatives, as well as some pro t-minded ventures, that align with their governments SME and job creation goals. Much of the companies motivation stems from a more rounded understanding of self-interest. All large companies depend on the health of the domes-tic business environment for their staff and subcontracted work, on top of needing a market for their goods and services. Plus, an SME sector that is creating jobs reduces the pressure on large companies to hire people they dont need just to reduce unemployment.

The wave of corporate initia-tives supporting job creation in the MENA region is still very new and has not yielded de nitive, long-term results. But the surge of activity and anecdotal evidence convinces us that the trend is signi cant and could prove pivotal to the regions economic development and job cre-ation abilities. We have identi ed

two areas in which private compa-nies are already making big moves to nurture the entrepreneurial eco-system and promote SME creation: (1) education and networking, and (2) nancing.

Education and Networking Education is a broad category that includes everything from instilling basic nancial literacy, to teaching

An SME sector that is creating jobs reduces the pressure on large companies to hire people they dont need just to reduce unemployment.

Exhibit: SME ImpactSmall and medium-sized enterprises play an integral role in virtually all diversified economies.

Source: European Commission SME PerformanceReview, U.S. Department of Statistics, OECD, UNECE,World Bank, Zawya, Booz & Company analysis

SMEs as a % of Total Employment

Note: 2008 data

SMEs as a % of GDP

Saudi Arabia

Egypt

UAE

U.K.

U.S.

Germany

France

Hungary

25%

38%

42%

54%

55%

60%

61%

71%

25%

33%

30%

51%

52%

53%

54%

50%

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business theory and practices, to pro-viding hands-on training and guid-ance from mentors with business and startup expertise. At the base of this education pyramid is teaching fundamental concepts about saving, budgeting, and investingthe CSR focus since 2006 for SEDCO Hold-ing, a private wealth management company based in Saudi Arabia. That year, the company conducted a nationwide survey of 1,000 Saudi youththe demographic segment that makes up 40 percent of the overall populationto assess their habits in managing expenses, sav-ing money, and investing. Accord-ing to the survey, only 11 percent kept track of their spending, and 80 percent didnt budget. However, 90 percent said that they wanted to in-crease their nancial knowledge.

In response, the company launched its nancial literacy pro-gram, called Riyali, partnering with the Saudi Ministry of Labor and Operation Hope, an international nonprot organization based in the United States. Working with public-sector agencies and local universi-ties to increase scale, Riyali aims to reach tens of thousands of students over the next few years. If young people dont have the basics of -nancial literacy today, theyre going to fall into many, many problems when they enter the workforce to-morrow, noted Amr Banaja, Riyali program director and vice president of corporate communications and marketing at SEDCO.

Another example comes from the Abdul Latif Jameel Group in Saudi Arabia, which established the Abdul Latif Jameel Community Ini-tiatives (ALJCI) in 2003. ALJCIs current CSR work focuses heavily on job creation. Its Bab Rizq Jameel (BRJ) program (or The Beautiful

Gateway to Prosperity) focuses on identifying job opportunities, pro-viding skills and training to indi-viduals, and granting micronance loans to new entrepreneurial ven-tures. To date, BRJ has created hun-dreds of thousands of jobsinclud-ing nearly 50,000 in 2011 and more than 58,000 in 2012for men and women in Saudi Arabia and other MENA countries, including Mo-rocco, Syria, and Egypt.

Several large companies are stepping up to provide information and education on more sophisticat-ed business concepts. For instance, Emirates Integrated Telecommu-nications Company (known com-monly as du) launched the Q&A platform Ejaba.me in 2013. The site provides entrepreneurs with answers from experts on topics such as man-agement, legal services, funding, and intellectual property rights. De-signed by French entrepreneur Joan-na Truffaut, Ejaba.me is intended to give entrepreneurs access to afford-able advice at a time in their devel-opment when funds are scarce. The site charges by the answer: US$20 for short answers and $30 for longer ones. It is also considering offering monthly subscription packages with lower costs for heavy users.

Other companies in the region are offering more hands-on train-ing and mentorship to entrepreneurs in elds as varied as telecommuni-cations and maritime operations. Dubai-based digital media company Intigral, a joint venture between Saudi Telecom Company (STC) and All Asia Networks (ASTRO), launched an accelerator named Afkar.me to support startups build-ing digital products and services. The startups work out of Intigrals ofces in either Dubai or Riyadh for three months to develop their

ideas with the help of the agencys expertise and network of mentors. Afkar.me has created regional part-nerships with Astrolabs, ArabNet, the Online Project, consultancy Oliver Wyman, PR rm Ketchum Raad, and Wamda programs. These partners provide mentoring, legal advice, product development, de-sign, marketing and PR, and busi-ness development support. The goal is for the startups to create viable products that Afkar.me can plug di-rectly into telecom opportunities in Saudi Arabia, Africa, and Asia.

Another new corporate-spon-sored accelerator is Turn8, a year-long program supported by DP World, one of the largest marine ter-minal operators in the world, which is owned by the Dubai government. Turn8 identies candidates for the accelerator during a global series of pitch events, incubates those start-ups for several months, and then brings them on a road show. Given the accelerators sponsor, its no sur-prise the startups focus on sectors that support marine port operation, including transportation, logistics, the environment, health and safety, and travel.

Like many other such initia-tives, Turn8 is not a seless pro-gram. It benets both parties. We realized that change is happening so quickly around us and that weve got to be part of it, said Yousif Al Mu-tawa, DP Worlds chief information ofcer, according to an article in Wamda, a website devoted to news about small business and entre-preneurship in the MENA region. Theres a big drive from the leader-ship to foster the [entrepreneurship] ecosystem in UAE.

The momentum behind these CSR initiatives and new business models is not coming just from lo-

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cal companies in the Middle East. Some well-known multinationals are throwing their own weight be-hind the movement. For example, Google for Entrepreneurs is sup-porting the Library Giza, a com-munity space in the Cairo suburb of Giza designed to offer testing, support, and training for startups that focus on Web technology.

The Library Giza will offer a collection of devices that startups can use to test their products and services. It will also host meet-up groups; training sessions; and classes on topics such as technical develop-ment and design, business planning, management and operations, and business model development. The co-working space will sponsor talks and mentorship sessions with indus-try experts and provide programs targeted to specic vertical markets, including mobile apps, e-commerce, health, education, and gaming.

The Library Giza will generate ideas, jobs, and energy for the new Egypt and help harness that energy and untapped potential of the Egyp-tian youth, said Wael Fakharany, Googles regional manager in Egypt and North Africa, in a statement posted by Wamda.

Creating Financing OptionsBeyond education and training, some established companies are be-ginning to provide more investment support to SMEs. In a speech at the Global Entrepreneurship Summit in Dubai in late 2012, Fadi Ghandour, founder and then CEO of Aramex, noted that SMEs face severe impedi-ments when trying to access capital from banksincluding high inter-est rates and crippling collateral demandsleaving them with few nancing options. According to the 2012 World Bank report on SMEs

for job creation in the Arab world, only 20 percent of SMEs have a loan or line of credit, and SME lending accounts for only 8 percent of total loans made in the Arab world, the lowest ratio globally.

Ghandours proposed actions for companies include establish-ing angel investment networks (by city, country, and sector); investing in and supporting venture capital funds, private equity funds, and other investment tools; partnering with banks to develop SME-friendly debt services; and investing in mi-cro-venture funds and micronance institutions. Some of these activities will, ideally, result in prot, but the core driver is creating and sustaining a legitimately friendly environment through which entrepreneurship can ourish in the region.

In a similar vein, the Abdul La-tif Jameel Community Initiatives has committed to supporting the MIT Arab Business Plan Competi-tion for the next ve years to ensure the initiatives sustainability. The competition received 1,852 appli-cations from 13 Arab countries. It requires entrepreneurs to work in teams and to present their business ideas to some of the Middle Easts leading decision makers. The short-listed teams compete for startup seed grants of $60,000 as well as mentoring support from successful business leaders and consultants.

Some established companies

are making direct investments in the startup space. The Middle East Broadcasting Center Group (MBC), the rst private free-to-air satellite broadcasting company in the Arab world, recently began investing in startups focused on media and entertainment through its funding arm, MBC Ventures. Aside from cash investments, which range from $100,000 to $500,000 per deal, MBC will leverage its expertise to support the startups in areas such as advertising, social media, and legal issues.

Several of the regions incubators backed by established companies also include a funding component. Turn8 will invest $24,000 to help teams with promising ideas design, build, and launch a prototype. Inti-grals Afkar.me is using a different

nancing model. Instead of offer-ing seed capital for an equity stake, it will offer as much as $20,000 in seed investment as a loan. Once startups launch their products, Afkar.me will introduce them to a network of partners and inves-tors such as STC Ventures, MBC Ventures, and Middle East Venture Partners.

We dont want to place a value on the company from Day One, explained Victor Kiriakos, senior manager of strategic products at Intigral, according to an article in Wamda. Our objective is to create a company that could sit as a partner

Google for Entrepreneurs is supporting the Library Giza, designed to offer testing, support, and training for startups.

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with us, so that we can set up rev-enue shares. Were not looking for a return on investment; were looking to enrich the ecosystem.

CSR as Change AgentAlthough we expect large companies to continue and even increase their promotion of entrepreneurship and job creation in the Middle East, the full impact of their activities wont be felt for several years to come. Even in the near term, though, the direction of corporate thinking about CSR and entrepreneurial in-vestments demonstrates a keen un-derstanding of the regions problems and where the gaps in the entrepre-neurial framework exist. Increasing collaboration among governments and companies to establish an eco-system favorable to SMEs could be pivotal to the MENA regions eco-nomic development. It may also become a template for other devel-oping regions and for multination-als looking to start CSR programs in those regions. CSR can be much more than a bit of corporate theater. It can be an agent for genuine and much-needed economic progress. +

Reprint No. 00234

Ramez T. Shehadi [email protected] is a partner with Booz & Company based in Beirut. He leads the rms digitization platform globally and the business technology practice in the Middle East.

Mounira Jamjoom [email protected] is a former senior research specialist at the Ideation Center, Booz & Companys think tank in the Middle East.

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