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Leadership Interviews

Aligning Strategy and Sales


The Choices, Systems, and Behaviors that Drive Effective Selling. A conversation with Harvard Business School professor and author Frank Cespedes

Published on December 11 2014
Harvard Business School professor and author Frank Cespedes, interviewed by Peter Clayton -TotalPicture Radio Frank Cespedes

In the preface to Aligning Strategy and Sales, Frank Cespedes writes; "Selling is, by far, the most expensive part of implementation for most firms... The amount invested in sales forces (including salaries, benefits, and other components of SG&A -- selling, general and administrative expenses) is about $900 billion annually. This is more than five times the $170 billion spent on all media advertising in 2012 and more than twenty times the $40 billion spent on all online advertising and marketing in 2013."

According to Cespedes, that gap between your company's sales efforts and strategy? It's real-and a huge vulnerability. Addressing that gap, actionably and with attention to relevant research, is the focus of Aligning Strategy and Sales, published by Harvard Business Review Press.

Welcome to a Leadership Channel podcast on TotalPicture Radio, with Peter Clayton. Joining Peter for our interview with Harvard Business School professor and author Frank Cespedes is David Dalka, Business Transformation Consultant, Facilitator, and Keynote Speaker.

In Aligning Strategy and Sales, (Harvard Business School Press), Cespedes equips business leaders to link go-to-market initiatives with strategic goals. Cespedes offers a road map to articulate strategy in ways that people in the field can understand and that will fuel the behaviors required for profitable growth. Without that alignment, leaders will press for better execution when they need a better strategy, or change strategic direction with great cost and turmoil when they should focus on the basics of sales execution.

Cespedes shows how sales efforts affect all elements of value creation in a business, whether you're a start-up seeking to scale or an established firm looking to jump-start new growth. The book provides key insights to optimize your firm's customer management activities and so improve selling and strategy. Most sales books go on and on about tactics and techniques, what first got you interested in the vast disconnect between sales and strategy?

Frank Cespedes: TotalPicture Radio Transcript

Peter: In the preface to his new book Aligning Strategy and Sales, Frank Cespedes writes - Selling is, by far, the most expensive part of implementation for most firms. The amount invested in sales forces, including salaries, benefits and other components of SG&A which is selling, general and administrative expenses, is about 900 billion annually. This is more than 5 times the 170 billion spent on all media advertising in 2012, and more than 20 times the 40 billion spent on all online advertising and marketing in 2013.

Welcome to a leadership channel podcast on TotalPicture Radio. I'm Peter Clayton. Joining me for our interview with Harvard Business School professor and author of Frank Cespedes, frequent contributor to TotalPicture Radio David Dalka business transformation consultant, facilitator and keynote speaker.

Frank and David, welcome to TotalPicture Radio.

In reading your book Frank, I was thinking wouldn't it be interesting for an HR or a recruiting leader to shadow a sales manager for a day out in the field during a customer facing sales meeting. I bet they would come away with some really fresh approaches to hiring sales managers for their own organizations. Wouldn't you agree?

Frank: I do agree and I would go farther than that. I think it's not only a good idea; I think for a variety of reasons it's a very important thing to do. You've already sited, Peter, the magnitude of what we're talking about; $900 billion how much more money is spent by companies on their selling efforts and on the things we tend to hear more about - consumer advertising, social media, etcetera - that has ramifications throughout most companies, and in areas where HR managers frankly have expertise but it's often expertise that is either not tapped or is not allowed to be tapped. Let's think about hiring.

You'll see this data in my book as well. Across industries turnover in sales forces averages about somewhere between 25% and 30% annually. Now, what does that mean? What that means is that on average, there are many companies that have to change their entire sales organization about once every four years. That is where much of the hiring goes on. Right now, that hiring is for the most part done by sales managers and we've known these for years through research; sales managers tend to hire according to a classic cloning bias; in other words, this is what got me in this position to hire, this must be what good selling is about so they try to hire in their own image. HR people know a lot more about assessment tools, about hiring. Their expertise is important and you want to shadow that sales manager because what HR needs to do is learn more about what goes on there so they can become true partners with that area of the business where often the most money is being spent and where the people issues are fundamental.

Peter: That's really interesting. This whole conversation around advertising and social media and all of the attention that is being paid to that, I recently interviewed Tom Doctoroff who is the Asia Pacific CEO of J. Walter Thompson who has an interesting new book called Twitter Is Not A Strategy. I asked Tom I said, in the meetings that you're having with your advertising agency and the creative people and the marketing people within large organizations, do you ever bring HR people into these conversations or recruiters because employment branding is really important today, especially when you consider what's going on with social media and he said, you know, that's really interesting; I don't think we've ever had any HR people in our... {laughing}

Frank: But thank you for the suggestion. ☺

Peter: Yeah. Exactly.

Frank: I personally feel there's also a bigger issue around social media that involves not only HR but frankly, other folks in the organization. If I can make an informal prediction; I think you're going to see changes here.

In general, I think that what we've been doing for the last few years in most companies is we talk too much about social media and frankly, we expect too little in terms of business results.

Here's the data; a very good Gallup survey done earlier this year, 62% of US adults who do use social media regularly say it has absolutely no influence on their purchasing decisions. McKinsey did a very good survey, a very good study of how companies use social media and what they found in effect was that there is, for the most part, no business case that supports the investments in many companies and you may notice that it's agencies, ad agencies, in my opinion, are part of the culprits here. It's now become fashionable to say that social media tools are about connecting. They're not about promoting your products and services or selling. Now, isn't that convenient, right?

Peter: Right.

Frank: If it's about connecting and not selling it means, oh well, don't hold me to return on investment metrics. That's not sustainable. That's not sustainable. As the numbers increase, boards, investors, CEOs, marketers and others should and will demand more rigor in that area. I think you're exactly right; one of those areas is going to be what is it that we're doing in our use of social media for a variety of human resource, as well as marketing activities. Right now it's a free lunch.

Peter: Yeah, absolutely. You know, one other thing that's really interesting a week or so ago while there was an article in the Wall Street Journal that Nielsen is now going to start measuring what's going on with YouTube, with Hulu, and with a lot of these other online services serving up videos. That's a first and now all of a sudden, we're opening that can of worms of network television.

Frank: Yeah, imagine that. Measure what you get for what you spend. What a great idea.

Peter: Yeah. David, why don't you jump in here and I know you've got some questions keyed up for Frank.

David: Well, actually I want to just build on what you just talked about.

Peter: Okay.

David: I think from the earliest days of social media I said this is a customer service and innovation device. It's not a promotion device. And that's kind of what we did with BlackRock back in the day; we used phone messages to satisfy customers and innovate what we did as a company, and I think this entire paradigm has it wrong. I mean, what do you think, Frank?

Frank: You know, we have to set priorities. Business, this is what my book is about. Strategy is about choice. It's about tradeoffs and right now we're not making rigorous choices in this area. That's my point of view.

David: That's definitely the case. So anyways, I love this book because in so many sales books they're just about tactics and they go on and on and on about tactics and this individual and managing the individual, and you have this totally different viewpoint about combining it with something external that I call business strategy. Where did you first get interested in that and how did you make that research?

Frank: Well, my academic research always focused on go to market elements, including sales management. Then when I left academia and ran a business for 12 years, like most entrepreneurs I had to meet payroll and sell, and I saw how often sales and strategy were basically ships passing in the night. Then after getting lucky in business and returning to academia, I taught strategy for a few years here at Harvard and the reality is there is remarkably little research about how to link strategy with the nitty-gritty of field execution and especially sales efforts. In fact, if the gods of strategy even mention sales, it's typically advice from a fortune cookie... work as a team or reorganize. In other words, do good and avoid evil.

Conversely, there's obviously a vast literature about selling as you just mentioned, Dave. Much of it, in fact most of it is anecdotal. People in effect generalizing from N=1, but some of it is really grounded in good research but the sales advice is misleading in a different way. The consultants and trainers who make their living that way, they have an incentive and they act on their incentive to promote the universal applicability of a particular selling methodology and they also treat sales in isolation from strategy. The result, I think, is that much sales training has a perverse effect.

People may work harder but they don't necessarily work smarter. Again human resources, to Peter's point, can and should play a very important role in this process. HR managers know a lot about training, about development, about what works, about what doesn't. By its very nature human resources tends to work across functions. They have a perspective across silos in an organization and part of their role is to provide that line of site that's crucial for implementing any strategy. But in order to do that, HR needs to know more about sales. They need to know more about what goes on out there and what are the key elements, and I would like to think that my book might be able to help in that process.

David: You cited that Andris Zoltners survey were only 13% of the executive stated issues external to sales when asked about creating successful sales forces. What should executive teams do to alter the situation in your view?

Frank: Well, my whole research and books starts from a premise that I think is fairly undeniable if you're in a for profit business and that is, that in any business value is created or destroyed in the marketplace out there with customers. It's not created in planning meetings. It's not created in capital budgeting meetings. It's created out there.

So the first step is to have that mindset that says we've got to be doing things both in our strategy and our implementation in sales and other areas that are relevant to our market today and tomorrow. Not yesterday. There's frankly very little reward for nostalgia in business. Strategy is fundamentally about the future. Sales is about getting people to buy today, not yesterday. I think that's the start.

Andy Zoltners results about sales they're not that uncommon. I mean, if you look at other areas of the business they also for obvious reasons, reasons we all know, tend to be more inward focused than external focused; the need to get things done, etcetera, but the reality in any business is that value is what happens out there with customers and that's where sales lives and that's why results like that are not good. They're just not good.

David: At the beginning of this Peter talked about those dollar figures involving sales and involving marketing. Based on your experiences because you've written books on marketing too, which area has the most opportunity for improvement in the 21st century?

Frank: Well, you know, I say this not just because as a father you obviously when someone asks you which of your children do you like most, you know, but I say this because I think it is business reality. Both marketing and sales are obviously important. I think in improving either in both, the first thing to recognize however is that they are different jobs. They are fundamentally different jobs.

Marketers get paid to think in terms of aggregates, segments, markets. Sales gets paid to know everything there is to know about their assigned accounts or territory or customer. Now, both are important. If you're going to scale a business, if you're going to amortize your expenses, you do need to think in terms of segments.

But in the history of business since the Phoenicians, a market segment has never bought a thing. Only customers buy. Only individual accounts buy. So both are important but they're different jobs and from an HR point of view, I think one of the biggest and most recurring mistakes that I see in companies and usually they do this under the banner of "teamwork" or "customer focus" or some other slogan, but I think one of the more destructive things I've seen in my career is basically trying to turn an excellent marketer into a mediocre salesperson or vice versa. Different jobs, different skills. The relationship between marketing and sales in most companies has always been fraught. I have a previous book that I think documents this but it's also under more pressure to improve these days for a couple of reasons and the reasons related to some of the earlier questions, David, that you and Peter raised.

Online media of various sorts not just social media, but online media various sorts makes any marketing and sales gap in companies simply more visible to customers. Companies are more transparent these days, but also more tools for lead generation and outbound marketing are, frankly, productively blurring longstanding distinctions between marketing and sales responsibilities in many firms.

And then finally due to the data revolution, selling itself is a much more analytical activity in many businesses. It's very fashionable these days to talk about the so-called big data. If you really want to understand to date the most specific applications of big data, talk to people who work in sales for consumer package good firms that have to sell to the Wal-Marts and Targets of the world. They're dealing with data that far surpasses the number of likes and tweets that marketers tend to deal with and frankly, they're dealing with more real-time data about consumer behavior than many of the brand managers in their firms are.

So for all of these reasons, the marketing and sales relationship, which has always been a sort of tense relationship is, under more pressure to improve and that's a process and a human resource issue.

David: You mentioned a book in that answer. So that we save Peter from getting a bunch of emails asking what that is, go ahead and plug it.

Frank: There's nothing to plug. It's about 15 years old. You can buy it for a penny on Amazon.

David: That's fine. What's the name of it?

Frank: The book is called Concurrent Marketing and it's about exactly the issue you were raising, Dave.

David: Okay. Great. You suggest that once executive teams become aware of the opportunity to change this external environment that they need to manage sales so it can be strategic, organizationally focused long term and cross functional. What are the barriers to making that a reality?

Frank: Well, whether the sales force needs to be long term or not, whether the relative importance of cross functions, the point is it's going to depend on the strategy and the sales task. I think the most important part to my book, I think, are the following.

First, now what I'm about to say once I say it may sound obvious but all I can tell you in 30 years of working with a lot of companies around the world and getting paid nicely to do it, I have found that this statement even the best companies and best executives periodically need reminding about this. There is no such thing as effective selling if it's not linked to the company strategy and its goals, both quantitative and qualitative goals. In addition, effective selling is an outcome. It's an outcome of what the organization is doing to align those goals with a number of different areas. It's not only an outcome of the individual heroic efforts in the field by salespeople, although obviously those are always welcome.

The basic idea in my book is this; again, in any business, value is created or destroyed in the market with customers. The market includes the industry that you, your company competes in, the customer segments where you choose to play and the buying processes that those customers that you sell and service. If a company has a strategy as opposed to a slogan or an aphorism or a mission statement that is often confused with a strategy, those factors should inform the strategy and as a result the required sales task. In other words, what salespeople have to be good at to deliver value and implement your strategy effectively. Not the tasks in a generic selling methodology or the tasks that another company faces because they've made different strategic choices.

Then assuming strategy the issue is aligning selling behaviors with those tasks, business is a performance art. Business is ultimately about behavior. It's not about good ideas, not about aspirations, not about hopes, wishes or fears. Business is ultimately about performance. Managers basically have three levers to do that, to link the behavior of their salespeople with the tasks. The first is always is people. How do we hire? Who are our salespeople? What do we know? What do we do with them once we hire them? How do we develop their skills?

The other is what I call the control systems; the performance management practices in the firm, including sales compensation and the metrics used to measure effectiveness. I've got colleagues in my university and you'll hear other people say this; they will say that compensation and incentives are way overrated. It's all or primarily about intrinsic rewards. All I can say to that and you'll see the data in the book that is not the planet I have lived on for the last 55 years. These things matter but you've got to think about comp and incentives and sales as a hygiene factor as HR people would say, a necessary but not sufficient cause of getting the behavior you want.

The third lever is what I call the sales environment, that wider company context in which sales initiatives do or don't get executed. How communication works or doesn't work across functions. How sales managers, not just reps, are selected and developed and very, very important how performance reviews are conducted. Performance reviews, not just in sales but in other areas of companies are, in my experience, the most underutilized lever for affecting behavior in organizations.

Now notice the levers I'm talking about and notice what HR brings to so many of those levers. Higher compensation, performance reviews. I ran a business for 12 years. There is, this is a trainable skill. I and my equity partners were horrendous at that when we started but we got better and I thank our HR manager for that. So there are so many areas here where the value added from folks that, the good folks in HR, the value added can be enormous but again, it depends on a partnership with those very, very busy people in the field.

Peter: You know, there's something that I think is contributing a lot to what you were just talking about right now and the improving economy retention now is of course a huge issue with many companies and many HR leaders and now that the things are picking up, there are more opportunities out there and they're terrified that these people that they've been treating badly for the last 7 years are just going to bail at the first opportunity.

Frank: First, I think you're right and the data in sales supports exactly what you're saying, Peter. As I mentioned earlier, on average, you find that turnover in sales organization runs from about 25-30% but obviously in a long-sustained deep recession, turnover after the cuts tends to go down but you can see what happens when people become more marketable. Now, how do you deal with that? Obviously there's the basic supply and demand of compensation, but the other ways you deal with that are understanding who is really important, who is it that we want to go out of our way to keep. In addition, the other things besides compensation and being treated well that tend to promote employee loyalty in sales and in other areas and one of the big ones and what a recession does is simply accelerate this; people saying, look, if I stay here, I'm going to learn things, I'm going to get things that frankly develop me and make me more marketable even if I decide to leave in 3 to 5 years. That's where training comes in.

Training is vital. Somebody once told me early in my career that many companies maintain their equipment better than they develop their people and unfortunately, that has a large element of truth.

Peter: Right.

Frank: Again, that's an area especially in sales where good salespeople develop relationships and very often can take those relationships with them if they choose to leave. There is a demonstrable return on investment there and one where HR can and in many companies does help tremendously.

Peter: Right. The interesting thing about that, the whole training function, is during a downturn or a recession, what's the first thing most companies cut? Training programs, right?

Frank: That's exactly right. The status of training and development is frankly the same status as in advertising. To use the accounting jargon, it gets managed according to so called LIFO principles - Last In First Out.

Peter: Right.

Frank: When do companies increase their advertising budget? When sales are good. When do they decrease it? When sales are bad. So does advertising drive sales or does sales drive advertising? The same is true in training in many companies and as a result, it feeds on itself. It becomes difficult for many C-level executives to actually figure out and measure what they're getting from that investment but to use a wonderful American phrase, you're never going to figure that out if you continue to fund those activities in a bas-ackwards fashion.

David: I love what you said an answer or two ago about business is about the changing of behavior. It's a very refreshing thing to hear people talk about that instead of pie in the sky ideas like you mentioned. What are some of the biggest stereotypes in business? If it involves sales or salespeople, what are the things there that drive you insane that you'd love to see change?

Frank: Let's look at sales because you're raising a really important issue in sales because it is full of stereotypes and it is full of stereotypes in the popular culture as well as in many companies. Now, here's what the research tells us and it's not as though there hasn't been research about what is an effective salesperson for 100 years. Companies have been interested in selling way before anybody could spell MBA. This research goes back a long time.

What the research tells you - and again, your listeners, I hope, will obviously I hope they buy the book and read it, but selling is arguably the most contextually determined set of skills in a company. What I mean is what works there does not necessarily work here. The reason is because of what I said earlier; sales tasks are going to be determined by your strategy, assuming you have one, and what that strategy implies for who is and who is not your customer, their buying processes, etcetera. As I said, there's now over a century of research about salespeople and that research does not support all these glib generalizations about what's a salesperson. A salesperson is extroverted personality, has a limitless fund of stories and jokes, etcetera, etcetera.

Sales talent comes in all shapes and sizes because selling jobs vary hugely in the kind of product or service being sold, the price points, the customers, a rep is responsible for and so on. But the stereotypes about sales personalities still dominate the field. Why is that? The novelist Saul Bellow when he was in a bad mood, Saul Bellow used to say, "Do you know what the difference between ignorance and indifference is? I don't know and I don't care." ☺

Many executives and sales managers first don't know about this research. I hope HR managers do, but many of them simply don't know about this research, so that's the I don't know explanation. Again, as I said earlier, many sales managers have a classic cloning bias; they hire in their own image. Conversely many sales trainers and consultants don't care. They have a hammer, a particular methodology and everything looks like a nail.

Now in my experience, these generalizations are actually destructive and not just abstractions because what they do is encourage quick fix approaches that substitute for more fundamental sales and strategy issues confronting firms. Now, those approaches may be quick but they are very rarely a fix. I think the stereotypes also blind managers to the interactions between strategy, sales task and selling requirements that ultimately they are paid to manage.

It's an excellent question David, and it continues but I think we know the reasons why they continue.

David: So there's one more aspect of that which is you sometimes see salespeople be hired that have never done sales before in their lives and they're superstars yet, the majority of job ads will say must have 10 years sales experience in this industry space knowing all the jargon and this other stuff. What do you think about that dogma? What do you think about those stereotypes?

Frank: I think you're asking two excellent questions there. Let me start with the first part because you're exactly right. I don't want to say it's common, but it's certainly not uncommon for the novice to come in and hit the ball out of the park in sales, as we say. Think about startups; how often that happens in successful startups. Why does that happen?

The reason it happens is because there's a good fit between that person's personality and characteristics and those particular sales tasks. That's the reason it happens.

Now, the dogma about hiring for experience first of all, you are empirically correct; there's a lot of data about this and you'll see it again sited in the book. When sales managers are asked what are the most important criteria you use for hiring, consistently at the top of the list is experience, right? Now, two things to be said about that, first, notice what goes on in an industry in hiring. What that means is that both you and your competitors are looking at each other's stars, not the laggers, in trying to hire. It's a little bit - to use a timely reference to a Chicago Cubs fan - it's a little bit like the free agent market.

The second thing is that experience in sales is an inherently multi-dimensional variable. This is important and again, HR people know this, many sales managers either don't know or don't care. What does it mean to say I hire for experience in sales? What does that experience mean? Is it simply selling experience? So it doesn't matter whether this person has been selling real estate and I'm now selling software as a service? Is it experience with a given customer group? They weren't selling my product but they were selling into my market. This is very common in healthcare, and it very often makes sense in healthcare because firms across various sectors many of them still have to sell to hospitals and doctors. Is it experience with a particular product?

Now, the important thing I think if you're going to hire that way is to force the people doing the hiring to clarify what they mean by experience, because sometimes these managers know it when they see it and very often they don't. The HR literature about interviews and hiring is very definitive. This literature has been replicated for 40 years. There's a less than 20% correlation between the scores people get in their interviews and their actual job performance. So that rationale and you're exactly right, that rationale is not irrelevant but it needs to be operationalized and again, HR can and very often does help tremendously with this.

David: There's so much more we could talk about but we need to leave something for people to read the book. So the book is Aligning Strategy and Sales: The Choices, Systems, and Behaviors that Drive Effective Selling by our good friends over at Harvard Business Review Press.

Frank, thank you so much for joining us.

Frank: Peter, David, I thank you sincerely for the opportunity. Thank you.

Peter: Thank you very much.

This is Peter Clayton. Thanks for tuning in to TotalPicture Radio. See you next time.


Twitter is Not a Strategy


A conversation with Tom Doctoroff, the CEO of J Walter Thompson in Asia Pacific

Published on December 02 2014
Tom Doctoroff,CEO of J Walter Thompson in Asia Pacific  -TotalPicture Radio interviewTom Doctoroff

In a cultural climate saturated by technology, HR and talent acquisition professionals have focused their energies on creating newer and more digital methods of promoting their employer brands, with the fear that if they don't embrace "Big Data," they will fade into obscurity.

Tom Doctoroff, Asia Pacific CEO for J. Walter Thompson, argues that this frenzy over digital media has created a schism in the marketing world that is hindering brands from attaining their true business potential. The tension between traditional branding and the seemingly unlimited possibilities presented by the advent of "digital" branding leads companies to abandon the tried and true aspects of marketing for the flash of the new. Welcome to a Leadership Channel Podcast on TotalPicture Radio, this is Peter Clayton reporting.

In his new book, Twitter is Not a Strategy, Doctoroff argues a strategy that truly integrates the two ideas is the best way for a brand to move into the future. Using some of the biggest brand names in the world as examples, such as Coca-Cola, Nike, and Apple, he breaks down the framework of marketing to explain how digital marketing can't stand without the traditional foundation.


Karan Girotra: The Risk Driven Business Model


Four Questions That Will Define Your Company. An Interview with INSEAD Professor Karan Girotra

Premiers on July 29 2014
Karan Girotra, Professor of Technology and Operations Management INSEADKaran Girotra

At a time when business model innovation is flourishing as never before, The Risk-Driven Business Model (Harvard Business Review Press) by INSEAD professors Karan Girotra and Serguei Netessine reveals how new startups and large established companies alike are designing or redesigning their business models to better tolerate risk and outpace competitors. In our interview, Karan sites real-world examples of how business model innovation has impacted corporat growth far more than product innovation, and why most companies focus their attention and dollars on product innovation.

According to the authors, the key to creating an innovative business model is to ask these four essential questions:

WHAT key decisions get made in a business;
WHEN these decisions are made;
WHO is empowered to make decisions, and
WHY those individuals make the decisions they do.
By changing a company's approach to these choices, we can fundamentally alter the risks involved and invent new, superior business models.

Welcome to a Leadership Channel podcast on TotalPicture Radio with guest host David Dalka, business transformation consultant, facilitator and keynote speaker reporting. While most companies focus their innovation efforts on new products, companies like Amazon and Netflix are disrupting industries with business model innovation - a different kind of innovation that is cheaper, easier, and more powerful.

TotalPicture Radio Transcript: Karan Girotra

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And now, here's our interview with Karan Girotra.

Peter: Welcome to a Leadership Channel podcast here on TotalPicture Radio. This is Peter Clayton reporting with guest host David Dalka. While most companies focus their innovation efforts on new products, companies like Amazon, Netflix, Airbnb and Uber are disrupting industries with business model innovation, a different kind of innovation that is cheaper, easier, and more powerful. Joining us is Karan Girotra co-author of the Risk-Driven Business Model recently published by Harvard Business Review Press.

David, welcome back to TotalPicture Radio and Karan, thanks for joining us today.

Karan, I'd like to lead off today's discussion with this question, if business model innovation impacts corporate growth far more than product innovation, why do most companies and, quite frankly, the press focus their attention and dollars on product innovation? You look at a company like Apple, it's all about the next iPhone. It's never about their supply chain or about the latest iTunes or iOS innovation.

Karan: Right. That's a great question. I think a couple of reasons that drive that first is perhaps the most simple reason is, it is just a lack of awareness. So I think while business model innovation for people who have been able to pull it off works very well but there's a lot of folks who just don't know about it, who just don't consciously think about it, and that is related to how the media covers innovation too.

I think from the media side it is again, business model innovation might particularly for the larger readership, a new iPhone is a sexy product to cover. It is something that the consumers directly see.

Business model innovation pretty much by definition is not really about changing the product for the consumer. It's really about changing how you get the product to the consumer, how do you really make it happen, and that is something that is often not even directly visible to the outside so many people in media can't see it until it already is a huge success, and also I think from a consumer point of view it attracts a little less interest.

We've thought of this question carefully, we've tried looking at many industries, and we found if we had to give the top reasons, it would be lack of awareness; if I may say for general consumers a lack of sexiness in this kind of things that happen with it and finally, I think business model innovation is also while very rewarding for everyone who can master it, it does require a certain competency, a certain organizational maturity to be able to pull it off mostly because this is not... when you come up with a new iPhone, the roles of folks at Apple don't really change. It is pretty much the same engineers who produce the next product.

On the other hand, if you think of a radical business model change, for instance, IBM moving from selling products to services; that kind of a change really changes people's jobs. So you're a marketing manager at IBM and we're changing from selling products to services. You're not going to servers or computer products; you're going to now sell a service. That requires a very different marketing organization and that creates kind of this internal constituency against business model innovation and it requires a fairly enlightened and smart leadership to be able to pull that off. I think that's why sometimes some organizations shirk from doing it even though the benefits might be very large and generally at lower risk than regular innovation, than product or technology innovation.

David: You mentioned in there organizational maturity. What exactly are the attributes required for an organization to be ready to do this properly?

Karan: Right. Again, great question. So I think the first attribute again like with my last comment, it really is about awareness. Awareness on two dimensions. One, that changing the business model is not about changing people's roles or anything like that. It's about innovation. It is about creating a disruptive company. So because folks thinks disruption and game changing differences and advantages over competition or over incumbents can really come through new technology and products. They tend to view business model innovation as not a worth enterprise sometimes. So the first kind of organization maturity that is needed is awareness, that thinking about your business model can be game changing.

I think the second thing you need is systems, systems to make that happen, and these systems go all across the full range of systems. They start with a systematic process of doing this of identifying what are potential business model innovation opportunities. That is really what our book The Risk Business Model describes; a systematic process to help organizations do it.

I think the second thing you need is even if you have come up with great business model innovations, you need a certain strength, consistency in the leadership to really be able to take these goals through. Mostly again because I said these involve a fairly radical change to the organization so there will always been internal constituency against doing this. Folks who are afraid of their jobs, to put it very simply. There are ways in which the leadership needs to manage it perhaps by having generating small pilot experiments to convince folks with data rather than making it into a political enterprise and should we do this, should we not.

So things like that are certain systems which are needed to really make business model innovation happen to summarize an awareness that you need to do it and once you know how to, that you need to do it, a certain system organization and discipline to make it happen.

David: Your original background in being a professor was in operations management. How did those experiences lead to your interest and passion in this topic and the book we see before us?

Karan: Operations management put simply is just the science of doing things. Now, too often it is thought of as a tactical tool to just help us check the boxes and make sure the products are on the shelves. Not really the strategic differentiator. I was, like you said, a professor of operations and I was also actually teaching some innovation but these were almost two different sides of my professional personality - almost schizophrenic and I used to like to say that.

One thing I realized is when I was talking about operations, a lot of folks were thinking about it tactically but then if you looked at business history, there were many, many companies who had taken and the most kind of historical and relevant example is a folk person like Henry Ford who really retaught the operations of making cars and created an industry around it. There are hundreds of examples like that in business history. If you look at that, you see that many of these companies, many industries, for instance the automobile industry, even the digital music industry that was mentioned, really caught on not because of new technology but only when somebody came up with a business model to make it happen.

So to me it seemed and even more specific than a business model, it was very much how someone changed operations to establish an industry because before that it was a hobby and esoteric thing. For instance with automobiles, the German about 120 years or so back, the German engineers had designed great engines and great fossil fuel based vehicles but these were novelty items. It is only when Henry Ford came up with a different operational system, a different way of doing things that the automobile industry started. With digital music, part of Apple's ability to really open up that digital content space now about 12 or 13 years back was really about creating the iTunes platform where folks could buy a song a piece and bringing publishers and consumers on to that platform. Really a new business model for selling music rather than the store based physical format.

So from the operations side, it seemed that operations could do more. It wasn't just a tactical thing to make the wheels spin right. It was actually something which could be game changing.

On the other hand when I would talk to folks who are talking about innovation, we talk to top CEOs and what would happen is everyone would say innovation is one of my top priorities. The next question I would ask is how are you really going about making it happen since you say innovation is your top three priorities in the next five years. Typically they'd say, oh yeah, we have an R&D group and they think about it and then they tell me what's good or bad. That seemed kind of very hands off and for a priority for a top leadership which is one of their three properties it didn't really seem... in most cases, it was something which was great to say in mission statements and somewhat okay to mention too but in the end in practice, it really was just something given to a small group of people who in some industries were not even very empowered. Particularly I think while this kind of R&D based innovation was great in pharma, in tech but the vast majority of other kind of CEOs we would meet in commodities, in energy, in say cement, in steel, they really didn't have any innovation going on even though they were talking a lot about it.

So again from the innovation point of view, we saw a huge demand for an innovation which applies to beyond the three sectors out there today and then we again saw an opportunity on putting the two things together operations and operations thinking used as innovation and then really bringing an innovation which can apply to a far broader set of industries than traditional product innovation. And that's the somewhat long journey from operations to business model innovation.

David: So the qualifier in the book in the front, risk driven with my background in the investment industry, I'm very familiar with risk and its implications for the enterprise, yet most executives go a whole career without exposure to serious deep dives into risk concepts. What do you mean exactly by risk driven and what do leaders need to do differently to incorporate that?

Karan: That's a good question. When it comes to examining a business model or examining any organization's performance, you're systematically used to looking at revenue numbers or cost numbers. That is great if you improve your revenues, decrease your costs, business does do better. But it turns out there is a third dimension of really evaluating and thinking about business models, and that dimension is risk. What I mean by that is the same business model perhaps with the same revenue structures, same cost structure, if you somehow decrease the risk in that business model, that could be a superior business model. At the very least give you those revenues and cost in a more consistent basis, for instance.

So the central thesis of our book is that the cost and revenues are great ways of creating new business models but perhaps they've been done to the core. Most companies have cut costs very aggressively, so those are going to get your improvement 2%, 3%, 4%, or 5% but not game changing disruption or innovations.

On the other hand, few companies and entrepreneurs have thought of industries and from the perspective of not just cost and revenues, but really from the perspective of risk in the business model. So once folks start thinking about the risk in their business model and how could they change the risk could decrease the risk while keeping their revenues and cost the same. In fact, many times, they could just decrease the risk while increasing their costs. Increasing their costs and it could turn out to be a better model.

For instance, this is what happened in the apparel industry. Zara really changed the industry. Zara the Spanish retailer and now of course globally very successful and really has come up in the last 20 years in an industry which had had no innovation pretty much for almost 100 years. Zara comes in and shakes up the industry largely by a different business model which involves a much higher cost structure, so more costs, because they produce most of their clothing in Southern Europe and now perhaps parts of Africa and Eastern Europe all of which are far more expensive than East Asia, be it China, maybe now Bangladesh, Vietnam. So the cost structure is a lot higher but it turns out that if you produce clothes in Europe to sell to Europe or the US, you can have clothes from the designers table to the store in about 3 weeks, whereas if you produce them in Asia, you get them in 3 months. Producing clothes 3 weeks in advance is a lot less risky often enterprise than producing clothes 3 months in advance. Why? Because you have better idea of what styles are doing well. You have a better idea on what fashion trends are catching on. You have a better idea on what colors are good.

So as a whole, that really is a new business model which even though it might have higher cost, it actually has much lower risk and that really is what we mean by risk driven business model; a model design keeping in mind the risk considerations also of the industry.

David: Thank you for walking us through that. One of the things that I love about this book is it talked about a ton of obscure previous unknown examples and stories. Walk us through another one or two of those that you really thought get the point across that you just made.

Karan: Another, I think, example of a slightly different kind of risk, so in the example of Zara, this really was not the risk that the business model faces is not knowing what the big fashion trends are going to be and they made their risk exposure a little bit smaller. Another kind of risk that often organizations have is of individuals not acting in the interest of the larger organization or individuals having different interests than what you'd like them to have perhaps.

So company perhaps a little bit obscure to some of our listeners is an Israeli company called Netafim. This company makes irrigation equipment, drip irrigation equipment. Now, this equipment is as far more efficient in irrigating a plot of land than perhaps traditional irrigation methods. Particularly useful in drier climates. Right now actually it's a very successful product in California because of the weather we've had there in the last few years. So this is a very high tech equipment which gives exactly the right amount of water to the plants on the basis of the weather forecast, on the basis of the different properties of the soil composed of many sensors and real time information system increases crop yields by an order of magnitude.

Now this company made this great product and it was trying to sell it, did well in the US and Europe but then it identified that one of the biggest markets for this product is actually dry parts of Afghanistan and Pakistan. Remember, this is an Israeli company and they're trying to go in and try to sell this product there. They go in there and it turns out that most farmers are like sounds good but it's an expensive product and on top of it, I have no reason to believe all that you're saying that okay it will improve yields by 50%, 100%. That's really going to materialize. I have to pay you up front and then this may or may not give me the returns that you're promising and put simply, I don't trust you.

So now this company had a quandary because it was not really only a business enterprise to break into these regions, it really was a social enterprise. Because in these parts if one could increase the productivity of agriculture, one could argue that it can solve a lot of other problems, other socioeconomic problems in the region. Now, this company is trying to make this happen and then they really change the business model around selling of this product. They try to make it a little more different model for selling. The offer now is they go to the farmers and say we will install this equipment for you. Not only will we install it, we will maintain it and actually do the day-to-day running of this equipment which would involve making sure it is downloading the latest weather data, so on and so forth. They're like, we will take care of all of it and we will do it all for free. Rather than sell the product for a certain amount of money, we'll help you. You have to share with us perhaps 50-50 or in some proportion. Now suddenly from the farmer's point of view, it's a no brainer. You pay nothing and if you have a yield you lose; okay you have to share some of it but only if you have something.

On the other hand, from the company' point of view this is also a great idea because before that they were selling nothing. Now at least the farmers are there and because they know their technology works, they're willing to take the bet and typically this 50% of the crop yields increase could be significantly more than cost of the price of the system, so they make even more money this way even if they had sold. So this really brings this new technology to a place where it wouldn't have; again, not by improving the technology in anyway but by really changing the business model around it. In this case, the risk that they reduce is what one might call an incentive alignment risk that the farmer when he was purchasing his incentives or the company's incentive to design a good system are better aligned with the farmers in this new model than in the older model.

So that's another example of a company helping create a new business model. The best part I find about this is, is business model innovation applies across the board. So this was on the sales side. We have multiple other examples on different dimensions on the people management side perhaps on many other dimensions.

David: That brings up a great point that it goes across multiple organization including what we talked a lot about here on TotalPicture Radio all the time which is hiring and hiring managers. When we met the other day for lunch, you discussed that you have an example of a company that was hiring people without actual job interviews. Tell us more about that.

Karan: So a company, I think, many of our listeners might have heard of the company is They're a hosted service for Wordpress. The company is Automatic which really owns They've been a big success. A large fraction of blogs online majority of them are hosted on the wordpress platform and many of them on This company has covered an excellent and a very interesting way of hiring people.

Traditional job interviews are a classic example of an information risk. In the same way as Zara doesn't know what trends will be good and what clothes will catch on; in the same way, when we're hiring an individual, there is very poor information on two things. One, the person's capabilities. Will he fit in? Will he not fit in? And not just the hard capabilities but the soft capabilities of cultural fit and so on and so forth, and also of what the organizations needs would be in the kind of people they need. Do you need a specialist in X or specialist in Y? So that is a challenge all hiring managers face. If we would be honest to ourselves, I think most hiring managers would admit that it is in the end an article of faith. Even the best designed interviewing systems really can't test real life performance. They're best and inaccurate signal of what might happen in a bit.

So Automatic comes up with this new kind of "job interview." They don't really call you in for interview, they don't do an HR interview followed by different rounds. What they do is they bring in people and it's a very simple test, you have to work in one of the teams at Automatic for 3 weeks and for that they will offer you some compensation. By the end of the 3 weeks, we all will sit together and decide if you want to work here or not. So this is not a formal interview. It is a 3-week one might say pre-job kind of an internship without an interviews, and it really makes it - Automatic also, I must add, has a very unique cultural challenge.

Automatic is a company which allows most of its employees to be based anywhere. They don't really have a physical location. They're a fairly big and very successful internet company but the vast majority of their employees work remotely. So they don't even get to see each other. So cultural fit is really important because you bring in a person even though these employees don't see each other, they work collaboratively to develop new products, new services very closely. So they might be talking to each other 50 times a day even though they might not be face-to-face. It's really getting the right people into the system is very important because otherwise it will break and the best way to test that they found and this far out performed any interview, any database selection schemes that they had applied. So now they really just do no interviews at all and simply just bring in people, test them for three weeks and take it from there.

David: Let's look at the other side of that. You talked about the companies not necessarily knowing their needs. Earlier you talked about sometimes hiring managers have a personal incentive to not always hire the best person if they feel threatened by a new skill or a concept that might be involved in a paradigm shift or business model involved in your work. Let's bring this elephant out in the middle of the room. What do you see there that CEOs and boards need to be thinking about so that they can actually empower their talent people to identify those situations and create the right situations involving new people.

Karan: So most often an interview process, an HR process for bringing in new folks would involve often the direct manager and the people who have to directly work with the individual in a fairly significant way. Now, that is clearly important and necessary because you want the people to be compatible but at the same time this very process can be one of these biggest barriers to change because if you really want to bring in a new person to change the business model or drive through some important fixes asking the incumbent leadership to evaluate candidates for that has the potential of having a slight incentive issue.

For instance, if I need to hire... again, let's go back to the IBM example. If you're going to move from selling products to services, a very important strategic shift and like I mentioned, that would really make the marketing managers who are used to selling products perhaps a little bit concerned about their roles; not all of them but there might be some in there. Generally, not a majority I might even add because most folks I found really do want to work in the interest of the organization, but then again, everybody has their individual incentives too.

Now, you need to build a new group of people who can sell this as a service. To make this happen, in the HR process, if you involve the current marketing organization, the marketing manager who has made his experience in selling products is the one who's truly proved the next generation which is going to transform into services. It really is like hiring someone who will make him redundant. And that does have the potential of certain incentive issues. And in these cases, when there is a radical shift that the organization needs, the need to bring in external, perhaps third parties to really mediate the hiring process to watch it more carefully so that someone who is more aware of the holistic needs for the organization to change can be part of this.

Peter: I want to interject something here. A recent study that was done by the Corporate Executive Board found that 74% of the respondents reported that their most recent hire had a personality "similar to mine." So it's not just a bias towards bringing in people that perhaps may not out-perform that hiring manager, it's a bias towards 'I want to hire people who are similar to me and who I feel comfortable with,' and that gets away from the whole issue of the importance of diversity in organizations today.

Karan: Exactly right. There are multiple studies that have found that in terms of hiring people and in evaluating employees, your culture familiarity with the individual ends up being a fairly important factor. That is terrible from not just a change management point of view, but two other point of views.

One that Peter mentioned which really is diversity, and diversity not just in race or other things but also diversity in intellectual grounding, background thinking. If we get all people who think the same way in the organization, we really aren't going to be able to change. If we get all people who think the same way in the organization, and therein I think comes the real rub, that is really, really bad for innovation.

I'm always amazed by companies which have debated a new product for months and they bring it out and it's a complete shock to everyone outside. Microsoft has announced a lot of recent changes. They've invested tons of money in a product, and when it comes out, people are almost surprised with some very basic factors that were overlooked in the product. The core problem in most of these places is group thing; it's the lack of independent thinking. And hiring practices, because of the reasons that Peter mentioned, reinforce that. Everyone hires people who think like them. It's not surprising that the organization will get into a group thing and that can be killer from a intellectual diversity point of view and from an innovation point of view.

Peter: I want to jump into something now real quick and you wrote a lot about in your book, and that's disruption. I recently interviewed Chip Conley who was the founder of Joie de Vivre boutique hotel chain based in California that was recently bought by one of the Pritzker families. He completely disrupted the hotel industry and now he's working with Airbnb - another huge disruptive force out there. And you look at companies like Uber and Lyft that are completely disrupting industries, so talk to us a little bit about that and some of the challenges.

Karan: Today, I think we're living in the golden age of new business models which are game changing. So if we look at Uber, Airbnb, these are all companies, first I'd like to stress, which are disrupting but not disrupting by any new technology. If you look at what Uber is doing, that is something a taxi company could have done 15 years back or 10 years back certainly since the smartphone became a substantial product. This was a product that the incumbent could have thought of, not just as a technology product but as a new business model of bringing their suppliers, the drivers and their customers together; really matching them using geolocation based platforms like Uber does, along with changing prices and so on and so forth.

So this is a new business model and it is disrupting industries. In the hotel industry, I think certain figures really highlight how disruptive an Airbnb can be. In a normal hotel chain, when Airbnb enters a new city, within months or weeks with very limited marketing or any other spend, they might bring in on the order of 10,000 or 15,000 rooms on to the market within a matter of a month or two. On the other hand, a regular hotel chain, probably adds that many numbers across the world in a year, not even in a month. So the kind of competitor that a hotel chain or a taxi company is facing today is a very different beast. It's a beast which is coming with a different business model.

Now, if you are one of those disruptors, if you are an entrepreneur and are thinking about how to change an industry, be it hiring, be it any industry, then I think the prescription for you is clear, think about new business models, try to make the change happen, perhaps even follow the systematic process of changing the business model that we talk about.

On the other hand, if you are the incumbent, that poses, it's not that promising a situation for you. My main recommendation there is it is always better to disrupt yourself before someone else disrupts you, and it turns out that you're often very well-positioned, you're probably the best person to disrupt yourself because people don't fully get that. So for sure, Uber a group of guys in San Francisco, came up with this app and are disrupting the taxi industry. But think about it, if the taxi industry was not so in love with their incumbent model, with their old model, they were far better positioned to make it happen than Uber. It was lying there in front of them, smartphones were out there, this is not a need that was not known, it is just that they were too much afraid of changing their own incumbent model. And so if you don't disrupt yourself, someone else will.

There's a positive side to it, you are often the best position because you know the industry, because the customers trust you. You are better positioned to change the industry in many ways than a new phone can be. What you need to do is deal with the internal barriers to change within your organization.

David: You talked a little bit about - when we talked the other day about Skunk Works, and that's potentially one of the best ways to do this. What are the best ways for companies in your view to actually do this and overcome some of the barriers that we've talked about here?

Karan: First off, again, I'll reiterate it is about developing the right systems to make it happen. Now, what could be these good systems? A few of these systems which we found to be very effective is, first up gradual piloting and testing in a separate Skunk Works organization. I like calling it a little bit more like running an internal insurgency or a guerrilla warfare type attack to the existing market. What do I mean by that?

We found that companies that come in and say the CEO comes in and says tomorrow we're going to have a different business model, let's make it happen. In this kind of style, even in the most respected experience senior leadership rarely works out, for a simple reason, because the internal constituency goes broad and deep for the existing model. By definition, people who are doing the best in the organization are the ones who have most to preserve in keeping the existing business model.

So that kind of coming in and saying let's change everything top down often doesn't work well. What does work well is if the senior leadership understands that this change needs to happen and then rather than going into everyone and showing them oh let's change it, tutorially, what works well is to create a small empowered group often separate from the main organization which is what a Skunk Works would mean. They'd often be sitting in one separate physical location and really give them some freehand to create an internal startup or an internal insurgency in a very limited way, perhaps in one market, perhaps with a small subset of customers, often not even the most important customers or markets.

So give them a little bit of freedom in a very separate, small organizational Skunk Works team who doesn't have to comply with the usual bureaucracy and the rules and let them run some experiments. And these are just experiments, nobody say you're going to change the organization or anything like that. You let them run some experiments which test out things on the basis of the results from those experiments. It will be one of two things; either you think it works really well. I think that's often rarely the case. Your first hypothesis is often proven wrong once you start doing it. But if it does work well, you take that data from that experiment to the organization and try to build a constituency on the basis of facts, on the basis of actual working pilots, rather than on the basis of hopes and dreams. And that is the case if the experiment works.

If it doesn't work, the recommendation is simple, you either kill the project or find out why it doesn't work and improve the experiment.

So in principle, I think and there's more science into how exactly one can design experiments to get the most important information early on. But as a whole, the idea is to not come in and say we're going to change the organization in one day, but really create an internal insurgency, a small empowered but not with all the resources of the organization - a small internal startup which can start creating some ordinate facts, some ultimate data to challenge the status quo. I find that data and real world instances and examples tend to be the best anecdote against organizational inertia, against politics, against people saying stuff to keep things the same.

David: So to close, people read this book in 2014 and five years from now, the world has adopted the methods and the thoughts in this book. What outcomes are the world going to see if they do that?

Karan: I think we'll see more disruption because I think disruption and game-changing innovation has been restricted because of our view of thinking of innovation only as products and technology in a very limited set of sectors right now. It is mostly tech, biotech perhaps and sectors like that. You're seeing a little bit of this already with Uber and Airbnb. You're seeing disruption happening in industries which people thought had been the same for a hundred years. Taxi hailing a ride services have been the same since the times of the horse and buggy. Really, we will see disruption happening in many more industries than people think of disruption coming from business models.

Also, I think and hope that this kind of disruption will extend beyond the corporate sector. So I think for companies, great, this will be more innovation, more money and more wealth, but some of my personal hopes is that this really also disrupts the way in which many times cities are run in many ways in which public systems work. I think that's one place where the business models have a whole host of conflicts of interest or incentive alignment risk or whole host of information risks, and we're improving those models you may call economic models, now perhaps now business models in the public sector. Be it in urban planning, be it in healthcare, I think we can have some really game-changing impacts if we rethought the way we do things and not just about the technology to make those things happen.

We are seeing it a little bit in urban transportation now, not just with Uber and Lyft but also with bike sharing systems, perhaps more in the public domain, a new business model of using bikes which is changing urban planning and many things. So we'll see more disruption in different sectors and I hope more and more in the public sector too.

David: Thank you for joining us, Karan. The book is called The Risk-Driven Business Model and it's on the Harvard Business Review Press, available now in the format of your choice. And, Karan, thank you so much for joining us today, we really enjoyed it.

Karan: Thanks for having me.


Chip Conley - WOBI on Innovation


Disruption, Peak Performance, and Emotional Equations with the Head of Global Hospitality at Airbnb

Published on July 22 2014
Head of Global Hospitality, Airbnb, TotalPicture Radio interviewChip Conley

On our plat du jour today we're serving up disruption. Industry disruption. Creative disruption, Technological disruption changing and challenging industries overnight. Disrupt was the theme of WOBI on Innovation in New York this year. One of the keynote presenters at WOBI to receive a standing ovation is our guest today -- Chip Conley.

Welcome to a special Leadership Channel Interview with Peter Clayton reporting. I first met Chip Conley in 2008, when his bestselling book, PEAK: How Great Companies Get Their Mojo From Maslow, was published. (Check the side bar. You'll still find the podcast on TotalPicture Radio).

As the founder of the Joie de Vivre boutique hotel chain in 1987 Chip has already disrupted the hotel industry once. As current Head of Global Hospitality at Airbnb he is part of a team doing so again. Oh, by the way? The service industry represents two-thirds of the Global GDP.

Stay tuned... our exclusive interview with Chip Conley will air Tuesday, July 22nd!


Deborrah Himsel - Inside the Reign of Avon's Andrea Jung


What makes leaders great? What Makes them Fail? A conversation with Deborrah Himsel, former Vice President of Avon and the author of Beauty Queen

Published on July 03 2014

"Culture eats strategy for lunch." Deborrah Himsel

Deborrah Himsel, Leadership coach, author of Beauty Queen -TotalPicture Radio interviewDeborrah Himsel

Deborrah Himsel is the author of a new book titled Beauty Queen: Inside the Reign of Avon's Andrea Jung (Palgrave Mcmillian). A former senior leader at Avon Products, Deutsche Bank and Pfizer, Himsel is currently a leadership development consultant and executive coach for many global companies, including Johnson & Johnson, ExxonMobil, KPMG, Essilor, Citigroup and Walmart. She teaches at Thunderbird School of Global Management.

Welcome to a Leadership Channel podcast on TotalPicture Radio. Andrea Jung, the former head of Avon, was one of the world's most charismatic and effective CEOs, credited with the astonishing turnaround of the company. Universally praised in the business press, I remember meeting her at the HSM World Business Forum at Radio City Music Hall, (now called WOBI), during the peak of her power. She clearly projected the aura and authority of a Fortune 500 CEO. So what went wrong?

Deborrah Himsel TotalPicture Radio Transcript

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Hi, this is Peter Clayton. Welcome to a special leadership channel podcast on TotalPicture Radio. Today, we're going to be speaking about someone who is a former CEO who is on Professor Finkelstein's third worst CEO of 2012 list. He is actually the professor at the Tuck School of Business at Dartmouth University, and this individual actually when she took over the reins of the company, it had a market value of about $21 billion back in 2004 and in 2012 its market value was down to $6 billion. We are speaking about Andrea Jung who is the former CEO of Avon, a celebrity CEO. We're going to be speaking today with Deborrah Himsel who is the author of Beauty Queen: Inside the Reign of Avon's Andrea Jung, a brand new book that is just published and she was a VP at Avon at that time that Andrea was the reigning queen there, and I'm really interested in getting her perspective. So thank you very much for taking time to speak with us.

Deborrah: Thank you, Peter, for having me.

Peter: What inspired you to write this book first of all?

Deborrah: Well, I have over 25 years of experience in the leadership development space and one of the things that I found is that storytelling is just such a powerful learning tool and the story of Andrea Jung is compelling. I mean, you talked about how she ended up on the worst CEO list and she started out here tenure as one of the most admired CEO's and she was on the cover of Fortune, Business Week also Time's one of their most influential 100 and when I left Avon in 2005, things were going well and I couldn't even imagine Avon or Andrea falling and then as you said, things just kind of went downhill. I always thought that she was a very, very strong leader. In fact, I actually still do but I was really curious as to what went wrong and most importantly I really wanted to understand why and what we can learn from that. So the book actually Beauty Queen is in two parts. The first is the Avon story and kind of her rise and eventual fall, and then the second part are really the broader leadership lessons learned. So as I mentioned, I really wanted to focus on what we can learn.

Peter: Right. Yeah, and you're right, she was a celebrity. I mean, there's no question. She spoke at Clinton Global Initiative. She spoke at the World Business Forum. I was there, and she was a star. She was like...

Deborrah: Yeah. Almost could do no wrong as well.

Peter: I've had the opportunity, as have you, of working personally with CEOs of very large organizations, and I have to say it is a rarified world of private jets. They're almost like state leaders. I mean, they have that kind of staff and resources available to them. So tell us a little bit about your story at Avon and how you came to work with her there.

Deborrah: I was leaving Deutsche Bank at that time and I got a call from a recruiter and they said there was a fantastic opportunity at Avon and my first thought was like, is Avon still around? Because at that time when I went there and then at the time when Andrea took over, Avon was really struggling. There were takeover attempts. The brand was very outdated and it was called I think not your mother's brand but your grandmother's brand. I joined before she was CEO but the company was in the midst of a large scale change and transformation. They said they really wanted to focus on leadership as an avenue to drive organizational change and I met with her, I met with other people and it sounded really exciting.

I remember the first time I met her and she's just tall, beautiful, gorgeous, speaks so eloquently and she just motivated me with the vision of the company that was really all around women's empowerment all around the world, and I could tell that she believed and she got me to sign up and away I went. My role was really to help architect the transformation from really Avon that operated as a set of independent countries and the vision was to really move to a more integrated organization where there wasn't one of everything and you had more efficiencies and economies of scale and I wanted to be part of it and it was a terrific ride. It really was.

Peter: Give us some timeframe, when did you start working there at Avon?

Deborrah: I started working there in 1999 and I left in 2005 and then was relocated from New York and I live out in Arizona and I teach and consult now and like I said, when I left everything was great and then it started kind of going up and down from there. I was just cringing on the sidelines and so is my stock portfolio.

Peter: Yeah. Absolutely. Wow. Obviously, you've done a lot of research in putting together this book and some of the lessons learned from her tenure there. Do you see any comparison between her leadership at Avon and Carly Fiorina at HP?

Deborrah: A little bit. I mean, style wise I think their styles were very different from what I have read about Carly - a more directive leadership style and Andrea's style was really more inclusive, which really is strength and she really worked hard to kind of get everybody all on board with where she was going which I think that was one of her strengths. One of the lessons that I talk about in Beauty Queen is that also was a liability because she oftentimes would not... she would shy away from some of the tough conflict and some of the tough decisions because she really wanted... she was a pleaser and she wanted to make sure there was harmony and almost to a fault that everybody was on board.

One of the things that I did learn is that you can have different styles and when I was there Andrea was CEO and she had another woman Susan Croft who was her number two and they were like Yin and Yang and very different. Susan was an operations person, very detailed. Andrea very strategic, very visionary and one of the things that I talked about is that complement was so helpful because ultimately what I find in leaders is that you need both focused on the vision as well as the focus on the operations. I think we're seeing a lot of companies today Veterans Administration, GM, the list goes on where they really need some leaders that are down there in the nitty-gritty detail.

Peter: I think one of the criticisms of Andrea was that she was a marketing wizard but knew absolutely or cared nothing about operations.

Deborrah: Yeah, and that was I think overall one of the key takeaways for leaders and there's a little bit of everything for everybody in the book but you have to really know where your tilt is. As I mentioned Andrea's was in marketing, it was on the mobilizing the strategy, what can be, had a million great ideas and when she had her strong CEO there, they really balanced each other but when the CEO retired, she never really had that complement on her team and to your point, where she really struggled was in the details.

One of the things that really t tripped her up in the company in the end was that they had IT infrastructure problems in Brazil and they lost representatives and sales. They just couldn't get orders out the door so some supply chain issues as well, and a bad acquisition. So part of this was just really some of the fundamentals of the blocking and tackling that were missing.

Peter: You write in your book about the risk of functional favoritism and over-specialization. Can you talk about that a little bit?

Deborrah: I think that was to your point earlier that Andrea's strengths was really as a marketing whiz and all the jobs that she had were marketing jobs and around re-inventing the brand and things like that, and so she had never had when she got the role at Avon, she had never had a role outside the United States and Avon's portfolio was shifting from when she came in it was about 80% sales in the United States, 20% overseas and that's reversed right now. So she hadn't had any overseas assignments and she had never had any assignments outside of marketing. So that goes back to our earlier discussion is you could really see how that hindered her because in terms of really knowing the operations, what drove some of the P&L lovers, she just really didn't have that. In the latter part of her reign, she was still focused on the marketing ideas and the big marketing programs and that's not what the company needed right then.

So part of the lesson is to really make sure that if you have ideas and aspirations of more general management roles, you really need to have some rotations into other areas outside your comfort zone, especially for women. Sometimes companies have difficulty getting women outside the sort of normal stereotypical roles in getting them into some assignments where you really get into the bows of the organization.

Peter: I'm curious, do you think women CEO are treated differently than men CEO? I mean, obviously... and you brought this up the new CEO of GM Mary Barra of course has been in the news a lot lately and on television.

Deborrah: They keep grilling her like...

Peter: Oh my god, it's unbelievable.

Deborrah: Well, you know what, when I look - I'll just take Mary Barra for an example - I sometimes think and I don't know if the research bears that out a little bit does that we expect female CEOs and leaders to be exhibiting of the those I'll call them kind of stereotypical and characteristics that women do more compassionate, more let's say... some of the kind of warm and fuzzy, maybe more direct communication, not evading the issues and I think that...

Peter: But those are all good attributes.

Deborrah: Well, they are, but I think that sometimes and when I watch the Mary Barra grillings that it sometimes you think that they want her to be saying just to give away the whole store and to say, oh my gosh, we're so sorry. We're just going to give anybody whatever amount that they need to compensate them for and/or to kind of say things that are maybe what we'd all like to hear but potentially put GM in a more libelous position than they already are. I don't know if I made that clear but with their all good attributes but sometimes I think we expect that that will extend into other situations and you know what, some of that is not good business. I think what she is doing is she's trying to be compassionate but also trying to protect her company and that's a very difficult paradox, I believe.

Peter: She clearly walked into a snake pit here.

Deborrah: I know. I feel for her and some people say is she on the glass cliff that she was just there potentially as a scapegoat. I don't think she's on the glass cliff but I think it's so sad that her tenure may be defined just by this incident, which I think is very sad.

Peter: I agree with that. In reading your book, I interviewed David Rose recently who's an angel investor in New York. His book is all about angel investing, and I pulled a quote out of that which is, "Any company designed for success in the 20th century is doomed to failure in the 21st." In reading your book, it seems to me like Avon was really stuck in the 20th century. They just didn't really perceive the impact of the internet and what all of this was going to mean to their business.

Deborrah: You're exactly right and I talk about that not as in the Beauty Queen, not as much on the internet but what I do talk about is just not adapting the business model to meet the real needs of the local markets and how to really walk that line between driving global scale and economies of scale, but also locally. What happened, which is I think really interesting, in the US direct selling is still viable but I think to your point we've got the internet, we've got Amazon where you can buy everything and you've got just different ways that people are selling.

In the US, the kind of typical door to door just isn't as strong as it was. But in markets like Brazil, in Chile, Vietnam and some of these emerging markets where you don't have the corner drugstore, direct selling is really a viable business model. So I think one of the big lessons learned is companies just have to be very nimble and adaptable and have to really look at what's right for one market may be very, very different from another market and I think that's really, to me, the big lesson learned.

Peter: Deborrah, in doing the research on this book, is there anything that really surprised you when you were doing the research that you learned?

Deborrah: Well, the thing that really surprised me was - and I interviewed close to 100 people - how loyal that everyone still was to Andrea and in fact, I really wanted to in the book Beauty Queen to actually have individuals quoted, and only about three or four people said I could use their name. Everybody wanted to be anonymous. I think it just struck me how at the end stock price was down, people spoke when case were in the toilet and the company was ripe for a takeover and yet... and I just didn't go after everybody that I knew would be loyal to her but I did a cross section and there was still so much loyalty to her and people really... I don't want to say most people but many people said, you know what it was just the perfect storm. Things collided it all at one time. She's really still a good leader. I have to say that it just really surprised me that how much they still think of her, and the company is still struggling now and it's still takeover rumors are once again rampant. So I have to say that was the biggest surprise overall.

Peter: Yeah, of course during her reign Coty made a $10 billion offer which was rejected and she's been roundly criticized for that.

Deborrah: Yeah, very much so. And now Coty and Avon have an arrangement in Brazil where they will co-market some products which is really interesting, and I think those takeover rumors are once again kind of bubbling a little bit to the surface but they're still really struggling which to me, and even though the book I'm really happy that it's a balanced book about what she did well and what she didn't do well still when you go back and look at it, Avon is still struggling and still so many remnants of what wasn't focused on when she was there.

Peter: Was it really all of the bribery charges that brought her down?

Deborrah: That was another thing I think that surprised me that it wasn't just one thing; it was multiple things. Clearly the alleged bribery in China and the investigation it was just a cash drain, and when all is kind of totaled up for legal fees and the SCC charges or settlement will be close to half a billion dollars. So if you just look at that and then there was, as I mentioned, IT problems and just... what you could tell there was just a lack of investment in infrastructure which really had Brazil at that time was the biggest market and really had a profound effect on that. There was a bad acquisition Avon acquired during her reign Silpada which was a party plan silver company for $650 million and then silver prices skyrocketed. Anyway, last year they sold the company back to the original owners for $85 million.

Peter: One of those. One of those. Oh man, yeah.

Deborrah: Then the last thing there was a talent drain and people - the really good talent were really fed up and so there was kind of the revolving door.

Peter: Right. You wrote a lot about culture and how important culture is within an organization and she really didn't seem... I mean, she had her inner circle and her loyal, as you put her very loyal supporters within the organization, but when you're operating a global organization like that that's not enough.

Deborrah: No. And also what had happened during the second half was she ended up more tilted with outsiders coming in and they seemed to have the floor more without the understanding of the business and sometimes the outsiders really denigrated the insiders. You had a lot of the people who really understood direct selling leave and so you had a drain really on the direct selling business as well.

Just as an aside, going back to GM again, some of the congress has said, 'GM needs to get rid all of the long tenure people bring in a bunch of new people.' One of my big learnings was it's not an either/or it's and/both. So you have to have a mix of people that really understand the business with also some fresh blood, and that's one of the things that Andrea didn't do as well as really manage those tensions between the old and the new.

Peter: Another criticism from our friend Professor Finkelstein was that she had no succession plan. There was no one in place to take her role.

Deborrah: Yeah, and at the end of the book I have what's called kind of the manager to-do list and you've just got to have succession plan and you have to have more than one also. She had a successor identified Liz Smith, but Liz Smith got frustrated because the job wasn't hers, and she didn't see it in the future so she left. Andrea, I think, in the end she almost boxed herself into a corner in that there was really nobody else that the board could turn to until it was really almost too late.

So even though I find leaders sometimes find it hard to have somebody waiting in the wings, you really need to have that pipeline, you need to have that succession plan in place and more than one. Most companies, as you know Peter, they have the horse race, they have multiple people that can really take on it anytime.

Peter: One more question for you. As we all know, women CEO remain extremely, extremely rare out there and according to a recent PWC study, women CEOs are more likely to be forced out of office than men. So what do you think the future holds for women in Corporate America?

Deborrah: Well, maybe it's my optimistic personality but when Andrea took over the CEO role in 1999, there were only three other CEOs and at least now my latest stat show 5% women in the CEO roles but the pipeline looks good. I've actually gone in and looked at the pipeline of CEOs in some of the Fortune 500 companies and it's strong.

But I'd say for the younger women coming up, they face challenges as I mentioned earlier about getting some of these cross-functional roles where they can really learn different parts of the business and secondly raising their hands. Sheryl Sandberg talks about that a lot in Lean In, but raise your hand for those high visibility assignments, those ones where you can get noticed.

Sometimes what I find - when I do a lot of executive coaching - is that women don't promote themselves enough and they think well if I do good work people will see me, and you just can't do that. So it's raising your hand for these assignments.

The third thing which this is some of the researchers call it the second order gender biased but it's those kind of subtle ways where women may not be getting their voice in the workplace, may not be getting the coaching that they need and we really, that's a both ways that both men and women need to work together to really understand how we can continue to move women through the pipeline. Because I think we've got a lot of ones that may be ready to take on the senior positions but it's the earlier ones and some of the women that are opting out and they're just saying, 'who needs all of this. I don't want to be grilled like Mary Barra in front of congress.' So I think it's a number of issues that we still need to address.

Peter: I think that's some great advice and I completely agree with you about women in these roles in Corporate America really need to help promote themselves and take those expat assignments because that will be invaluable in promoting and advancing your career.

Deborrah: One of the biggest learnings that I've had is that it's easier to do that when you're younger, when your children that are younger, your spouse it's a little bit easier for them to move. So getting organizations to do some of this earlier versus later when the compensation just gets too high, so do it earlier when you're young and a little bit more mobile.

Peter: Deborrah, thank you very much for taking time to speak with us here on TotalPicture Radio. I enjoyed your book.

Deborrah: Yeah. Thank you. I really enjoyed our conversation. Thanks very much.

Deborrah Himsel is the author of Beauty Queen: Inside the Reign of Avon's Andrea Jung. It's available now in bookstores or in Amazon or wherever you buy your books. You'll find this podcast in the leadership channel of TotalPicture Radio, that's Visit Deborrah's showpage where you'll find a complete transcript of our podcast. While there, sign up for our newsletter. It's free, easy and fast. Connect with our TotalPicture Radio group on Facebook. Follow me on Twitter @peterclayton and @totalpicture. I'm happy to connect on LinkedIn with TotalPicture Radio listeners. Please be sure to include in your invite that you listen to my show when sending the invitation. Thank you for tuning in.


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