Strategy Business - Summer 2017

THE ACCOUNTABLE CEO NEUROSCIENCE AND LEADERSHIP BUILD YOUR DIGITAL CONFIDENCE
GLOBAL ENTERTAINMENT
AND MEDIA OUTLOOK
ARTIFICIAL
IMAGINATION
Using digital technology to
unlock human creativity
Summer 2017 $12.95

Display until August 29, 2017
www.strategy-business.com
ARRIVE AN ELITE EXECUTIVE.
EMERGE A VISIONARY LEADER.
The Advanced Management Program is designed to help
ADVANCED accomplished senior executives navigate the complex global
challenges facing businesses today. Along with an elite group
MANAGEMENT of peers and the renowned HBS faculty, you will explore
best management practices and bold new strategies that will
PROGRAM disrupt your way of thinking, challenge your assumptions, and
improve your ability to lead with vision and purpose.
ADVANCED MANAGEMENT PROGRAM

10 SEP26 OCT 2017 | 02 APR17 MAY 2018
LEARN MORE AT WWW.EXED.HBS.EDU/SB-AMP

editors letter
1
The Algorithm and

the Artist
How many geniuses does it take to run a company? As the inuential technology
and media commentator Shelly Palmer notes in our Thought Leader interview,
articial intelligence (AI) will soon be robust enough to overtake many jobs, even
those that require managerial and creative skill (page 132). Business profession-
als, at every level of the hierarchy, will need to apply some truly artistic genius on
a day-to-day basis or we, too, may be vulnerable.
This is an especially critical matter for the entertainment and media (E&M)
industry, which is getting more and more competitive, especially when it comes
to generating original and compelling content. Hence this issues focus on arti-
cial imagination. Three articles here, developed as part of PwCs Global Enter-
Illustration by Lars Leetaru
tainment and Media Outlook, explore the range of possibilities when algorithms
become artists.
One is the Palmer interview. Another is on page 66, where Deborah Bot-
hun and David Lanceeld of PwC look at AIs growing role in the production
and distribution of movies, songs, and writing and in how consumers experi-
editors letter
ence them. And in A Strategists Guide to Articial Intelligence (page 82),

Anand Rao, a longstanding expert in this eld, identies three types of AI:
assisted intelligence, which helps businesses improve what they already do; aug-
mented intelligence, which makes possible new skills that were previously undo-
able; and autonomous intelligence, which operates without human involvement
except, again, for those rare geniuses who can outpace the robots.
Several articles cover the rapid evolution of technology and media. Augment-
ed reality is transforming retail stores (page 8). Enthusiastic followers or fans,
as Christopher Vollmer calls them are the growth engine for E&M companies
2
(page 55). And PwCs annual look at technology acumen, the Digital IQ study,
shows how companies can keep up with ever-changing tech skills (page 44).
Perhaps one new high-tech function will be monitoring the accountability
of chief executives. In the annual study by Strategy&, PwCs strategy consult-
ing group, of chief executive tenure trends, Per-Ola Karlsson, DeAnne Aguirre,
and Kristin Rivera document the link between ousted CEOs and the reputa-
tion of their companies (page 98). For another take on ethical decision making,
see senior editor Laura W. Gellers interview with Kellogg professor Maryam
Kouchaki (page 21).
Elsewhere, neuroscientist Jeffrey Schwartz, executive coach Josie Thomson,
and I talk about the High Road, a mind and brain function conducive to stra-
tegic leadership (page 114). And an insightful look at NYU Langone Medical
Center shows how to turn around any complex organization (page 32).
I personally remain optimistic that no matter how many jobs are lost to
automation and articial intelligence, the world will still need to employ human
beings. Once theyre sentient, robots wont want to cope with the multifaceted
complexity of the human race. If Im wrong, my AI replacement will have to edit
a magazine for robot readers. Until that day comes, the algorithm and the artist
will live in complementary coexistence.
strategy + business issue 87
Art Kleiner
Editor-in-Chief
kleiner_art@
strategy-business.com
leading ideas 82
8 Augmented Reality Comes
to Retail
Kamil Klamann and Sekoul Krastev
The Pokmon Go craze may have faded,
but it provides clues for retailers using
technology to engage consumers.
15 Connecting the Dots from

Brand to Demand
Emre Sucu, Matthew Egol, and
Edward Landry
The best consumer strategies start
with knowing where and why people
shop for your product.
21 Why Good Employees Do 28

Bad Things
Laura W. Geller
Kelloggs Maryam Kouchaki on
understanding and avoiding
ethical breakdowns.
28 Us versus Them: Reframing

Resistance to Change
Elizabeth Doty
How to bridge the gap between those
who champion transformation and those
who challenge it.
8
essays
HEALTHCARE MARKETING, MEDIA & SALES
32 Management Lessons from One 55 How to Make Entertainment and

Hospitals Dramatic Turnaround Media Businesses Fan-tastic
Eric J. McNulty, Nathaniel Foote, Christopher Vollmer
and Douglas Wilson Capturing the strategic advantages
Putting people at the core is the of fan-centric businesses requires
key to major improvements in functional transformation.
nancial, performance, regulatory,
and quality indicators.
44 TECHNOLOGY
Winning with Digital Condence

Chris Curran and Tom Puthiyamadam
The right mix of talent, innovation,
and experience will help your company
master emerging technology.
features
MARKETING, MEDIA & SALES STRATEGY & LEADERSHIP
66 AI Is Already Entertaining You 98 Are CEOs Less Ethical Than

Deborah Bothun and David Lanceeld in the Past?
How technology endowed with creative Per-Ola Karlsson, DeAnne Aguirre,
intelligence changes the way companies and Kristin Rivera
generate and distribute content. Why more chief executives are
losing their jobs after scandals
and corporate misconduct.
TECHNOLOGY
82 A Strategists Guide to 106 CEO Turnover in 2016

Articial Intelligence
Anand Rao
As the conceptual side of computer ORGANIZATIONS & PEOPLE
science becomes practical and relevant 114 The High Road Less Traveled
to business, companies must decide what Jeffrey Schwartz, Josie Thomson,
type of AI role they should play. and Art Kleiner
Neuroscience research shows
88 The Road to Deep Learning how to become a better leader.
THE THOUGHT LEADER INTERVIEW
132 Shelly Palmer

Deborah Bothun and Art Kleiner
One of the worlds leading digital-
technology commentators sees a
stark future for entertainment and
media companies.
BOOKS IN BRIEF
148 The Business of Tetris

Laura W. Geller
151 Care Personally,

Challenge Directly
Theodore Kinni
END PAGE: RECENT RESEARCH
154 Control Issues

Matt Palmquist
Startups are valued signicantly
higher and attract more nancing
after their founders relinquish
some power.
Cover illustration by John Hersey
Issue 87, Summer 2017

www.strategy-business.com
strategy+business Published by PwC
EDITORIAL
Editor-in-Chief Executive Editor Managing Editor Senior Editor Senior Editor Editor, Digital
Art Kleiner Daniel Gross Elizabeth Johnson Laura W. Geller Jan Alexander Melanie Rodier
kleiner_art@ gross_daniel@ johnson_elizabeth@ geller_laura@ alexander_ jan@ rodier_melanie@
strategy-business.com strategy-business.com strategy-business.com strategy-business.com strategy-business.com strategy-business.com
Deputy Managing Editor Associate Editor Chief Copy Editor Information Graphics Editorial
Sally Errico Michelle Gerdes Victoria Beliveau Linda Eckstein Operations Manager
errico_sally@ gerdes_michelle@ info@ info@ Natasha Andre
strategy-business.com strategy-business.com strategy-business.com strategy-business.com andre_natasha@
Art Director Designers Contributing Editors
John Klotnia Laura Eitzen Edward H. Baker William J. Holstein Cesare R. Mainardi Jeffrey Rothfeder
klotnia@optodesign.com eitzen@optodesign.com Susan Cramm David K. Hurst Eric J. McNulty Michael Schrage
Ken Favaro Jon Katzenbach Gary L. Neilson Thomas A. Stewart
Jennifer Thai Bruce Feirstein Theodore Kinni Rob Norton Christopher A.H.
jennifer@ Lawrence M. Fisher David Lanceeld James OToole Vollmer
optodesign.com Ann Graham Tim Laseter Matt Palmquist Chrisie Wendin
Sally Helgesen Paul Leinwand Juliette Powell
PUBLISHING
Publisher and Senior Marketing Advertising Director Business Operations Circulation Director Production Director
Business Manager Manager Judith Russo Manager Beverly Chaloux Catherine Fick
Gretchen Hall Charity Delich Tel: +1 212 551 6250 Bevan Ruland Circulation Publishing Experts Inc.
Tel: +1 617 521 8808 Tel: +65 9359 4784 russo_judy@ Tel: +1 973 630 6924 Specialists Inc. cck@publishing
hall_gretchen@ delich_charity@ strategy-business.com ruland_bevan@ bchaloux@circulation experts.com
strategy-business.com strategy-business.com strategy-business.com specialists.com
PwC
Chairman, Head of Global Markets Global and Asia Pacic, Head of Strategy&, PwC US Public Communications
PricewaterhouseCoopers and Services Americas Cluster PwCs strategy Marketing Leader Review
International Ltd. Richard Oldeld Advisory Leader consulting business John Sviokla Ann-Denise Grech
Robert E. Moritz Miles Everson Les Moeller Julie Weidemann
Head of Global Clients, Head of Global Natasha Andre
Industries, and Sectors Europe, Middle East, Consulting Thought
Robert Swaak and Africa Cluster Leadership
Advisory Leader Ivan de Souza
Ashley Unwin
Editorial and Retail Subscriber strategy+business magazine Articles published in

Business Ofces Comag Customer Services contains only paper products strategy+business do not
101 Park Avenue Customer Service Tel: +1 855 869 4862 that the Forest Stewardship necessarily represent the
Council certies have views of the member rms
New York, NY 10178 Tel: +1 800 223 0860 Outside the U.S., come from well-managed of the PwC network. Reviews
Tel: +1 212 551 6222 +1 903 636 4955 forests that contribute to and mentions of publica-
Fax: +1 212 551 6732 Back Issues & Reprints conservation and respon- tions, products, or services
info@strategy- www.strategy- customerservice@ sible management. do not constitute endorse-
business.com business.com/reprints strategyandbusiness ment or recommendation
Tel: +1 703 787 8044 .info for purchase.
Scan this QR code with Design Services
your smartphone reader Opto Design Inc. Permissions www.strategy-
to get the s+b iPad app. 150 W. 28th Street, 704 www.strategy- business.com/
New York, NY 10001 business.com/press/ subscribe
Dont have a reader? Tel: +1 212 254 4470 permissions-faqs
Search for QR info@optodesign.com Tel: +1 973 630 6924 strategy+business
code reader in your P.O. Box 8562
app store. Big Sandy, TX 75755
strategy+business (ISSN 1083-706X) is published quarterly by certain member rms of the PwC network. 2017 PwC. All rights reserved. PwC refers to the
PwC network and/or one or more of its member rms, each of which is a separate legal entity. Please see pwc.com/structure for further details. Mentions of
Strategy& refer to the global team of practical strategists that is integrated within the PwC network of rms. For more about Strategy&, see strategyand
.pwc.com. No reproduction is permitted in whole or part without written permission of PwC. strategy+business is a trademark of PwC. Postmaster: Send changes
of address to strategy+business, P.O. Box 8562, Big Sandy, TX 75755. Annual subscription rates: United States $38, Canada and elsewhere $48. Single copies
$12.95. Canada Post Publications Mail Sales Agreement No. 1381237. Canadian Return Address: P.O. Box 1632, Windsor, ON, N9A 7C9. Printed in the U.S.A.
BREAKING
CONVENTION,
SPARKING
INVENTION
Since its founding, MIT has fostered a spirit of ingenuity and creative disruption. As a result, our faculty and students
are behind some of the worlds boldest inventions and innovative companies. Thats also why thousands of executives
and senior managers from around the globe come to MIT Sloan Executive Education every year seeking hands-on
experiences that can help them catalyze revolutionary change at work and in life.
Breakthrough business thinking is happening within your reach. Enroll now in these upcoming programs:
Leading People at Work: Strategies for Talent Analytics

July 1112
The Good Jobs Strategy: Delivering Superior Value to Customers, Shareholders, and Employees
July 1819
Supply Chain Strategy and Management
July 2526
Developing a Leading Edge Operations Strategy
July 2728
Driving Strategic Innovation: Achieving High Performance Throughout the Value Chain
September 2429 executive.mit.edu/sb
8
leading ideas
Ideas
Leading
Illustration by Federico Jordn

leading ideas
Augmented Reality
Comes to Retail
The Pokmon Go craze may have faded, but it provides
clues for retailers using technology to engage consumers.
by Kamil Klamann and Sekoul Krastev
I
n the summer of 2016, pedestrians on New Yorks Fifth Avenue encountered
9
crowds of (mostly young) people, hastily running into Central Park, smart-
phones in hand, shouting out Pokmon character names and cross-street loca-
tions. Within weeks of its release on July 6, 2016, the Pokmon Go app at-
tracted 40 million daily active users and created a level of in-app engagement that
Facebook could only envy.
The Pokmon Go fad has faded, but it holds important lessons for companies
intent on reaching and engaging consumers where they are, especially retailers: The
game, the rst truly social augmented reality (AR) experience, enthralled a new
breed of omniconnected consumers as nothing else had done previously. The people
who embraced the augmented reality of Pokmon Go inhabit a world where the line
between real and digital is so blurred that they essentially became one and the same
constantly augmented and improved by invisible technologies. And they are
hungry for better, more personalized experiences.
AR, which has been around since the late 1960s, has long lived in the shadow
of virtual reality (VR). Whereas VR wants to transport us to a new virtual world
that provides unique immersive experiences, AR brings these experiences to the
world we already inhabit. For example, IKEA has released an AR app that allows
shoppers to place digital furniture and other products from the catalog into pictures
of their rooms at home. But for the most part, the early ambitions of AR have not
borne much commercial fruit. AR features have generally lived inside retailers
stand-alone apps that consumers didnt want to download. Moreover, Google Glass,
which was perceived as socially awkward, failed miserably. The AR ecosystem has
lacked a shared platform with mass acceptance that, like Googles ad network, al-
lows brands to simply plug in and thus removes the consumer friction of download-
leading ideas
ing individual apps. And there was no killer use case to make AR popular and,
more important, social until Pokmon Go.
The Pokmon Go craze has opened consumers minds to similar experiences
that will take place in a more connected future. New forms of augmented reality
will allow brick-and-mortar retailers to take todays showroom experiences to the
next level, creating unique encounters that blend digital and physical shopping.
Today, a few farsighted retailers are in the rst, introductory phase of apply-
ing AR to the shopping experience. On a range of independent platforms, these
companies are experimenting, trying to understand their audiences and grasp how
10
their brands t into this new environment. As the eld enters its growth phase in
the next two to three years, it will consolidate into a few dominant players, and
companies must gure out what distinctive offerings they can produce and how to
integrate them into omnichannel strategies. Once the medium matures in four to
ve years, AR will become table stakes for retailers and brand marketers, and com-
panies will have to determine how they can curate bespoke content and create
unique experiences in this new medium. Over the long term, it is clear companies
must use AR to lead customers through four stages: creating awareness; increasing
consideration; converting customers at key decision and purchase points; and
building enduring loyalty.
Creating awareness. AR represents a singular opportunity for retailers to de-
velop a more rened level of targeting based on demographic proles, past in-store
behavior, and live recommendation engines. Much of this will involve linking loca-
tion tracking with advertising delivered to smartphones. For example, Tom typi-
cally buys a US$4.99 gel laundry detergent. Target could display an AR ad on Toms
phone of a new, more powerful $5.99 gel suited to similar laundry needs, instead of
posting a generic static endcap display for laundry powder.
Virtual shopping assistants are another likely use case. In 2013, IBM launched
an AR shopping app that provided shoppers instant product details and comparison
when they pointed their smartphone at the grocery shelf, allowing them to sort the
strategy+business issue 87
products there by nutritional value, highlight gluten-free or organic options, and

display coupons. Retailers can use the same app for shelf stocking. In 2014, Tesco
employees tested IBMs AR app to report out-of-stock products and instances when
conditions on shelves didnt comply with display plans.
leading ideas
As AR becomes more powerful, we are likely to see a higher degree of person-
alization of in-store product recommendations. Perhaps pointing your smartphone
toward a shelf in a clothing store will not only provide information about the origins
of the wool in the cashmere sweater, but also reveal special deals that are tailored to
your prole such as a discount in advance of the ski season.
Ultimately, as AR integrates with big data and machine learning, we will see
intelligent personal shoppers that can provide consumers with information, recom-
mend products, and even look for special bundle deals and coupons, depending on
the consumers preferences and behaviors.
11
Increasing consideration. Consumers, driven by their online shopping experi-
ences, already expect a high level of engagement. In years to come, these expecta-
tions will grow, pushing physical retailers to deliver memorable interactions at every
touch point.
Virtual try-on experiences are the rst step that brands have taken toward
using AR to raise customer engagement. In 2014, LOral released its Makeup Ge-
nius app, which allows shoppers to virtually try on different shades of blush and
mascara before making a purchase decision. Once the makeup is applied on the
face through the smartphone camera,
As AR becomes more the LOral facial recognition system fol-
powerful, we are likely to lows face movement and angles, show-
see a higher degree ing what the makeup would look like
of personalization of in-store from different perspectives. By early
product recommendations. 2016, Makeup Genius had been down-
loaded more than 20 million times. And
it has inspired similar efforts from innovators such as Meitu, a Chinese company
that built a range of try-on apps for makeup, hair, and fashion; the app has been
installed on more than 1 billion unique smartphones.
As AR matures, we will start to see applications that combine the online and
ofine environments. Ultimately, retailers will have to think hard about what the
ideal shopping experience is like, regardless of the medium. People could experience
Nespresso machines in-store, surrounded by the aroma of freshly brewed coffee.
Then, using an AR app and photos of their kitchen at home, they could see what the
machines would look like on their countertop, customizing colors to see which best
leading ideas
matches the backsplash, order the machine with a single click, immediately subscribe
to monthly shipments of assorted coffee pods, and request warranty support.
Converting consideration to action. Although Pokmon Go showed ARs abil-
ity to drive foot trafc, AR has yet to prove its mettle in converting consideration
into purchase. This may be the biggest challenge AR will have to tackle to be able
to provide return on investment.
Technologies such as Googles Tango platform will come to help. Tango en-
ables mobile devices to be more sentient about the world around them, understand-
ing the environment theyre situated in, including space, orientation, and motion,
12
without using GPS. In March 2017, Lowes Innovation Labs announced Vision, its
in-store navigation app, leveraging Googles Tango for indoor mapping. Now Lowes
customers with Tango-enabled smartphones can search for products, add them to
shopping lists, and locate the product within the store using augmented reality.
Chinas largest online grocery store, Yihaodian, created more than 1,000 vir-
tual shops in public places. Shoppers can use the companys AR app to browse prod-
ucts and make purchases that are then delivered to their homes. Similarly, upon
pointing a smartphone at a Nike ad in Runners World, a user can jump straight to
the shopping cart on Nikes website.
As AR becomes integrated with other technologies such as beacons
Bluetooth-enabled devices that can communicate with nearby shoppers smart-
phones we are likely to see localized and personalized coupon offers at key pur-
chase points within the store aisle or at the checkout counter. The ultimate goal will
likely be fully automated and personalized one-to-one marketing that seamlessly
tracks shoppers movements on- and ofine, offering engaging AR experiences at
critical decision-making points.
Building enduring loyalty. The more adept a company is at creating loyalty, the
more sustainable its marketing efforts are in the long term, and the higher an ROI
it can ultimately achieve. Further, repeat customers tend to spend 60 percent more
per transaction than rst-time customers. AR affords opportunities for loyalty pro-
grams that are otherwise unattainable.

The current generation of apps already allow stores to integrate AR with
existing programs, bridging the gap between the online and in-person experi-
ences of shoppers. For example, Walgreens Aisle411 app allows shoppers to dis-
purpose
noun \`prps \
That moment I realized I could

impact my companys success
no matter what the challenge.
upcoming strategy
& innovation programs
Dene your Wharton moment. NEW Mastering Innovation:
The Strategy Programs at Wharton Executive Education will From Idea to Value Creation
set your direction and make your purpose clear. You will jun. 1115, 2017 san francisco
learn from world-renowned business leaders and academic
Creating and Implementing Strategy
strategists. You will discover the most effective pathways to
jun. 1216, 2017 sep. 1822, 2017
overcome current challenges. And when you leave, you will be
poised to help your organization achieve immediate growth. NEW Effective Execution
Become the competitive advantage. of Organizational Strategy
sep. 2529, 2017
execed.wharton.upenn.edu/strategy The Strategic Decision-Making Mindset

nov. 1417, 2017
leading ideas
cover products and deals in-store as well to collect loyalty points by exploring the
stores aisles.
As shoppers become more acclimated to the idea that AR can improve their
shopping experience, we will likely start to see greater integration between the digi-
tal and face-to-face experiences. This, in turn, will allow brands and retailers to
create customized loyalty programs that correspond to a shoppers exact interests as
well as their online and ofine behaviors. Imagine heading into a supermarket and
having an application on your phone that suggests products based on your past pur-
chases, one that can also seek out the best deals based on how often youve pur-
14
chased that brand before.
As AR and other technologies mature, stores will gain a much better idea of
shoppers behaviors. This will allow them to use loyalty programs in a far more tar-
geted manner, encouraging the exact behaviors that lead a specic shopper to the
counter. A thrifty consumer might enable a setting on an app that allows the shop-
ping assistant to lead him or her through specic aisles of a supermarket that have
been incentivized by a brand.
Augmented reality clearly has the power to transform retail. However, it will
pay dividends only if stores and brands learn how to translate foot trafc into de-
sired action and become seamlessly integrated into the experience. And although
Pokmon Go itself may have been a fad, it probably will not take long for another
(better and more ambitious) platform to emerge and ll the social AR space.
To be sure, some skepticism is warranted. But in the 21st century, paradigm
shifts that used to take years now routinely happen in months. Just as retailers came
to rue not investing earlier in e-commerce, or a Facebook presence, or mobile pur-
chase apps, they may regret not investigating the potential of AR more aggressively. +
Reprint No. 17201
Kamil Klamann Sekoul Krastev

kamil.klamann@pwc.com sekoul@gmail.com
advises retailing and consumer is vice president of product man-
brand companies on growth and agement at iGotcha AR/VR, an

innovation strategies for Strat- interactive agency based in Mon-
egy&, PwCs strategy consulting treal focused on creating immer-
business. Based in New York, he is sive experiences and engagement
a senior associate with PwC US. strategies for Fortune 500 brands.
leading ideas
Connecting the Dots
from Brand to Demand
The best consumer strategies start with knowing
where and why people shop for your product.
by Emre Sucu, Matthew Egol, and Edward Landry
T
he notion of a typical consumer, one whose gender, age, ethnicity, and
15
zip code can be used to make reasonably accurate assumptions about
purchasing behavior, is a thing of the past. The most predictable char-
acteristic of todays consumers may actually be their variability
theyll choose different brands depending on where they are shopping and the
occasion they are shopping for. This trait is a logical extension of todays retail
environment: Many consumer packaged goods (CPG) categories now consist of
hundreds of brands, and new niche products launch every week. People can shop
at supermarkets, warehouse stores, convenience stores, and a huge array of e-
commerce sites. And there are far more ways for marketers to engage with shop-
pers, including mobile apps and social media.
Given this complexity, its more critical than ever for brands to nd consum-
ers in the moment. Doing so requires a more integrated view of what drives
choice, one that isnt tied to one-
Finding consumers in the dimensional demographics or a nar-
moment requires a more rowly dened need. Companies have
integrated view of what to combine a deep knowledge of who is
drives choice, one that isnt shopping, and when, and where, and
tied to one-dimensional why, with an understanding of the
demographics. emotional and functional benets of
their products. As you make those con-
nections, you gain insight about the specic situations, or demand windows, in
which consumers want or need to make a purchase. These windows open and
close based on different factors at different times. Someone shopping for sand-
wich ingredients may choose one brand of deli meat when planning a childs
leading ideas
Exhibit: Anatomy of a Demand Window

Brand selection is dependent on consumers using a particular channel to shop for a specific
occasion.
Why Where
What motivates
What Where do
consumers in the Which brand best consumers shop
moment? meets the needs of for the occasion?
the consumers
across all three
dimensions?
16
Who
How does decision
making vary by
consumer segment?
Source: Strategy&
school lunch during a grocery store trip, but another when stopping at a deli to
prepare a quick, healthy snack at home. Context is everything.
Demand windows create opportunities to drive better targeting and engage-
ment along the path to purchase by more directly linking brand, consumer, chan-
nel, and occasion (see exhibit). The concept is gaining traction among CPG lead-
ers, but its equally relevant across industries: Nearly every company needs to
understand the way people evaluate products and make decisions. Yet the concept
will have value only if it changes the way companies execute their strategy. Theyll
need to identify those windows that are most promising for their brands, and
then make changes in how they market and sell their current products, as well as
develop new ones. The companies that get it right will dramatically improve the
way they interact with consumers.
Past Is Prologue
A look at two large retail categories reveals how demand windows work in
crowded markets. The rst is beer, a category with a wide range of brands,
leading ideas
styles, and price points. Some consumers prefer an easy-to-drink domestic
beer when watching a football game at home but upgrade to a more complex
craft brew that pairs well with a meal at a restaurant. The second is diapers,
another category rife with options. Some consumers will buy a premium natu-
ral brand of diaper for a newborn, and then focus on durability when their
child begins crawling.
The retail channel and specically the range of available options at a
given location also affects shoppers decisions. Consumers may go to a large
upscale grocery chain with a huge selection of craft brews over the weekend, but
17
then stop after work at a local corner store with a much smaller selection. Con-
sumers may always pick up a jumbo pack of diapers at the big-box store or when
buying online, but, knowing the per-diaper price is high, will look for a small
package at the convenience store when theyre in a pinch.
Companies learn about consumers penchants and practices by looking at
data on what theyve bought in the past. That data, and the ability to mine it for
useful insights, enables companies to understand the demand windows for their
products. Only a decade ago, companies looked primarily at consumer surveys.
Today, they still look at survey results. But they can overlay that information with
detailed data about consumers online behavior their browsing history, pur-
chases, online reviews, and social media activity plus metrics that track their
behavior inside physical stores.
The good news is that the technology required to identify demand windows
is not cutting-edge. In other words, seeking out demand windows isnt the same
as chasing the next shiny thing in digital marketing technology. To be sure, you
need strong analytics capabilities or you risk falling behind. But you can build
these capabilities by applying established quantitative marketing techniques in
innovative ways that integrate and exploit a broad set of data sources.
The Execution Challenge

To implement a strategy based on demand windows, start with the following
three steps:
1. Identify your ideal windows. Any given product has a long list of potential
demand windows, but only a select few are the right choice for your company.
leading ideas
The winnowing process begins with a

clear understanding of your companys
own capabilities. There will be specic
things that your brand is known for
and that your company does best,
whether its new product development,
innovative packaging, or something
else. Certain demand windows will
naturally be a better match with these
18
areas. For example, a craft brewer might
specialize in creating new beers with
higher alcohol content. Many beer drinkers in that region undoubtedly buy
canned beer on sale at the convenience store before local sporting events. But the
brewer would rightfully decide not to compete in that market. The capabilities t
just isnt there.
At this early stage, you also need to make sure that the market size of a par-
ticular demand window is sufcient to justify the effort required to target it with
current products or to develop new ones for it. Analytics can help you gauge the
potential prot available from various options, through market simulations, sce-
nario modeling, and other similar tools.
2. Tailor your sales and marketing approach. A detailed understanding of
demand windows allows you to engage consumers in a way that a company using
old segmentation approaches cannot. The right channel and marketing strategies
can help you engage the consumer at the right places and times, resulting in more
authentic connections and higher sales.
Consider, for example, promotions and other related content that create a
more personalized experience for consumers rich and relevant to their specic
interests. One company recently developed a new type of scissors, which it mar-
Illustration by Phil Marden
keted and sold through separate campaigns aimed at craft hobbyists, students,
and ofce workers. The company tailored its channel and marketing strategies,
including decisions about which stores to sell in, promotions, coupons, packag-
ing, and digital advertising, to serve these different consumers and their different
occasions. It even segmented user reviews to ensure that hobbyist consumers, for
leading ideas
example, saw only the reviews from hobbyist users. The result was a huge in-
crease in sales compared with previous product launches.
Once you have used demand windows to shape your sales and marketing
strategy, employing analytics enables you to measure the results of specic initia-
tives more accurately. For example, your company might run thousands of pro-
motions in a given year. By staging experiments, such as testing new copy on a
digital promotion aimed at a specic demand window and quickly gauging the
results, you can improve the effectiveness of your next promotion in weeks, rath-
er than months.
19
3. Innovate to create new products and services. Beyond improving market-
ing strategies for current products, demand windows can help companies develop
new products. They are able to create products with the features consumers want,
delivered in the right context to enhance their emotional connection, rather than
simply making incremental improvements. For instance, if a diaper manufac-
turer with strong capabilities in sustainable manufacturing identies a demand
window for new parents looking to reduce their impact on the environment, the
company can focus its innovation efforts on minimizing materials and offering
recyclable or biodegradable packaging.
Analytics will guide your efforts here. At a micro level, analytics can help
you more precisely target innovation opportunities for your brand at the intersec-
tion of consumer, channel, and occasion that is right for your business. Youll be
able to more accurately predict what product to develop, and which consumers
are more likely to purchase it. On a macro level, you can use analytics to better
track your return on innovation investment through metrics such as time-to-
market and R&D productivity.
Windows of Opportunity
To see how companies can bring it all together, using demand windows to con-
nect with consumers and drive growth, consider a deli meat company that has
strong capabilities in product packaging. It identies parents looking to buy
healthy products for their kids lunches as a high-potential demand window. Tar-
geting this group of consumers requires a different approach from what the com-
pany would use if just considering simple demographics, for example, What do
leading ideas
kids of a certain age like to eat? or What are regional lunch meat preferences?
Given its expertise, the company could focus on developing kid-friendly
lunch packages. It would target traditional grocery stores, where many families
do their big weekly shopping trip, cre-
Demand windows enable ating in-store displays highlighting the
companies to nd the fact that the product is small enough to
consumers most likely to t in a lunch box, easy to open, appro-
want their brand. priately portioned, and healthy. The
company could then run promotions
20
timed to the beginning of the school year, or over the weekend when parents are
shopping for the coming school week.
The company could also create original content to engage potential consum-
ers in the demand window, delivered through digital channels for instance,
healthy recipes or blogs that tackle subjects such as dealing with picky eaters. To
boost engagement, it could create a social media campaign, such as asking parents
to send in pictures of the empty lunch boxes their kids bring home after school,
indicating that the product was a hit.
In a crowded eld, demand windows enable companies to nd the consum-
ers who are most likely to want or need their brand. Rather than offering quick
wins, they can help companies develop a more sustainable source of competitive
advantage that will bring growth and protability. For company leaders, the mes-
sage is clear: The consumers looking at your products online or on the shelf are
individuals, with preferences shaped by who they are, where they are, and what
they want or need at a moment in time. The more you think about them in this
light, the more attractive your brand will become. +
Reprint No. 17202
Emre Sucu Matthew Egol Edward Landry

emre.sucu@pwc.com matthew.egol@pwc.com edward.landry@pwc.com
is an advisor to executives is a thought leader in digital is a leading practitioner in mar-
in growth and go-to-market strategy with Strategy&s keting and sales strategies for
strategies for Strategy&, consumer markets practice. Strategy&. Based in New York,
PwCs strategy consulting Based in New York, he is a he is a principal with PwC US.
group. Based in Chicago, he principal with PwC US.
is a director with PwC US.
leading ideas
Why Good Employees
Do Bad Things
Kelloggs Maryam Kouchaki on understanding
and avoiding ethical breakdowns.
by Laura W. Geller
F
or outsiders observing a scandal at a company or organization, the situ-
21
ation often seems implausible or incomprehensible. How did leaders let
it happen? Why did so many people go along with the wrongdoing?
And why did it go on for so long?
The view from inside a scandal-plagued organization is considerably differ-
ent. We know that, in business as in life, good people sometimes do bad things
whether its a small lie or a giant fraud, a one-time act of dishonesty or an ongo-
ing deception. Maryam Kouchaki, an assistant professor at Northwestern Univer-
sitys Kellogg School of Management, has made understanding this phenomenon
a prominent theme of her academic career. After studying physics as an undergrad
Photograph courtesy of Kellogg School of Management at Northwestern University
in Tehran, and earning an MBA

along the way, Kouchaki came to the
U.S. in 2007 to pursue a Ph.D. in or-
ganizational behavior at the Univer-
sity of Utahs David Eccles School of
Business. After two years as a post-
doctoral fellow at the Edmond J. Safra
Center for Ethics at Harvard Univer-
sity, she joined Kellogg in 2014.
Kouchaki studies the causes of
unethical behavior, with a particular
focus on how psychology and human
nature come into play. Shes found
that anxiety-inducing music makes
Maryam Kouchaki people more likely to cheat, for ex-
leading ideas
ample, and that cheaters are more likely to have fuzzy memories of their mis-
deeds. But shes not simply interested in documenting and diagnosing our fail-
ings. In Kouchakis view, we humans may be hardwired to react and behave in
certain ways that may not always make us proud, but we are by no means a lost
cause. And so she looks for interventions that can help people behave morally and
become emboldened to speak up when they witness wrongdoing.
Kouchaki has also researched how ethical breakdowns affect individual em-
ployees and organizations. As she explained in a recent interview with
strategy+business, because people (herself included) spend a large amount of their
22
time at work, their actions there are closely intertwined with their identity. Thus
even a small unethical request can have signicant implications. The result can
be a vicious circle one that Kouchaki strives to make more virtuous.
S+B: What can make people more susceptible to ethical lapses?

KOUCHAKI: When we look at scandals retrospectively, we can always identify a
number of contributing factors. They may be subtle and even sometimes seem-
ingly irrelevant, but can have profound effects on individuals moral behavior and
decisions. We are all susceptible to dishonesty; it can happen to any one of us at
any level, in any type of organization.
For example, I often hear from employees that they feel exhausted and
stressed. Their anxiety may come from managing unrealistic goals. It can result
from performance pressures or competition. Or it could be that their organiza-
tion is going through a transformation with many unknowns.
Under normal circumstances, people think rationally about benets and
costs when making decisions. But when people feel pressured, it can deplete the
resources they need to act morally and resist temptations. It can put them in a
state of threat. And when people are in this position, they are more likely to en-
gage in self-interested behaviors that they would otherwise avoid. Because in that
moment, the brain goes into defensive mode people are thinking only about
their benets in the short term.
In one experiment, my colleague [UNCs Sreedhari Desai] and I had some

participants listen to anxiety-inducing music, and others to more calming or neu-
tral music, while playing a game. We found that those who were listening to
leading ideas
anxiety-inducing music were more likely to cheat. In another study, we asked
participants to think about a time when they felt pressured and anxious. Even
just recalling those instances made people more likely to be dishonest. Elsewhere,
through survey data from supervisors and employees, we found a correlation be-
tween those who describe a higher level of anxiety and those who were reported
by their managers to have engaged in unethical behavior.
S+B: Corporate scandals often reveal a pattern of unethical behavior. What

drives people to be dishonest repeatedly over time?
23
KOUCHAKI: This is an area of research that we dont know much about, espe-
cially when it comes to organizations. One assumption could be that there are
bad people, and that those people, no matter what, do bad things. But the notion
that only bad people behave unethically is false.
Theres been research on unethical organizational cultures, and obviously
such cultures sustain repeated bad behaviors. Other research has shown that there
are various things people might do to overcome the dissonance they feel when it
comes to dishonesty. Among the more powerful is justication: They justify their
bad behavior, for example, by dehumanizing the victim of their dishonesty.
I set out to determine if it is also possible that this dissonance leads people
to forget about what theyve done. And, in fact, in a number of studies [with
Harvards Francesca Gino] weve
Over time, peoples memory found evidence for what we call un-
of their past unethical actions ethical amnesia. Over time, peoples
becomes less detailed and memory of their past unethical ac-
less vivid compared to other tions becomes less detailed and less
types of actions. vivid compared to other types of ac-
tions [that are positive or more neu-
tral]. We gave people the opportunity to cheat in a game; if they misreported
their performance, they could earn more money. A few days later, we asked
them to recall the details of the game. We found the memories of the partici-
pants who cheated were less clear than those who did not. This motivated for-
getting helps people to eliminate or reduce feelings of threat, and in so doing,
the distress and dissonance.
leading ideas
S+B: Youve also studied how the dark side of creativity can
contribute to dishonesty.
KOUCHAKI: Encouraging creativity is critical for organizational learning and in-
novation. However, we have to think about what else comes along with creativ-
ity. For example, it can create a sense of entitlement, a feeling that I deserve
more than others. In some ways, other peoples behavior reinforces this feeling
in creative people. We treat them as special, and we hold them to a different stan-
dard. Then, when people think they are special, they start to think they can
break rules and not be punished. There is a link between feeling entitled and
24
being dishonest.
In one study [with Syracuses Lynn Vincent], we asked participants to ll out
a survey that gave them feedback about their personalities. Some were told they
were creative and others practical [dened for the purposes of the study as
non-creative]. We then randomly assigned each participant to one of two groups
where their respective personality was rare or common. When we asked partici-
pants to complete a task in which they had opportunity to lie, people who were
identied as creative and who were rare in their group were more likely to behave
unethically than creative people in a group where everyone was creative. Practical
people were less likely to lie than were creative people, and also behaved the same
whether they were with other practical people or with creative people.
To avoid this phenomenon, leaders should establish what types of risk-taking
or rule-breaking behaviors are acceptable, and warn against ignoring moral guide-
lines. And they should emphasize the idea that creativity is something everyone
can tap into a skill people can learn.
When creativity is seen as common, it doesnt necessarily lead to creativity
also being seen as less valuable. It is still celebrated. But when we think we are all
creative or can become creative and encourage that mind-set, it reduces feelings
of entitlement and dishonesty.
S+B: What happens when employees are pressured to cut ethical corners?
KOUCHAKI: Lets say Im an employee and I feel pressured to behave badly at
work. Im more likely over time, as a defensive strategy, to segment my identity.
We each have multiple identities that we could be at any moment. When our
leading ideas
identities are integrated, they are in sync. When our identities are segmented, we
feel like our various selves are in conict.
For example, Ive found that just receiving requests from managers to do
something unethical, and contemplating such requests, can inuence employees
motivation and performance. Being asked to lie, cheat, or otherwise behave un-
ethically doesnt just inuence your morality, it also inuences the meaning of
your work. And this is important, because if people see their work as meaning-
less, they will become disengaged and unmotivated to improve and more
likely to do bad things. Moreover, they would want to have their home life and
25
their work life separate, thinking, If I integrate my identities, I would feel badly
all the time.
S+B: Disengaged employees may not be motivated to speak up when they wit-
ness wrongdoing. How can leaders counter that effect?
KOUCHAKI: Corporate scandals show peoples reluctance to speak up about un-
ADVERTISEMENT
How to Guarantee Employee

Development is Exceeding Expectations
developments has been a The Project StepTracker system provides
priority for Mr. White since your team with a large-scale overview of the
he took on the position in entire project development process, using color-
early 2016. Before I took on coded magnets to indicate whether or not a
the role, our projects were milestone has been met.
primarily tracked using some In Mr. Whites case, projects are listed
form of an online spreadsheet. down the left side of the board with individual
It was a little bit difficult to milestones running across
understand how far along the top.
we were in the development I actually have my Project StepTracker
process because people would hanging above my desk. Its a permanent
rarely post updates, leading reminder of how were progressing on a project.
to communication errors. Ill have team members come in and out
Whether it was forgetting during meetings and take a look at how were
O
ne of the biggest responsibilities to update something, or progressing. Right now, we have a whole lot of
Matthew White, Director of Programs the software not syncing properly, it wasnt green and yellow magnets running from left to
at the Zygo Corporation, faces on a something that worked for me. right so I know what our current status is.
daily basis is the overseeing of projects from the Looking for an alternative solution for With the Project StepTracker outlining the
early stages of development to the moment they tracking project management milestones, Mr. development cycle from start to finish, Mr.
are purchased by a customer. White contacted the team at Magnatag Visible White believes that project management and
As Project Managers, we all know that Systems to help find the best-suited tool for communication will be streamlined as his team
business proposals often undergo numerous the Project Management team. Tasked with heads into the new year.
iterations before reaching the final product. All finding something that was not only visually
the while, its the responsibility of people like engaging, but also built to manage a number of
Mr. White, to ensure important steps of the developing projects, the Magnatag Sales team
development process do not fall behind. recommended the StepTracker magnetic dry
Ensuring that every member of the team erase system. 800 624 4154 | magnatag.com/ddxt
is on task and in the know with the latest sales@magnatag.com
leading ideas
ethical behaviors in the workplace. Ive been very interested in the question of
moral muteness and am working on a number of projects that examine solu-
tions. Interestingly, given my research about creativity and entitlement, Im cur-
rently working on a project that shows how encouraging creativity can also lead
to speaking up. Creativity is about engaging in behaviors that are outside of
convention and require the appearance of condence. In this way, creativity not
only helps individuals think outside the box but also helps them speak outside
the box.
Another factor Ive looked at is authenticity. We discussed earlier why people
26
may behave badly when they feel pressured. When their key resources are threat-
ened or lost, they experience stress and fear, and they become defensive. They are
in survival mode. Employees need the psychosocial resources to balance the typ-
ical psychological barriers to doing the right thing, and to feel encouraged to
speak up.
Authenticity has been shown to be such a resource. It is about owning your
personal experiences, thoughts, feelings, preferences, and beliefs and behaving
according to ones true self and personal values. And its about people discovering
and expressing their true self regardless of other peoples concerns. The litera-
ture has shown the psychological benets of authenticity. It leads to self-esteem,
hope, and other personal, positive effects. In my research, Ive found that encour-
aging authenticity can also lead people to speak up, to feel less stressed, and to
engage in better behaviors. And Ive found that integrated identities lead to great-
er feelings of authenticity and better moral behavior, compared with segmented
identities, which lead people to feel less authentic and thus to a higher likelihood
of behaving unethically.
S+B: How can people stay authentic?

KOUCHAKI: Im working on a study now in which employees complete a simple
exercise early in the morning [in which they think about their personal values
and beliefs and their true self]. For two weeks, I have them respond to three dif-
ferent surveys daily that ask them to reect on their activities and experiences. I
dont have that data yet, but Im very optimistic that it will be an effective way to
help people to stay authentic.
leading ideas
When I teach my MBA students about ethics, I focus on self-reection
actively recognizing when one does something wrong or right. Of course, ad-
mitting, even to ourselves, that weve done something bad is difcult. For real
learning to happen, leaders have to make people feel psychologically safe. Em-
ployees need to believe that their team and their organization are places when
they can learn from their mistakes, and even from their moral failures. +
Reprint No. 17203
Laura W. Geller 27
geller_laura@
is senior editor of
strategy+business.
: Meet the next generation of business thought leaders

at strategy-business.com/youngprofs.
leading ideas
Us versus Them: Reframing

Resistance to Change
How to bridge the gap between those who champion
transformation and those who challenge it.
by Elizabeth Doty
A
nyone attempting to lead change in an organization knows to expect
28
some resistance. Change is not a rational process; no matter how posi-
tive the future you are creating, its natural for humans to struggle
with it.
Such resistance is no less frustrating for being predictable. At times, it can
seem that all that stands between you and your goals is a few naysayers and whin-
ers. And to those on a mission, such reactions can seem like putting ones head in
the sand. The old business is not coming back, one CEO told me. We have to
innovate or we will die. Faced with negative remarks, critical questions, or stony
silence, change champions naturally begin to interact more with those already on
board, consciously or unconsciously distancing themselves from those who dont
get it.
Gradually, a wall begins to form between us and them champions who
support the change, and resisters who openly or quietly oppose it. Unfortunately, ap-
proaching change with an us versus them mind-set actually increases pushback.
When we think of people as resisters, we dont truly engage with them. We tend to
discount their perspective, assuming that if we are right, they must be wrong.
In reality, each side is paying attention to different things, says Robert
Jake Jacobs, an expert in polarity management a method for dealing with
chronic issues in organizations and groups. Change champions tend to pay atten-
tion to the upside of their future vision and the downside of todays status quo.
For example, those who are passionate about customers are hyper-focused on
building relationships for the long term. To them, resisters seem greedy or blind.
Conversely, resisters pay attention to the downside of the change and the
upside of the current state. They see the risks. When change champions refuse to
leading ideas
29
discuss an issue, resisters assume they are hopelessly naive or sinister actors trying
to pull the wool over everyones eyes. To them, it can seem scally reckless to
divert attention from the nancial aspects of the business to softer issues such as
customer experience. Which of them is right? They both are, says Jacobs. But
each is only half-right.
In the worst-case scenario, us versus them thinking devolves into factions
that compete but never really engage. According to Robert Fritz, author of The
Path of Least Resistance for Managers (Newfane Press, 2011), the result is an oscil-
lation between changes, rather than real advancement. Companies swing back
and forth, from centralization to decentralization, acquisition to divestiture, cus-
Illustration by Richard Mia
tomer focus to shareholder focus, he explains. Its like a rocking chair: lots of
movement, with very little progress.
The solution is to reframe how we think about resistance. Rather than as-
suming critical thinkers are resisters, we would do better to treat them as guard-
ians. Guardians see what needs to be protected, and the trust that can be de-
leading ideas
stroyed by a broken promise or a shortcut. Who else will ask the hard questions?
Guardians keep us honest in the face of self-delusion or blind spots. For example,
one executive I worked with learned that his frontline professionals were con-
vinced that new data he wanted to capture would be used in a punitive way. He
had no intention of using it that way, and had dismissed their concerns as ridicu-
lous. But, in fact, he had provided no assurances to the contrary, and such abuses
had occurred in the past. From the employees point of view, he later acknowl-
edged, the questions were legitimate. Seeing this, he gave them practical assur-
ances and backed them up over time through his actions.
30
When you approach guardians as responsible, thinking adults (who have
imperfect information and biases, just like you), you demonstrate genuine re-
spect. You gather input, not as a way to get them to buy into the change, but
because they have important information you may be missing. Remember Stan-
ley Tucci as the risk management ofcer in the movie Margin Call ? He isnt re-
sisting the new direction out of spite; he knows the risks are too great.
Once you have recognized your guardians, you can turn the wall between
us and them into a bridge. In the getting unstuck process outlined by Jacobs,
you start by asking about the upsides of the current reality. What is important?
What strengths should be protected? What have we promised? Get specic, and
ask for the history. Next, ask about the downsides of the change. What could go
wrong? One manager I spoke with wor-
Rather than assuming critical ried that outsourcing would hamstring
thinkers are resisters, we his company and he had good data
would do better to treat them to support his concerns. In another
as guardians. company, I heard people joking about
the companys new values initiative.
Their worry? That the effort would become hollow. Bringing these risks to the
surface helped the rst company avoid a bad decision and the second to avoid
commitment drift.
Lets be clear: You arent asking for permission to change. You still need to
make tough calls and stand for your values. You will have real differences to work
out. But engaging your guardians with respect gives you greater intelligence,
keeps you honest in the face of dysfunctional momentum, and highlights where
leading ideas
safeguards are needed. Having acknowledged others valid points and planned to
handle the biggest risks, you can add your perspective, highlighting what needs
to change in the current situation as well as the possibilities for the future.
Throughout this process, you will learn about misconceptions and assumptions
to clear up in your communications.
For their part, guardians can do a better job of clarifying what they are pro-
tecting, and articulating it in a constructive way dont just assume change cham-
pions see the risks and dont care. Then, together, you can decide how to approach
the future you want. According to Fritz, We shift from the oscillating pattern into
31
an advancing pattern when we focus on a shared purpose that builds on the things
that work now. For example, one plant manager told me he discovered his employ-
ees were resisting added safety precautions because the procedures made it hard to
respond quickly to customers. Rather than overriding or dismissing them, he used
the tension as a focus for innovation, asking his teams, How might we increase
safety and reliability without sacricing customer responsiveness? This is the kind
of leadership needed to create a successful organization for the long term. +
Reprint No. 17204
Elizabeth Doty
edoty@leadershipmomentum.net
is a former lab fellow of Harvard
Universitys Edmond J. Safra
Center for Ethics and founder
of Leadership Momentum, a
consultancy that focuses on the
practical challenges of keeping
organizational commitments.
essay healthcare
HEALTHCARE
32
Management Lessons
from One Hospitals
Dramatic Turnaround
Putting people at the core is the key to
major improvements in nancial, performance,
regulatory, and quality indicators.
by Eric J. McNulty, Nathaniel Foote, and Douglas Wilson

essay healthcare
A
ssuming the leadership of a 165-year-old institution that appears to
be in long-term decline can be a daunting task especially if it faces
deep-rooted nancial challenges, eroding market position, drops in
quality, a fading reputation, an aging physical infrastructure, and an
inuential cadre of veterans satised with good enough.
This was the challenge Bob Grossman faced when he became the dean and
CEO of NYU Langone Medical Center in July 2007. In the 10 years since, how-
ever, rather than preside over further decline, Grossman has led the institution,
which comprises both NYU School of Medicine and NYU Hospitals, to an im-
33
pressive comeback.
The dramatic turnaround engineered by Grossman offers lessons for any
manager seeking to overcome chronic underperformance. Confronting an en-
trenched, entitled workforce the tenured faculty in an academic medical cen-
ter he and his team succeeded in raising performance standards throughout
the enterprise, while simultaneously increasing staff commitment levels. The re-
sult has been signicant improvements across key nancial, performance, regula-
tory, and quality indicators:
From an operating loss in 2007 of US$120 million, NYU Langone now
earns an operating margin of 10 percent and is investing heavily in infrastruc-
ture, equipment, and people. A new building that includes a childrens hospital is
under construction. The institution continues to expand its ambulatory care for
patients in the greater New York City area. Since 2007, the faculty group practice
has grown from 600 to 2,700 physicians at more than 150 locations, and overall
revenues have more than tripled.
NYU Langone now consistently receives ve stars for overall perfor-
mance and is ranked by U.S. News & World Report as one of the 10 best hos-
pitals in America.
For four years running, NYU Langone received top rankings for overall
patient safety and quality of care from Vizient, formerly the University Health-
System Consortium (UHC).
The medical school has risen in U.S. News & World Reports rankings from
34 to 11 in seven years one of the more rapid increases in the magazines history.
Research grant funding from the National Institutes of Health (NIH) rose
essay healthcare
from $122 million in 2008 to $189 million in 2016, despite NIH funding re-
maining virtually at nationally.
NYU Langone achieved these dramatic results even though it had to con-
tend with several challenges, including the destruction wrought by Superstorm
Sandy in 2012. And although much of the discussion involving the reinvention
of healthcare delivery revolves around technology or new business models, NYU
Langones transformation has had people at its core. Grossman knew that a more
committed, engaged workforce would be the primary competitive factor in a
service-driven, knowledge-intensive business such as healthcare. By focusing on
34
three mutually reinforcing elements, Grossman and his team unleashed the mo-
tivation to excel at all levels across the institution. The elements were (1) creating
belief in an inspiring stretch vision and then translating it into tangible improve-
ments for each area; (2) championing data transparency as a powerful source of
focus and motivation; and (3) committing to upgrading and supporting talent in
key roles.
An Inspiring Stretch Vision

Grossman, educated at Tulane University and the University of Pennsylvania, was
60 years old and a nationally recognized neuroradiologist when he was named
CEO. In his October 2007 investiture speech, just four months into his ten-
ure, he laid out a bold 10-year vision to restore NYU Langone to its status as a
world-class, patient-centered integrated academic medical center. The language
he used was carefully chosen. Integrated signaled the combination of the hospitals
and the medical school, which had been separated in the 1990s as the precursor
to an attempted merger with another organization. It also highlighted the need
for greater collaboration across functional disciplines; department boundaries;
and the three missions of research, education, and clinical care. World-class was
also a signicant term. Grossman was declaring that the institution would be
judged by externally validated standards, and would measure up against the very
best centers of academic medicine places such as Harvard, the University of

Pennsylvania, and Johns Hopkins. In an interview, he later recalled, I wanted to
articulate the vision early and let people know I meant it.
But the gap between the aspirations and reality was glaring. The School of
essay healthcare
Medicine was losing more than $12 million every month on its operations, and
the hospital was not making enough to support the schools losses. Even among
the leadership team, many openly questioned whether Grossmans vision could
actually be achieved, and there was far greater skepticism among the clinicians
and researchers who would be critical
The gap between the to its success. Grossman and the senior
aspirations and reality team had launched an ambitious range
of initiatives, and key leaders across the
was glaring. The School
institution were now working at a fre-
of Medicine was losing netic pace and experiencing overload
35
more than $12 million and conict.

every month. Building belief in the vision was
critical, Grossman said. I also wanted
to show the institution that it was much better than what [critics] perceived, yet at
the same time, [I wanted stakeholders to] embrace the brutal facts. He decided to
engage the leadership team and the broader organization in a structured dialogue
about the vision. The senior team jointly crafted a concise document they named
the Statement of Strategic and Organizational Direction and shared it with the
entire organization, along with a call for input. In addition, a task force of 12 lead-
ers below the senior level conducted condential interviews with more than 100
people, representing a cross-section of the organizations extended leadership.
The unvarnished key ndings from the data were then shared with the se-
nior team. There was good news the great majority of respondents agreed
with the need to transform the organization and viewed the vision as personally
meaningful. However, they also viewed NYU Langone as ill equipped to achieve
any of its strategic priorities, and they were hungry for greater clarity about how
the vision could be achieved. Additionally, respondents saw the organizations
deep silos and the senior teams lack of effectiveness as critical obstacles to success.
In light of the feedback, the senior team focused and reoriented its agenda.
To clarify the path needed to achieve the vision, Grossman drafted a one-page,
50,000-foot strategic road map, providing an overview of the sequencing and
interrelationships among the key initiatives, such as the implementation of an
integrated IT platform, the complete renovation of the emergency department,
essay healthcare
and the introduction of a new medical school curriculum. The senior team then
undertook a 60-day drill-down to develop 10,000-foot plans for each of the
three core missions research, education, and patient care including a view
of the support and coordination requirements from key functions.
In parallel, Grossman and the vice deans responsible for the missions began
meeting weekly to get a broader view of operations, and the entire executive team
redoubled their efforts to improve collaboration and break down silos, focusing
on the potential for integration. Previously, fragmented responsibility between
the medical school and hospitals had made it easy to accept some problems as
36
unsolvable. (A damaged wall from a leaking pipe went unrepaired for six weeks
as the hospital and the School of Medicine debated nancial responsibility.) Con-
solidated responsibility within newly integrated functions such as nance, IT,
and real estate and facilities claried accountability for results, and practical im-
provements could nally be made without bickering.
Integration would also mean working in more cross-functional and multi-
disciplinary teams. So Grossman and his direct reports allocated scarce discre-
tionary funds to make early investments in research centers of excellence such
as brain aging, multiple sclerosis, and skin cancer, forming new collaborations
among researchers from a wide range of complementary disciplines. Similarly,
they designated a short list of strategic clinical areas such as cancer and musculo-
skeletal disorders where they could focus their efforts to combine clinical excel-
lence, translational and clinical research, and a patient-centered approach.
Once the mission road maps and corresponding functional plans were com-
plete and fully vetted, Grossman and the team engaged in a second wave of
broad organizational engagement. In November 2008, about a year after the
original investiture speech, they brought more than 500 key individuals together
to discuss NYU Langones future. In four large group meetings, executives de-
scribed each of the mission road maps and the sequence of strategic steps they
would take to realize the vision. They highlighted the progress that had already
been achieved on key initiatives, including record-breaking fund-raising results

(more than $300 million total in 2008), and gave participants the chance to
share their own assessment of progress. The skepticism that had greeted the ini-
tial announcement was turning to belief. According to Grossman, Other people
essay healthcare
began to say we could be a great institution. We had awakened their imagination
to the possibilities.
Empowerment through Data

In addition to providing inspiration and direction from the top down, Gross-
man was a great believer in the importance of working from the data up. As
chair of the radiology department from 2001 until his promotion to dean and
CEO in 2007, he had seen how data had the power to transform performance.
NYU Langones radiology department had not ranked among the nations top
37
40 in 2001 when Grossman arrived. But Grossman deployed benchmarking to
compare its performance, metric by metric, with that of the top ve departments
in the country, identifying the specic dimensions along which the department
needed to improve. By 2006, the radiology department was considered one of the
best in the country.
Starting in 2008, Grossman In addition to providing
sought to bring the same approach inspiration from the top
to bear across each of the medical
down, Grossman was a
centers departments, the critical
performance units that served as
great believer in the
the focal point for accountability importance of working
for the entire faculty. The leader- from the data up.
ship team charged a task force of
forward-thinking department chairs with addressing the question What would
departmental excellence look like in the context of a world-class, patient-centered
integrated academic medical center? In effect, they were asking the task force
to translate the implications of the vision all the way down to the organizations
most important frontline performance units. Taking input from all the chairs,
the task force highlighted the key dimensions that would dene excellence, the
relevant metrics, and the potential sources of data for measuring progress. Once
these had been agreed to, the information technology department created an
online dashboard. Initially, the dashboard served as the basis for individual de-
partment review meetings among the chair, Grossman, and the vice deans, but
after a year Grossman opened access to the entire dashboard to all the depart-
essay healthcare
ment chairs. It was a single source of truth, Grossman said. I was able to look
at data every day from my ofce and know what was happening throughout the
institution. It did not take long, and soon others were looking as well and making
improvements in their own departments as well as learning from others.
Data transparency was a powerful motivator. Each department chair could
see his or her own progress, and compare it with that of peers. Performance de-
mands were not simply being imposed from the top of the hierarchy. Rather, the
departments set aspirations and could judge their own progress, using metrics
and corresponding data that they had helped dene.
38
Data transparency was an equally potent catalyst in making improvements
in hospital operations and patient care quality. Traditionally, most hospitals in-
cluding NYU Langone had not widely shared clinical outcomes data. Bernard
Birnbaum, the new head of hospital operations promoted by Grossman, formed a
high-level task force on quality aimed at sharing data more broadly. Starting with
a focus on mortality and length of stay, the task force doggedly surfaced the data
and followed where it led, even if it meant having difcult conversations with
some of the most powerful and productive clinicians.
Pursuing data transparency not only gave people a greater understanding of
their own role in the larger enterprise, but also signaled a commitment to meri-
tocracy and demonstrated results.
Supporting People
Grossman recognized that upgrading talent in key positions was a prerequisite
for achieving his vision. But in an academic setting, leaders dont necessarily have
the ability to make wholesale changes quickly. He understood when to move
rapidly and when to have patience with talent challenges. On his rst day as dean
and CEO, Grossman consolidated functional support areas between the medical
center and the hospital. He used it as the opportunity to replace ve of his direct
reports and promote more aggressive managers in their stead.
It was clear that the centers 33 department chairs, who exerted power over
department resources and the career prospects of faculty, were among the most
inuential people in the institution. But there was a challenge. It was typical
for chairs to rise to their position on the basis of their excellence as individual
essay healthcare
researchers or clinicians, or owing to recognition in the broader eld not on
the basis of organizational or leadership skills. Whats more, many of these vet-
eran physicians were entrenched in the legacy mind-sets Grossman was seeking
to change.
Early vacancies in neurosurgery and psychiatry let Grossman establish a new
prole for what sorts of people he wanted to see as NYU Langone department
chairs: those high in emotional intelligence and executive leadership capabilities.
Over time, as he lled positions, Grossman balanced national searches and inter-
nal promotions. Anticipating the need to navigate around some entrenched in-
39
cumbents, Grossman and the leadership team instituted six-year chair terms and
established a faculty committee to redraw department boundaries, for example,
combining parasitology with microbiology.
Grossman matched the heightened expectations of the department chairs
with an increased willingness to invest in their success, upgrading the role and
managerial abilities of the department administrators to ensure each chair would
have a key right-hand person to help in running his or her department. He pro-
vided the resources to recruit the top faculty nationwide in priority areas and to
fund key initiatives. The leadership team created an extensive orientation pro-
gram for chairs who were newly recruited or promoted, and ultimately evolved
it into an in-depth leadership develop-
Over time, Grossman ment program open to all the chairs.
used progress on Over time, Grossman used pro-
gress on department metrics as an in-
department metrics as
controvertible performance standard
an incontrovertible for chairs. Some of them chose to step
performance standard down, appreciating the extent of the
for department chairs. change in expectations for their role.
In other cases, Grossman used the new
term limits to create opportunities for replacement. By 2015, 30 of the 33 depart-
ment chairs had been replaced.
These moves were, in part, a means of addressing an even more difcult,
deep-seated problem low faculty productivity. When Grossman took over,
25 percent of the research faculty were attracting no research funding whatso-
essay healthcare
ever. And the benets structure encouraged lifetime employment, with no of-
cial retirement age.
Grossman and the leadership team established a faculty committee to ad-
dress the issue, fully cognizant that similar committees had been established in
1997, 2004, and 2006, only to wither in the face of faculty opposition. This time,
buttressed by strong backing from the board of directors, leadership maintained
its resolve. If a faculty member objected and tried to make an end run to the
board, then Ken Langone, the chairman, would stand shoulder to shoulder with
me, Grossman said. The faculty learned I had the full support of the board
40
throughout the process.
The committee used external benchmarking to demonstrate that the most
respected academic medical centers had explicit productivity expectations, thus
paving the way for a three-year phase-in of productivity standards at NYU Lan-
gone by 2010. A step down program introduced in 2008 created incentives for
retirement, and 50 faculty members ultimately took the offers. As department
chairs faced increasing accountability for the overall productivity of their depart-
ments, they began to allocate resources such as lab space to reect individual
faculty productivity.
Grossman and the leadership team knew they had the support of the top
quartile the most productive faculty. We needed to convince the great ma-
jority in the middle that they would actually benet from meeting the higher
expectations of a top-performing institution, Grossman said. Early successes in
winning grants, providing additional nancial resources, and improving rank-
ings all contributed to growing support. By taking on the toughest issues, while
slicing them into manageable pieces in order to avoid large-scale confrontations,
Grossman and his team succeeded at winning supporters.
Surviving the Storm

On the night of October 22, 2012, it seemed as though all the momentum built
over the previous ve years if not the institution itself might be swept away
by Superstorm Sandy. Unprecedented storm tides breached the barriers protect-
ing the buildings on the east side of Manhattan, entering NYU Langones base-
ments and knocking out all backup generators. More than 300 patients, many
essay healthcare
in critical condition, were evacuated down blacked-out emergency stairwells by
NYU Langone clinicians, house staff, and students. The entire hospital facility
was forced into indenite shutdown.
The crisis became a true test of the organizations resilience, and leaders at
all levels rose to the challenge. Despite extensive damage, the hospital resumed
core functions in 59 days sooner than anyone expected. Grossman continued
his weekly staff meetings despite the degraded physical surroundings, sending a
signal that they would all carry on. On the day after the storm, he told his lead-
ership team, This is not a disaster. Its a tremendous opportunity to start anew
41
and rebuild for the future.
Student lectures were suspended for just a week and then relocated to other
facilities. Clinical rotations were relocated to more than a dozen other hospitals
for three months, and the entire healthcare staff was seconded to other hospitals
around New York City. Had there been problems with the culture or the level of
commitment to the institution, this upheaval could easily have resulted in a dra-
matic loss of the best staff to their new host institutions. Instead, NYU Langone
experienced 100 percent staff retention through this difcult period, undoubt-
edly aided by its decision to keep all staff on full salary throughout the closures
(a move that astounded the unions).
Restoring all services quickly and retaining all staff at a cost of millions of
dollars would not have been possible if Grossman and the senior team had not
fundamentally strengthened the institution over the previous ve years. If any-
thing, the crisis actually galvanized further improvements. Despite all the disrup-
tion, the following year NYU Langone ranked rst in quality and patient safety
among all academic medical centers, according to the University HealthSystem
Consortium 2013 Quality and Accountability Study. Meanwhile, by making
an innovative settlement with the federal government, the devastated emergency
department closed for 18 months to undergo a thorough expansion and upgrade.
An Organization Transformed
At the heart of the NYU Langone transformation was Grossmans legitimacy as
a leader. He held himself to the same aspirations and high standards he applied
to the organization. He consistently relied on data to measure performance and
essay healthcare
achievements and to avoid playing favorites. Grossman integrated his height-

ened expectations with personal strategic insight and creativity. He was also
backed up by a united board including Langone, the visionary chair. The board
gave Grossman a clear mandate, reinforced by an unprecedented level of capital
donations, and stood by him on even the most contentious of issues, such as
raising faculty productivity.
NYU Langone has forged a path to rejuvenation. A vision can create a unity
of purpose and spur everyone in an institution to reach higher and contribute to
improvement. Data transparency enables everyone to see benchmarks and mea-
42
sure progress. And efforts to upgrade and support talent bring energy and build
commitment. Many other institutions might benet from following NYU Lan-
gones three-part prescription for organizational transformation. +
Reprint No. 17205
Eric J. McNulty Nathaniel Foote Douglas Wilson

eric@richerearth.com nfoote@truepoint.com dougawilson@gmail.com
is the director of research at is a coauthor of Higher Ambition: is executive fellow at the Center
Harvard Universitys National How Great Leaders Create Eco- for Higher Ambition Leadership
Preparedness Leadership nomic and Social Value (Harvard and the CEO of Next Solutions.
Initiative and a contributing Business Review Press, 2011)
editor of strategy+business. and writes extensively on the role
He writes frequently about of organizational design.
leadership and resilience.
ATTACK
BUSINESS
CHALLENGES
WITH BOLD
NEW STRATEGIES
Global executives come to MIT Sloan Executive Education
to learn powerful frameworks and business strategies
they can immediately apply to complex problems. Led by
our world-renowned faculty, our 40+ short courses will
help your team overcome its toughest challenges.
Plan your attackenroll now in these upcoming programs:

Leadership by Design: Innovation Process and Culture
June 2728
Creating High Velocity Organizations
June 2728
Digital Marketing and Social Media Analytics
June 2930
Marketing Innovation
July 1112
Implementing Improvement Strategies: Dynamic Work Design
July 2021
executive.mit.edu/sb
Open enrollment courses,
executive certicates, and custom
programs for your organization
essay technology
TECHNOLOGY
44
Winning with
Digital Condence
The right mix of talent, innovation,
and experience will help your company
master emerging technology.
by Chris Curran and Tom Puthiyamadam

essay technology
T
oday, if theres a problem with the heat or hot water in your hotel room,
you call the front desk and wait for maintenance to arrive. At some
chains, you have the option of reporting the issue using a mobile de-
vice. But in the near future, many hotel rooms will be wired with con-
nected devices that report potential breakdowns to maintenance and may even
automatically x them. Smart-building technology will turn the heat up when
your apps locator notices you are on the way back to your room.
Of course, such developments have signicant implications for hotel staff.
George Corbin thinks about them from a scientic perspective. As the senior vice
45
president of digital at Marriott, Corbin oversees Marriott.com and Marriott mo-
bile, and is responsible for about US$13 billion of the companys annual revenue.
He notes that the skills half-life of a hotel industry worker is about 12 years,
at least for those working in conventional areas such as sales, operations, and
nance. In other words, if people leave jobs in these functions, they could come
back in 12 years and half their skills would still be relevant. But on the digital
side, the skills half-life shrinks to a mere 18 months, according to Corbin.
Virtually every other industry faces similar dynamics. Digital competency
is practically mandatory in many sectors; if you dont get on board, youll fall be-
hind competitors that do. And yet the knowledge required for widespread digital
competency is often in short supply, and the related skills in agility and collabora-
tion are often difcult to achieve in large companies. In a few years, an 18-month
skills half-life may seem like a luxury. As a result, many executives condence in
their organizations Digital IQ their ability to harness digital-driven change
to unlock value is at an all-time low.
Thats one of the main ndings from the 2017 edition of PwCs Digital IQ
survey. We interviewed more than 2,200 executives from 53 countries whose
companies had annual revenues of at least $500 million, and found that execu-
tive condence had dropped a stunning 15 percentage points from the year be-
fore. These company leaders said that they are no better equipped to handle the
changes coming their way today than they were in 2007, when we rst conducted
this survey.
Back in 2007, being a digital company was often seen as synonymous with
using information technology. Today, digital has come to mean having an orga-
essay technology
nizational mind-set that embraces constant innovation, at decision making, and

the integration of technology into all phases of the business. This is a laudable
change; however, in many companies, workforce skills and organizational capa-
bilities have not kept pace. As the denition of digital has grown more expansive,
company leaders have recognized that there exists a gap between the digital ideal
and their digital reality.
The ideal is an organization in which everyone has bought into the digital
agenda, and is capable of supporting it. What does this look like? Its a company
in which the workforce is tech uent, with a culture that encourages the kind of
46
collaboration that supports the adoption of digital initiatives. The organizational
structure and systems enable leaders to make discerning choices about where to
invest in new technologies. The company applies its talent and capabilities to cre-
ate the best possible user experiences for all of its customers and employees.
Simply upgrading your IT wont get you there. Instead of spending indis-
criminately, start by identifying a tangible business goal that addresses a problem
that cannot be addressed with existing technology or past techniques and then
develop the talent, digital innovation capabilities, and user experience to solve
it. These three areas are where the new demands of digital competence are most
evident. They are all equally important; choosing to focus on just one or two
wont be enough.
Our ndings from 10 years of survey data suggest that the organizations
that can best unite talent, digital innovation capabilities, and user experience
into a seamless, integrated whole have a higher Digital IQ, and are generally
further along in their transformation. Our data also shows that the companies
that use cross-functional teams and agile approaches, prioritize innovation with
dedicated resources, and better understand human experience, among other
practices, have nancial performance superior to that of their peers. Its time for
company leaders to build their digital condence and their digital acumen; they
cant afford to wait.
Getting Tech Savvy

We are now moving into a world with this innovation explosion, where we need
full-stack businesspeople, says Vijay Sondhi, senior vice president of innovation
essay technology
and strategic partnerships at Visa, drawing an analogy to the so-called full-stack
engineers who know technology at every level. We need people who understand
tech, who understand business, who understand strategy. Innovation is so broad-
based and so well stitched together now that were being forced to become much
better at multiple skill sets. Thats the only way were going to survive and thrive.
In the past, digital talent could lie within the realm of specialists. Today,
having a baseline of tech and design skills is a requirement for every employee.
Yet overall digital skill levels have declined even further since our last report,
published in 2015. Then, survey respondents said that skills in their organiza-
47
tion were insufcient across a range of important areas, including cybersecurity
and privacy, business development of new technologies, and user experience and
human-centered design. In fact, lack of properly skilled teams was cited this year
as the number one hurdle to achieving expected results from digital technology
investments; 61 percent of respondents named it as an existing or emerging barri-
er. And 25 percent of respondents said
Lack of properly skilled they used external resources even when
teams was cited this they had skilled workers in-house, be-
cause it was too difcult or too slow to
year as the number
work with internal teams.
one hurdle to achieving The skills gap is signicant, and
expected results from closing it will require senior leaders to
digital investments. commit to widespread training. They
need to teach employees the skills to
harness technology, which may include, for example, a new customer platform or
an articial intelligencesupported initiative. They will also need to cross-train
workers to be conversant in disciplines outside their own, as well as in skills that
can support innovation and collaboration, such as agile approaches or design
thinking. Digital change, says Marriotts Corbin, is driven by using technology
in ways that empower human moments. Rather than replace [human interac-
tions], we are actually nding its improving them. We need the human touch to
be powered by digital.
One way that companies can accomplish these goals is by creating a cross-
discipline group of specialists located in close proximity (we refer to this as a sand-
essay technology
box), whether physically or virtually, so each can observe how the others work.
Such teams encourage interaction, collaboration, freedom, and safety among a
diverse group of individuals. Rather than working in isolation or only with peer
groups, members develop a common working language that allows for the seam-
less collaboration and increased efciency vital to moving at the speed of technol-
ogy. And this approach avoids the typical workplace dysfunction that comes with
breaking down silos: Because business issues are no longer isolated within one
discipline, but rather intertwined across many, colleagues from disparate parts
of the organization are able to better understand one another and collaborate to
48
come up with creative solutions.
Part product development, part project management, the sandbox ap-
proach enables your workforce to visualize the journey from conception to
prototype to revelation in one continuous image, helping spread innovation
throughout the organization. The culture of collaboration can speed adoption
of emerging technologies.
For example, this approach enabled the Make-A-Wish Foundation to bring
employees together from across the organization, including some whose role in
developing a new tech-based feature may not have been obvious, such as a tax
expert and a lawyer. In just three months, using this approach, the foundation
created and operationalized a crowdfunding platform to benet sick children.
Investing in the Future

At GE Healthcare, engineers are experimenting with augmented reality and assis-
tant avatars. Part of my job is to help pull in [great innovations] and apply them
through a smart architecture, says Jon Zimmerman, GE Healthcares general
manager of value-based care solutions. The innovations must be mobile native,
becauseour job is to be able to serve people wherever they are. And that is going
to include more and more sensors on bodies and, if you will, digital streaming, so
people can be monitored just as well as a jet engine can be monitored.
Amid an increasingly crowded eld of emerging technologies, companies

need strong digital innovation capabilities to guide their decision making. Yet
this achievement often proves challenging as a result of organizational and -
nancial constraints. Our survey revealed that fewer companies today have a team
essay technology
dedicated to exploring emerging technologies than was the case in years past.
Many are relying on ad hoc teams or outsourcing. Moreover, 49 percent of com-
panies surveyed said they still determine their adoption of new technologies by
evaluating the latest available tools, rather than by evaluating how the technology
can meet a specic human or business need.
Equally troubling, spending on emerging technologies is not much greater
today, relative to overall digital technology budgets, than it was a decade ago. In
2007, the average investment in emerging technology was roughly 17 percent
of technology budgets, a surprisingly robust gure at the time. Fast-forward 10
49
years, and that rate has grown to
only about 18 percent, which may Spending on emerging
well be inadequate. technologies is not
Its time to change these trends.
much greater today,
Youve identied a problem that ex-
isting technology cannot solve, but
relative to overall digital
you shouldnt just throw money at technology budgets, than
every shiny new thing. A digital in- it was a decade ago.
novation capability must become a
central feature of any transformation effort. This approach goes beyond simply
evaluating what to buy or where to invest, to include how best to organize in-
ternal and external resources to nd the emerging technologies that most closely
match the direction and goals of the business.
Nearly every company is experimenting with what we call the essential
eight new technologies: the Internet of Things (IoT), articial intelligence (AI),
robotics, drones, 3D printing, augmented reality (AR), virtual reality (VR), and
blockchain. The key is to have a dedicated in-house team with an accountable,
systematic approach to determining which of these technologies is critical to
evolving the business digitally and which ultimately will end up as distractions
that provide little value to the overall operation. This approach should include
establishing a formal listening framework, learning the true impact of bleeding-
edge technologies, sharing results from pilots, and quickly scaling throughout
the enterprise.
Perhaps most important, organizations need to have a certain tolerance for
essay technology
risk and failure when evaluating emerging technologies. Digital transformation

requires organizations to be much more limber and rapid in their decision mak-
ing. Says GE Healthcares Zimmerman, One of our cultural pillars is to em-
brace constructive conict. That means that when an organization transitions or
transforms, things are going to be different tomorrow than they were yesterday.
You must get comfortable with change and be open to the differing thoughts and
diverse mind-sets that drive it.
In a promising development, signs indicate that companies are starting to
focus on bringing digital innovation capabilities in-house. According to the New
50
York Times, investments by non-technology companies in technology startups
grew to $125 billion in 2016, from just $20 billion ve years ago. The Times, cit-
ing Bloomberg data, also noted that the number of technology companies sold to
non-technology companies in 2016 surpassed intra-industry acquisitions for the
rst time since the Internet era began. Walmart, General Motors, Unilever, and
others are among the non-technology giants that made startup acquisitions last
year. General Electric, whose new tagline is The digital company. Thats also an
industrial company, spent $1.4 billion in September 2016 buying two 3D print-
ing businesses in Europe.
Other companies are engaging in innovative partnerships. In January 2017,
at the annual Consumer Electronics Show, Visa, Honda, and IPS Group a
developer of Internet-enabled smart parking meters teamed up to unveil a
digital technology that lets drivers pay their parking meter tab via an app in the
cars dashboard. By tokenizing the car, or allowing it to provision and manage
its own credit card credential, they essentially make it an IoT device on wheels.
The car becomes a payment device, explains Visas Sondhi. And taking it even
further, we can turn it into a smart asset by publishing information thats related
to the car onto the blockchain. This can enable a whole host of tasks to be simpli-
ed and served up to the driver, such as pushing competitive insurance rates or
automatically paying annual registration fees.
Solving for X
At United Airlines, Ravi Simhambhatla, vice president of commercial technol-
ogy and corporate systems, views digital innovation as a way to break free from
essay technology
habits ingrained in his company over nine decades because they are no longer
relevant to its customers and employees. The company plans to use machine
learning to create personalized experiences for its customers. For example, when
someone books a ight to San Francisco, its algorithm will know if that person
is a basketball fan and, if so, offer Golden State Warriors tickets. What we have
been doing is really looking at our customer and employee journeys with regard
to the travel experience and guring out how we can apply design thinking to
those journeys, says Simhambhatla. And as we map out these journeys, we are
focused on imagining how, if we had a clean slate, we would build them today.
51
With the right digital skills and capabilities comes great opportunity to
improve the experience of both your employees and your customers. One con-
stant that emerges from 10 years of Digital IQ surveys is that companies that
focus on creating better user experiences report stronger nancial performance.
But all too often, user experience is pushed to the back burner of digital priori-
ties. Just 10 percent of respondents to this years survey ranked creating better
customer experiences as their top priority, down from 25 percent a year ago.
This imbalance between respondents focus on experience and its importance
to both customers and employees has far-reaching effects. It creates problems
in the marketplace, slows the assimilation of emerging technologies, and hin-
ders the ability of organizations to an-
Companies that create ticipate and adapt to change.
better user experiences Part of the reason user experience
ranks as such a low priority is the fact
report stronger nancial
that CEOs and CIOs, the executives
performance. who most often drive digital transfor-
mation, are much less likely to be re-
sponsible for customer-facing services and applications than for digital strategy
investments. As a result, they place a higher priority on revenue growth and
increased protability than on customer and employee experiences. However,
user experience is also downgraded because getting it right is extremely dif-
cult. It is expensive, outcome focused as opposed to deadline driven, and
fraught with friction.
However, unlike so many other aspects of technological change, how or-
essay technology
ganizations shape the human experience is completely within their control.

Companies need to connect the technology they are seeking to deploy and the
behavior change they are looking to create.
And making this connection will only become more critical as emerging
technologies such as the IoT, AI, and VR grow to dene the next decade of
digital. These and other technologies that simultaneously embrace consumers,
producers, and suppliers will amplify the impact of the distinct behaviors and
expectations of these groups on an organizations digital transformation.
Companies that focus too narrowly on small slivers of the customer experi-
52
ence will struggle to adapt, but overall experience-and-outcome companies that
seamlessly handle multiple touch points across the customer journey will suc-
ceed. Thats because, when done right, the customer and employee experience
translates great strategy, process, and technology into something that solves a
human or business need. You have the skills and the capabilities; now you need
to think creatively about how to use them to improve the user experience in
practical yet unexpected ways. Says Uniteds Simhambhatla, To me, Digital
IQ is all about nding sustainable technology solutions to remove the stress
from an experience. This hinges on timely and contextually relevant informa-
tion and being able to use technology to surprise and delight our customers and,
equally, our employees.
The Human Touch

When talent, innovation, and experience come together, it changes the way your
company operates. Your digital acumen informs what you do, and how you do
it. For example, Visa realized back in 2014 that digital technology was changing
not only its core business but also those of its partners so rapidly that it needed to
bring its innovation capabilities in-house or risk being too dependent on external
sources. It launched its rst Innovation Center in 2014; the company now has
eight such centers globally, and more are planned.
Visas Innovation Centers are designed as collaborative, co-creation facilities

for the company and its clients. The idea was that the pace of change was so fast
that we couldnt develop products and services in a vertically integrated silo. We
want the Innovation Centers to be a place where our clients could come in, roll
connection
noun \ k `nekshn\
That moment I realized I was

now part of a network that
would truly empower me.
Dene your Wharton moment.

comprehensive executive programs:
Your success is built upon the connections you make. Through
the Comprehensive Executive Programs at Wharton Executive Executive Development Program
Education, youll become part of a powerful network that will sep. 1022, 2017 nov. 517, 2017
propel you forward. Youll hone your business acumen and
Advanced Management Program
sharpen your leadership skills. And youll emerge empowered oct. 1nov. 3, 2017
to effect immediate change within your organizationand
throughout your career. Transform into your best version. General Management Program
a exible six-program learning journey
execed.wharton.upenn.edu/ connect
essay technology
up their sleeves, work with us, and build solutions rapidly within our new, open
network, says Visas Sondhi. The aim is to match the speed and simplicity of
todays social- and mobile-rst worlds by ideating with clients to quickly deploy
new products into the marketplace in weeks instead of months or quarters.
Across industries, company leaders have clearly bought into the importance
of digital transformation: Sixty-eight percent of our respondents said their CEO
is a champion for digital, up from just one-third in 2007. Thats a positive devel-
opment. But now executives need
to move from being champions to Sixty-eight percent of
54
leading a company of champions. our respondents said
Understanding what drives your
their CEO is a champion
customers and employees success
and how your organization can ap-
for digital, up from just
ply digital technology to facilitate it one-third in 2007.
with a exible, sustainable approach
to innovation will be the deeper meaning of Digital IQ in the next decade.
Its the blend that makes the magic, says GE Healthcares Zimmerman.
Its the high-impact technological innovations, plus the customer opportunities,
plus the talent. You have to nd a way to blend those things in a way that the
markets can absorb, adopt, and gain value from in order to create a sustainable
virtuous cycle. +
Reprint No. 17206
Chris Curran Tom Puthiyamadam

christopher.b.curran@pwc.com tomp@pwc.com
is a principal with PwC US is a principal with PwC US
based in the DallasFort based in New York. He leads
Worth area. He is the chief the rms digital services
technologist for the rms new practice, which helps clients
ventures practice, and he leads create next-generation
the development of PwCs experiences for their customers,
ongoing Digital IQ research. employees, and partners. He
is also the advisory markets
and competencies leader.

essay marketing, media & sales
MARKETING, MEDIA & SALES
55
How to Make 201721
Entertainment and
Media Businesses
Fan-tastic
Capturing the strategic advantages of fan-centric
businesses requires functional transformation.
by Christopher Vollmer
T
o promote Mr. Robot, a dystopian video series about hacker culture on
the USA Network starring Christian Slater, NBCUniversal recognized
it needed a new playbook for audience development that went well be-
yond linear TV. To forge a passionate following of tech-savvy millen-
nials, it created original content for Facebook Live, Reddit, Snapchat, YouTube,
and Twitch, Amazons platform for gamers. The network also developed a virtual
reality simulcast for San Diego Comic-Con 2016, and created a Mr. Robot experi-
ence in a Manhattan storefront where visitors could hack an Evil Corp ATM
machine. What did these efforts have in common? They all encouraged Mr. Ro-
56
bot viewers to stay connected with storylines and characters in the environments
where viewers desired that emotional and social connectivity. These experiences
thus turned viewers into fans, and fans into zealots.
An entertainment and media (E&M) offering today simply cannot thrive
without the economic, social, and emotional power of fans. Devoted followers are
as critical to feature lms, video games, and sports teams as they are to Mr. Robot.
Premium content is expensive, and getting more so. Distribution is a brutal battle
for shelf space where only brands that are most wanted can hope to win. The
steady march of digital technology has ushered in a direct-to-consumer environ-
ment characterized by greater choice and user control. There is simply too much
competition for users to allow E&M businesses to survive on experiences that
cater to casual eyeballs or infrequent users.
In todays hypercompetitive landscape, entertainment and media business-
es designed around and for fans command multiple strategic advantages. They
know more about who their users are, what they want, and how and where to
deliver it. Fans spend more per capita and are less likely to churn. Todays fans
recruit tomorrows.
To regularly make the kind of transition exemplied by NBCUniversals
Mr. Robot, E&M companies need to orient themselves around fans. They need
capabilities that help them operate in new, more exible ways across content,
distribution, and user experience. They must become fan-centric. The good
news is that they can accomplish all these objectives by focusing on ve key
functions: user/fan insight, content and experiences, distribution, monetiza-
tion, and operations.
User/Fan Insight
As user behaviors rapidly evolve and consumption occurs across an ever-expand-
ing universe of distribution environments and platforms, companies with the
deepest, most direct insight into their fans have a decisive advantage. Unfor-
tunately, too many large E&M companies remain focused on analyzing out-
puts such as ratings, unique visitors, and time spent rather than drilling into the
functional, emotional, and social behaviors that translate into fandom for their
brands. And although most companies sit on a treasure trove of rst-party data,
few have organized their people, processes, and technology to mine those insights
57
into fan preferences at the necessary operational scale.
It is not surprising that fan insight capabilities have evolved most quickly in
the music industry. In the pre-digital era, top artists such as the Beatles and the
Grateful Dead recognized the value of interacting directly with fans and creating
fan communities (the Beatlemaniacs and the Dead Heads, for example). Through
their fan clubs, these bands learned about who their fans were, what they liked,
and where they lived. This continued focus helps explain why contemporary art-
ists such as Taylor Swift and Beyonc have been so successful in leveraging social
media to crack the code for fan development and fan activation.
Global music services such as Spotify show what is possible when fan insight
capabilities are more fully realized. Spotify has a database of more than 100 mil-
lion users, including 50 million paid subscribers, which provides information
about any artists listeners. The Spotify Fan Insights service enables artists to sort
through listening data and to zero in on their heavy listeners and sharers (i.e.,
their fans) versus their more casual consumers. Then they can start building a
more powerful fan base.
Development of these powerful insight capabilities does not happen over-
night. Since 2014, Spotify has purchased three companies (the Echo Nest, Seed
Scientic, and Preact) to bolster its analytics capabilities and help it better under-
stand how casual users can morph into higher-value fans (subscribers).
Content and Experiences

For many consumer entertainment and media businesses, avid or loyal fans
who typically represent 10 to 20 percent of a franchises user base can drive 80
percent or more of that franchises overall business value. Content efforts there-
fore must prioritize initiatives aimed at super-serving them deepening engage-
ment with avid fans and simultaneously extending the brands and franchises
associated with these passionate fans into new areas.
Avid fans cannot get enough of the content they love. They binge on it.
They share it. They talk and post about it. They create more of it. They might
watch The Americans, a spy drama on FX, and then listen to Slates podcast about
each episode. Avid fans will seek out content-fueled interactions across a diver-
sity of experiences, provided those interactions ignite and fuel their emotional
58
connection with, say, a sports team, a lm, or a video game. For many fans, the
quality of these experiences is further amplied when it translates into social
connections; fan-to-fan relationships; and active communities united by shared
passions, values, and interests.
In recent years, the National Football League has placed growing strategic
emphasis on its own media assets, including the NFL Network, a 24/7 pay-TV
network that has become a US$1 billion business. Providing blanket coverage
of events such as the draft and the NFL combine, the NFL Network enables
fans to indulge their passion for football year round. The NFLs RedZone pay-
TV channel, which allows fans to watch the most exciting plays of every game,
further feeds the voracious appetites of fantasy football acionados who follow
players on multiple teams. These committed fans now have more football to
consume than ever before, they are watching more and spending more, and
they are more engaged.
The New York Times Companys subscription-rst growth strategy is
aimed at expanding its roster of subscribers from the current 3 million to 10 mil-
lion. In effect, this is a fan-rst strategy. It emphasizes super-serving users who
are regular readers and most willing to pay for a print or digital subscription and
who create the most value for advertisers.
Distribution
As user behavior and content consumption especially among younger users
trend more toward social media, mobile devices, and streaming, E&M com-
panies have to adapt to ensure they are building and strengthening their fan
bases. For many players, this means developing powerful owned and operated
showcase destinations, and designing experiences on partner platforms that grow
and deepen the fan base.
E&M companies can take some pointers from luxury brands. The products
of Burberry can be found at such global retailers as Saks Fifth Avenue, Harrods,
and KaDeWe. However, the fully expressed world of Burberry can be experi-
enced only at the companys global agship store in London, Burberry Regent
Street. At Burberry Regent Street, which opened in 2012, consumers can shop
the companys full lines for men, women, and children. The store also curates
59
events featuring new creators in music, lm, theater, and art. Burberry has used
Regent Street to pilot innovations, including interactive displays and mobile apps
that deliver in-store notications and offers.
This showcase approach to owned distribution is relevant for en-
tertainment and media brands that, like Burberry, possess a critical mass of pas-
sionate fans who will reward the richest, deepest experience with their time and
money. The WWE Network, World Wrestling Entertainments subscription
video on demand (SVOD) product, with 1.5 million subscribers, is a compel-
ling illustration of how a media company can add a premium distribution plat-
form to its arsenal while furthering relationships with distribution partners such
as NBC-Universal, Facebook, and YouTube. This service has become WWEs
preferred home for popular pay-per-view events such as WrestleMania, along
with new series including 205 Live and WWE Fastlane as well as archival con-
tent. The WWE network is now the second-largest specialty SVOD network,
after Major League Baseballs MLB.TV.
Even the largest, most well-regarded E&M content brands need the distribu-
tion scale that third parties can generate. Companies should thoughtfully select
distribution partners that can create robust fan value versus lower-value eyeballs.
The distribution partner needs to deliver concentrated reach efciently in terms
of either avid fans (therefore resulting in incremental engagement) or convertible
fans (casual users who can be cultivated into avid fans). The partner ideally also
shares information on users and fans to help further inform business as well as
creative decision making.
As noted, with Mr. Robot, NBCUniversals USA Network has strategical-
ly expanded its digital distribution roster to add platforms including Amazons

Twitch, Facebook Live, and Reddit. For shows with broader fan bases, NBCUni-
versal has relied on partnerships with players such as Verizons AOL to post video
clips from shows including The Blacklist, Saturday Night Live, and The Tonight
Show on the AOL On video network.
Monetization
Companies that build fan bases have to be able to capture their premium value
effectively. Given that fans engage across many properties and feel increasingly
60
skittish when content and advertising are out of context, E&M companies have
to become more sophisticated with respect to data, segmentation and measure-
ment, and technology to succeed commercially. Selling fans, after all, has differ-
ent requirements than selling eyeballs. Companies must develop sales structures,
processes, and decision rights that extend not only across a companys entire port-
Romans Aqueducts
Strategy that works
builds empires.
2017 PwC. PwC refers to the PwC network and/or one or more of its member
rms, each of which is a separate legal entity. See www.pwc.com/structure.
folio, but also into business partners properties. Sales teams need to know how
to translate the factors that drive relevance and emotional connection with their
fans into compelling t-for-purpose solutions for their marketing customers.
Finally, sales teams must ensure that their advertising and promotional efforts
amplify the quality and intensity of a fans experience.
Several entertainment and media players companies such as NBCUniver-
sal, Time Warners Turner, Viacom, and, more recently, Disney have reimag-
ined their advertising sales capabilities to take better advantage of their audience
scale across brands and screens through new combinations of data, technology,
61
and advertising products. This approach is also enabling these companies to move
away from their historical focus of selling specic shows, dayparts, networks, and
brands, and toward selling fan-based segments. Over time, this should lead to
fewer but higher-impact ad executions, less clutter, and less waste beneting
fans, marketers, and the media properties.
The Model T The Assembly Line

Strategy that works
revolutionizes industries.
Given the realities of user fragmentation, companies have to better under-

stand the behavior of their fans beyond their own properties. NBCUniversal has
built a strategic network of digital partners that includes AOL, Vox, BuzzFeed,
Snapchat, and, most recently, Apples News app to further scale its sales and
technology capabilities and extend the depth of its fan communities. These part-
nerships enable NBCUniversal to sell advertising packages associated with its
premium content that incorporate some inventory from each of these partners.
For example, NBCUniversal has developed a version of its singing contest The
Voice for Snapchat, which involves integrating relevant Snapchat inventory for
62
The Voice (e.g., lters, lenses, Snap ads) into the mobile- or video-centric solutions
that NBCUniversal offers marketers.
Following fan passions creates a natural pathway to identifying new revenue
opportunities for E&M companies especially live events, which millennials
nd particularly compelling. Cond Nast with a brand portfolio that includes
Better Health Big Data

Strategy that works
improves lives.
such stalwarts as Glamour (and its Women of the Year Awards franchise) and
newcomers such as Pitchfork, which specializes in music festivals views live
events as an attractive mechanism by which to bring leading personalities togeth-
er with avid fans while increasing its revenues. The potential benets: more rev-
enue via sponsorship and ticket sales, new sources of rst-party data that support
fan development efforts for its brands, better solutions for advertisers through
improvements to activation, and stronger social distribution and fan recruitment
achieved by tapping into avid fans social networks.
With advertisers as well as distribution partners, sales teams must act
63
more like strategic consultants than traditional sellers to design and execute
the collaboration models and client-oriented solutions required by working
with third parties. Internally, they need to team more seamlessly across func-
tions. In most cases, these requirements will profoundly change the prole of
what constitutes the ideal sales leader and sales team. How well companies ex-
Strategy& creates Strategy that starts with your

greatest strengths and builds in
strategy that works. execution at every step.
Lets talk about what works for you.

strategyand.pwc.com
ecute this transformation of the sales function will play a decisive role in their
future success.
Operations
The fth and nal key function E&M companies will have to pursue involves
operations. The highest-performing companies tightly link revenue and cost
agendas. As this industry transitions to a direct-to-consumer world, senior execu-
tives need to (1) focus on what they do best in terms of serving fans, (2) align
their cost structure, and (3) organize their operations accordingly. To win with
64
fans, E&M companies must get t for growth growth that is both protable
and sustainable.
Reallocating resources in order to grow is a difcult task that requires mak-
ing tough choices and wrenching trade-offs. Will these changes make a differ-
ence for fans? Answering this question has to be the starting point for identifying
any signicant alterations or improvements to company operations. Not every-
thing companies do creates meaningful differentiation with fans or, secondarily,
with marketing or distribution partners.
Today, brands and products that are not heavily populated by avid fans are
essentially commodities. Consider the many zombie pay-TV networks with low
ratings, sustained primarily by an aging video bundle that fewer distributors and
consumers appear prepared to support.
Going forward, the preferential economics of fan-centric businesses com-
bined with the necessity for both better internal collaboration within compa-
ny portfolios and more holistic external relationships with partners will compel
E&M companies to structure their operations in new ways. Business processes
across the enterprise can be designed to optimize both the cost-to-serve and fan
satisfaction, avoiding overserving casual users and underserving loyal fans. Any
activity that does not demonstrably improve fan value should be as lean and ef-
cient as possible and is therefore a potential candidate for automation, consolida-
tion, or outsourcing.
Todays fast-changing E&M landscape further rewards companies with su-
perior exibility and speed. All of these factors will drive companies to pursue
operational improvements in two areas: (1) process innovation and clustering of
similar activities to increase fan scale and optimize variable costs in such areas as
sales, marketing, product development, and production; and (2) centralization,
outsourcing, and portfolio rationalization designed to attack xed costs in areas
such as G&A expenses and IT.
Future of Fans
Even in a period of disruption, some realities endure. The most valuable con-
stituents in the E&M industry are the active, loyal, and passionate fans. As the
industry transforms in response to the direct-to-consumer model, those compa-
65
nies that fully embrace a fan-centric approach to their business, functions, and
operating culture will emerge as the new leaders. +
Reprint No. 17207
Christopher Vollmer
christopher.vollmer@pwc.com
is PwCs global advisory leader
for entertainment and media.
He focuses on developing strate-
gies for revenue growth, building
digital businesses, and creating
innovative user experiences for
leading companies across media
and technology for Strategy&,
PwCs strategy consulting busi-
ness. Based in New York, he is a
principal with PwC US.
66
feature marketing, media & sales
201721
AI IS
ALREADY
ENTERTAINING

YOU
How technology endowed with creative
intelligence changes the way companies
generate and distribute content.
BY DEBORAH BOTHUN AND DAVID LANCEFIELD
67
I
n the fall of 2016, a pop song was released in Japan.
Daddys Car, derivative of a Beatles tune, had a sooth-
ing beat and vaguely uplifting lyrics: Good day sun-
shine in the backseat car / I wish that road could never
stop. The ditty was distinctive for its authorship. Sonys
Computer Science Laboratories in Paris produced the song,
which was written by an articial intelligence (AI) system
called Flow Machines. The melody and harmony were com-
Illustration by John Hersey
posed by AI, and a human musician mixed the sound and

wrote lyrics for the track.
AI the new set of technologies that perform tasks
that require human intelligence, such as speech recognition,
decision making, and learning is rapidly working its way
into business operations within many global industries.
Deborah Bothun David Lanceeld Also contributing to this
deborah.k.bothun@ david.lanceeld@pwc.com article were PwC princi-
pwc.com is a partner with PwC pal Anand Rao and PwC
leads PwCs global UK. Based in London, director Sally Potts.
entertainment and he advises senior
media practice. She executives of media
focuses on assisting and entertainment
clients in adapting to companies, and writes
the changing content and comments regularly
and distribution market- on leadership, digital
place. Based in New innovation, and mega-
York, she is a principal trends for Strategy&,
with PwC US. PwCs strategy consult-
ing group.
Some members of the entertainment and media (E&M) industry have down-
played its potential. After all, these are creative industries in which both the
germ of the business and the value added to it stem from the contribution of hu-
man ingenuity and people exchanging ideas. The most successful E&M prod-
ucts and services rely on connecting creative content, brands, and experiences
with audiences.
The more creative you are, the conventional wisdom holds, the more pro-
tected you are, or the less able you are to benet from the many advances in
technology. And skepticism seems justiable when it comes to the ability of ma-
chines to be truly creative. In PwCs Consumer Intelligence Series (CIS) survey,
24 percent of respondents said AI could, by 2025, create a Billboard Hot 100
68 song, but only 12 percent said it could write a New York Times bestseller and 7 per-
cent said it could win a Pulitzer.
And yet AI is already very much present in the creative industries, just as
it is exerting an inuence on nancial services, healthcare, manufacturing, and
most other industries. Which isnt surprising. Whether in the form of digitiza-
tion or social networking, the E&M industry has long had the necessary levels
of creativity, content, technology know-how, and consumer passion to kick-start
innovation. Throw in the low level of legal, nancial, and regulatory barriers
surrounding business models in entertainment and media, and you have a natu-
ral proving ground for new technologies.
Articial intelligence is starting to transform the role of creativity in
the factors of both production and customer experience. You can see the impact
IT IS POSSIBLE FOR AI TO REACH
DEEP INTO COMPANIES CORE
OPERATIONS TO FOSTER CREATIVITY
AND ORIGINALITY AT SCALE.
clearly at two extremes in virtually every market: in startups, where innovation

and disruptive media models are tested, and in industry giants that are facing an
urgent need to alter their 20th-century processes, technology, and structures.
Working Hand in Hand

As AI becomes more powerful, a sense persists in the entertainment and media
industry that there is a trade-off between creativity, ingenuity, compelling content,
and originality on the one hand, and standardization, scale, optimization, and
repetition on the other. Left brain and right brain. Instinct and execution. Cre-
ativity develops the concept, the lm, the ad campaign, the song, the app; stan-
dardization is required to turn it into a marketable product, a functioning, scalable
business. In this view, creative work is the preserve of humans, and if AI can play
any role, it will be in a small way. Left entirely to its own devices, the thinking
goes, technology would produce bland material, or, worse, go off the rails.
But this polarized view takes into account only the extremes as if ev-
ery ad jingle writer is Mozart and every computer is HAL from 2001: A Space
Odyssey. We have been conducting extensive consumer and executive research
via surveys, and holding conversations with leaders throughout the E&M and
technology, media, and telecom sectors. And weve concluded that the reality lies
between these two extremes. AI has the potential to help transform companies
by reimagining the ways in which people and machines interact as workers,
content creators, and consumers. It is possible for AI to reach deep into compa-
nies core operations to foster creativity and originality at scale. When it comes
to creative intelligence, in fact, the purported trade-off between humans and
machines may in fact be a set of synergies. As technology leaders will tell you, AI
is an industrial advance on a par with the arrival of electricity its that big (see
Human vs. Machine).
Grappling with new technologies will be unavoidable for leaders because of
two important structural forces driving AI. First is the supply of new products,
services, and platforms. The typical persons media diet is, in effect, already de-
signed by computer-based nutritionists. Every day, millions of Spotify listeners
take their cues from AI-generated playlists. During one National Novel Genera-
tion Month (NaNoGenMo), coders wrote programs that, in turn, generated some
500 novels. For me, asking if a business can benet from AI is like asking if a
70 business can benet from the Internet, said one leader. It is that fundamental a
shift in technology. If you dont gure out how to use it and benet from it, you
are going to go out of business. Your competitors will destroy you.
Human vs. which clearly has the potential to dis- istrative support positions or bank
place labor. Our most recent PwC UK teller jobs. Rather than ghting the
Machine Economic Outlook suggests that up to process, companies should consider
38 percent of U.S. jobs and 30 percent devoting resources to skills training
H istorically, the advent of of U.K. jobs are at high risk of being for the many service and manufac-
powerful technologies has automated by the 2030s. We know turing workers who will be displaced
inspired equal doses of fear and that the most at risk jobs are those by machines, and preparing them for
hope. But something is particularly that are repetitive, process-driven, the new jobs that will emerge.
compelling and terrifying about AI, and rules-based, such as admin-
The second structural force is demand. The industry shift is being driven by
consumers desire to move to a world in which they have greater customization,
spontaneity, and personalization in the way they consume content, communicate,
and engage in commerce. More than half (55 percent) of millennials in the CIS
survey said they would like to select their media by curating a list that draws heav-
ily on AI recommendations, or simply have it selected altogether by a bot. The
acceleration of AI is arriving just in time to meet the demand for new forms of
digital experiences, to cope with the growing complexity of curating and accessing
digital media, and to address evolving concerns about security and privacy.
Thus considered, AI is both a strategic imperative and an immense opportu-
nity to improve efciency, create new and better user experiences and products,
free up human labor for more intense creative efforts, and contribute to value cre-
ation. It can be applied to all areas of corporate endeavor: process, monetization,
distribution, and creative work. To date, many companies have been in AI denial.
Some are beginning to experiment, focusing on specic activities (e.g., the back
ofce or customer service). Others are taking a strategic, organization-wide view.
But in order to make the most of AI, leaders have to learn to think more analyti-
cally about the challenges and opportunities at hand.
Grasping Opportunities
No single path is best for integrating AI into the E&M business. The key is to
understand the dimensions in which AI can aid, abet, optimize, enhance, and,
yes, occasionally replace human work and to learn from what companies are
Exhibit: The Creative Intelligence Matrix
Where you are depends on the targeted user (workers vs. consumers) and AIs role in
completing the task (full automation vs. working alongside people).
Consumer Simplifying Content Creation Improving the Consumer Experience

Innovation AI-generated music Athletic performance monitoring
Facebook Timeline Movie Maker (content enhancement)
Google Photos face recognition Video exploration (content interactivity)
Google Photos movie assistant Recommendations (film, TV, music)
Content curation (e.g., Spotify playlists)
Digital assistants (e.g., Alexa)
Workflow Freedom from Repetitive Tasks Better, More Creative Decisions

Optimization Customer service process automation Acceleration of sales team readiness
Credit control process automation Maximization of film revenue
Churn prediction engines Maximization of content licensing
Programmatic ad buying Mitigation of regulatory risks
Newsletter curation, creation, distribution Monitoring/filtering of comments
Content tagging Insights gained from video
Content editing (e.g., movie trailers) Insights gained from social media
AI-generated sports summaries
AI-generated film scoring, stock music
Fully Automated Human Works with AI

Source: PwC analysis
already doing. Next, prioritize the opportunities and assess whether your current
capabilities will allow you to pursue AI effectively. Doing so will either free up
resources or impose new requirements on you and your colleagues.
Drawing on our interviews with clients who are leading this work for their
organizations today, weve created an illustrative framework of organizing prin-
ciples for evaluating AI projects. This approach examines the use of AI tools
72 and strategies in two dimensions (see exhibit). One (the vertical axis) considers
whether the functions are aimed primarily at optimizing existing workows or
primarily at creating innovations in the consumer experience. The other (the
horizontal axis) considers whether the activities involve people working alongside
AI or whether the functions are fully automated. We should note that the as-
sumption typically applying to a 2x2 matrix, in which the lower left quadrant is
for underperformers and the upper right is home to the most evolved companies,
doesnt necessarily apply here. In fact, signicant business value can be derived
in each quadrant. Companies may have activities and initiatives that fall into
multiple quadrants. The level of investment in each quadrant depends on an or-
ganizations views about value creation and protection, its appetite for change, its
risk proles, and its ability to execute.
Freedom from Repetitive Tasks
Because of the availability of proven, off-the-shelf articial intelligence solutions,
many companies start in the lower left quadrant automating processes, often
in human resources and nance. Many media companies have lagged in putting
effective back-ofce processes and technology into place. Thus, the potential for
the application of AI is great. One U.K. media company that is a leader in the
exhibitions industry is experimenting with back-ofce automation, and expects
it will help the company boost margins from activities such as credit control and
customer acquisition.
But these efforts arent conned to the back ofce. Historically, the out-of-
home ad industry hasnt kept up with other media-buying trends. One of the
brands within a large ad holding company in Japan developed an AI-based solu-
tion for making purchasing decisions on out-of-home advertising locations, such
as billboards. By deploying bots, the unit has automated the online bidding pro-
cess for clients.
Efforts aimed at creating content can also fall into this quadrant. News
services (for example, the Associated Press) are now using AI platforms such as
Wordsmith to generate short articles that summarize a baseball game via sta-
tistics or that are based on the earnings reports of publicly held companies. A
movie studio has used IBMs Watson to create trailers. By watching an entire
lm and selecting six minutes worth of scenes, the AI solution can do in less
than 24 hours what normally takes 10 to 30 days. When Shelly Palmer, a lead-
ing media technology consultant, publishes his daily newsletter, he writes one
new article and algorithms aggregate additional articles (see The Thought
Leader Interview: Shelly Palmer, by Deborah Bothun and Art Kleiner, page
132). Next, AI generates four versions of the newsletter, one aimed at maxi-
mizing engagement, another at maximizing clicks, and so on. Programs then
mine data on subscribers to determine which of the four versions will be sent
to each recipient.
AI CAN WORK ALONGSIDE PEOPLE
TO CARRY OUT TASKS THAT ARE
COMPLEX YET REPEATABLE.
Better, More Creative Decisions

A useful rule of thumb says that if you have a playbook for managing a work
process editing and publishing a magazine, distributing a lm, planning an

advertising campaign algorithms can be developed to help execute the play-
books more effectively. AI can work alongside people to carry out tasks that are
complex yet repeatable, thus generating powerful insights and freeing up time
that professionals can use to make more intelligent decisions, as seen in the ex-
hibits lower right quadrant.
Studios are getting better at applying advanced analytics and real-time feed-
back to shape their marketing campaigns. Using an analysis of initial uptake and
social chatter surrounding a new movie release, one studio is using an AI-powered
74 solution that makes recommendations for marketing and monetizing the content
across downstream windows such as premium cable and video-on-demand plat-
forms. Beyond measuring eyeballs for content aired at a specic time, the new
data factories that studios are constructing allow them to measure, and often
help direct, a consumers online journeys and actions.
A major U.S. digital company is developing an AI-powered interface for its
ad sales team. When ad reps input information on upcoming client meetings, the
tool provides recommendations on which individuals to target, challenges that
have arisen in previous campaigns, and which ad products and types of cam-
paigns will be especially compelling to the client.
One of the most powerful contributions AI can make is to shed light on
emerging preferences for people who are designing products intended to appeal
to large audiences. An advertising holding company in the U.S. has teamed up
with technology partners to develop a proprietary AI tool that scours social me-
dia platforms and delivers insights into what types of ads resonate with consum-
ers. Creative directors and writers thus approach the creative process with a better
handle on what might be expected to work well.
Simplifying Content Creation

A useful way to think about consumer-facing innovation is to look at it through
the lens of customer jobs. Harvards Clayton Christensen has put it this way:
Customers dont simply buy products or services; they hire them to do a job.
And customers whether they are the end consumers or companies are hir-
ing AI to do a growing array of jobs.
In the upper left quadrant of the exhibit, AI fully automates the creation
of content, material, or services aimed at consumers, and the work becomes
more experimental. Here the company is, in effect, going all in on the ability
of AI to create a compelling product or service. In many instances, the sub-
stitution for creative intelligence is complete. Facebooks Moments app has a
tool that creates short lms out of the videos and photos that users post on
their timelines.
Many of the early experiments in E&M have been in music. Sonys efforts
in Japan to use AI to write pop songs stand as one example. Bobbie Barrat, a
high school student in West Virginia, trained a computer to rap in a week using
open source software on a Linux-driven laptop. Having cut its teeth on 6,000
Kanye West lines, the computer can generate somewhat authentic rap verses.
Originally it just rearranged existing rap lyrics, but now it can actually write
word by word, Barrat said.
But companies are also testing whether machines can effectively create use-
ful advertising content. McCann Japan decided to pit its AI director against the
human creative director to create a 30-second ad for Clorets gum. When it asked
the Japanese public to vote on which was better (without disclosing the author-
ship of the ads), the concept generated by the human director was preferred, but
only by a 54 to 46 percent margin.
Elsewhere, AI has been taught to improve the user experience of online read-
COMPUTERS CAN DETERMINE
ON THEIR OWN WHICH COMMENTS
DONT MEET A SITES STANDARDS
AND CAN TAKE THEM DOWN.
ers by cleaning up comments sections. On many news sites and social platforms,
it is difcult for humans to monitor the many comments being posted by readers
and users. Using Googles Perceptive software, publishers such as the Economist
in the U.K. are able to leverage AI to intelligently lter comments. Empowered
by machine learning, computers can determine on their own which com-
ments dont meet a sites standards and can take them down.
Improving the Consumer Experience

With its ability to enable personalization and customization at scale, AI can be
a powerful differentiator for consumer-facing businesses. It improves precision
and speed-to-market, and increases and enhances the potential for interactions,
76 engagement, and transactions. In the upper right quadrant of the exhibit are
examples of how companies combine human and computer expertise to create
new services and enable people to discover and engage with content and brands
in new ways. Familiar examples such as Spotify playlists, the Facebook news-
feed, and Netixs recommendation engine are just the beginning (see Discov-
ery vs. Filtering).
A global technology company is working with athletes to deploy AI in con-
junction with sensors to provide unprecedented visibility into their performance.
Athletes can get instant measurements on key performance metrics for their
sport. The company also uses this information to provide richer, more interactive
viewing experiences for fans.
Tagasauris, a New Yorkbased media technology startup, has developed an-
notation programs that break television shows and lms down into shots and
scenes, and document key elements of the story (characters, themes, locations,
music, product placements, etc.). Its consumer-facing app connects events, peo-
ple, and locations in the show to real-world locations, actors, and social content.
This provides viewers a visual-rst deep dive into the drama as it unfolds epi-
sode to episode and season to season.
JD.com, a Chinese online retailer, has established an AI lab to investigate
perception and cognition with computer learning algorithms. The results will be
applied to face recognition and text and image searching. But the rst use will be
a virtual reality tting room for customers to try on clothing and other products.
Organizing for AI
The universe in which AI operates is a uid one. Your company may easily nd
itself engaged in activities in every quadrant of this matrix. Some of the apps on
your phone today are purely for work, some are purely for play, and some are use-
ful for both. The same holds true for AI. This framework should help you under-
stand what are the best areas in which to launch AI pilots, where the low-hanging
fruit is, and what it will take to move AI opportunities forward in the near term.
Before you start, its important to have a handle on the maturity of the AI tech-
nology you will be dealing with. Theres a vast difference between chatbots and
Discovery vs. work more effectively. based on consumption habits, our

First, although consumers personalized bubbles become nar-
Filtering tend to seek out and access content rower and more difcult to penetrate.
on a range of platforms, very few In many instances, consumers are
C ontent discovery is one of

the most common ways
media consumers benet from AI.
companies have developed tools that
enable search and discovery across
multiple platforms such as Ama-
becoming dened by what they are
likely to like. The result is that they are
less apt to nd new types of con-
Overwhelmed by the exponential rise zon, HBO, Netix, Hulu, and iTunes. tent and perspectives outside their
in online content, people rely on MightyTV, launched by a former prescribed comfort zones. Having
algorithms to serve up curated lists Google executive in 2016, aimed to become procient at making recom-
and recommendations on the plat- let consumers do just that. But it was mendations based on past usage,
forms they favor: Spotify, Netix, and acquired by Spotify in March 2017 and AIs next step of evolution may be to
Amazon, for instance. But the indus- immediately dissolved. gure out ways to pierce the carefully
try must address two challenges if Second, as more content dis- constructed lters and broaden the
it is to make discovery and curation covery is determined by algorithms horizons of discovery.
automated newsletter generation on the one hand, and self-driving automobiles
on the other (see The AI Maturity Curve).
Once you have a sense of where your companys current plans or pilots sit
on the matrix, its easier to identify how your business strategy needs to prepare
and respond.
Shaping Strategy
As shown by the many examples above, AI is here now for the E&M industry.
If you are an executive in the industry, the good news is that many of these ele-
ments are within your reach already. Others will require signicant investment
and a leap of faith. Making progress in any quadrant of our matrix will require
targeted investment, as well as some fundamental changes in how you work, and
how you organize to do that work. E&M companies must evolve from the long-
standing organizational architectures and mind-sets that support a massive vol-
ume of repetitive, rules-based work.
The case for hiring AI into the business is compelling, whether the goal is to
have AI work alongside key professionals or to take over certain tasks and func-
tions entirely. The same IT revolution that has made AI possible is increasing the
necessity to use it. As organizations expand into new markets, they are getting
more complex, engaging with ever-longer supply chains, and confronting a variety
of regulatory regimes. The volume of unstructured data that companies are gener-
78 ating and absorbing is rising at an exponential rate. Every tweet, every transaction,
every post on social media, every view of a video all these actions create data
that needs to be managed and begs to be mined for advantage. Companies con-
nections with their consumers, and with their partners and employees, have like-
The AI rst phase, assisted, humans make decisions: Think of Netix recom-
all the decisions, but AI reduces the mendations based on past behavior
Maturity Curve costs of labor-intensive rules-based and user review. The third stage is
tasks: Think of Google Gmails self- autonomous, in which people set the
I n A Strategists Guide to Arti-

cial Intelligence, our colleague
Anand Rao lays out three stages of
sort tabs. The next stage is aug-
mented, in which people and AI work
together in a symbiotic way, with self-
rules and AI makes the decisions
with very little human involvement
or oversight: Think of algorithm-
AIs maturity curve (page 82). In the reinforced learning leading to better driven stock trading.
wise escalated and intensied. Regardless of how procient a person is with Excel,
he or she cant hope to stay on top of and make sense of the torrent of bits, bytes,
comments, opinions, purchases, and signals that our systems generate daily.
More Than a Tool

AI is not IT. Its not simply a tool or a function that can be outsourced or placed
in a silo. Rather, it is increasingly evolving into an element of strategy. So leaders,
and their boards, have to dene the strategic role of AI. They also need to un-
derstand how it is playing into the strategy of their competitors, both direct and
indirect. Then they must ask themselves where AI can have the biggest impact
that can translate into shareholder or enterprise value. Is the primary goal to cut
costs or manage margins? Or is it to drive new revenue growth and create a new 79
level of engagement with customers?
While these questions are being answered, leaders have to decide on the im-
portant rst steps to take in embracing AI. Most leaders in the E&M world did
not grow up in the industry talking about or using AI. And neither did most of
their direct reports. In order to combat the hype and fear surrounding AI, lead-
ers must educate themselves and their colleagues especially those who work
in creative areas on the potential of AI. They need to move quickly, because
the institutionalization of AI is happening much faster than most people realize.
As one executive put it, AI is now part of the stack the set of software that
serves as infrastructure for a business.
The capabilities E&M companies require if they are to succeed in adopting
Checklist of Critical Build data factories Double down on the
Success Factors to feed and power your human element. Make
AI projects. sure people understand
that AI offers them the
Position AI as the new
potential to raise their
member of your team,
game and increase their
here to drive productiv-
ow and creative insight.
ity and stay ahead of the
competition. Embrace education
to raise awareness and
Channel AI into the busi-
create AI advocates
ness, creating the right
throughout the business.
environment to nurture
and empower those
leading its development.
AI fall into two broad categories: data and organizational (see Checklist of Criti-
cal Success Factors). At its root, AI rests on the ability of people and machines to
collect, manage, mine, analyze, and secure staggering amounts of data. Compa-
nies need to attract data and computer scientists. And once those specialists are on
board, to succeed in todays competitive dynamics, companies must retain and em-
power them. They have to invest to create what our PwC colleague Todd Supplee
calls data factories: systems that can combine data from proprietary, third-party,
and public- and partner-generated sources and extract value. While doing so, they
must build the capacity for data governance and be sensitive to norms, regulations,
and expectations surrounding transparency and privacy. In our CIS survey, 47 per-
cent of respondents said they were unwilling to allow their online entertainment
80 and media consumption to be tracked, even if it would lower their costs.
The Human Element

In adopting AI, a focus on talent is critically important, because the gap between
the opportunities inherent in AI and the number of skilled resources available
to implement them is large. This means that companies have to make a cultural
shift. Its not simply a matter of CEOs and top leaders becoming more conversant
in the language of technology. Rather, they may need to think about reordering
the way their company relates to its employees.

As Shelly Palmer puts it, AI is a new employee that can help drive productivity.
Leaders must be willing to invite this new employee and the people who work
with it to disrupt existing processes and activities. Companies have to make
themselves and their working environments more open and attractive to the people
who work with AI. Beyond the usual imperatives of appealing to younger workers
with exible, engaging workplaces, companies can create greeneld sites, insulated
from the day-to-day operations, that provide more freedom to experiment.
Paradoxically, the advent of AI means companies have to double down on
the human element. As automation and machine learning release people from
repetitive, process-driven activities, they simultaneously impose new pressure on
people to deliver value. Employees will be able to spend more time building rela-
tionships, understanding the competitive context, innovating for the next wave,
and creating more engagement within and outside companies. At a certain level,
I think AI can drive out a lot of general ad agency laziness and content medioc-
rity, as Jon Cook, chief executive ofcer of the ad agency VML, put it. We have

to be much better than AI-generated content. AI will force us all to be better.
AI is not coming to destroy your business. But neither is it here to save your
business from disruption. Rather, it has arrived at a pivotal moment in the devel-
opment of the E&M industry and the people who work within it. If engaged in
the right way, AI can be a catalyst for reinvigoration of the very parts of compa-
nies that are most critical to their growth. AI gives humans more space to gener-
ate more value to unleash creativity, to exercise judgment, and to think about
the ow of their work rather than the processes that govern it. When understood
and managed properly, standardization and creativity dont have to clash. Increas-
ingly, as with Sonys AI-generated pop song, they can produce harmonies. + 81
Reprint No. 17209
Resources
Deborah Bothun and John Sviokla, Youre a Media Company. Now What? s+b, June 7, 2016: Four strategies that work in this dynamic new world.
Lauren Johnson, How 4 Agencies Are Using Articial Intelligence as Part of the Creative Process, Adweek, Mar. 22, 2017: A look at some early
disruptions in the advertising industry.
Joe Keohane, What News-Writing Bots Mean for the Future of Journalism, Wired, Feb. 16, 2017: How the Washington Post and others are using auto-
mated systems to cover the news.
Frank Rose, The Power of Immersive Media, s+b, Feb. 9, 2015: The most successful advertising today convincingly takes on the qualities of real experience.
Todd Supplee and Alex Mannella, Quantifying Entertainment, s+b, Jan. 26, 2017: How the science of big data analytics can contribute to the art of
producing movie and TV content.
More thought leadership on this topic: strategy-business.com/marketing_media_sales
82
feature technology
201721
A STRATEGISTS
GUIDE TO
feature technology
ARTIFICIAL
INTELLIGENCE
As the conceptual side of computer science
becomes practical and relevant to business, companies
must decide what type of AI role they should play.
BY ANAND RAO
83
Jeff Heepke knows where to plant corn on

Illustration by The Heads of State
his 4,500-acre farm in Illinois because of articial

intelligence (AI). He uses a smartphone app called
Climate Basic, which divides Heepkes farmland
(and, in fact, the entire continental U.S.) into plots
that are 10 meters square. The app draws on local
temperature and erosion records, expected
precipitation, soil quality, and other agricultural data
to determine how to maximize yields for each plot.
Anand Rao Also contributing to
anand.s.rao@pwc.com this article were PwC
is a principal with PwC principal and assurance
US based in Boston. He innovation leader
is an innovation leader for Michael Baccala, PwC
PwCs data and analytics senior research fellow
consulting services. He Alan Morrison, and writ-
holds a Ph.D. in articial er Michael Fitzgerald.
intelligence from the
University of Sydney
and was formerly chief
research scientist at
the Australian Articial
Intelligence Institute.
If a rainy cold front is expected to pass by, Heepke knows which areas to avoid
watering or irrigating that afternoon. As the U.S. Department of Agriculture
feature technology
noted, this use of articial intelligence across the industry has produced the larg-
est crops in the countrys history.
Climate Corporation, the Silicon Valleybased developer of Climate Basic,
also offers a more advanced AI app that operates autonomously. If a storm hits
a region, or a drought occurs, it adjusts local yield numbers downward. Farm-
ers who have bought insurance to supplement their government coverage get a
check; no questions asked, no paper ling necessary. The insurance companies
and farmers both benet from having a much less labor-intensive, more stream-
lined, and less expensive automated claims process.
84 Monsanto paid nearly US$1 billion to buy Climate Corporation in 2013,
giving the companys models added legitimacy. Since then, Monsanto has con-
tinued to upgrade the AI models, integrating data from farm equipment and sen-
sors planted in the elds so that they improve their accuracy and insight as more
data is fed into them. One result is a better understanding of climate change and
its effects for example, the northward migration of arable land for corn, or the
increasing frequency of severe storms.
Applications like this are typical of the new wave of articial intelligence in
business. AI is generating new approaches to business models, operations, and

the deployment of people that are likely to fundamentally change the way busi-
ness operates. And if it can transform an earthbound industry like agriculture,
how long will it be before your company is affected?
An Unavoidable Opportunity
Many business leaders are keenly aware of the potential value of articial intel-
feature technology
ligence, but are not yet poised to take advantage of it. In PwCs 2017 Digital
IQ survey of senior executives worldwide, 54 percent of the respondents said
they were making substantial investments in AI today. But only 20 percent said
their organizations had the skills necessary to succeed with this technology (see
Winning with Digital Condence, by Chris Curran and Tom Puthiyama-
dam, page 44).
Reports on articial intelligence tend to portray it as either a servant, mak-
ing all technology more responsive, or an overlord, eliminating jobs and de-
stroying privacy. But for business decision makers, AI is primarily an enabler
of productivity. It will eliminate jobs, to be sure, but it will also fundamentally 85
change work processes and might create jobs in the long run. The nature of
decision making, collaboration, creative art, and scientic research will all be
affected; so will enterprise structures. Technological systems, including poten-
tially your products and services, as well as your ofce and factory equipment,
will respond to people (and one another) in ways that feel as if they are coming
to life.
In their book Articial Intelligence: A Modern Approach (Pearson, 1995), Stu-
art Russell and Peter Norvig dene AI as the designing and building of intel-
ligent agents that receive percepts from the environment and take actions that
affect that environment. The most critical difference between AI and general-
purpose software is in the phrase take actions. AI enables machines to respond
on their own to signals from the world at large, signals that programmers do not
directly control and therefore cant anticipate.
The fastest-growing category of AI is machine learning, or the ability of
software to improve its own activity by analyzing interactions with the world at
large (see The Road to Deep Learning, page 88). This technology, which has
been a continual force in the history of computing since the 1940s, has grown
dramatically in sophistication during the last few years.
News aggregation software, for example, had long relied on rudimentary AI
feature technology
to curate articles based on peoples requests. Then it evolved to analyze behavior,

tracking the way people clicked on articles and the time they spent reading, and
adjusting the selections accordingly. Next it aggregated individual users behav-
ior with the larger population, particularly those who had similar media habits.
Now it is incorporating broader data about the way readers interests change over
time, to anticipate what people are likely to want to see next, even if they have
never clicked on that topic before. Tomorrows AI aggregators will be able to de-
tect and counter fake news by scanning for inconsistencies and routing people
to alternative perspectives.
86 AI applications in daily use include all smartphone digital assistants, email
programs that sort entries by importance, voice recognition systems, image rec-
ognition apps such as Facebook Picture Search, digital assistants such as Ama-
zon Echo and Google Home, and much of the emerging Industrial Internet.
Some AI apps are targeted at minor frustrations DoNotPay, an online legal
bot, has reversed thousands of parking tickets and others, such as connected
car and language translation technologies, represent fundamental shifts in the
way people live. A growing number are aimed at improving human behavior; for
instance, GMs 2016 Chevrolet Malibu feeds data from sensors into a backseat
driverlike guidance system for teenagers at the wheel.
Despite all this activity, the market for AI is still small. Market research
rm Tractica estimated 2016 revenues at just $644 million. But it expects hock-
ey stickstyle growth, reaching $15 billion by 2022 and accelerating thereafter.
In late 2016, there were about 1,500 AI-related startups in the U.S. alone, and
total funding in 2016 reached a record $5 billion. Google, Facebook, Microsoft,
Salesforce.com, and other tech companies are snapping up AI software compa-
nies, and large, established companies are recruiting deep learning talent and,
like Monsanto, buying AI companies specializing in their markets. To make the
most of this technology in your enterprise, consider the three main ways that
businesses can or will use AI:
Assisted intelligence, now widely available, improves what people and or-
ganizations are already doing.
Augmented intelligence, emerging today, enables organizations and peo-
ple to do things they couldnt otherwise do.
feature technology
Autonomous intelligence, being developed for the future, creates and de-
ploys machines that act on their own.
Many companies will make investments in all three during the next few
years, drawing from a wide variety of applications (see Exhibit 1). They comple-
ment one another, but require different types of investment, different stafng
considerations, and different business models.
Exhibit 1: Anticipated AI Applications

Estimated dates of commercial availability for products and services incorporating the three forms of artificial intelligence.
2015 2020 2025 2030
Medical image Personalized Doctorless

Healthcare 87
classification medicine hospitals
Robot musicians Automated

Arts and Creative arts
Augmented movie machine
Communications translation engines
script writing
Personal Automated insurance Guided personal Autonomous

Finance claims processing budgeting investing
Self-driving
Mobility Robotaxis Self-navigating drones
vehicles
Precision Autonomous Automated 3D bioprinting

Science and planting advice mining Artificial wildlife habitats
Environment
Bomb disposal robots Scientific discovery
Customer Legal Management Decentralized

Management service e-discovery cockpits for corporate functions
chatbots business decisions (e.g., HR and accounting)
Assisted AI that improves what your business is already doing.

BASIC FORMS OF AI Augmented AI that enables your business to do things it couldn't otherwise do.
Autonomous AI that acts on its own, choosing its actions on behalf of your business goals.
Source: PwC research and analysis

The Road to expert human players in Jeopardy, bot would interpret the emotions in a
chess, Go, poker, and soccer dif- conversation by following a program
Deep Learning fer from most day-to-day business that instructed it to start by checking
applications. These games have for emotions that were evident in the
T his may be the rst moment

in AIs history when a major-
ity of experts agree the technology
prescribed rules and well-dened
outcomes; every game ends in a
win, loss, or tie. The games are also
recent past.
The second approach is known
as machine learning. The machine
has practical value. From its con- closed-loop systems: They affect is taught, using specic examples,
ceptual beginnings in the 1950s, led only the players, not outsiders. The to make inferences about the world
by legendary computer scientists software can be trained through around it. It then builds its under-
such as Marvin Minsky and John multiple failures with no serious standing through this inference-
McCarthy, its future viability has risks. You cant say the same of an making ability, without following
been the subject of erce debate. As autonomous vehicle crash, a factory specic instructions to do so. The
recently as 2000, the most procient failure, or a mistranslation. Google search engines next-word
AI system was roughly comparable, There are currently two main completion feature is a good exam-
in complexity, to the brain of a worm. schools of thought on how to develop ple of machine learning. Type in the
feature technology
Then, as high-bandwidth networking, the inference capabilities necessary word articial, and several sugges-
cloud computing, and high-powered for AI programs to navigate through tions for the next word will appear,
graphics-enabled microprocessors the complexities of everyday life. In perhaps intelligence, selection, and in-
emerged, researchers began build- both, programs learn from experi- semination. No one has programmed
ing multilayered neural networks ence that is, the responses and it to seek those complements. Google
still extremely slow and limited in reactions they get inuence the way chose the strategy of looking for the
comparison with natural brains, but the programs act thereafter. The rst three words most frequently typed
useful in practical ways. approach uses conditional instruc- after articial. With huge amounts of
The best-known AI triumphs tions (also known as heuristics) to
in which software systems beat accomplish this. For instance, an AI (continued on next page)
88 Assisted Intelligence
Assisted intelligence amplies the value of existing activity. For example, Googles
Gmail sorts incoming email into Primary, Social, and Promotion default
tabs. The algorithm, trained with data from millions of other users emails,
makes people more efcient without changing the way they use email or altering
the value it provides.
Assisted intelligence tends to involve clearly dened, rules-based, repeatable
tasks. These include automated assembly lines and other uses of physical robots;
robotic process automation, in which software-based agents simulate the online

activities of a human being; and back-ofce functions such as billing, nance,
and regulatory compliance. This form of AI can be used to verify and cross-
check data for example, when paper checks are read and veried by a banks
ATM. Assisted intelligence has already become common in some enterprise soft-
ware processes. In opportunity to order (basic sales) and order to cash (re-
feature technology
ceiving and processing customer orders), the software offers guidance and direc-
tion that was formerly available only from people.
The Oscar W. Larson Company used assisted intelligence to improve its
eld service operations. This is a 70-plus-year-old family-owned general contrac-
tor, which among other services to the oil and gas industry, provides mainte-
nance and repair for point-of-sales systems and fuel dispensers at gas stations.
One costly and irritating problem is truck rerolls: service calls that have to be
rescheduled because the technician lacks the tools, parts, or expertise for a par-
ticular issue. After analyzing data on service calls, the AI software showed how
to reduce truck rerolls by 20 percent, a rate that should continue to improve as 89
the software learns to recognize more patterns.
Assisted intelligence apps often involve computer models of complex realities
that allow businesses to test decisions with less risk. For example, one auto man-
ufacturer has developed a simulation of consumer behavior, incorporating data
about the types of trips people make, the ways those affect supply and demand
for motor vehicles, and the variations in those patterns for different city topolo-
gies, marketing approaches, and vehicle price ranges. The model spells out more
than 200,000 variations for the automaker to consider and simulates the potential
success of any tested variation, thus assisting in the design of car launches. As the
automaker introduces new cars and the simulator incorporates the data on out-
comes from each launch, the models predictions will become ever more accurate.
(continued from previous page) cessing thousands of images, it translation, and vehicle navigation
data available, machine learning can recognizes objects based on a (see Exhibit A).
provide uncanny accuracy about pat- hierarchy of simpler building blocks: Though it is the closest ma-
terns of behavior. straight lines and curved lines at chine to a human brain, a deep learn-
The type of machine learn- the basic level, then eyes, mouths, ing neural network is not suitable for
ing called deep learning has become and noses, and then faces, and then all problems. It requires multiple pro-
increasingly important. A deep learn- specic facial features. Besides cessors with enormous computing
ing system is a multilayered neural image recognition, deep learning power, far beyond conventional IT
network that learns representations appears to be a promising way to architecture; it will learn only by
of the world and stores them as a approach complex challenges such processing enormous amounts of
nested hierarchy of concepts many as speech comprehension, human data; and its decision processes are
layers deep. For example, when pro- machine conversation, language not transparent.
Exhibit A: Potential Applications of Deep Learning

INDUSTRY GOAL DEEP LEARNING APPLICATION
Banking
feature technology
Detect suspicious ATM activity on Process footage along with images from other available
video footage from all branches law enforcement data banks; extract images related to
suspicious activities
Insurance Compute automobile insurance Establish heuristics for basic claims analysis; train claims
claims costs directly from accident system to analyze accident images and, based on
images submitted by policyholders heuristics, classify accidents by severity of damage and
cost of damaged parts
Healthcare Automatically identify potential Deploy a deep learning system, trained to analyze and
abnormalities in CT scans, MRI scans, categorize large volumes of images; join the pool of
x-rays, and other diagnostic images diagnostic labs contributing images to the system for
large-scale pattern recognition
Automobiles Identify most appealing marketing Build a database that incorporates auto sales data and
attributes, such as stylishness, assigns attributes to each model
acceleration speed, and roominess
Government Detect and prevent cyberattacks Create an autonomous system operating on multiple
agency Internet portals and gateways, one that
monitors keystrokes, recognizes typing patterns linked
to past intrusions, isolates potential intruders, and
alerts human investigators
90
Source: PwC analysis
AI-based packages of this sort are available on more and more enterprise
software platforms. Success with assisted intelligence should lead to improve-
ments in conventional business metrics such as labor productivity, revenues or
margins per employee, and average time to completion for processes. Much of
the cost involved is in the staff you hire, who must be skilled at marshaling and
interpreting data. To evaluate where to deploy assisted intelligence, consider two
questions: What products or services could you easily make more marketable if
they were more automatically responsive to your customers? Which of your cur-
rent processes and practices, including your decision-making practices, would be
more powerful with more intelligence?
feature technology
Augmented Intelligence
Augmented intelligence software lends new capability to human activity, per-
mitting enterprises to do things they couldnt do before. Unlike assisted intel-
ligence, it fundamentally alters the nature of the task, and business models
change accordingly.
For example, Netix uses machine learning algorithms to do something
media has never done before: suggest choices customers would probably not have
found themselves, based not just on the customers patterns of behavior, but on
those of the audience at large. A Netix user, unlike a cable TV pay-per-view 91
customer, can easily switch from one premium video to another without pen-
alty, after just a few minutes. This gives consumers more control over their time.
They use it to choose videos more tailored to the way they feel at any given mo-
ment. Every time that happens, the system records that observation and adjusts
its recommendation list and it enables Netix to tailor its next round of vid-
eos to user preferences more accurately. This leads to reduced costs and higher
prots per movie, and a more enthusiastic audience, which then enables more
investments in personalization (and AI). Left outside this virtuous circle are con-
ventional advertising and television networks. No wonder other video channels,
such as HBO and Amazon, as well as recorded music channels such as Spotify,
have moved to similar models.
ALGORITHMS WILL LINK SCENES
TO AUDIENCE EMOTIONS. A CONSUMER
MIGHT ASK TO SEE ONLY SCENES
WHERE A MERYL STREEP CHARACTER
IS FALLING IN LOVE.
Over time, as algorithms grow more sophisticated, the symbiotic relation-

ship between human and AI will further change entertainment industry prac-
feature technology
tices. The unit of viewing decision will probably become the scene, not the
story; algorithms will link scenes to audience emotions. A consumer might
ask to see only scenes where a Meryl Streep character is falling in love, or to
trace a particular type of swordplay from one action movie to another. Data
accumulating from these choices will further rene the ability of the enter-
tainment industry to spark peoples emotions, satisfy their curiosity, and gain
their loyalty.
Another current use of augmented intelligence is in legal research. Though
most cases are searchable online, nding relevant precedents still requires many
92 hours of sifting through past opinions. Luminance, a startup specializing in le-
gal research, can run through thousands of cases in a very short time, providing
inferences about their relevance to a current proceeding. Systems like these dont
yet replace human legal research. But they dramatically reduce the rote work
conducted by associate attorneys, a job rated as the least satisfying in the United
States. Similar applications are emerging for other types of data sifting, includ-
ing nancial audits, interpreting regulations, nding patterns in epidemiological
data, and (as noted above) farming.
To develop applications like these, youll need to marshal your own imagi-
nation to look for products, services, or processes that would not be possible at
all without AI. For example, an AI system can track a wide number of prod-
uct features, warranty costs, repeat purchase rates, and more general purchasing
metrics, bringing only unusual or noteworthy correlations to your attention. Are
a high number of repairs associated with a particular region, material, or line of
feature technology
products? Could you use this information to redesign your products, avoid re-
calls, or spark innovation in some way?
The success of an augmented intelligence effort depends on whether it has
enabled your company to do new things. To assess this capability, track your
margins, innovation cycles, customer experience, and revenue growth as poten-
tial proxies. Also watch your impact on disruption: Are your new innovations
doing to some part of the business ecosystem what, say, ride-hailing services are
doing to conventional taxi companies?
You wont nd many off-the-shelf applications for augmented intelligence.
They involve advanced forms of machine learning and natural language pro- 93
cessing, plus specialized interfaces tailored to your company and industry. How-
ever, you can build bespoke augmented intelligence applications on cloud-based
enterprise platforms, most of which allow modications in open source code.
Given the unstructured nature of your most critical decision processes, an aug-
mented intelligence application would require voluminous historical data from
your own company, along with data from the rest of your industry and related
elds (such as demographics). This will help the system distinguish external fac-
tors, such as competition and economic conditions, from the impact of your
own decisions.
The greatest change from augmented intelligence may be felt by senior deci-
sion makers, as the new models often give them new alternatives to consider that
AUGMENTED INTELLIGENCE SYSTEMS
DONT YET REPLACE HUMAN LEGAL
RESEARCH. BUT THEY DRAMATICALLY
REDUCE THE ROTE WORK CONDUCTED
BY ASSOCIATE ATTORNEYS.
dont match their past experience or gut feelings. They should be open to those
alternatives, but also skeptical. AI systems are not infallible; just like any human
feature technology
guide, they must show consistency, explain their decisions, and counter biases,
or they will lose their value.
Autonomous Intelligence
Very few autonomous intelligence systems systems that make decisions with-
out direct human involvement or oversight are in widespread use today. Early
examples include automated trading in the stock market (about 75 percent of
Nasdaq trading is conducted autonomously) and facial recognition. In some cir-
cumstances, algorithms are better than people at identifying other people. Other
94 early examples include robots that dispose of bombs, gather deep-sea data, main-
tain space stations, and perform other tasks inherently unsafe for people.
The most eagerly anticipated forms of autonomous intelligence self-driv-
ing cars and full-edged language translation programs are not yet ready for
general use. The closest autonomous service so far is Tencents messaging and
social media platform WeChat, which has close to 800 million daily active us-
ers, most of them in China. The program, which was designed primarily for
use on smartphones, offers relatively sophisticated voice recognition, Chinese-to-
English language translation, facial recognition (including suggestions of celebri-

ties who look like the person holding the phone), and virtual bot friends that can
play guessing games. Notwithstanding their cleverness and their pioneering use
of natural language processing, these are still niche applications, and still very
limited by technology. Some of the most popular AI apps, for example, are small,
menu- and rule-driven programs, which conduct fairly rudimentary conversa-
tions around a limited group of options.
Despite the lead time required to bring the technology further along, any
business prepared to base a strategy on advanced digital technology should be
thinking seriously about autonomous intelligence now. The Internet of Things
will generate vast amounts of information, more than humans can reasonably
interpret. In commercial aircraft, for example, so much ight data is gathered
feature technology
that engineers cant process it all; thus, Boeing has announced a $7.5 million
partnership with Carnegie Mellon University, along with other efforts to develop
AI systems that can, for example, predict when airplanes will need maintenance.
Autonomous intelligences greatest challenge may not be technological at all
it may be companies ability to build in enough transparency for people to trust
these systems to act in their best interest.
First Steps
As you contemplate the introduction of articial intelligence, articulate what mix
of the three approaches works best for you. 95
Are you primarily interested in upgrading your existing processes, reduc-
ing costs, and improving productivity? If so, then start with assisted intelligence,
probably with a small group of services from a cloud-based provider.
Do you seek to build your business around something new responsive
and self-driven products, or services and experiences that incorporate AI? Then
pursue an augmented intelligence approach, probably with more complex AI ap-
plications resident on the cloud.
Are you developing a genuinely new technology? Most companies will
be better off primarily using someone elses AI platforms, but if you can justify
building your own, you may become one of the leaders in your market.
The transition among these forms of AI is not clean-cut; they sit on a contin-
uum. In developing their own AI strat- Exhibit 2: Steps in Adopting Artificial Intelligence
egy, many companies begin somewhere
1. Develop an AI strategy aligned with your overall
between assisted and augmented, while business strategy
Integrate AI into your existing digital and analytics plans
expecting to move toward autonomous Decide which businesses to disrupt and which to enhance
eventually (see Exhibit 2). Consider new business models based on improved productivity
Plan long-term investments in autonomous intelligence
Though investments in AI may
2. Develop an enterprise-wide AI capability
seem expensive now, the costs will de- Redesign products and services to incorporate machine learning
cline over the next 10 years as the soft- Use AI to upgrade your most critical distinctive capabilities
feature technology
Use automation to improve your current decisions

ware becomes more commoditized. Automate your existing business processes or develop new ones
As this technology continues to ma- Recruit engineers and other professionals who understand AI
ture, writes Daniel Eckert, a manag- 3. Institutionalize your portfolio of AI capabilities
Embed AI throughout your business processes
ing director in emerging technology Embrace cloud platforms and specialized hardware
services for PwC US, we should see Foster a decision-making culture open to ideas from AI support
the price adhere toward a utility mod- 4. Ensure appropriate governance
el and atten out. We expect a tiered Establish clear policies with respect to data privacy, decision
rights, and transparency
pricing model to be introduced: a free Set up governance structures to monitor possible errors and
problems (for example, overreach in program trading)
(or freemium model) for simple activi- Set up communications practices to explain AI-related decisions
Consider the impact on employment and invest in developing
96 ties, and a premium model for discrete, the workforce that AI will complement
business-differentiating services. Source: PwC analysis
AI is often sold on the premise that

it will replace human labor at lower cost and the effect on employment could
be devastating, though no one knows for sure. Carl Benedikt Frey and Michael
Osborne of Oxford Universitys engineering school have calculated that AI will
put 47 percent of the jobs in the U.S. at risk; a 2016 Forrester research report es-
timated it at 6 percent, at least by 2025. On the other hand, Baidu Research head
(and deep learning pioneer) Andrew Ng recently said, AI is the new electricity,
meaning that it will be found everywhere and create new jobs that werent imag-
inable before its appearance.
At the same time that AI threatens the loss of an almost unimaginable num-
ber of jobs, it is also a hungry, unsatised employer. The lack of capable talent
people skilled in deep learning technology and analytics may well turn out to
feature technology
be the biggest obstacle for large companies. The greatest opportunities may thus
be for independent businesspeople, including farmers like Jeff Heepke, who no
longer need scale to compete with large companies, because AI has leveled the
playing eld.
It is still too early to say which types of companies will be the most success-
ful in this area and we dont yet have an AI model to predict it for us. In the
end, we cannot even say for sure that the companies that enter the eld rst will
be the most successful. The dominant players will be those that, like Climate
Corporation, Oscar W. Larson, Netix, and many other companies large and
small, have taken AI to heart as a way to become far more capable, in a far more 97
relevant way, than they otherwise would ever be. +
Reprint No. 17210
Resources
Raman Chitkara, Anand Rao, and Devin Yaung, Leveraging the Upcoming Disruptions from AI and IoT, PwC, 2017: Together, these two technolo-
gies will have as great an impact as the personal computer did.
Lawrence M. Fisher, Siri, Who Is Terry Winograd? s+b, Jan. 3, 2017: For 40 years, the Stanford professor has steered the increasingly complex and
meaningful interactions between humans and computers.
Art Kleiner and John Sviokla, The Thought Leader Interview: GEs Bill Ruh on the Industrial Internet Revolution, s+b, Feb. 1, 2017: View from
inside one of the leading AI platform creators.
Michael Specter, Climate by Numbers: Can a Tech Firm Help Farmers Survive Global Warming? New Yorker, Nov. 11, 2013: Compelling article on
Climate Corporations AI models and their potential impact on global agriculture.
More thought leadership on this topic: strategy-business.com/technology
98
feature strategy & leadership
Are CEOs
Less Ethical
Than in
the Past?

Why more chief executives are
losing their jobs after scandals and
corporate misconduct.
by Per-Ola Karlsson, DeAnne Aguirre, and Kristin Rivera
The job of a chief executive ofcer at a large publicly held

company may seem to be quite comfortable high pay, ex- 99
cellent benets, elevated social status, and access to private jets.
But the comfortable perch is increasingly becoming a hot seat,
especially when CEOs and their employees cross red lines.
As this years CEO Success study shows, boards of direc-
tors, institutional investors, governments, and the media are
holding chief executives to a far higher level of accountability
for corporate fraud and ethical lapses than they did in the
Illustration by Andr Da Loba
past. Over the last several years, CEOs have often garnered
headlines for all the wrong reasons: for misleading regula-
tors and investors; for cutting corners; and for failing to de-
tect, correct, or prevent unethical or illegal conduct in their
organization. Some high-prole cases, involving some of the
worlds largest corporations, have featured oil companies brib-
ing government ofcials and banks defrauding customers.
Per-Ola Karlsson DeAnne Aguirre Kristin Rivera Also contributing to
per-ola.karlsson@ deanne.aguirre@pwc.com kristin.d.rivera@pwc.com this article were Gary
strategyand.ae.pwc.com is the global leader of leads PwCs fraud risk Neilson, Spencer Herbst,
leads the organization, the Katzenbach Center and controls team and and Anjali Fehon, of PwC
change, and leadership of Innovation for Culture serves as the global US, and s+b contributing
practice in the Middle and Leadership and an forensics clients and editor Rob Norton.
East for Strategy&, expert in team effec- markets leader. A part-
PWCs strategy consult- tiveness for Strategy&. ner with PwC US, she is
ing business. Based in Based in San Diego, based in San Francisco.
Dubai, he is a partner she is a principal with
with PwC Middle East. PwC US.
To be sure, the number of CEOs who are forced from ofce for ethical laps-
es remains quite small: There were only 18 such cases at the worlds 2,500 larg-
est public companies in 2016. But rings for ethical lapses have been rising as
a percentage of all CEO successions. (We dene dismissals for ethical lapses as
the removal of the CEO as the result of a scandal or improper conduct by the
CEO or other employees; examples include fraud, bribery, insider trading, envi-
ronmental disasters, inated resumes, and sexual indiscretions. See Methodol-
ogy, page 109.) Globally, dismissals for ethical lapses rose from 3.9 percent of all
successions in 200711 to 5.3 percent in 201216, a 36 percent increase. The in-
crease was more dramatic in North America and Western Europe. In our sample
of successions at the largest companies there (those in the top quartile by market
100 capitalization globally), dismissals for ethical lapses rose from 4.6 percent of all
successions in 200711 to 7.8 percent in 201216, a 68 percent increase.
Our data cannot show and perhaps no data could whether theres
more wrongdoing at large corporations today than in the past. However, we
doubt thats the case, based on our own experience working with hundreds of
companies over many years. In fact, our data shows that companies are continu-
ing to improve both their processes for choosing and replacing CEOs and their
leadership governance practices especially in developed countries.
But over the last 15 years, the environment and context in which companies
operate has changed dramatically as a result of ve trends. First, the public has be-
come more suspicious, more critical, and less forgiving of corporate misbehavior.
Second, governance and regulation in many countries has become both more pro-
We doubt theres more
wrongdoing today than in the
past. But there is more scrutiny
of CEO behavior.
active and more punitive. Third, more companies are pursuing growth in emerg-
ing markets where ethical risks are heightened, and relying on extended global

supply chains that increase counterparty risks. Fourth, the rise of digital commu-
nications has exposed companies and the executives who oversee them to more
risk than ever before. Finally, the 24/7 news cycle and the proliferation of media in
the 21st century publicizes and amplies negative information in real time.
Add it all up, and you get greater scrutiny of CEO behavior, a greater desire
for swift justice and action, and a smaller margin of error for all parties involved.
But theres good news for CEOs, their leadership teams, and their boards. Orga-
nizations can protect themselves by making sure that their controls and compli-
ance programs are truly world-class, and even more important that their
corporate culture sends and reinforces clear, well-understood messages about eth- 101
ical conduct.
Room for Improvement

Globally, this years study shows that although there is still room for improve-
ment, boards continue to get better at planning smooth successions and bol-
stering corporate governance. Over the last decade, the number of forced turn-
overs has dropped signicantly. From 2007 to 2011, forced turnovers accounted
for 31.1 percent of total turnovers at the 2,500 largest companies, whereas from
2012 to 2016 the share of forced turnovers fell sharply, to 20.3 percent. Our data
also shows that the concentration of power in a single person is declining: The
share of incoming CEOs who also serve as chair of the board at the worlds 2,500
biggest companies has been dwindling Exhibit 1: CEO Turnover by Region
Although forced turnovers are generally declining, the proportion of
steadily, from 48 percent in 2002 to 10 CEOs fired for ethical lapses is rising.
percent in 2016. Planned Forced (other) Forced (ethical lapses)
However, dismissals for ethical 3.9% 5.3% 1.6% 3.3% 4.2% 5.9% 3.6% 8.8%
lapses increased signicantly over the 27.2% 15.0% 26.2% 15.8% 32.4% 26.1% 26.7% 8.1%
83.2%
last ve years on a global basis and 79.7 % 80.9%
72.1%
in each of the three major regions we 68.9% 68.0%
69.7%
63.4%
analyze: the U.S. and Canada; West-
ern Europe; and Brazil, Russia, India,
and China (the BRIC countries). The
share of all successions attributable to
102 ethical lapses rose sharply in the U.S.
200711
201216
200711
201216
200711
201216
200711
201216
and Canada (from 1.6 percent of all
successions in 200711 to 3.3 percent Global U.S. and
Canada
Western
Europe
BRIC
in 201216), in Western Europe (from Source: Strategy& 2016 CEO Success study
4.2 percent to 5.9 percent), and in the

BRIC countries (from 3.6 percent to 8.8 percent; see Exhibit 1).
We believe that the rising numbers of dismissals for ethical lapses in the
U.S. and Canada and Western Europe stem from the fact that the changes in
the business environment weve cited in public opinion, governance and

regulation, operating risk, digital communications, and media attention are
most pronounced in those regions. The fact that dismissals for ethical lapses
were even higher at companies in the top quartile by market capitalization in
these regions supports that hypothesis, Exhibit 2: The Bigger They Are
The CEOs at the largest companies are significantly more likely to be
because the largest companies are the ousted for ethical lapses.
ones most affected by these changes Share of CEOs in the U.S. and Canada and 7.8%
Western Europe forced out of office for
and are subject to the greatest scrutiny ethical lapses, by market cap quartile
(see Exhibit 2). Largest quartile 4.6%
The higher rate of dismissals for Third quartile

Second quartile 3.0%
3.3% 3.2%
ethical lapses in companies in the Smallest quartile

1.8%
2.4%
BRIC countries reects these changes 0.8%
as well, but in an amplied way, given 200711 201216
the historical pervasiveness of corrup- Source: Strategy& 2016 CEO Success study
tion in the countries in which these

companies operate. Among the BRIC countries, for example, Transparency

Internationals Corruption Perceptions Index 2016 ranked Brazil, India, and
China in 79th place (tied) out of 176 countries analyzed, and Russia was in
131st place.
Despite the global increase in dismissals for ethical lapses, companies in
the U.S. and Canada have the lowest incidence of such dismissals 3.3 per-
cent in 201216, compared with 5.9 percent in Western Europe in 2016, and
8.8 percent in the BRIC countries. More stringent governance regulation is one
likely reason. Nearly two-thirds of U.S. respondents to PwCs Global Economic
Crime Survey 2016, for example, agreed strongly that their organization had a
code of conduct in place covering key risk and policy areas and setting out the 103
organizational values and behaviors expected of employees, compared with 44
percent of respondents globally. And only 14 percent of U.S. respondents re-
ported that their organization had experienced cases of bribery and corruption
over the preceding 24 months, compared with 24 percent globally. Both the
legislative requirements for codes of conduct and anti-bribery statutes have been
tightened signicantly in the United States.
When we compared the reasons for dismissal of CEOs who also held the ti-
tle of board chair with the reasons for dismissal of those CEOs who did not hold
both titles, we found that 24 percent of CEOs with joint titles were dismissed for
ethical lapses, compared with 17 percent of those with the CEO title only a
44 percent difference. This suggests that awarding joint titles to the CEO in-
creases the risk of ethical lapses, and validates the consensus among experts that
separating the roles is a basic tenet of good governance practice.
We also found that CEOs forced out of ofce for ethical lapses had a me-
dian tenure of 6.5 years, compared with 4.8 years for CEOs forced out for other
reasons. Why? Its possible that companies with long-serving CEOs tend to be
those that have been achieving above-average nancial results, and thus may at-
tract less shareholder and media scrutiny than companies that have been per-
forming poorly. Its also possible that when an organizations leadership is static,
employees may begin to see ethical lapses as normal, and allegations of miscon-
duct are less likely to be raised, investigated, or acted on.
A Sea Change in Accountability

How much has the level of CEO accountability risen in recent decades? In the
late 20th century, even the most serious, large-scale, and widely publicized cases
of corporate misbehavior rarely led to dismissal of the CEO. Criminal prosecu-
tions of corporate ofcers were extremely rare. Financial penalties tended to be
modest, ranging from the tens of millions to the low hundreds of millions of
dollars, and media attention was often limited to the business press. Today, the
chief executive of a company caught up in a major scandal is often dismissed
quickly. And it is not uncommon to see multiple criminal indictments of cor-
porate ofcers. The nancial penalties that companies face have rocketed in
104 some recent cases, into the tens of billions of dollars. And media attention, from
online outlets, cable television channels, and the relentless glare of social me-
dia, is omnipresent. We believe that the ve tectonic shifts identied above have
forged this new era of CEO accountability.
Public opinion. Condence and trust in large corporations and CEOs have
been declining for decades. But the decline has accelerated since the nancial cri-
sis of 200708, the Great Recession, and the slow recovery that ensued. Corpora-
tions and executives received government bailouts, while seeming to suffer little
in the aftermath. Although many companies paid large nes and settlements,
few were charged criminally, even in instances where unethical and illegal activ-
ity was widespread and well documented. Media attention has also focused more
and more on corporate tax avoidance and the offshoring of jobs, as well as record-
Only 37 percent of people
consider CEOs credible today
down 12 percent from last year.
high rates of executive compensation and rising income inequality in general.

Those are the areas that, although not illegal, do not promote goodwill.

The upshot: Only 37 percent of people consider CEOs credible today, ac-
cording to the 2017 Edelman Trust Barometer an all-time low for the 17-year-
old survey, and down 12 percent from just last year. According to a long-running
Gallup poll, whereas 34 percent of citizens surveyed in the U.S. in 1975 said
they had a great deal or a lot of condence in big business, only 18 percent
said so in 2016.
Governance and regulation. Heightened public criticism and skepticism of
executives and corporations have translated directly into regulatory and legisla-
tive action. Over the last 20 years, new laws generally passed after scandals
or market crashes have ratcheted up scrutiny of CEOs and corporations and 105
mandated much more formal and extensive compliance practices. In the U.S.,
the Sarbanes-Oxley Act of 2002, enacted in the wake of the Enron and World-
Com scandals, fundamentally changed the nature of corporate regulation, and
similar measures were enacted in many other countries. The Dodd-Frank Act of
2010, which imposed new regulations and standards, included further measures
to detect, discourage, and punish corporate wrongdoing. To keep on the right
side of such laws, companies in the U.S. and many other countries have moved
to a zero-tolerance approach toward bad behavior in the C-suite.
One effect of these measures has been to shift the focus of accountability
from companies to individuals. Indeed, prison sentences for corporate malfea-
sance have been increasing. Between 1996 and 2011, the mean fraud sentence
CEO Turnover greater diversity that had been occur- Among industries, turnover in
ring over the last several years, and 2016 was highest at utilities compa-
in 2016 a recovery from 2015s 2.8 percent. nies, where more than one-fth of
Of the regions studied, the share of all companies 20.8 percent ap-
T urnover among CEOs at the

worlds 2,500 largest compa-
nies decreased from its record high of
incoming women CEOs was highest
in the U.S. and Canada, rebounding
to 5.7 percent after having fallen for
pointed a new CEO; this was followed
by industrial companies (16.4 percent)
and energy companies (16.1 percent).
16.6 percent in 2015 to 14.9 percent in the previous three years. China had For the rst time in ve years, tele-
2016, due largely to a drop in merger the second-highest share of incom- com services did not have the highest
and acquisition activity. Our turnover ing women CEOs, at 5.3 percent. rate of CEO turnover.
data reafrms the continuing im- Among industries, utilities companies The share of incoming CEOs
provement in corporate governance had the highest share of incoming with international work experience
globally: Planned turnovers, which women CEOs, at 13.6 percent, fol- continued to decline, to 24 percent
are generally indicative of good suc- lowed by consumer discretionary (7.3 in 2016 from 28 percent in 2015.
cession planning, continue to be more percent) and nancial services (5.4 Western European companies were
common. Excluding CEOs removed as percent). However, ve industries most likely to hire CEOs with interna-
a result of M&A, the share of planned healthcare, industrials, information tional work experience; 47 percent of
turnovers in 2016 was 81 percent, the technology, consumer staples, and incoming CEOs there had worked in
third-highest rate since 2000. This telecom services did not have a other regions. And a large majority of
was the seventh year in a row that the single incoming woman CEO in 2016. companies continue to choose CEOs
share of planned turnovers was more from the same country as the location
than 75 percent. Regions, Industries, Demographics of their company headquarters 87
Another sign of improving CEO CEO turnover was highest in Brazil, percent in 2016, up from 83 percent
succession practices: The share of Russia, and India, at 17.2 percent, in 2015.
incoming CEOs who were also named followed by Japan (15.5 percent), Thirty-six percent of the
board chairman was just 10 percent Western Europe (15.3 percent), and incoming class of 2016 had MBA
in 2016 up slightly from 7 percent China (15.2 percent). CEO turnover fell degrees, the highest share in the last
in 2015, but far lower than the 25 to 50 in every region we studied except for ve years. The share of incoming
percent rates of the early 2000s. the U.S. and Canada. Turnover was CEOs with Ph.D.s was little changed,
lowest, at 13.6 percent, in emerging at 10 percent, as was the median age
Women CEOs countries other than BRIC, and sec- of 53. The number of CEOs hired from
106
Globally, companies appointed 12 ond-lowest in the U.S. and Canada, at outside the company, however, fell to
women CEOs in 2016 3.6 percent 14.2 percent. The spread between the its lowest level in ve years: 18 per-
of the incoming class. This marks highest and lowest regional succes- cent, down from 23 percent in 2015.
a return of the slow trend toward sion rates was unusually narrow.
for individuals in U.S. federal courts nearly doubled from just over one year
to almost two years. During the same period, the mean sentence for all fed-
eral crimes dropped from 50 to 43 months. (Its worth noting that a debate is
currently under way in the U.S. about whether business regulation has become
overly stringent, potentially signaling an inection point in the trend toward in-
creased corporate oversight.)
In recent decades, power has also shifted away from CEOs and toward
boards and large shareholders. The days of an imperial CEO presiding over
a board largely composed of personal friends and company insiders are gone. In
2016, according to the Spencer Stuart Board Index, 85 percent of all board di-
rectors at S&P 500 companies were independent, and 27 percent of boards had
a truly independent chair, up from 9 percent in 2005.
Business operating environment. The threats that companies face in the
normal course of business have multiplied in recent decades. Global growth op-

portunities are increasingly found in emerging economies, where the risk of ethi-
cal lapses particularly corruption and bribery is higher than in more devel-
oped markets, in terms of both complying with local legal systems and meeting
home-country legal requirements for global operations. Not surprisingly, the
percentage of CEO turnovers resulting from ethical lapses is much higher in the
BRIC countries than in other regions in our study.
The growing interconnectivity of businesses, as operations have globalized
and supply chains have lengthened, also exposes companies to more risk. Com-
panies dont only have to worry about risk in their own business. They also
have to be cognizant of the risks present in their vendors, and in the vendors of 107
their vendors.
The rise of digital communications. Beyond providing new channels for in-
discretion, the use of email, text messaging, and tweets has created new risks
for ethical lapses. A companys digital communications can provide irrefutable
evidence of misconduct, and their existence increases the likelihood that a CEO
will be held accountable for ethical lapses that occur on his or her watch. A pub-
lic company CEO who tweets inaccurate information about the company, for
example, puts him- or herself at risk for being investigated by the SEC for securi-
ties fraud.
Moreover, societys rising reliance on data and digital technologies in-
cluding the rapidly emerging Internet of Things has outpaced the develop-
ment of systems, standards, rules, and other measures for mitigating the risks to
cybersecurity and privacy that are inherent in the many devices being designed,
built, purchased, and used online. Hackers have succeeded in accessing the pri-
vate data and electronic communications of companies and executives with the
goal of exposing unethical or embarrassing conversations and conduct to the
public and media.
The 2016 Global State of Information Security Survey found that the
number of these types of security incidents across all industries rose by 38 per-
cent in 2015 the biggest increase in the 12 years since the global study was
rst published. In the 2017 edition of the survey, 59 percent of respondents re-
ported having raised their cybersecurity spending as a result of digitizing their
108 business ecosystem.
The 24/7 news cycle. The changing nature of media has amplied nega-
tive news and opinion about businesses and executive conduct. In the 20th cen-
tury, most executives and companies could maintain a low public prole, and
live and work in relatively anonymity. No longer. The lightning-fast ow of
Web-based nancial news and data ensures that information travels quickly and
widely. Whats more, negative information revealed by whistleblowers, short sell-
ers, critics, and hackers quickly attains global distribution. Companies are now
pressured to respond instantly when problems, crises, or inquiries appear in the

news, erupt on social media, or arise directly from inuential individuals. In this
pressure-cooker environment, its easy for the removal of the CEO to become
the publics and eventually the companys solution of choice.
Methodology Each company that appeared
to have changed its CEO was investi-
succession event as part of the
effort to learn the reason for specic
gated for conrmation that a change CEO changes in their region. To dis-
T he CEO Success study identi-

ed the worlds 2,500 largest
public companies, dened by their
occurred in 2016, and additional
details title, tenure, chairmanship,
nationality, professional experi-
tinguish between mature and emerg-
ing economies, Strategy& followed
the United Nations Development
market capitalization (from Bloom- ence, and so on were sought on Programme 2015 ranking. Total
berg) on January 1, 2016. We then both the outgoing and incoming chief shareholder return data over a CEOs
identied the companies among the executives (as well as any interim tenure was sourced from Bloomberg
top 2,500 that had experienced a chief chief executives). Company-provided and includes reinvestment of divi-
executive succession event between information was acceptable for most dends (if any). Total shareholder re-
January 1, 2016, and December 31, data elements except the reason for turn data was then regionally market
2016, and cross-checked data using a the succession. Outside press reports adjusted (measured as the difference
wide variety of printed and electronic and other independent sources were between the companys return
sources in many languages. For a used to conrm the reason for an and the return of the main regional
listing of companies that had been executives departure. index over the same time period)
acquired or merged in 2016, we also Finally, Strategy& consultants and annualized.

used Bloomberg. worldwide separately validated each
Build a Culture of Integrity

Large organizations undoubtedly face a large and expanding spectrum of
threats and issues. And the reality is that CEOs, senior leaders, and board
members will increasingly be held accountable (often personally) for ethical
lapses that occur anywhere in their organization. So how can leaders limit their
exposure to potential threats?
From our own experience in advising companies that have experienced eth- 109
ical lapses, we have observed that the single most important force for prevent-
ing fraud and other misconduct and withstanding regulatory scrutiny is your
corporate culture. An effective culture must clearly state the companys values
of ethics and integrity, but it also needs to ensure that every team and every
employee understands the critical few behaviors that will enable them to
embrace and live those values in the work they do every day. To reinforce those
behaviors, the companys organizational ecosystem must address the underlying
conditions that are always present when employees engage in illegal or unethi-
cal acts, by (1) ensuring that the company isnt creating pressures that inuence
employees to act unethically; (2) making sure business processes and nancial
controls minimize opportunities for bad behavior; and (3) preventing employ-
Companies that get caught in
ethical lapses typically have
incentives that prioritize
achieving targets over all else.
ees from nding ways to rationalize Exhibit 3: Ethical Behavior Ecosystem
breaking the rules. This line of think-

Organizational
ing borrows from sociologist Donald and External
Influences
Business
Processes
Strong business
Cresseys classic 1950 conception of Leadership style,
compensation structure, processes and a
strict system of
incentives, and
the fraud triangle, which identied internal/external
pressures set the
controls discourage
unethical
context for
Culture behavior
the three elements necessary as precur- behavior
of
Integrity
sors to fraud as opportunity, rational-
Individual
ization, and pressure (see Exhibit 3). Ethical
Decision Making
1. Organizational and external in- Individuals make
decisions and rationalize
behavior according
uences. Unethical behavior is typi- to their personal
code of ethics
cally triggered by some kind of pres-
110 sure or incentive. Financial pressures Source: Strategy& 2016 CEO Success study
(such as bonus packages or stock op-

tions) are often assumed to be the primary driver of bad behavior. But this is
a misconception. Rather, social pressures tend to create larger problems. Em-
ployees and managers may be unwilling to admit they cant meet performance
targets. An organization that prides itself on never missing a quarterly earn-
ings target, for example, may inadvertently create this kind of pressure. Com-
panies can inoculate themselves from such concerns by taking the following
three steps:
Recognize whether you have a command and control culture. You may be
inadvertently encouraging bad conduct. Companies that get caught in ethical
lapses typically have incentives that prioritize achieving targets over all else, ex-
posing managers and employees to pressures that discourage speaking up to de-
liver bad news or ag ethical issues.
Insist on an open-door policy. Are you encouraging your managers and em-
ployees to raise issues that trouble them in informal dialogue, rather than only
on formal occasions such as performance reviews?
Consider whether you need structural reform. If your company has an exces-
sively purpose-driven culture that reects a strong or charismatic CEO modeling
the wrong approach, do you need a stronger governance infrastructure at the

board level to act as a check and balance? Part of the remediation may be one-
on-one coaching to help the CEO develop an appropriate tone.
2. Business processes. Weak business practices or lax nancial controls
create opportunities for unethical behavior. Most large companies in developed
countries have robust nancial controls, and these have been strengthened over
the last two decades by the requirements of the Sarbanes-Oxley Act in the U.S.
and similar laws elsewhere. Make sure your processes and controls are strong
and up-to-date by following three steps:
Determine your unique threat prole. Are you aware of the full range of po-
tential threats that exist in places you operate or plan to operate, and the political 111
and economic climate in those places? Consider all third parties to which you
may have exposure.
Take a close look at your existing compliance program. Are your current con-
trols sufcient to mitigate the threats across all operations? They should be up-
dated and tested to deal with any changes to your business strategy, your operat-
ing model, and the laws and regulations spanning your geographic footprint.
Assess your employee reporting systems. Is an employee hotline or similar
feedback mechanism in place that employees can use to ask questions or dis-
creetly report issues and if so, are your employees aware of it?
3. Individual ethical decision making. Employees who break the rules must
rst convince themselves that their actions are justiable, a process known as
rationalization. In some cases, they feel they have no alternative if they are to
keep their job or meet their performance targets. In other cases, they convince
themselves that their conduct isnt really wrong, or that it is justied because
the organizations culture or leadership implicitly condones it. Companies can
understand this process and prevent it from taking root by taking the following
three steps:
Clarify your communications strategy. Is the compliance and ethics messag-
ing from the top clear and consistently understood across the organization, and
is the messaging and training frequent enough and adapted to local languages
and cultural nuances?
Drive engagement from the top. Are the leaders behaviors consistent with
what they say in their communications? Are senior leaders and managers rein-
forcing messages about ethical conduct by engaging with their direct reports
and staff? Sharing stories about difcult situations and how they were resolved
and not shying away from those that turned out badly is one of the most
powerful ways to inculcate awareness of what not to do. Some leadership teams
publish case studies with transcripts of emails that show how mistakes happen.
112 Leadership teams should also engage informal leaders, individuals who lack
formal authority but who lead through example, experience, or reputation, to
communicate and amplify key messages throughout the organization.
Dont go it alone. Do leaders and managers have access to informed advice?
In some cases, ethical lapses occur because individuals facing ethical dilemmas
act without fully understanding how the decisions they make relate to the rules
and this is especially likely in crises. When in doubt, seek guidance from ex-
perts either inside or outside the rm.
The low level of public trust and condence in big business may be dismay-
ing. But its the reality in which companies operate today. We believe that public
perceptions may not fully reect the extent to which legal, regulatory, and ethi-
cal standards now in effect have evolved from those of earlier times. In a perverse
Public perceptions may
not fully reflect the extent
to which legal and ethical
standards have evolved.
way, the increasing incidence of CEO dismissals for ethical lapses may have a
positive effect on public opinion over time by demonstrating that bad behav-

ior is in fact being detected and punished.
In the meantime, the only course for CEOs who wish to avoid being part
of the small but rising share of leaders dispatched for ethical lapses, and for their
board colleagues, is to lead by example. Talking the talk is necessary. But its not
sufcient in this unforgiving climate. On a personal level, that means telling
the truth, seeking advice and following it, and responding swiftly to any allega-
tions of misconduct. On an organizational level, that means working to ensure
that your companys processes and controls are effective in all the businesses and
geographies in which you operate, and striving to build and maintain a true cul-
ture of integrity. + 113
Reprint No. 17208
Resources
Strategy&s 2016 CEO Success study, strategyand.pwc.com/chiefexecutivestudy.com: The full report and data analysis of this years study.
PwCs 20th Annual Global CEO Survey, 20 Years Inside the Mind of the CEO: Whats Next? Jan. 2017: The latest PwC Annual Global CEO
Survey shows chief executive ofcers are increasingly concerned about globalizations inability to close the gap between rich and poor and the challenge
of sustaining trust in the digital age.
DeAnne Aguirre, Per-Ola Karlsson, and Gary L. Neilson, 2015: Not the Year of the Woman, s+b, Apr. 22, 2016: Strategy&s 2015 CEO Success
study showed a sharp decline in the number of women named to the top post at large companies.
Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson, The $112 Billion CEO Succession Problem, s+b, May 4, 2015: The nancial penalties companies
pay when they plan poorly for changes in leadership and the payoff from getting it right.
More thought leadership on this topic: strategy-business.com/strategy_and_leadership
114
feature organizations & people
Neuroscience
research
shows how to
become a
better leader.
by JEFFREY SCHWARTZ,
JOSIE THOMSON, AND
ART KLEINER

115
R
AV E L E D
Jeffrey Schwartz He was the rst scholar Josie Thomson Art Kleiner
jmschwar@ucla.edu to identify self-directed josie@josiethomson.com art.kleiner@pwc.com
is a research psychiatrist neuroplasticity and at- is an independent, is editor-in-chief of
at the University of Cali- tention density, terms award-winning leader- strategy+business. He
fornia, Los Angeles, and that he coined, as means ship coach based in has been working with
the author or coauthor of making personal and Brisbane, Australia. Schwartz and Thomson
of three bestsellers: organizational changes. A two-time cancer since 2008 to research
Brain Lock (Harper- survivor, she has worked and articulate the
Collins, 20th-anniv. ed., closely with Schwartz concepts underlying
2016), You Are Not Your and developed a leader- this article.
Brain (Avery, 2011), and ship coaching practice
The Mind and the Brain based on neuroscience
(HarperCollins, 2002). principles.
H
ave you ever had a difcult executive decision to
make? This is the kind of decision where the best op-
tions arent obvious, the ethics arent clear, and the

consequences could affect hundreds of people or more.
How do you gure out the right thing to do? More
importantly, how do you develop the habit of making
better decisions, time and time again, even in difcult
and uncertain circumstances?
Neuroscientists and psychologists are beginning to learn what happens at
moments of choice inside the human mind (the locus of mental activity) and the
brain (the physical organ associated with that activity). If you understand these
116 dynamics and how they affect you and those around you, you can set a course
toward more effective patterns of thinking and action. You can replicate those
benecial patterns, at a larger scale, in your organization. Over time, this prac-
tice can help you take on the qualities of strategic leadership: inspiring others,
helping organizations transcend their limits, and navigating enterprises toward
lofty, benecial goals.
For example, consider the case of a human resources director for a regional
professional services organization, a linchpin in its local economy. (We have per-
mission to tell this story, but we cannot use the real name of the company or the
individual.) Natalie, who is in her 40s, reported directly to the CEO. When
the rm hit a long stretch of dwindling revenues, Natalie had ideas for turn-
ing things around, but she wasnt included in strategic conversations. Instead,
This article is derived
from a book in progress,
to be published by
Columbia University
Press in 2018.
all personnel issues including sexual harassment cases, bullying claims, and
layoffs were delegated to her. One year, she had to move the rms nancial

accounting staff offshore. About 30 local people lost their jobs. It was a painful
but necessary decision that allowed the rm to survive.
Stress took its toll. For years, Natalie worked 70 hours or more per week.
Her marriage was on the rocks, she came to work anxious, and she lost the abil-
ity to hide her chronic irritation. As a result, her performance reviews slipped.
She felt herself panicking: If this goes on much longer, I wont be able to cope, and
Im going to lose my job.
Fortunately for Natalie, there were people, including an executive coach,
who helped her see what was happening. First haltingly, and then with growing
enthusiasm, she adopted a regimen of practices that included mindfulness. Every 117
day, soon after waking, she spends 30 minutes alone, focusing her attention on
the deceptive brain messages that underlie her stress. For instance, she knows she
tends to see everyone but herself as prone to error. Most people are screwups, and
need to be tightly managed. She has also felt at times that the rms leaders dont
respect her. Im just the head of HR, and the real work happens in sales and nance.
She used to assume these were accurate statements of reality; now, she has rela-
beled them simply as brain messages, which she can observe dispassionately as
they rise into her awareness.
As she reects, she reframes these messages, choosing alternative ways of
looking at her situation. These dont come out of thin air; she practices think-
ing through the rms problems sometimes in areas she knows well, such as
Exhibit 1: High Road and Low Road
These two recurring patterns of mental activity have close relationships with their associated brain circuits. The named centers represent
functions of the brain, and the descriptions in italics represent associated mental activity.
Executive Center THE HIGH ROAD

Lateral prefrontal cortex
Human-evolved brain Is invoked by mentalizing and mindfulness;
function, associated develops your capacity for strategic
with goal-directed leadership. Messages that call on the Wise
responses and planning Deliberative Advocate, focusing on broad perspective and
Do what is most Self-Referencing Center long-term value, travel easily along this
Dorsal medial prefrontal cortex circuit and strengthen it.
needed.
Mentalizing
What others are thinking
Warning and what others
Center will do.
}
Amygdala, insula, and
orbital frontal cortex Self-Referencing Center
Mammalian-evolved Medial prefrontal cortex
brain function associated Processes information
with strong emotion Reactive concerning self and others
Something is Self-Referencing Center
wrong. Ventral medial prefrontal cortex
Subjective valuation
Who I am, what I want,
and what others want.
Habit Center THE LOW ROAD

Basal ganglia
Focuses on solving problems and expedience,
Reptilian-evolved brain
but provides no movement toward strategic
function, associated with
leadership capability. Deceptive messages
automatic responses.
travel easily along this circuit and reinforce it.
Do what feels right.
Source: Jeffrey Schwartz, Josie Thomson, Art Kleiner, and Wise Advocate Enterprises
recruiting and training, but also in less familiar domains, such as mergers and
growth and proposing strategic approaches. She refocuses her attention on
these alternatives, returning again and again, for example, to ways in which she
118 could make a valuable contribution. Before any major meeting, she thinks about
how the various leaders of the company might respond to the points she will
bring up. As she makes critical decisions, she reminds herself to pay attention to
the way others respond and follow up. In all this, she calls upon a construct that
she has developed in her mind: a disinterested observer whom she can consult
for guidance and perspective. We call this construct the Wise Advocate.
Natalie began this discipline around 2013, and it gradually affected the way
she spoke and the things she said. She is now regularly invited into conversations
about strategy. When there is a possible crisis, people turn to her rst, as if she
were a Wise Advocate for the larger enterprise. The companys prospects have
turned around in part because of opportunities she has pointed out. And in-
stead of laying people off, shes now recruiting. She has also reduced the amount
of oversight and number of approvals in the HR function; she no longer has to
work 70 hours per week.
You might think this is just standard good management practice, nothing
special. And you may well be right. But it was beyond Natalies skill set four
years ago. Natalie made a deliberate transition, from a harassed functionary bent
on pleasing her bosses to an inuential leader with strategic perspective. The po-
tential for this change was there all along, but nothing external no incentives,
rewards, threats, or burning platformstyle pressure could force her into it.
The leverage came from transforming her thoughts. By refocusing her attention,
she became the kind of leader needed in that company at that time.
The Power of Focusing Attention

T
he shift that Natalie made was conscious, pragmatic, and replicable;
anyone reading this can make it too. Her story exemplies a hypoth-
esis it could be called the Wise Leadership hypothesis about
the way people become effective leaders of large organizations, espe-
cially at times of turmoil and change. This hypothesis suggests that better, more
strategic leadership can be developed by combining two often-misunderstood
cognitive habits: mindfulness (clear-minded awareness of ones own mental ac-
tivity) and mentalizing (paying close attention to what other people are thinking
and are likely to do next). For all its complexity, the Wise Leadership hypothesis
can be boiled down to one core principle: The focus of your attention in critical 119
moments of choice can build your capacity to be an effective leader.
In most business decisions, you are likely to focus your attention in one of
two basic ways. Exhibit 1 (previous page) shows them in schematic form. We
call one pattern of mental activity the Low Road, because it favors expedient ac-
tions aimed at giving you what you want and giving others what they want, as
rapidly and efciently as possible. The other pattern, the High Road, often man-
ifests itself as the mental construct we call the Wise Advocate: a voice within the
mind, making the case for fundamental solutions with longer-term and broader
benets. The Low Road is tactical; the High Road is strategic.
As it happens, these two patterns of mental activity are associated with two
aspects of the prefrontal cortex dorsal (higher) for the High Road and ventral
(lower) for the Low Road. When people hold their heads upright, the dorsal area
sits above the ventral area in the brain. This is one reason that the names High
Road and Low Road seem apt to us. Because they link mental activity and brain
circuits, both the High Road and the Low Road are habit-forming. If the Wise
Leadership hypothesis is true (and it is consistent with current knowledge about
neuroscience, psychology, organizational research, and ethics), then the relation-
ship between them illuminates the source of strategic leadership.
The interaction between mind and brain is central to this hypothesis. When
experimental subjects are encouraged to pay attention in particular ways, certain

areas of the brain demonstrate observable activation, often in the form of blood
owing to those parts of the brain. Thus, for example, when people are shown
a frightening picture, the amygdala is activated in a way that is made visible by
functional magnetic resonance imaging (fMRI) scans. This activation is physi-
cal and passive. People do not consciously choose the emotions they experience
and the activations that arise in the brain.
But brain activity is not the same as mental experience. Mental activity,
although often associated with a physical circuit in the brain, also has a distinct
120 existence. For example, when people suffer brain damage and receive training
intended to refocus the injured persons attention, the functions of those dam-
aged areas can relocate to other parts of the brain. Further evidence comes from
the fact that solutions to mental problems, such as addiction, depression, and
obsessive-compulsive disorder, often elude or resist purely physical ways of ad-
dressing them. In addition, the mind is active in a way that the brain is not. You
can choose where to focus your attention, and your choices, made in the mind,
will eventually affect the physical makeup of your brain. This phenomenon is
called self-directed neuroplasticity.

Canadian scientist Donald Hebb discovered one of the core principles of
neuroplasticity in the 1950s. He summarized his ndings with a phrase now
known as Hebbs law: Neurons that re together wire together. In other words,
YOUR BRAIN CIRCUITS ARE
STRENGTHENED BY THE CHOICES
YOU MAKE ABOUT WHERE AND
HOW TO FOCUS YOUR ATTENTION.
parts of the brain that are continually activated together will physically associate
with one another in the future. The more frequently a pattern of mental activ-

ity occurs in your mind, the more entrenched the associated neural pathway
becomes in your brain, and the easier it becomes to follow that same pathway in
the future in fact, it can become totally automatic.
This process is loosely analogous to the way a powerful search engine works.
When you search Google, for example, for a particular term or phrase, the soft-
ware takes note. It also tracks the results that you click on and records your se-
lection of the items presented to you. The next time you use the Google search
engine, it will feature more prominently the terms and results that you chose
before, because it is designed with the assumption that this is closer to what you
want. You get more of what youve already looked for; the results in your future 121
echo the choices of your past.
In a somewhat similar way, your brain circuits are strengthened by the
choices you make about where and how to focus your attention. Thats how ad-
diction and obsessive-compulsive disorder, among many other human frailties,
gain much of their power. But it is also possible to consciously use self-directed
neuroplasticity to train your brain toward more constructive ends, and toward
a stronger leadership role. At rst, the Low Road is more comfortable; the High
Road is indeed a road less traveled. But as you learn to make choices that favor
the High Road in your mind, those choices strengthen the related circuits in
your brain. This makes it easier to stay on the High Road, and gives you greater
facility and sophistication in leading others.
VIDEO FEATURE
How Strategic Leaders
Use Their Brain
Neuroscientists are learning how
executive decision makers can use
their minds to transform organizations.
Cruising the Low Road
L
ife is a constant barrage of challenges. We have promises to fulll,
problems to solve, tests to pass, and situations to manage. The Low

Road is the pattern of mental activity, and the related brain circuits,
involved in meeting these challenges in an expedient way. When you
make deals, design rewards and incentives, or think about satisfying your needs
or the needs of others in your organization, you are probably on the Low Road.
This activity often elicits powerful emotions, such as desire, anxiety, fear, frus-
tration, elation, and relief. In everyday workplace life, most of us occupy the
Low Road most of the time.
The Low Road connects three major functions of the brain. We call the
122 rst the Reactive Self-Referencing Center; it is associated with the ventral medial
prefrontal cortex (vmPFC). This center is spontaneously activated when thought
processes or sensory stimuli are perceived as primarily related to the self. Low
Road activity is also known as subjective valuation: It is concerned with what
is valuable and relevant. Whats in it for me? How much is it worth? How might we
close the deal? What might others want? Though powerfully related to incentives of
various kinds, these are not purely selsh concerns; for example, the Low Road is
involved when you observe others being rewarded.
It is important to note that the Reactive Self-Referencing Center is just half

of a larger system called the Self-Referencing Center (associated with the entire
medial prefrontal cortex). As well see, the other half (the Deliberative Self-Refer-
encing Center) is a key element of the High Road. The overall Self-Referencing
Center is involved in many aspects of your personality and identity, especially in
the way you perceive yourself and relate to others. It correlates with your inner
monologue: the voice inside your mind that thinks about people, articulates your
hopes and fears, daydreams about the future, and interprets experience. When
youre on the Low Road, this inner monologue will be oriented to yourself; as
well see later, its different on the High Road, which is much less prone to subjec-
tive valuation.
The second function of the Low Road is the Warning Center. It is associ-

ated with three parts of the brain: the amygdala, insula, and orbital frontal cor-
tex. This center generates feelings of fear, gut-level responses, and the sense that
something is worth pursuing or avoiding. Anxious feelings of impending danger
(especially those related to the experience of past threats) can activate this cen-
ter with such intensity that they override all other thinking and response. Emo-
tional Intelligence author Daniel Goleman calls that phenomenon the amygdala
hijack. (As well see, the Warning Center is also associated with the High Road.)
The third major brain function on the Low Road is the Habit Center. This
function, typically associated with the basal ganglia (which are located deep with-
in the base of the brain), manifested itself early in animal evolution. (It is some- 123
times called the lizard brain.) The Habit Center manages automatic thoughts
and actions basic behaviors that dont generally require conscious attention
because they have become automatic through repetition. These are actions such
as walking up stairs, locking the door, brushing your teeth, and steering your car.
Making use of this center is the subject of Charles Duhiggs bestseller The Power
of Habit (Random House, 2012).
Some gifted and charismatic, albeit narcissistic, leaders are extremely skilled
at traveling the Low Road. They can read a room and give the people what
they want, powerfully and decisively, and they thus come across as masterful
competitors. Former GE CEO Jack Welch titled one of his books Straight from
the Gut, a reference to the power of signals from this circuit. But though they
tend to feel true, these signals arent necessarily accurate. Deceptive brain mes-
sages frequently arise from the Low Road, ranging from all-or-nothing thinking
(Youre either a winner or a loser in this company) to complacency (Our big custom-
ers have nowhere else to go). Natalies chronic worries (I will never be taken seriously
as a leader of this enterprise) were deceptive Low Road messages. So are many
other messages of expedience, including rationalizations for crossing an ethical
line (No one will notice if we manipulate these numbers).
The Low Road is familiar and emotionally powerful in business because it
has real value there. What would consumers pay for our product? What bonus will
our employees accept? What does my boss want, right now? What must I produce by
next quarter? How should we price our stock? Questions like these trigger the Low
Road, and your career may prosper if you answer them shrewdly. But business
leaders who spend most of their time on the Low Road are unlikely to break free
of the conventional wisdom of their industry. Strategic insights considerations
of the purpose of the enterprise, and the long-term value it brings to the world
are more likely to emerge when you travel the High Road.
124 Leading on the High Road
T
he 18th-century economic philosopher Adam Smith, best known
for his foundational book The Wealth of Nations, spent his last two
decades considering the problem of virtue in capitalism. The vitality
of the industrializing world was based on the good faith of energet-
ic, creative people, acting individually. But no human society had ever resisted
the temptations of corruption and exploitation. How would capitalism survive?
Smith said that the two obvious means, legal regulations and community cen-
sure, were not completely adequate, because they were often ill-placed, bore
enormous costs, reduced productivity, and diminished entrepreneurial vitality.
Yet what else could hold the inevitable waves of robber barons in check?
Smiths other famous work, The Theory of Moral Sentiments, rst published
in 1759 and signicantly expanded in 1790, proposes a solution principally
based on what he called the impartial spectator. Our Wise Advocate closely

resembles his solution. That voice within the mind is oriented not just to your
desires, needs, and success, but to the overall long-term value of the entire sys-
tem. It has the dispassionate perspective of a clear-minded observer, helping you
see yourself and your actions as others might see them. It may not be obvious,
but it is always there, an inner source of guidance ready to be cultivated; when
you act with it in mind, you stop looking for the most expedient outcome or
trying to make everyone happy. You dont necessarily want to make anyone un-
happy in the short run, but if that is a requisite part of a longer-term, broader-
based positive outcome, you are willing to consider it.
This type of mental activity is typical of the High Road. Like its Low Road 125
counterpart, the High Road connects three major centers of the mind and their
associated brain regions. The rst is the same Warning Center function that
links to the Low Road, associated with the amygdala, insula, and orbital frontal
cortex. Thus, the High Road also channels feelings of urgency.
Second, instead of the Reactive Self-Referencing Center, the High Road
connects to a function we call the Deliberative Self-Referencing Center. This is
associated with the dorsal (upper) medial prefrontal cortex (dmPFC), a brain re-
gion above the vmPFC. The Deliberative Self-Referencing Center is activated by
consideration of what others are thinking and evaluations of what future actions
they might perform. What is he thinking? What is she thinking? What will they do
next? These are High Road questions.
The third function on the High Road is the Executive Center, associated
with the lateral prefrontal cortex. Working memory, the ability to keep informa-
tion accessible so your conscious attention can work with it, is located in this
center. When you reect on your most meaningful aspirations, and plan how
you might bring those changes to pass, you generate activity in the Executive
Center. This center is also associated with cognitive exibility: the ability to see
a situation from multiple perspectives and act according to the potential and
subtle connections among them. Finally, this part of the brain is the home of
self-regulation, or the inhibition of habitual and impulsive behaviors. Columbia
University research psychologist Walter Mischel, the creator of the marshmal-
low test experiments, which linked childrens ability to self-regulate with suc-
126 cess later in life, identies the Executive Center as the source of this all-impor-
tant attribute.
Brain research related to the High Road is still evolving, and its implica-
tions are still being explored. It seems likely that the High Road is often trig-
gered when you think about people in abstract terms, studying them as an an-
thropologist might. You dont have to be entirely accurate in your perception of
others thoughts, motives, and future actions; just inquiring about and reecting
on what theyre thinking or what theyre likely to do will trigger the High Road.
If the Low Road is concerned with subjective value, the High Road is concerned
with genuine worth: whether something is important enough to deserve close,
sustained attention.
By linking it to the High Road, our hypothesis suggests that the Wise Ad-
WHEN YOU REPEATEDLY PAY
ATTENTION TO THE WISE ADVOCATE,
YOU WILL TEND TO REWIRE THE
PATHWAYS OF YOUR BRAIN IN WAYS
THAT ENHANCE YOUR PERSPECTIVE.
vocate is not just a metaphor. It represents a real, recurring mental phenomenon.

When you repeatedly pay attention to it, because of self-directed neuroplasticity,

you will tend to rewire the pathways of your brain in ways that signicantly en-
hance your perspective. The most accomplished leaders, from the earliest human
history up to today, have appeared to understand this. By managing their atten-
tion to achieve more signicant goals, they move their mind more frequently
onto the High Road, and they strengthen their Wise Advocate accordingly.
Mentalizing and Mindfulness
T
he Low Road and the High Road are both oriented toward achiev-
ing goals; theyre both somewhat concerned with how you make
your way in the world. They can sometimes be hard to tell apart. 127
And yet the switch between them can make all the difference to
your ability and success as a leader.
How, then, can you develop that capacity in yourself and in your orga-
nization? Two mental activities seem to evoke the High Road. The rst prac-
tice, mentalizing, has also been called theory of mind. When you mentalize,
instead of focusing on the desires and problems around you (and whether you
need to intervene), you consider people more dispassionately, trying to gure
them out, as if they were characters in a novel or lm. What makes them tick?
What will they do next? What are they really thinking about, and why?
Social neuroscientists have studied mentalizing in some detail. In typical
experiments, people are asked to look at groups of pictures illustrating simple
stories, or to read passages describing simple situations. Then they are asked to
explain the behaviors in the pictures and stories. This exercise, designed to trig-
ger mentalizing, consistently activates the Deliberative Self-Referencing Center,

which is associated with the High Road circuit. Some people have an easier
time with it than others; people who are skilled at it develop a more nuanced,
sophisticated understanding of other people that helps them manage others ef-
fectively. Emily Falk of the University of Pennsylvania has also found that ac-
tivity in brain areas associated with mentalizing is correlated with ideas that
become inuential.
Considering the benets of mentalizing, youd expect executives to eagerly
pursue it as a path toward leadership. But they often dont. The people who
128 mentalize most frequently those who are, as one study puts it, more likely to
engage in social cognitive processes that aid in understanding how others think,
feel, and behave tend to perceive themselves as low-status individuals. For
example, people who have a job that requires serving others (such as assistants,
caretakers, and salespeople) tend to consistently mentalize about higher-status
individuals. One could argue that some jobs are considered low-status precisely
because the job holders are expected to mentalize about their customers, inves-
tors, bosses, and everyone else, while no one pays attention to them. It takes
mental strength to be a good mentalizer. Its hard work, so its easy to see why
some people stop doing it when they rise to a position of inuence. They feel
theyve paid their dues.
And yet for aspiring leaders, mentalizing becomes even more important as
SOME OF THE MOST EFFECTIVE
SENIOR EXECUTIVES CAN ARTICULATE
WHAT OTHER PEOPLE ARE THINKING
AND WHY IT IS IMPORTANT.
they rise to higher levels of responsibility and authority. Some of the most ef-
fective senior executives have a well-developed ability to mentalize. They can

articulate what other people are thinking, what those people intend to do next,
and why it is important. They give the impression of genuinely caring about
what other people think, because of the intensive, high-voltage way they pay at-
tention in conversation.
But that is not enough, in itself, for consistent High Road leadership. The
other necessary practice is mindfulness. Millions of people have been exposed
to this basic practice in the context of meditation. You sit in a comfortable but
upright position, your spine straight, perhaps with your legs folded. You draw
your attention to some regular aspect of your experience in one common and
extremely benecial form, you focus your attention on your breathing. Each 129
time your mind wanders on a tangent, you catch yourself, and bring your at-
tention back to your breath. As you do this regularly, you develop new cogni-
tive skills. For example, you gain an enhanced awareness of thoughts moving
through your mind. This practice also induces self-directed neuroplasticity; it
changes your brain.
Wendy Hasenkamp, currently the science director of the Mind & Life In-
stitute in Massachusetts, conducted research at Emory University in which this
basic breathing exercise brought people to the Executive Center function and
thus to the High Road (specically, in the brain, the dorsal part of the lateral
prefrontal cortex was activated). But when their minds inevitably wandered
when they started thinking about the days activities, obligations, hopes, fears,
or anything other than their breathing the brain scans showed activity in the
ventral medial prefrontal cortex, associated with the Low Road. When they re-
turned to focus on their breathing, as meditators are trained to do, their mental
activity returned to the High Road (see Exhibit 2).
Hasenkamps research on focused attention, and other research on mind-
fulness, has helped explain why these practices are linked with stress reduction,
and with increased emotional intelligence. In general, mindfulness appears to
enhance the connection between the Executive Center and the emotion-based
Warning Center, to enhance peoples ability to disengage from Low Road

thoughts and feelings, and thus to strengthen the High Road.
When you combine mindfulness
and mentalizing to the extent that Exhibit 2: Mindfulness and the High Road
Two brain fMRI images from research by Wendy Hasenkamp and her
both practices become routine for you colleagues show how mindfulness may correlate with activity related to
the High Road and Low Road. Each is a composite brain image from
subjects performing a breath awareness exercise classically associated
you begin to mentalize about your- with mindfulness. The top image shows brain activity during a focus
period when the subjects paid close attention to their breathing. The
self. What am I likely to do? What am I yellow highlights a key brain area associated with the Executive Center
and the High Road. The bottom image shows brain activity during a mind
really about? Why am I thinking this way? wandering period, when the subjects minds took on thoughts unrelated
to the mindful attentive state. Activated areas include the ventral medial
These questions, strongly linked to the prefrontal cortex (in blue), a key brain area associated with the Reactive
Self-Referencing Center and the Low Road.
130 High Road, may be closer to authentic

leadership than questions typically as- Sustained Focus
of Mindful Attention
sociated with authority: How will we x Dorsal lateral
prefrontal cortex,
associated with
this problem? Who can we bring on board the High Road
with us? How will I triumph?

As a leader, you may already con-
sult your Wise Advocate a fair amount.
Mind Wandering
But unless youre quite unusual, the Ventral medial
prefrontal cortex,
Low Road in your brain is much more associated with
the Low Road
active than it needs to be. The more
you use your mind to shift activity Source: Wendy Hasenkamp et al., Mind Wandering and Attention during Focused
Meditation: A Fine-Grained Temporal Analysis of Fluctuating Cognitive States,
from this circuit to the High Road cir- NeuroImage, July 2011
cuit, the more effective you will be as a leader. You may, like Natalie, feel called
upon to play a more visible leadership role within your organization. And with
the application of the principles described here, you can provide the same kind of
guidance for the enterprise that the Wise Advocate provides for your own mind.
Invoking the High Road is not a miracle practice. It is not a sure path to
wealth, success, promotion, or any other material or social benet. But it seems
to be a reliable process for building your leadership acumen. You may experi-
ence this as the development of an inner dialogue that makes you more aware

of benecial opportunities, more likely to act on them, and more able to do so.
With regular practice, it can become habitual for you to step back and look at
any situation in your organization or in your personal life with a Wise
Advocate frame of mind. +
Reprint No. 17211
131
Resources
Emily Falk et al., Creating Buzz: The Neural Correlates of Effective Message Propagation, Psychological Science, May 2013: Links mentalizing (and
the dorsal medial prefrontal cortex, associated with the High Road) to the ability to inuence others.
Shihui Han and Georg Northoff, Culture-sensitive neural substrates of human cognition: A transcultural neuroimaging approach, Nature Reviews
Neuroscience, 2008: Articulates features of the Self-Referencing Center and its functions.
Ryan Patrick Hanley, Adam Smith and the Character of Virtue (Cambridge University Press, 2009): A guide to the moral and political philosophy of
capitalisms founding father, exploring his ideas about virtue in a market age (including the impartial spectator concept).
Wendy Hasenkamp et al., Mind Wandering and Attention during Focused Meditation: A Fine-Grained Temporal Analysis of Fluctuating Cognitive
States, NeuroImage, July 2011: Explorations of the impact of mindfulness.
Walter Mischel, The Marshmallow Test: Mastering Self-Control (Little, Brown, 2014): Overview of research by Mischel and others on the executive func-
tion of the brain, which is strongly linked to the High Road.
Keely Muscatell et al., Social Status Modulates Neural Activity in the Mentalizing Network, NeuroImage, Jan. 2012: Suggests that mentalizing activ-
ity increases for people who perceive their status to be lower.
More thought leadership on this topic: strategy-business.com/organizations_and_people
THOUGHT LEADER
The Thought 201721

Leader Interview:
Shelly Palmer
One of the worlds leading digital-technology
commentators sees a stark future for
entertainment and media companies.
BY DEBORAH BOTHUN AND ART KLEINER

thought leader
Photograph by Peter Ross
132

T
oday is the slowest rate of technological change you will ever experience
in your lifetime, wrote Shelly Palmer in his e-book Data-Driven Think-
ing (Digital Living Press, 2016). As one of the worlds premier voices on
the accelerating pace of digital technology, he is increasingly preoccu-
pied with helping companies and individuals prepare for the dramatic changes he
sees coming, particularly in entertainment and media.
Palmer started his career at age 12 as a musician, playing the clarinet, sax-
ophone, and ute in the 1970s in venues around New York. He was also an early
experimenter with analog and digital synthesizers. He holds patents for two ma-
jor interactive television technologies, one of which a method for syncing
broadcast TV with server-based text, known as enhanced television was ad-
opted by Monday Night Football and Who Wants to Be a Millionaire? His back-
ground also includes writing the theme music for Spin City and Live with Regis
and Kathie Lee, and conducting the London Symphony Orchestra. Currently, he
is Fox 5 New Yorks on-air tech and digital media expert and the proprietor of a
popular and prescient email newsletter that covers the impact of technology on
media and daily life, with a special focus on smart cars and smart homes.
For the past decade, as a venture capitalist and CEO of his own consulting
rm and marketing agency, the Palmer Group, Palmer has focused his attention
on the evolution of advertising, marketing, and related businesses, along with
leading-edge technologies such as smart home systems and data analytics. We
recently talked with Palmer in New York. Conscious of the intertwined trajecto-
ries of trends in technology and media, we sought to explore how articial intel-
ligence (AI) and the churn in business models could affect advertising, media,
thought leader
and related elds over the next few years.
S+B: What prospects do you see for media companies?

PALMER: To be a successful company in entertainment and media or in most
industries, actually either you need immense scale or you need to be tiny, ex-
ible, and independent. Successful media companies today are either really big or
really little. Thats why you see so many large organizations merging together.
Medium-sized companies are really vulnerable today.
Even in technology, there arent many midsized companies. Whats left?
133
Deborah Bothun Art Kleiner
deborah.k.bothun@ kleiner_art@
pwc.com strategy-business.com
leads PwCs global en- is editor-in-chief of
tertainment and media strategy+business.
practice. She focuses
on assisting clients in
adapting to the changing
content and distribution
marketplace. Based
in New York, she is a
principal with PwC US.
Twitter? There are a lot of thriving small companies, but its hard for them to
grow to scale. Theyre much more likely to get bought rst. Weve seen a signi-
cant increase in [US]$20 million to $30 million acqu-hires the acquirers
buying companies only for their teams of brilliant people, as opposed to choosing
companies because they are going concerns.
S+B: How do you see media companies monetizing content in this new world?
PALMER: There are only three business models for media: I pay, you pay, or
someone else pays. Either I pay the media (with subscription fees or my data), or
you as the media pay your costs (because theres value in having me in the audi-
ence), or someone else, like an advertiser, pays you for access to me.
The media industry used to be perfectly structured to take advantage of all
three models. But today, with quickly changing consumer behaviors, its getting
extremely difcult for many old-fashioned media companies to make money.
thought leader
Add to that the cross-purposes of the three major publicly traded large entities in
the advertising-supported media model: ad agencies, media entities, and brands.
Each has a different way of creating shareholder value. Agencies need to make a
prot. Media companies need to get the highest possible price for each impres-
sion. And brands need to drive velocity. These three goals are not in concert with
one another.
And, by the way, consumers dont care about any of this. Consumers want
all their media for free, and they want simple, interoperable platforms. It sounds
great, but Apple and Google have no interest in interoperability. That would
134
mean having everything work on each others devices. Facebook has a large group
of members who dont use the rest of the Web; they interact only through Face-
book. Why would any of these companies want to give up their boundaries? The
fact that consumers want something like interoperability does not mean that it is
smart for the business to provide it.
The rest of Silicon Valley tends to disrupt traditional business by taking the
consumers side and giving consumers everything they want free. Thats awe-
some as long as you dont care about making money. At the end of the day, Inter-
net media companies will have to gure out a way to get advertising support, sell
subscriptions, sell a service, or use another means to drive velocity for a brand at
retail. Otherwise, theyll have no way to make a living. Cash has to change hands.
That said, the nancial community will continue to make a fortune nan-
cially engineering startups and taking them public. That kind of prot making
is not always equally accretive to all of the shareholders, and it does not usually
thought leader
require a sustainable business to emerge.
S+B: What models do you see that will resolve this?

PALMER: As I said, there are only three types of models, and the successful com-
panies seem to combine them. The cable television industry combines all three,
for instance. You pay for cable ostensibly because your antennas not good enough,
and you still have to see ads (except for the premium channels, which you just pay
for). And the cable companies take your data as well, and theyre monetizing it.
Theyre nowhere near as granular as Facebook or other pure-play digital media,
135
but they have a good-enough data set to drive hundreds of billions of dollars in
sales for their clients.
Speaking of data-driven companies, Amazon is about as data rich a com-
pany as you are likely to nd. It probably owns the greatest database of consumer
consumption on the planet. Amazon is legendarily protective of its data, and al-
most every manufacturer complains about Amazons walled garden. But it
hasnt stopped very many companies from selling on the platform. Im fascinated
by one twist: A search on Amazon is more valuable to many advertisers than a
search on Google because consumers are more likely to buy there. Consumers
have been trained: If you want to buy something, go to Amazon rst, look it over,
and add to cart.
YouTube is another good example for content owners because of its ability to
aggregate hyper-targeted audiences at scale. A few weeks ago, a friend of mine
came over to jam and wanted to play some bebop. It was super fun, but after the
session, I felt like I could use some remediation around the bebop melodic minor
scale. So I went on YouTube to look for some drills that wouldnt bore me to tears.
If you type bebop melodic minor scale in the YouTube search bar, you get
thousands of videos. You might never live long enough to watch them all. Some
were mind-blowingly good. The two musicians I liked the most made money by
selling transcriptions of famous solos and giving private music lessons over Skype
or FaceTime. Others offered paid subscriptions to their newsletters or sold lesson
books. And thats just one eld in an almost innite list. I typed in quilting, just
to see what would happen, and I got a very similar result.
The downside of these models is very serious. They hyper-fragment the audi-
thought leader
ence and encourage people to lter out anything that feels uncomfortable to
them. Theres a very strong conrmation bias for all content today, regardless of
whether its entertainment, news, or just information. It will grow even stronger
as technology improves. As content distributors, we are ghting the hardest ght
ever: getting through the personal lters of people who have opted into their own
world view. Many have no interest in getting out of it.

I think this will be a huge problem going forward and I dont know what
will break the cycle. Back in a simpler time, you could read your favorite newspa-
per and occasionally discover new things. Sure, it had a bias. You understood
136
what that bias was, and you also understood the difference between news and
opinion. Thats over. Today, you get what an algorithm thinks youre most
likely to engage with, and everything it serves up is designed to elicit a specic
response from you. The free and open Internet has made people more local, more
tribal, and more susceptible to conrmation bias than anything in the history of
humankind. I wrote an essay titled Your Comfort Zone May Destroy the World,
which explores this thesis.
Learning to Be Data-Driven
S+B: You have written that advertising will evolve into a data-driven, value-
centric game of capture the consumer. What do you mean?
PALMER: For a message to have the best chance of success, it must be delivered
to the right person at the right place at the right time. The best way to lead this
process is to encourage data-driven thinking across the enterprise. In most cases,
this requires a modication in corporate culture. In our work with clients at the
Palmer Group, weve found that few enterprises fully recognize the value of data,
data governance, and data hygiene.
Few enterprises fully Data is cash, and it should be treated
recognize the value of data. like cash. You need a data P&L.
Data is cash, and it should S+B: How does this work in practice?
be treated like cash. PALMER: There are really three kinds
of data. First-party data is your own
thought leader
companys asset, which you are directly responsible for collecting. It may be
from cookies, email subscriptions, orders, or sales receipts. Or it may be gener-
ated by customer behavior, such as a propensity to click a particular button or
visit a location.
Second-party data is simply someone elses rst-party data.
Third-party data is collected by outside companies. Companies like Acxiom
and Experian acquire and aggregate data on customers from many different places,
and they analyze and index it until they have complete proles on everybody. I
think Acxiom tracks almost 4,000 propensities. You can ask, for example, for lists
137
of people who are 150 percent over-indexed on luxury automobiles and 200 percent
over-indexed on craft beer, and geofence them. Button press, boom, here are the
people. All the best-practice purveyors of third-party data do their best to verify it,
but its still third-party data, and thus less accurate than rst- or second-party.
When you operate with a data P&L, you tend to favor deals that leverage
your data by combining it with rst-party data from other organizations. This will
almost always create additional value, because data is more powerful in the pres-
ence of other data.
S+B: Why does data become more powerful when you share it?
PALMER: If I know your name and email address from rst-party data, I have the
beginning of a prole. Add your Social Security number from second-party data,
and I can go to Experian and nd out about your mortgage from third-party
data. Now I know not only exactly where you live, but how much discretionary
thought leader
spending money you might have. The more complete the prole, the better and
more complicated the questions I can ask. Interestingly, although many execu-
tives have signicant experience working with numbers and making decisions,
very few have been trained to make decisions using data. To get the most out of
an algorithm, you must ask the right questions.
S+B: For example?

PALMER: How do we increase sales? is not a data-driven question. It may
sound like one, but it isnt. A better question from a marketer who had access to
138
a purpose-built data management platform might be Whats the last day of the
year that I can sell a full-price barbecue grill at the Home Depot in Danbury,
Connecticut? To answer it, you would use a variety of data: parking lot density,
same-store sales, predicted weather patterns, inventory levels, and so on. The
right answer could signicantly increase margins. You could save on advertising;
you could save by shipping unsold units to stores in warmer climates. If you re-
ally knew that these grills had to get moved, then you could put them on a
mostly empty truck headed to another location. You could decide to run a sale.
There are a million things you could do as a marketer if you asked the right ques-
tion of the data sets.
S+B: Wouldnt it be better to ask, Given everything were doing, where are the
Danburys with the best hidden opportunities?
PALMER: Thats a fabulous question to ask. But your ability to answer it depends
thought leader
on the level of technology you have deployed. If youve got an appropriate data set
and someone at your disposal who knows enough data science to create the pat-
tern-matching tools you need, youre golden.
Cognitive computing is still in its infancy, so if you needed to do this today,
youd have to write a pretty sophisticated algorithm to accomplish the task. It
would probably take thousands of lines of code, and only a couple of people in
the world would know how it was written. Even the people who wrote it would
occasionally be scratching their heads, because, as with automatic stock trading,
at a certain point the algorithms are so large and so complex that you cant auto-
139
pilot them anymore. [See A Strategists Guide to Articial Intelligence, by
Anand Rao, page 82.]
S+B: You mean there are too many layers of cognitive thinking to be able to
understand its reasoning.
PALMER: Thats right. People think of algorithms as decision making on autopi-
lot. But thats the worst metaphor ever. With actual autopilot, the person ying
the plane watches the controls and can always take over if something goes wrong.
Thats not possible with a complex algorithm. If the program misbehaves, the
only way to x it is to stop it, take the whole system down, recalibrate it, and then
test it to see if the outcomes are better or worse.
S+B: But if the algorithm is too complex to be controlled, what qualies a hu-
man being to judge the outcomes correctly?
PALMER: This scares me to death! I call it digital monoculturalism. If you
have only ve cognitive clouds Microsoft, Google, Amazon, IBM, and Ap-
ple each one will have some bias inherent in its programming, invisible to
outsiders and inevitable. These ve highly biased tool sets will make decisions
for thousands of executives around the world. And who programs those?
Automating the Media Enterprise
S+B: In the past, youve said that machines will eventually be able to do every-
thing that human beings can do now. How do you see this today?
thought leader
PALMER: I said they would do almost everything. But thats not the story. There
are four general types of tasks: manual repetitive (predictable), manual nonre-
petitive (not predictable), cognitive repetitive (predictable), and cognitive nonre-
petitive (not predictable). An assembly line worker performs mostly manual re-
petitive tasks, which, depending on complexity and a cost-benet analysis, can be
automated. A CEO of a major multinational conglomerate performs mostly cog-

nitive nonrepetitive tasks, which are much harder to automate.
The rapid advances in machine learning systems are allowing us to auto-
mate the low end of the cognitive nonrepetitive task spectrum, which was previ-
140
ously thought to be the sole bastion of human beings. For example, machine
learning systems can learn to drive. So the trucking and taxi industries are in
for a big shakeup; C-suite corporate management, at the higher end of the cog-
nitive nonrepetitive spectrum, not so much.
The rst white-collar jobs that machines will take are those of middle man-
agers, commodity salespeople, report writers, accountants, bookkeepers, jour-
neyman creative people (graphic artists, background music composers, artists
who paint pictures used to decorate hotel rooms), and some doctors who do
things like pathology and radiology. The last white-collar jobs to go will be
preschool and elementary school teachers, professional athletes, politicians,
judges, and mental health professionals. Also, the very few creative artists who
are truly innovative geniuses. These are jobs that when performed well require
humanity; they are incredibly safe until the machines actually rule the world.
S+B: How will AI affect people in media enterprises particularly

creative people?
PALMER: Thats a loaded question. If you can have articial intelligence, you
probably can have articial creativity. In many ways it would be indistinguish-
able from average human creativity.
Theres a great line in the movie I, Robot. Detective Spooner, played by Will
Smith, is questioning Sonny, the main character robot, about a murder. Can a
robot write a symphony? asks Spooner. Can a robot turn a canvas into a beau-
tiful masterpiece? Sonny looks him in the eye and asks, Can you? The average
person is not Chaucer, Shakespeare,
thought leader
If you can have articial David Mamet, or Lin-Manuel Miran-
intelligence, you can da or Mozart, the Beatles, or Ma-
donna. Only a tiny handful of human
have articial creativity...
beings in each generation exceed all ex-
indistinguishable from pectations of creativity.
average human creativity. That leaves journeyman creative
activity, which absolutely can be done
by AI. I wrote music full time for many years. A lot of the background music I
used to write for advertising, long-form industrial lms, and documentaries
141
could easily be created by AI. My job didnt call for brilliance every day. I
needed to be consistently good and occasionally brilliant. Music is an emotion-
ally communicative language, and prociency in it is rare, but it is possible for
machines to be consistently good at it. It wont work for every client or in every
use case, but it will work for enough clients to put a huge dent in the business.
The same is true for basic expository writing. The questions your seventh-
grade English teacher taught you to answer who, what, when, where, why, and
how are an algorithm. Of course machine learning systems can be trained to
write that prose. And they will.
S+B: Then how does a creative person get the experience needed to develop
into, say, a Billy Joel or an Elton John?
PALMER: There couldnt be a Billy Joel or an Elton John today. They are both
super talented, but neither was a superstar out of the gate. They had record labels
thought leader
that believed in them and gave them time to pay their dues and develop. That
doesnt happen today.
Of course, thats commercial intellectual property, which has very little to do
with artistry and creativity at a world-class level. AI doesnt change things for art-
ists who are willing to starve for their art. A dancer will still make crazy sacrices
to keep dancing every day. Nor does AI change the prospects of the very largest
companies. But it completely devastates the middle of the business, the rote cre-
ative work.
A lot of what marketing people do is at risk. If youre a marketer, you build
142
GAME PLAYER
GAME CHANGER
The Oxford Executive MBA

Go from a game player to a successful game changer. The Oxford Executive MBA is your opportunity to
transform yourself and your ambitions. This modular programme offers you the chance to join one of the
worlds most powerful networks and create a new future for your organisation and for yourself as a leader.
The Oxford Diplomas in Strategic Management

Join us and develop the extra focus required to perform consistently at the highest level.
Diplomas in:
Financial Strategy
Global Business
Organisational Leadership
Strategy and Innovation
Find out more and download brochures: www.sbs.oxford.edu

content pillars that support the brand, mission, and vision of the company. You
have boxes to check the piece will be knowing, educational, cheerful, what-
ever it is and if the piece of copy doesnt meet all criteria, you rewrite it until
it does. If thats not an algorithm, I dont know what an algorithm is. And thats
how you get 3,000 marketers who all think for themselves to put out messages
with a unied voice. If youre telling me I cant automate some of that, then you
dont understand automation.
Even if just 20 percent of white-collar jobs are automated, the ramications
for media companies will be immense. For example, suppose I could get a ma-
chine to create and produce an invitation to a gala event, with a Chagall-style
visual and drop shadow behind a font that evokes my brand. You might argue
that doing this would increase the productivity of my art director, and that would
be the main effect.
But there were 10 art directors in the department before; we just sent at least
thought leader
two of them packing. And there probably will be more laid off over time, in all
categories of corporate employee, because every CEO knows that the companys
competitors are also taking cost out of the system this way.
Along the way, well see enormous and unprecedented productivity advanc-
es. One small example: The Palmer Group has 5,000 old videotapes in tempera-
ture-controlled storage. They need to be transferred to digital, but weve been

putting it off because nobody, including me, wanted to spend the money to have
an army of library science majors go through and metatag the clips. Recently, we
did an experiment. We put a few videos through an open source video recogni-
144
tion software tool set, and with very little effort, the system could metatag the
content as well as a human intern would. It may actually be better than what a
person would do, because even when the AI system tags something incorrectly, it
is more likely to be consistently incorrect. So were about to do this for thousands
of old videos. It will become part of a body of knowledge we didnt have before.
Only one aspect of this isnt beautiful: No people are involved in doing it.
S+B: How does the digital shift affect the way you look for talent in your
own organization?
PALMER: We believe in the gig economy; on any given day, our staff expands to
t the needs of our business. We use exible shared ofce space organizations like
WeWork. I recently read an article saying that the gig economy is over and people
are returning to sustainable full-time jobs. Our experience is different. Every su-
per-skilled technology person available to us is looking for the next opportunity
thought leader
at a higher price, and they dont want to be tied down in a full-time job.
We try to recruit people by building a yellow brick road to the Palmer Group
to show that were the elites in the eld and theyll be in great company by
working with us, working on very cool projects. We host meetups and events on
key technology topics. We also ask the coders who work with us to spend an hour
or two each night contributing to open source projects. We stole that idea from
Facebook, which has its own scripting language called React. Its software devel-
opers make some of their code available on GitHub, people start to contribute
and share notes, and suddenly Facebook has a recruiting and training program
145
for coders, without paying a nickel for it. And who doesnt want to impress the
people at Facebook?
S+B: Do you recruit your content professionals the same way?

PALMER: No, because the talent pool for creatives is so vast. We know many
people because of, for example, my background in TV. Its harder to nd pro-
grammers, because companies are competing so heavily for them right now.
S+B: You make it sound like the most important thing the making of content
will not change much at all in the future.
PALMER: Theres a 40,800-year-old cave painting in El Castillo, Spain, that is
said to be one of the oldest known. The artist created that content for one pur-
pose and one purpose only: to be seen. The artist felt something or needed to
explain something and created the work to communicate it. Today, a television
commercial is there to be seen; a book is to be read; a song is to be heard. If you
dont have a point to get across, you dont need the television, the printing press,
or a stream on the Internet. And if you do have something powerful to say, your
job is to get it across, no matter what technology you use or business model you
work under. That hasnt changed, and it probably never will. +
Reprint No. 17212
thought leader
146
MEET
THE NEXT
GENERATION
OF BUSINESS
THOUGHT
LEADERS
strategy-business.com/youngprofs
Books in Brief
The Business of Tetris

by Laura W. Geller
The Tetris Effect: The Game That Hypnotized the World,

by Dan Ackerman, Public Affairs, 2016
D
ecades before you lost your rst few hours to Candy Crush, Tetris
had cast its spell over video game players worldwide. The concept
of Tetris, which originated deep behind the Iron Curtain in the
1980s, is deceptively simple: You manipulate different shapes of
bricks, or tetronimoes, as they fall at an increasingly fast pace, to form rows of
horizontal lines. A Russian folk tune plays in the background. But the game can
quickly turn on you one wrong move and the pieces start to pile up. The game
books in brief
ends, and then you play again, and again, and again.
Unlike many modern addictive games, Tetris has no plot, no cute animals, and
no lifelike animation. And yet Tetris is one of the most popular video games of all
time. It has been downloaded more than 500 million times on mobile devices, and
Illustration by Noma Bar
authorized copies have earned close to US$1 billion in total sales. Not bad for a piece
of code that traces its origins to the waning days of the Soviet Union.
Tetris was the brainchild of a Soviet engineer, Alexey Pajitnov, working on
an outdated desktop computer at the Russian Academy of Sciences. When he
invented the game in 1984, Pajitnov and his colleagues knew it was special it
148
spread quickly throughout the academy by word of
mouth and oppy disk, like a piece of samizdat. But
pre-glasnost and pre-perestroika, the notion of taking
Tetris outside the country, let alone commercializing it,
was difcult even to imagine.
The story of the next ve years, leading up to the
moment in 1989 when Nintendo secured the living
room console rights to Tetris, is a complex, winding
tale. And in The Tetris Effect: The Game That Hypno-
tized the World, Dan Ackerman, a journalist and editor
at the tech site CNET, unravels it.
The games soaring popularity, and its potential for massive prots, quickly
attracted the attention of the business world. At one point, in early 1989, execu-
tives from Japan, the U.K., and the U.S. literally raced to Moscow to vie for li-
censing rights. With such a perfect combination of widespread dissemination,
psychological triggers, and basic human greed, Ackerman writes, its not sur-
prising that Tetris was one of the worlds rst viral hits.
Ackerman introduces a large cast of characters, and over the course of the
book we learn more about their motivations and machinations. The effect can be
dizzying at times as he toggles back and forth between different players and
places. Coders, lawyers, and executives jump in and out of the narrative, all while
Ackerman painstakingly describes how the rights to Tetris for various channels
were licensed and sublicensed by an ever-widening web of software companies.
Theres Henk Rogers, the surfer-turned-programmer who ultimately found
books in brief
himself working on behalf of Nintendo. His story is perhaps the most breathless;
the book opens with Rogers ying into Moscow on a plane jointly operated by
Japan Airlines and the Soviet state-run Aeroot with a tourist visa, a checkbook,
and little else. Among some of the other key players are the British communica-
tions mogul Robert Maxwell and his son, Kevin; Nikoli Belikov, the bureaucrat
who served as lead negotiator for a Soviet bureau called Electronorgtechnica
(Elorg), an enigmatic division of the Soviet Ministry of Trade tasked with licens-
ing rights for technology developed by state agencies; and, of course, Pajitnov, the
engineer who created Tetris, and watched for years as others proted.
149
The Tetris Effect is also an ode to the game itself. A chapter of the book is
devoted to the story of journalist Jeffrey Goldsmith, who is credited with coining
the term Tetris effect. In 1990, while staying with a friend in Tokyo, Goldsmith
played the game for six straight weeks, barely stopping to eat and drink, and no-
ticed that he started seeing people and cars on the street as pieces that he was
trying to t together. In a Wired article, This Is Your Brain on Tetris, he de-
scribed the pharmatronic (another term he coined, to describe an electronic drug)
effect the game has on the brain.
This is a recurring theme throughout this fast-paced, gripping book: Playing
Tetris can actually change the way your brain is wired. The games repetitive pat-
terns, and the repetitive activity it inspires, enables Tetris to imprint itself on the
brain and can shape a players thoughts. Ackerman notes that an Oxford Univer-
sity researcher has shown that playing Tetris shortly after experiencing a trauma
can prevent victims from being repeatedly terrorized by painful memories. They
can remember the events, but because the way in which the events are remembered
is altered by the game, victims avoid some of the symptoms of post-traumatic stress
disorder. Ackerman also mentions a 2014 study that found that smokers and drink-
ers who played Tetris reduced their cravings by roughly 24 percent. In other words,
the addictive game can prove to be a weapon in the war against addictive behavior.
In his epilogue, Ackerman writes that Tetris is bringing order to disorder.
Its the eternal struggle against the onslaught of daily life, in all its colorful ran-
domness, seeming to fall on you from the sky. A bit grandiose? Maybe. But few
popular games have inspired Tetriss level of academic and scientic study. Even
the question of whether Tetris can be won is steeped in philosophy and physics.
books in brief
But those of us whove been sucked into the vortex can appreciate Ackermans
assessment: A classic Tetris game will inevitably end, and mathematicians can do
the same thing you and I do when a casual game goes wrong after a dozen pieces
blame those damn Z shapes. +
Laura W. Geller
laura.geller@pwc.com
is senior editor of
strategy+business.
150
Care Personally, Challenge Directly
by Theodore Kinni
Radical Candor: Be a Kick-Ass Boss without Losing Your Humanity,

by Kim Scott, St. Martins Press, 2017
I
ts been a long time since I was a wage slave. But if todays workplace is any-
thing like what Kim Scott describes in Radical Candor, it must be a night-
mare. People are picking their noses, stinking up the joint with body odor,
and tucking their underwear into the ofce furniture. They call each other
dumb-ass and cry a lot. It sounds like preschool for grownups.
Or maybe thats just business as usual in Silicon Valley, where Scott, an en-
trepreneur, executive, and executive coach, spent a decade or so. She ran online
sales and service at Googles AdSense, YouTube, and DoubleClick, where she
worked for her Harvard Business School classmate Sheryl Sandberg. Then, she
joined Apple University, where she designed and taught a course for rst-time
managers. With those unimpeachable credentials in hand, Scott struck out on
her own, coaching CEOs at Twitter, Dropbox, and Qualtrics. In 2016, she co-
founded Candor Inc., a training rm built around the concept of radical candor,
which she developed.
Radical candor stems from Scotts conviction that interpersonal relation-
ships are the currency of management. They determine whether you can fulll
your three responsibilities as a manager: (1) to create a culture of guidance (praise
and criticism) that will keep everyone moving in the right direction; (2) to under-
books in brief
stand what motivates each person on your team well enough to avoid burnout or
boredom and keep the team cohesive; and (3) to drive results collaboratively, she
writes. If you think that you can do these things without strong relationships,
you are kidding yourself.
In Scotts convincing telling, radical candor is a simple yet powerful mana-
gerial tool for building such relationships. It has two dimensions: To deliver
radical candor, you need to both care personally and challenge directly. The
rst dimension is about being more than just professional. Its about giving a
damn, sharing more than just your work self, and encouraging everyone who
151
reports to you to do the same, writes Scott. The second
dimension involves telling people when their work isnt
good enough. And when employees dont measure up,
managers must deliver tough feedback, making hard
calls about who does what on a team, and holding a high
bar for results.
What makes radical candor such a good idea is the
fact that so many managers avoid or ignore performance
problems that undermine employee and organizational
results. Scott offers a personal testimonial: After launch-
ing a software startup, she hired Bob, a great guy whose
work didnt live up to his resume. Instead of confronting Bob (Feedback is hard,
Scott says), she tried to work around the problem. But Bobs continued subpar
performance added to her workload, making her increasingly resentful and an-
gry. Worse, it affected the rest of her team; they couldnt understand why their
boss wasnt correcting the situation, and they lost condence in her. As a result,
their performance tanked and so did the startup.
The ultimate irony is that when managers dont candidly address an em-
ployees shortcomings, the employee loses too. When Scott nally mustered up
the courage to re Bob, it felt like a sucker punch to him. Why didnt you tell
me? he said. Why didnt anyone tell me? I thought you all cared about me!
The author also makes the point that you cant skimp on either candor or
care. Scott had been giving Bob care without candor what she calls ruinous
empathy. Not wanting to hurt the
books in brief
Obnoxious aggression feelings of an employee, she didnt say

is preferable to ruinous anything about his performance prob-
lems. At the same time, candor without
empathy because at least
care which Scott labels obnoxious
people know where they aggression is also problematic.
stand with the boss.
Steve Jobs, who frequently told Apple

employees Your work is sh**, irted
with obnoxious aggression. In Scotts telling, obnoxious aggression is preferable
to ruinous empathy because at least people know where they stand with the boss.
152
This explains the advantage that a**holes seem to Must Reads for all
have in the world, writes Scott. Business Leaders
In the spirit of radical candor, I should note that
although it starts off strong, Radical Candor becomes
less interesting once Scott gets beyond explaining the
core concept in the rst couple of chapters. The issue
is that shes seeking to elevate a very good and useful
idea into a full-blown management philosophy. That
transformation leads her into broader topics that dont
always lend themselves to simplied solutions, such
as employee development and personal growth tra-
The Sustainability Edge
jectories, and results improvement cycles. How to Drive Top-Line Growth with Triple-
Bottom-Line Thinking
The second half of the book is devoted to a col- by Suhas Apte and Jagdish N. Sheth
lection of briey explained tools and techniques in- The Sustainability Edge illustrates how
business leaders can embed sustainability in
volving how managers can go about integrating radi- a truly holistic and transformative way.
cal candor into their work. These recommendations

include be humble; give feedback immediately; and
praise in public, criticize in private. And they are
roughly stitched together under the rubrics of build-
ing relationships, giving and getting guidance, team
building and motivation, and accelerating perfor-
mance. First-time managers will nd this toolbox
particularly valuable, although veterans are likely to
be familiar with much of it.
Leadership in the Eye
The bottom line: Radical candor is a terric tool of the Storm
Putting Your People First in a Crisis
that every manager should use, and Radical Candor is by Bill Tibbo
a terric reference for rst-time managers. + This book shows how leaders can identify
and cultivate the skills required to not
only meet the challenges but seize the
opportunities that arise in a crisis.
Theodore Kinni
theodorekinni@gmail.com
is a contributing editor of
strategy+business. He also blogs at
Reading, Writing re: Management
and is @tedkinni on Twitter.
utppublishing.com
Control Issues
Startups are valued signicantly higher and attract more
nancing after their founders relinquish some power.
BY MATT PALMQUIST
n the two years after Lew Cirne founded Wily Technology in 1997, he as-
I sembled an experienced executive team, hired 50 employees, and raised two

rounds of VC funding. But he also had to relinquish three of ve board seats
to his investors, who promptly decided that Cirne should be replaced by a
CEO with a stronger business background. CA eventually bought the rm for
US$375 million a far larger haul than Cirne could have brought in, as he ad-
mitted. But the founder was still chagrined about the early decisions he made
that led to his ouster.
Whether in Silicon Valley or any of the other startup hubs around the
world, Cirnes dilemma is all too familiar. To grow their rms, founders desper-
end page
ately need nancing, skilled employees, and the kind of social buzz that makes
investors reach for their checkbooks. But the more investors or key hires who
come aboard to provide much-needed resources, the more autonomy the com-
pany founder must surrender. Founders face a trade-off between retaining con-
Illustration by Elwood Smith
trol and increasing the value of a young rm.

According to a new study of more than 6,000 high-potential U.S. startups
that launched between 2005 and 2012, how one navigates this early-stage founders
dilemma has a profound impact on the rms long-term value. The more power
retained by founders, the author discovered, the less valuable their companies are.
154
For every additional position of power a founder occupies (being both CEO
and chairman, for example, as opposed to controlling just one of those roles),
the companys value decreases by between 17.1 percent and 22 percent. The
author also found that startups whose founders retain an additional level of
power see a 35.8 percent to 51.4 percent decrease in the amount of nancing
they raise, depending on which variables he used to measure a founders control.
But this trade-off effect kicks in only after three years, at that delicate stage in
which founders technical expertise or visionary outlook typically become less
crucial to growth than the resources a rm has attracted.
Not only do these ndings have major implications for how entrepreneurs
should set up and structure their rms, but they also carry lessons for the people
who want to work at or invest in a promising startup. Investors who seek to
maximize their returns and potential hires who want to be part of a fast-grow-
ing enterprise should do their due diligence on founders to understand their
motivations and determine whether theyll be willing to cede power at the ap-
propriate time.
But the author also discovered a potential downside to ushering founders
out the door: heightened risk. Bringing VCs into the picture can ratchet up the
pressure to swing for the fences, he notes. And replacing a charismatic or cre-
ative founderCEO can give investors pause. Stakeholders and employees look-
ing for security rather than growth spurts should seek out founders who refuse
to step down and instead, in the words of Cirne, remain parent of my baby. +
Source: The Throne vs. the Kingdom: Founder Control and Value Creation
end page
in Startups, by Noam Wasserman, Strategic Management Journal, Feb. 2017,
vol. 38, no. 2
More Recent Research at:

strategy-business.com/recent_research
155
Certicate of
Excellence in
Global Business
CHALLENGE OR
OPPORTUNITY? Asian Institute of Management
The Philippines
EGADE Business School,
Tecnolgico de Monterrey
Mexico
ESMT Berlin Germany
FGV Escola de Administrao de
Empresas de So Paulo Brazil
Haas School of Business,
University of California
Berkeley USA
HEC Paris France
Hong Kong University
of Science and Technology
Business School China
IE Business School Spain
IMD Singapore, Switzerland
Indian Institute of Management
Bangalore India
Ko University Graduate School
of Business Turkey
Lagos Business School,
Pan-Atlantic University Nigeria
Its up to you. Through our Certicate of London School of Economics

and Political Science,
Excellence in Global Business you can choose Department of Management

United Kingdom
National University of Singapore
advanced courses from 19 top schools Business School Singapore
UBC Sauder School of Business
in 18 countries. Learn from some of the best Canada
UCD Michael Smurt Graduate
business school faculty in the world and Business School Ireland
University of Cape Town
build a true global perspective at the same time. Graduate School of Business
South Africa
Search for the right program for you: Universitas Indonesia Faculty
of Economics Indonesia
globalnetwork.io. Yale School of Management

USA
TO SET YOURSELF APART UPCOMING OPEN ENROLLMENT
PROGRAMS, 2017
THINK BOOTH Strategic Business Leadership
July 1014
Led by highly regarded University of Chicago Booth School Mergers & Acquisitions
of Business faculty and leaders in industry, our Executive July 24-28
Education programs offer the latest academic theory coupled Essentials of Effective Management
with business know-how and practical real-world applications. September 11-1 5
New Product Innovation, Development

Learn more about our programs at and Implementation Strategies
ChicagoBooth.edu/ExecEd September 18-22
or call our team at 312.464.8732
CHICAGO HONG KONG LONDON SINGAPORE

Strategy Business - Summer 2017

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Strategy Business - Summer 2017

Uploaded by

Copyright:

Available Formats

THE ACCOUNTABLE CEO NEUROSCIENCE AND LEADERSHIP BUILD YOUR DIGITAL CONFIDENCE

Summer 2017 $12.95

ADVANCED MANAGEMENT PROGRAM

LEARN MORE AT WWW.EXED.HBS.EDU/SB-AMP

The Algorithm and

ence them. And in A Strategists Guide to Articial Intelligence (page 82),

15 Connecting the Dots from

21 Why Good Employees Do 28

28 Us versus Them: Reframing

32 Management Lessons from One 55 How to Make Entertainment and

Winning with Digital Condence

66 AI Is Already Entertaining You 98 Are CEOs Less Ethical Than

82 A Strategists Guide to 106 CEO Turnover in 2016

132 Shelly Palmer

148 The Business of Tetris

151 Care Personally,

END PAGE: RECENT RESEARCH

154 Control Issues

Cover illustration by John Hersey

Issue 87, Summer 2017

strategy+business Published by PwC

Editorial and Retail Subscriber strategy+business magazine Articles published in

Leading People at Work: Strategies for Talent Analytics

Illustration by Federico Jordn

products there by nutritional value, highlight gluten-free or organic options, and

grams that are otherwise unattainable.

That moment I realized I could

execed.wharton.upenn.edu/strategy The Strategic Decision-Making Mindset

Kamil Klamann Sekoul Krastev

brand companies on growth and agement at iGotcha AR/VR, an

Exhibit: Anatomy of a Demand Window

The Execution Challenge

The winnowing process begins with a

Emre Sucu Matthew Egol Edward Landry

in Tehran, and earning an MBA

S+B: What can make people more susceptible to ethical lapses?

In one experiment, my colleague [UNCs Sreedhari Desai] and I had some

S+B: Corporate scandals often reveal a pattern of unethical behavior. What

How to Guarantee Employee

S+B: How can people stay authentic?

: Meet the next generation of business thought leaders

Us versus Them: Reframing

by Eric J. McNulty, Nathaniel Foote, and Douglas Wilson

An Inspiring Stretch Vision

best centers of academic medicine places such as Harvard, the University of

more than $12 million and conict.

been achieved on key initiatives, including record-breaking fund-raising results

Empowerment through Data

Surviving the Storm

achievements and to avoid playing favorites. Grossman integrated his height-

Eric J. McNulty Nathaniel Foote Douglas Wilson

Plan your attackenroll now in these upcoming programs:

by Chris Curran and Tom Puthiyamadam

nizational mind-set that embraces constant innovation, at decision making, and

Getting Tech Savvy

Investing in the Future

Amid an increasingly crowded eld of emerging technologies, companies

risk and failure when evaluating emerging technologies. Digital transformation

ganizations shape the human experience is completely within their control.

The Human Touch

Visas Innovation Centers are designed as collaborative, co-creation facilities

That moment I realized I was

Dene your Wharton moment.

Chris Curran Tom Puthiyamadam