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ExecutiveDigest Vol. 56, No. 2

California Management Review Executive Digest Winter 2014 // Vol. 56, No. 2

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Table of Contents

Social Capital, Sense-Making, and Recovery: Japanese Companies and the 2011 Earthquake 3by George Olcott and Nick Oliver

Managing Value in Supply Chains: Case Studies on the Sourcing Hub Concept 5by Anupam Agrawal, Arnoud De Meyer and Luk N. Van Wassenhove

Retail Inventory: Managing the Canary in the Coal Mine 7by Vishal Gaur, Saravanan Kesavan and Ananth Raman

Coping With Open Innovation: Responding to the Challenges of External Engagement in R&D 9by Ammon Salter, Paola Criscuolo and Anne L.J. Ter Wal

Employee Contributions to Brand Equity 12by Betsy DuBois Gelb and Rangarajan Deva

Culture Change at Genentech: Accelerating Strategic and Financial Accomplishments 14by Jennifer Chatman

Contesting the Value of “Creating Shared Value” 16by Andrew Crane, Guido Palazzo, Laura J. Spence and Dirk Matten


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Introduction

In March 2011, a magnitude 9.0 earthquake struck Japan. It was the most powerful earthquake to have ever hit the country, and the fifth most powerful earthquake in recorded history. The effects were disas-trous. An ensuing tsunami inundated the coastal re-gion of Tohoku, damaging or destroying an estimated 1.2 million buildings and leaving nearly 20,000 indi-viduals missing or killed. The tsunami then triggered a third event, a major catastrophe at the Daiichi Fukushi-ma nuclear power station, operated by Tokyo Electric Power (TEPCO). In the past, large-scale disasters of this nature have highlighted the worldwide consequences of dis-ruptions to globally-integrated supply chains. The March 2011 disaster in Japan caused massive damage, but despite predictions of severe disruption, production resumed with remarkable speed. The rate of recovery relied upon the adoption of two crucial shared concepts – social capital and sense-making – to mobilize and fo-cus the resources necessary for a rapid return to pro-ductivity.

Supply Chains

Major disasters often reveal the complex and in-terconnected nature of supply chains and highlight the significance of robustness and reliability of supply as key dimensions of productivity. Competing pressures pose a problem for manufacturers and their supply chains: in the interest of minimizing costs and maximizing quali-ty, most manufacturers adopt lean systems that rely on minimal inventories and deep, long-term relationships between buyers and suppliers. These close relations enable the tight operational integration required by manufacturing methods like “just-in-time” (JIT) pro-duction, and facilitate greater collaboration between business partners. However, lean supply chains are also extremely vulnerable due to the high interdependencies

that result from a combination of minimal inventories and single sourcing. A prominent example of this vulnerability comes from the Japanese automotive industry. All of Toyota’s 18 domestic assembly plants stopped produc-tion immediately after the earthquake, and by the end of the month only two had restarted. Total industrial production in Japan during March 2011 fell to around 85% of February levels. In the month following the di-saster, auto assemblers struggled to ascertain the impli-cations of damage to their second and third tier sup-pliers, whose activities had been virtually invisible up to that point, concealed behind their first tier suppliers. By April, Toyota estimated that the supply of 500 dif-ferent components, from 200 locations, was disrupt-ed. Despite these dire circumstances, 17 out of 18 of Toyota’s domestic assembly plants were operational by mid-April. By August, industrial production across Ja-pan had reached 95.6% of pre-earthquake levels. This remarkable recovery is due to the mobilization and col-lective use of multiple resources provided by suppliers, customers, partners, and – in some cases – direct com-petitors. Central to this mobilization was a remarkable willingness for parties to share resources, even in the absence of contractual protection over crucial matters of intellectual property and commercial advantage. Two critical concepts framed managerial decisions during the recovery: social capital and sense-making.

Social Capital

The concept of social capital is used to explain cooperative behavior within and between firms. From the perspective of the neo-classical economic model, where impartial, market-based relations between ratio-

Social Capital, Sense-Making, and Recovery: Japanese Companies and the 2011 Earthquake

by George Olcott and Nick Oliver


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nal and self-interested agents are seen to be the opti-mal method of determining resource allocation, social relations between agents are seen as unwelcome fric-tion. Adopting a sociological perspective, by contrast, emphasizes the benefits that accrue when parties enjoy social, as well as purely economic relations. These ben-efits include higher trust, easier exchange of resources, reduced monitoring costs, and more intense exchange of fine-grained information. Understanding the value of social capital can contribute to an understanding of its particular relevance to the rapid, large-scale, and co-operative mobilization of effort and resources necessary for disaster recovery. Put simply, social capital is a reservoir of good-will within a community, characterized by a sense of ob-ligation to assist other members of the community and a trust that those receiving aid will not exploit the situ-ation to their advantage. Social capital has traditionally been a significant component of inter-firm relationships in Japan, witnessed in the effectiveness of inter-firm processes like just-in-time (JIT) deliveries, collabo-rative product development, and joint cost reduction projects. The behavior of firms in the wake of the 2011 disaster displays an unprecedented degree of co-opera-tion and coordination amongst companies, assisted by industry associations and government, in order to se-cure recovery. In the case of Renesas – a Japanese man-ufacturer and key supplier to both the automotive and electronic sectors – both financial and physical on-site assistance from other companies (like Toyota) was of-fered before it was even requested, and certainly before any time-intensive contractual commitments could be agreed upon. Given the scale of the disaster, stricken companies might reasonably have expected their cli-ents to shoulder many of the consequences, and were in many cases protected legally by contract. However, social capital forces inspire a sense of obligation to part-ners that goes well beyond legal contracts.

Sense-Making and Situational Awareness

“Sense-making” is a means by which an individ-ual or community can develop mental models of the sit-uation with which they are forced to contend. Without shared mental models within a group, the underlying foundations for comprehension, cooperation, and team-work is lost – often precisely at the times in which they are most needed. The end result of sense-making is sit-

uational awareness. High situational awareness requires both a valid, appropriate mental model of the situation and a detailed understanding of one’s environment and the particular consequences of his or her actions. As such, sense-making is necessary to process information and to make intelligent choices in any form of collective action, but is especially useful in the process of recovery from disaster. Unlike social capital forces, which serve simply to mobilize effort, sense-making is particularly relevant to the effective coordination and direction of effort. After the March 2011 disaster, the inter-firm mobilization of resources was striking in terms of its sheer speed, something which would not have been possible had companies insisted on legal guarantees to protect their own private commercial interests. Howev-er, the mobilization of resources was only a first step; once mobilized, such resources had to be focused, di-rected, and coordinated. Organizations that routinely operate under extreme conditions – such as emergen-cy services or the military – rely on repeated drills and practice to enable rapid, coordinated action. Replicat-ing this ability with people working in an unfamiliar environment and with few existing contingency plans is extremely difficult. In the case of Renesas, the process of sense-making led managers to graciously accept offers of aid in the form of skilled labor, and they were able to quickly establish a schedule. Spurred by the pressures and obligations of returning to productivity as soon as possible, the speed of recovery was paramount.

Implications

The road to recovery after an immense disaster is always difficult. In the wake of the March 2011 earth-quake, Japanese manufacturers relied upon high levels of cooperation and social capital in the mobilization of labor and resources, as well as on the rational, coordi-nated direction afforded by processes of sense-making and high situational awareness among managers. While some may conclude that the cooperative behavior de-scribed is a consequence of cultural and institutional patterns found only in Japan, it is clear that the value of social capital and sense-making in rapid adaptation to changing conditions – whether in the face of disaster or in the face of day-to-day market forces – cannot be overstated. ■

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Managing Value in Supply Chains: Case Studies on the Sourcing Hub Conceptby Anupam Agrawal, Arnoud De Meyer and Luk N. Van Wassenhove

Introduction Apart from being concerned with their imme-diate suppliers, manufacturing firms must also source their raw materials effectively in order to capture the most value in the design and creation of their products and equipment. Effective sourcing is the result of spe-cific and detailed knowledge of the source itself. For many firms, the source of raw materials (RM) does not represent a point of immediate concern. Nevertheless, a firm’s increased attention on developing relationships with its suppliers’ suppliers can provide a means for the firm to influence both sourcing knowledge and sourc-ing costs. One way to focus such attention is to enable the collection and use of micro-level knowledge of the raw material (including quantities, grades, processes, sourc-es, technical linkages with components, and prices) be-ing sourced by the purchasing firm. However, in addi-tion to collecting this data, the firm must also establish practices to effectively utilize new knowledge in man-aging the relationship with its RM suppliers sourcing via a “sourcing hub” – an in-house group initiated and deployed by the firm that is focused not only on devel-oping deeper sourcing knowledge, but also on applying that knowledge to the creation of better sourcing prac-tices.

The Sourcing Hub

The sourcing hub is an upstream entity in sup-ply chains, focused on developing collaborative rela-tionships with a firm’s suppliers, and with those sup-pliers’ own RM suppliers. The hub can be deployed as a physical department or unit within a firm’s organiza-tional structure. This department can be separate from the normal sourcing or purchasing department, since its most critical purpose is to develop collaborative rela-tionships with RM suppliers.

In manufacturing firms, the Bill of Materials (BOM) contains information about the raw materials, components, and assemblies of a product, along with their respective quantities. Traditionally, studying the Bill of Materials has been the only way to determine which current products require which raw materials, what quantities of RM are needed, what quality (or grade) is necessary, and which processes must neces-sarily exist at the RM supplier to provide the materi-als. Despite the importance of this information, BOM-based RM sourcing knowledge is not widespread, and often goes unutilized in day-to-day decisions made by the sourcing or design engineers and managers. To pro-mote the seamless exchange of information, and the use of that information in informing design and man-ufacturing decisions, firms should rely heavily on de-veloping deeper BOM-based sourcing knowledge, and deploying that information through the sourcing hub model.

Applications of Sourcing Knowledge

Knowledge at a firm level has been defined as a set of capabilities resulting from activities and coop-eration within the firm. It is easier to transfer knowl-edge within the firm than across firms or in the market; firm knowledge is personal, context specific, and not necessarily formalized. Specifically, the RM sourcing knowledge of a firm comprises the collective set of ca-pabilities, information, production details (such as de-signs, processes, and prices) and other technical details required for procuring the required RM inputs. Deploying RM sourcing knowledge at the sourc-ing hub creates value in several ways. First, such knowl-edge decreases the manufacturing complexity related to sourced components. Greater sourcing knowledge can motivate reductions in complexity because even minor changes to a complex interconnected sourcing system can cause significant increases in the amount of steps necessary to process each sourced element. For example, informed managers would be reluctant to approve addi-tional grades of a particular RM because such a change would require that the firm and supplier agree on a new set of requirements and prices. Changing a grade could have IT implications as well, lengthening the process as a whole. Since the additional work is cumbersome, there is an inherent pushback to any frivolous increase in the number of basic RM grades being used, simplify-


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ing and streamlining the process as whole. Second, better RM sourcing knowledge from the sourcing hub can help reduce costs. By providing transparency on the material grades being purchased, component level RM details inform cost-based deci-sions during the design stage. It is helpful for the design and sourcing departments to collaborate in the inter-est of choosing the particular RM sources that provide the best quality for the lowest cost, promoting ease of sourcing. Finally, RM sourcing knowledge can help reduce the information asymmetry between the two ends of the supply chain, the purchasing firm and the RM supplier, addressing the mismatch of supply and demand. This mismatch can lead to loss of revenue: if supply outpaces demand, high inventories can cause a financial strain. If demand outpaces supply, sales are lost and customers are dissatisfied. Determining the appropriate levels of inventory is difficult, and must rely upon a system of communication, and a willingness to share information between the RM supplier and the purchasing firm.

Implications

Applying sourcing knowledge to the deci-sion-making process requires a balance between two seemingly contrasting views. On the one hand, manag-ers might attempt to gain greater awareness of their sup-ply network and exert more control – a perspective that leads to greater operational complexity. On the other hand, managers might choose to promote outsourcing, as efforts to directly control the supply network might seem overly complicated, and unrelated to the core fo-cus of the firm. The best way to balance both perspec-tives is by utilizing the sourcing hub model. To deploy the sourcing hub, the firm must first invest in upstream sourcing relationships with RM sup-pliers. There are two types of costs associated with es-tablishing the sourcing hub. Initial startup costs relate to the detailing of raw material at the component level and establishing a material database. This infrastruc-ture will allow for the collection of information gleaned from closer relationships with the firm’s RM suppliers. Ongoing costs involve establishing routine practices for the management of the sourcing hub: developing pe-riodic schedules, linking supply with the payment cy-cle to the raw material and component suppliers, and routinely auditing inventory. Savings of 3%-6% can be

expected for firms that take an active role in managing sourcing relationships in this way. Deploying a sourcing hub as part of a manufac-turing firm’s organizational structure is an involved and ongoing process. However, the hub can help in many ways. Such a structure facilitates generation and use of RM sourcing knowledge by helping to develop collab-orative relationships with RM suppliers. These close relationships encourage the sharing of demand, pro-duction, and design information. The exchange of this information leads to improved sourcing practices and a reduction in the overall complexity of new product development. Ultimately, taking sourcing knowledge into consideration will reduce costs while balancing the dual perspectives of outsourcing and complexity. As such, managers concerned with striking the appropri-ate level of involvement in the oversight of their supply chain would be well-served by exploring the option of implementing a sourcing hub in their own firm. ■




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Retail Inventory: Managing the Canary in the Coal Mine

by Vishal Gaur, Saravanan Kesavan and Ananth Raman

Introduction

The retail sector plays a crucial role in most economies, accounting for 8% of GDP in the United States and comprising roughly 20% of non-agriculture jobs in 2011. Within the retail space, considerable at-tention has been given to the problem of how much in-ventory a retailer should carry. In recent decades, an ex-plosive growth in the variety of products offered, paired with a sharp decline in product lifecycles, has contribut-ed to an increasing complexity in addressing the prob-lem of inventory management. “Inventory turns” – a commonly used metric to identify excess inventory – has traditionally been a reliable method of evaluating a retailer’s profit and cash flow. For retailers, increasing the amount of inventory reduces stockouts, improves customer satisfaction, fuels sales, and expands product offerings. However, these apparent benefits for retailers often represent a source of concern for other stakehold-ers, like equity investors and lenders, who view rapid inventory growth as a sign of trouble – a “canary in the coal mine.” As such, relying exclusively on inventory turns neglects the perspectives of a retailer’s investors, lenders, and suppliers. Developing a more nuanced metric – adjusted inventory turns – can better represent current performance while simultaneously serving as a more reliable indicator of future performance.

Inventory Turns

The prevalence of inventory turns as a metric to assess inventory productivity is due to simplicity. The number of inventory turns represents the number of times a retailer has refreshed its inventory over a given period. Inventory turns are easily calculated and under-stood, relying only upon data available to all stakehold-ers through public financial statements. Because of the nature of this data, however, inventory turns represent a coarse metric that varies widely across retailers and over time. For the purposes of integrating the perspectives of retailers and their associated investors, lenders, and suppliers, a more refined metric is necessary. The ad-justed inventory turns (AIT) metric identifies the two drivers of inventory turns, gross margin and capital in-tensity, and provides a method for reliably benchmark-ing the amount of inventory a retailer should carry. By identifying a target inventory level that allows for di-rect comparison between retailers, AIT is an improved predictor of future sales, earnings, and stock prices for retailers.

Perspectives on Inventory Management

Determining optimal inventory levels is a com-plicated problem for retailers. Optimal levels are affect-ed by many variables, including a product’s expected demand, gross margins, obsolescence, carrying costs, lead-time for replenishment, and periodicity of review. In addition, the increasing variety and shorter lifecycles of modern products have made it difficult to anticipate which products should be made available, in which quantities, at which times. Due to these complexities, retailers must match supply to demand very closely, and often face large risks of excess inventory or shortage. Investors care about retail inventory for similar reasons, but are most concerned with inventory as a sig-nal of future performance. For savvy investors, backing a retailer whose inventory growth exceeds sales growth would prompt concern. Excess inventory represents not only the significant risk of lost revenue, but could also indicate that short term operating margins have been manipulated by management to overstate performance. Investors ultimately seek to determine a reliable risk and return profile from the limited performance data available in public announcements and SEC filings. As such, stock valuation is highly dependent on investor


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interpretation of inventory levels. Lenders and suppliers also monitor a retailer’s inventory levels. Inventory growth can often predict fu-ture cash-flow problems and, in some cases, bankruptcy and liquidation. In the event of liquidation, inventory is the primary means by which lenders recover money. The relationship between inventory growth and cash flow can be complicated; it is possible that a retailer, de-spite the fact that sales of key products remained steady or increased, could incur a negative cash flow in antic-ipation of forecasted sales growth that did not materi-alize. Lenders pay attention to inventory as a means of determining the appropriate amount to loan: too small a loan and a profitable opportunity might be missed, too large and the lender may be unable to recover its money if the retailer suffers bankruptcy.

Adjusted Inventory Turns

Retailers and external stakeholders need a reli-able benchmarking tool that can be used to determine appropriate levels of inventory. Such a benchmark must be transparent - derived exclusively from publicly avail-able data - so that it can be calculated as easily by equity investors, lenders, and other stakeholders as by retail managers. One key metric to incorporate is gross margin, which exhibits a negative correlation with inventory turns. Improved product availability, increased variety, and a shift toward higher quality, slower-moving prod-ucts are among the changes associated with increased gross margins. With each such change, the number of inventory turns generally decreases. Indeed, retailers recognize that in order to be profitable, either a high gross margin must be earned on each sale, or inventory must be turned very quickly. A second important metric is capital intensi-ty. Defined as the ratio of capital assets to total assets, capital intensity should be positively correlated with in-ventory turns. Retailer investments in increasing capital intensity include setting up warehouses and bolstering supply chain infrastructure and logistics, enabling re-tailers to allocate and refresh inventory more produc-tively by closely managing the supply chain. Adjusted inventory turns (AIT) takes each of these additional metrics into account. The AIT of a firm is defined as its inventory turns multiplied by adjust-ment factors for gross margin and capital intensity. The adjustment is similar to the method used in economics

to adjust GDP for inflation. By utilizing both addition-al metrics – gross margin and capital intensity – AIT improves upon the traditional inventory turns calcu-lation by allowing for broad comparison of inventory productivity across firms in a particular retail segment, or within a given firm over time.

Implications

AIT is more effective than inventory turns at gauging the sales, earnings, and stock prices of retailers. Critically, AIT is predictive of future sales and earnings. A high AIT in a particular year suggests that the retail-er has lower inventories than its benchmark, realizing its sales and gross margins with low inventories, and is thus likely to achieve higher sales in the future. By con-trast, a retailer with a low AIT would have realized its sales and gross margin with high inventories, suggest-ing lower sales potential in the future. Due to the nature of bias on the part of investors and analysts, who tend to over-estimate the earnings potential of over-inven-toried retailers in the short term, AIT also serves as a more reliable predictor of stock price. To best manage investors’ and lenders’ concerns about inventory, retailers should benchmark their ad-justed inventory turns over time against those of oth-er retailers. Because AIT is a more reliable predictor of future performance, and because it is derived from retailers’ past historical performance, it should serve as an invaluable asset in optimizing inventory. However, since many investors and lenders continue to rely on the (unadjusted) inventory turns metric, it is also in the interest of retail managers to assess the potential sig-nals that might be communicated by significant, rap-id changes in inventory turns. Careful tracking of AIT, paired with an awareness of the perspectives of a firm’s investors and lenders, will allow for improvements in inventory productivity and will pave the way for future growth. ■




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edge within the organization (inbound open innova-tion), and their role in the successful implementation of open innovation is worthy of closer examination. In contrast to the closed innovation model, which emphasizes the development of new products, processes, and services internally, the open innovation model requires that individuals actively scout for exter-nal ideas, shepherding the new ideas through internal processes and facilitating their exploitation within the firm. These efforts require individuals to engage di-rectly with external parties, to participate in external communities, and to occasionally develop direct work-ing relationships with other organizations. In addition, open innovation requires significant changes to work-ing routines and job functions. R&D professionals may find that the new requirements for open innovation are incompatible with existing operating routines, such as the expectation that they personally generate intellectu-al property (IP). In such situations, employees may de-velop “coping strategies” or workarounds to allow them to work towards wider organizational goals while still being effective in their individual work roles.

Barriers to Open Innovation

Effective implementation of the open innova-tion model hinges upon external engagement. There are four primary challenges that individuals face at dif-ferent stages of involvement with external partners: get-ting the right mindset, building partnerships, starting the conversation, and taking advantage. Some individuals may not have the right mind-set, and will fail to see the value of open innovation in their own work. The dominant culture of R&D scien-tists and engineers remains largely inward-facing. They may perceive external engagement as only ‘second best,’ due in part to the demanding nature of working with external partners. In addition, local, in-house knowl-edge is already aligned to organizational categories and objectives, and is compatible in format and language. This makes it easily accessible and transferable, facilitat-ing rapid incorporation. Put simply, it is often easier for individuals to rely on existing methods of internal R&D than to expend the extra effort necessary to cultivate valuable external knowledge relationships. Moreover, corporate rewards systems often remain unchanged, and most still emphasize the number and quality of in-ventions and patents an individual develops. Even in organizations with ambitious open innovation goals,

Introduction

The popularity of the open innovation concept has prompted the widespread adoption of alternative research and development practices that emphasize ex-ternal input in producing or improving upon new prod-ucts, processes, and services. Over the past few years, many organizations have encouraged their employees to be more active “open innovators” by interacting with external parties to discover new ideas. The rationale behind open innovation suggests that if organizations can utilize external knowledge effectively, internal R&D efforts will become more productive. However, implementing open innovation sys-tems requires significant organizational changes and a broad redefinition of tasks and competencies inside the organization itself. To fully benefit from the restructur-ing, attention must be paid to the specific internal bar-riers that prevent individuals within the organization – often neglected when focusing on organizational-level changes – from effectively utilizing external ideas in their own efforts. By prioritizing “bottom-up” strategies for their individual R&D professionals, organizations can reconcile the differences between informal working practices and formal organizational policies while by-passing many of the barriers that stall open innovation.

Open Innovation at the Individual Level

Much of the literature on open innovation fo-cuses on the organizational practices that enable firms to find new ways to capture and exploit external knowl-edge. This work provides ample insights into a range of strategies such as out-licensing and in-licensing, corpo-rate venturing, utilizing innovation intermediaries, and adopting open source development. But while the ex-tant literature explores the organizational-level tactics necessary to implement open innovation practices suc-cessfully, it does not explore the micro-foundations of open innovation. Individual R&D professionals are di-rectly responsible for the integration of external knowl-

Coping With Open Innovation: Responding to the Challenges of External Engagement in R&Dby Ammon Salter, Paola Criscuolo and Anne L.J. Ter Wal


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there are only weak structures in place to reward suc-cessful external engagement. Relatedly, even organizations with robust open innovation initiatives are prone to reliance on a small number of comfortable partnerships with external col-laborators. These relationships are often covered by long-term agreements, making them a ‘safe space’ for the exchange of knowledge across the firm’s bound-ary. One of the primary reasons that individuals stick to known partners is the complexity of the setting up new IP agreements with external parties. However, lim-iting collaborative channels to only a handful of famil-iar partnerships will ultimately diminish the number of potentially useful interactions. A third challenge involves what is known as the “paradox of disclosure.” This term refers to the situation where a party in a technology exchange discloses too much information and the other party is unwilling to pay for it. Paradoxically, if the first party discloses too little information, the other party may not be willing to exchange at all. Typically, no internal knowledge is dis-closed until a confidentiality agreement is established. However, individuals are often pressured to provide at least some information in order to request a conversa-tion with a potential external collaborator. Striking a balance between revealing too much and revealing too little represents a significant hurdle that can quickly limit the number of partnerships pursued. Finally, individuals must also be able to take advantage of the knowledge they obtain from external

sources. External ideas may have poor overlap with in-ternal categories and expertise, and may be formulat-ed so that they appear very “foreign” to the firm. They can rarely be applied directly to existing knowledge, and effort may be required not only to align external and internal knowledge, but also to determine how new knowledge can be harnessed to meet the company’s ob-jectives. Open innovation programs often pay little at-tention to the assimilation of new ideas, and as a result, fail to properly support R&D professionals in the trans-formation of external knowledge into tangible results.

Coping Mechanisms and Strategies

When an individual cannot see the value of external collaboration, skepticism can be overcome through deeper immersion into the partner organiza-tion. Greater levels of immersion will allay negative per-ceptions of collaboration. Regular site visits to potential partners are an important way in which open innova-tion R&D professionals are able to better appreciate the value of external partners. In addition, organiza-tions should build more flexible reward and promotion systems that enable and support openness. This could include rewards for the identification of new external partners, the appropriation of a valuable idea, or the uti-lization of an external resource for an internal project. To break the cycle of over-reliance on existing partners, R&D professionals should seek to form more “transaction-light” partnerships with new partners on


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their own initiative. Such arrangements ensure that both parties can get to know one another before the formation of strong commitments covered by complex contracts. In order to overcome the paradox of disclosure while forming new partnerships, R&D professionals must rely on better knowledge of which parts of their firm’s IP can be revealed safely. Awareness of permissi-ble IP can be improved by adopting modular IP systems which separate the most critical IP assets from those which can be readily disclosed. Additionally, organi-zations can design IP training programs for staff that clearly differentiate the challenges and opportunities of open innovation. Making external knowledge viable for internal application requires translation skills. Individuals must invest considerable time and attention in refining ex-ternal ideas and knowledge to allow them to be inte-grated into the firm’s R&D efforts or processes. To fa-cilitate this process, R&D professionals should seek to align new ideas with existing needs and orientations from their firm. This assimilation effort may involve the creation of a compelling story about the utility of the external idea and its alignment with the firm’s overall strategy and assets. Many professionals lack these trans-lation skills, and would benefit from an organizational structure that makes assimilation more concrete and prominent.

Implications

Even if a firm is fully invested in deploying open innovation strategies, crucial difficulties still arise at the level of individual employees. As the primary means by which external partnerships are formed and new knowl-edge is incorporated into the organization, R&D profes-sionals play a critical role in the successful shift towards an open innovation model. Managers should seek to understand the challenges faced by their R&D employ-ees, and the difficulties involved in the organizational transition towards greater emphasis on external input. The coping strategies described above grant individuals the ability to surmount the challenges of external col-laboration and improve the efficacy of open innovation strategies. It is critical to develop practices that will low-er the personal and professional costs of openness while driving engagement, and managers would benefit from careful consideration of the individuals who make in-novation possible. ■ READ FULL ARTICLE ►



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Employee Contributions to Brand Equity

by Betsy DuBois Gelb and Rangarajan Deva

Introduction

It’s an acknowledged fact that employees have an effect on profits. In businesses ranging from hotels to insurance companies to retailers, customer-focused employees contribute significantly to increased reve-nue. However, employees’ roles within the business ex-tend far beyond profit generation alone. Employees also contribute to brand equity – the perceived value of a firm’s brand. One prominent case of employee contributions to brand equity is Starbucks, where well-trained, friend-ly baristas embody the values the company hopes to pro-mote. But employee contributions are not always posi-tive. Their actions can also tarnish brand equity. Take, for instance, the behavior of individual traders within the financial services industry. Rogue employees are

able to degrade the positive perception of many firms by making them appear predatory, callous, or incom-petent. Accordingly, it is necessary for managers to un-derstand the role of their employees in the development of brand equity. With greater understanding, managers can modify organizational policies and resource alloca-tion strategies to make systematic improvements to the brand itself.

Brand Equity

A brand is a form of intellectual property, and is one of the primary means of communication between an enterprise and its consumers. The term “brand eq-uity” refers to the distinction between a brand and its physical product – it represents the associated percep-tions and feelings customers (and potential customers) experience when they encounter the brand. A strong brand will decrease the price elasticity of its commod-ities, and can ensure a business’ longevity in a variety of ways. High brand equity can provide the ability to retain customers during price wars, the ability to charge more than competitors, and the ability to withstand


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negative publicity resulting from product or service fail-ure. Unlike basic profitability, which can be improved with short-term measures like cost-cutting, increasing brand equity involves investment in longer-term con-tingencies. Oftentimes, among competitors with similar goods and services, the brand alone stands as a sole dif-ferentiator.

Employee Contributions

Research continues to prove that employee behavior is integral to brand equity. Not surprisingly, service organizations find employee contributions to be critical. Increasingly, firms producing tangible prod-ucts rely on services to enhance customer experience. But employee influence is not limited to the consumer sphere. In the business-to-business arena, employees represent a link of mutual trust between two firms. In such a relationship, a key employee’s departure – a sales rep who handles the customer’s account, or a manag-er who adapts the product to the customer’s specific needs, for instance – could contribute to a loss of trust and result in a degradation of brand equity. In for-profit firms, designating employees as brand equity promot-ers provides high payoffs in branding. However, such initiatives are not limited to for-profit ventures; any type of company would benefit from their employees being educated on how to create “trust and credibility” for the brand to which they’re committed. Typically, an employee will play one of two roles as a proponent of his or her brand: a brand element, or a brand ambassador. As a brand element, the employee will match up to consumers’ expectations of a brand by personifying the brand’s “desired attributes.” A custom-er’s perception of a brand is defined by the sum of his or her experiences with the product, company, or service. Accordingly, employees are a primary determinant of customer experience, and making positive impressions is important. As brand ambassadors, employees perform be-yond their job description. They symbolize or embody the values of the brand to customers, the general public, or even potential new employees. They not only defend the brand, but are also core informers of feedback. By listening to a variety of audiences ranging from their friends to their competitors, brand ambassadors can gain meaningful insights into how the brand is per-ceived across different segments.

Implications

Management also plays a fundamental role in the development of brand equity, as substantive im-provements to brand equity require significant fiscal and managerial commitments. More money must be allocated to hiring, training, and evaluation based upon reinforcing the brand. Managers should specifically seek to reward employees’ brand-building actions, and work to retain particularly talented employees. Orga-nizations concerned with developing brand equity will reap the benefits of having passionate, committed em-ployees who serve as brand elements or brand ambas-sadors. Ultimately, developing a positive brand will im-prove public conception and can help to differentiate a company from its competitors. It may be tempting to view investments in brand equity as inefficient, given that short-term profits can be influenced by simpler measures like layoffs. How-ever, such solutions may deteriorate service quality or cause hostile employees to attack the firm, also leading to a loss of brand equity. Ultimately, managers should seek to promote and embody the brand itself while en-suring proper training for employees and establishing positive channels of internal communication. This will offer information that can be utilized to guide future decisions, and provides a means of integrating employ-ee, customer, and stakeholder feedback. ■




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Culture Change at Genentech: Accelerating Strategic and Financial Accomplishments

by Jennifer Chatman

Introduction

Genentech is a 35-year-old biotechnology com-pany that discovers, develops, manufactures, and com-mercializes medicines to treat patients with serious or life-threatening medical conditions. As of 2009, the company became a wholly owned member of the Swiss pharmaceutical giant Roche Group. Genentech focuses on five therapeutic areas – oncology, immunology, neu-roscience, metabolism, and infectious diseases. With more than 11,000 employees in the United States, Ge-nentech maintains a prominent influence in each of its areas of expertise. In 2009, Jennifer Cook – an MBA (1998) from the Haas School of Business at the University of Cali-fornia, Berkeley – became the Senior Vice President of the Immunology and Ophthalmology (GIO) business unit at the company. The relatively new GIO division included four branded products – each in very different stages of development and viability. Xolair and Ritux-an were mature Genentech brands with modest growth prospects and a strong sense of history and identity. Lu-centis was a Genentech brand with a robust life cycle, significant growth potential, and an established culture. Actemra was a Roche brand in launch mode that en-joyed an extensive lifecycle and impressive growth po-tential, but suffered from significant culture and prod-uct launch challenges. The assimilation of these four brands occurred amidst the recent Roche-Genentech merger, a period of time that led to layoffs, disruption, and widespread uncertainty over the course of multiple leadership changes. Like any business, Genentech grapples with the need to create value not only for its customer segments, but also for its own employees. Cook realized that due to the recent upheavals and the highly discrete nature of the four franchises she’d inherited, a “culture change” was necessary to guide her unit and to bring success over the long run.

Organization via Commonality

When Cook took over GIO, the four franchises had been performing adequately as independent en-tities. As a group, however, they lacked a strong sense of shared identity. Each franchise was organized as a discrete unit, and accordingly, had different individual histories, organizational cultures, and preexisting bias-es that had to be reconciled. Despite their differences, Cook determined that there was ample opportunity to emphasize a set of commonalities that might serve to conceptually link each of the brands and inspire greater cohesion within her unit. Cook began by focusing on engaging leaders and line managers to embark on a project to define GIO’s desired culture. In the fall of 2010, Cook held a GIO Senior Leader Kickoff meeting with 12 participants to discuss the culture change. Although she anticipated a certain level of skepticism, the discussions were fruitful and proved to be a catalyst for high-level acceptance of a shared cultural vision. Around that time, Cook also hired a third-party consulting firm, The Trium Group, to conduct interviews, focus groups, and to gather per-sonal stories with 35 participants within GIO. After getting her senior leadership onboard, Cook sought to apply the new culture effort to the entire GIO team. Beginning in the fall of 2010, she introduced the concept to the entire organization through multi-ple onstage communications. While certain members of the unit were skeptical, Cook realized that drawing attention to tangible similarities in each franchise’s end goals would serve to validate her initiative and promote a sense of unity. Moreover, Cook chose to combat cyni-cism with ownership. One of Cook’s initial frustrations was that her staff referred to the culture effort as “Jen-nifer’s culture.” She tried to distribute accountability evenly among all of her staff members. “You choose it” became a prominent theme in the development of a shared set of cultural values. As part of this process, Cook conducted a GIO-wide survey with 550 employees in September. Taking a data-driven analytical approach, unusual in culture change efforts but appropriate given Genentech’s adher-ence to the scientific process, Cook distilled the results of the survey into four qualities that each group agreed should represent the GIO culture.


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Four Cultural Pillars

Based on the survey, Cook determined that there were four areas that everyone at GIO wanted as part of their unique culture: (1) patient orientation, (2) focus on people, (3) courage/innovation, and (4) integ-rity. Two dimensions that people chose not to prioritize were “intensity” and “drive for results.” Cook realized that her team exhibited a will-ingness to drive results as a sales and marketing force without specific calls for greater productivity. Instead, most respondents desired greater inspiration from their day-to-day roles. Based upon these results, Cook ini-tiated an offsite leadership meeting to produce a uni-fied vision statement. Shortly thereafter, the results and vision statement were presented to all GIO employees and became the basis of a full workshop during which over 500 people worked to pinpoint the specific actions that might shift the culture. Participants brainstormed tangible ideas that could be readily implemented, such as placing patients versus sales numbers first in email communications. The workshop resulted in hundreds of ideas that The Trium Group organized and synthe-sized into 50 concepts based around the four cultural pillars. In addition, the 50 concepts focused on “change levers” – people-oriented areas of improvement like “communication,” “reward and recognition,” and “train-ing” – that could act as mechanisms for implementa-tion.

Putting Culture Change into Action

The GIO workshop proved to be an immense success. In the following months, Cook organized cross-franchise initiative teams around the change le-vers and the key initiatives culled from the workshop. The cross-franchise teams allowed people to form re-

lationships across the business unit that they would not have developed otherwise. Cook emphasized that the initiative teams would allow participants to choose what they worked on in order to foster engagement. She also ensured that teams would have the opportunity to present their work directly to their senior leadership. The franchise teams tackled a variety of initia-tives, each oriented to address one of five change levers. The Recruiting team focused on redefining their prac-tices and developing new interview questions to ensure that candidates “fit the culture.” The New Hires team focused on how GIO’s training process could be aligned with the new culture. The team developed a compre-hensive new hire packet, including a letter from Jen-nifer Cook, and organized a new hire reception where employees could meet and mingle with key leadership. In addition, more initiatives under the training lever sought to provide current employees with on-site ex-posure to different roles within the unit, letting them investigate whether or not an employment transition was appropriate. To address the communication lever, a Culture Advisory Board was established. Tasked with building greater awareness of GIO’s culture, the team created a new logo, and developed a patient-based model of internal communication. Rewards and recog-nition initiatives created new accolades which could be awarded to employees who demonstrated exceptional patient-focused service. Finally, the Development Plan-ning Skills Initiative focused on creating tools and re-sources to help GIO employees in their career develop-ment.

Implications

An important aspect of Cook’s success and the success of GIO’s culture effort was the fact that she “walked the talk,” guiding the process from initial con-ception through rounds of surveys and workshops, and eventually managing the smaller groups and initiatives making tangible changes to the structure and function-ality of her unit. Cook consciously tried to live the “fo-cus on people” pillar by making herself and her leader-ship team highly available. Ultimately, her “you choose” mentality distributed the task of culture change to every employee, fostering engagement and leading to system-atic positive improvements that shepherded GIO into a new era. ■




16

Contesting the Value of “Creating Shared Value”

by Andrew Crane, Guido Palazzo, Laura J. Spence and Dirk Matten

Introduction

The concept of Creating Shared Value (CSV) was popularized by Michael Porter and Mark Kram-er in a series of Harvard Business Review articles be-ginning in the early 2000s. Since that time, CSV has become a popular way of understanding the complex dynamics present in the relationship between business and society. In essence, CSV is presented as a means of legitimizing business practice in the face of widespread public distrust of the capitalist system. It proposes to transform social problems relevant to the corporation into business opportunities. In theory, a company intent on creating shared value would be contributing to the solving of critical societal challenges while simultane-ously driving greater profitability. CSV is a seductive promise – a means of driv-ing the next wave of innovation and growth while im-proving the general conception of capitalism. However, while it may be demonstrated to inspire greater aware-ness of relevant social issues, CSV is unlikely to inspire fundamental change. Several key shortcomings in Por-ter and Kramer’s premise are likely to prevent it from becoming a viable solution to the crisis of capitalism. Namely, the theory is unoriginal, ignores the tensions between social and economic goals, is naïve about the challenges of business compliance, and is based on a shallow conception of the role of the corporation in so-ciety.

The Emergence of Shared Value

The concept of shared value was proposed more than a decade ago, with research focusing explicitly on the nonprofit sector. Specifically, Porter and Kramer be-gan with an examination of how foundations can create social value. This soon extended into a piece exploring how corporate philanthropy can create both social and economic value, introducing the authors’ ideas sur-rounding the use of social programs to enhance a firm’s competitive context. By 2006, this had developed into a

broader analysis of how to integrate corporate social re-sponsibility (CSR) into core business strategy. The term ‘shared value’ was coined. Around the same time, Porter and Kramer be-gan working with the global food multinational Nestlé through their nonprofit consultancy, FSG. This collab-oration led to a 2006 report on creating shared value in Latin America. From 2008 onward, the company began producing biannual, global, company-wide CSV re-ports. Eventually, Porter and Kramer established a fully realized elaboration of shared value as a concept in the cover article of Harvard Business Review. This article formalized much of their previous research, and for the first time advanced a definition of shared value: “poli-cies and operating practices that enhance the competi-tiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates.”

Strengths of the Shared Value Concept

Porter and Kramer’s writings on CSV have met with considerable success, reaching an audience not only through HBR, but also through many news, maga-zine, and web channels. It has been the subject of sever-al CEO roundtables at Davos, and has become required reading in many MBA and executive education cours-es. Leading companies like Nestlé and Coca-Cola have embraced the concept, integrating it with existing CSR efforts. Additionally, the shared value concept has also made a significant impact in the academic community, where in a short space of time their most recent article has been among the most highly cited in Harvard Busi-ness Review. One of the critical strengths of the CSV model is its unequivocal elevation of social goals to a strategic level. Porter is perhaps the world’s best-known busi-ness strategist, and his endorsement of CSV represents a persuasive call to consider the strategic relevance of social goals. Porter and Kramer also make a significant step forward in understanding the role of the govern-ment in the social initiatives of companies: state actors should establish clear, measurable goals and regulations that enhance shared value and stimulate innovation. By framing their contribution in terms of broad-er system-level problems – problems of capitalism – Porter and Kramer also bring some much-needed con-ceptual development to existing debates about ‘caring’ or ‘conscious capitalism.’ Accordingly, CSV purportedly


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offers a holistic framework to unify largely disconnect-ed debates on the various social issues affecting modern capitalism. Ultimately, however, the framework only su-perficially deals with systemic issues and falls short in several critical respects.

Weaknesses of the Shared Value Concept

The first prominent weakness in the CSV con-cept is that it is largely unoriginal. CSV fails to super-sede the existing concept of Corporate Social Respon-sibility (CSR), which was established as early as the 1970s and has already undergone decades of strategic refinement. By disregarding these refinements, Porter and Kramer confer the inaccurate impression that CSR has only been regarded as ‘bolt-on’ philanthropy: a cost or constraint instead of a source of opportunity and in-novation. This is a narrow and incomplete reading of the most relevant CSR literature, which largely suggests that – like CSV – companies should treat social issues as strategic opportunities for growth. In addition, extant literature in the fields of stakeholder management and social innovation bear striking resemblance to Porter and Kramer’s descriptions of CSV. Ultimately, by ignor-ing or rejecting the relevant theories that overlap with core ideas from the shared value concept, Porter and Kramer fail to genuinely open new conceptual space. Beyond the unacknowledged gaps with other established streams of literature, the CSV concept also suffers from a failure to deal adequately with trade-offs between economic and social value creation, and fails to address negative impacts on stakeholders. While seeking win-win opportunities is clearly important, CSV does not provide guidance for the many situa-tions where social and economic outcomes will not be aligned for stakeholders. In reality, many corporate decisions related to social and environmental issues do not present themselves as potential win-wins, but in-stead manifest as dilemmas. Oftentimes, there is very little room for compromise. The mere idea of negoti-ation over a particular issue (poor labor practices, for instance) might be unacceptable for some stakeholders, like NGO activists. Given the complexity of balancing social and economic interests, CSV might simply drive corporations to invest more in easy solutions and de-coupled communication strategies rather than attempt-ing to solve broader societal problems. This shortcom-ing is not unique; one of the main critiques of CSR and stakeholder theory is that they tend to promote more

sophisticated corporate strategies of “greenwashing.” Additionally, CSV fails to account for industries that may be deemed socially destructive (tobacco, firearms) regardless of strategic efforts, and fails to address sus-tainability of decisions affecting global supply chains. The shared value concept also entertains an overly optimistic assumption about business’ desire to adhere to external norms, most notably governmental laws and regulations. Regulatory compliance should not be presumed, as it has not been a defining feature of past business practice. Instead, discussions of compli-ance should be fully integrated into new theories; this is particularly true given CSV’s stated objective of restor-ing trust in capitalism and re-legitimizing business. Finally, despite Porter and Kramer’s major am-bition to reshape capitalism, CSV does little to tackle any of the deep-rooted problems that are at the heart of capitalism’s recent legitimacy crisis. It seeks to solve the macro systemic problem of capitalism by changing mi-cro firm-level behaviors. It attempts to rethink the pur-pose of the corporation without questioning the sancti-ty of corporate self-interest. It seeks to restore business legitimacy without considering either adherence to reg-ulation or the role of market forces.

Implications

Although flawed, CSV does contribute mean-ingfully to the debate on business and society. Its pop-ularity may indeed lead to the emergence of more so-cially beneficial business practices. However, in its most basic premises, it does little to persuade capitalism’s most vocal critics who are looking for a fundamental departure from corporate self-interest, rather than a simple restatement. By failing to substantially incorpo-rate current literature on similar subjects, CSV does not break new ground and can be deemed unoriginal. In addition, the shared value concept is overly optimistic of the ability of businesses to consistently implement solutions that are both economically and socially bene-ficial, and that adhere to existing regulatory pressures. Ultimately, Porter and Kramer are seeking to solve a system-level problem with organizational-level chang-es. As such, Creating Shared Value can only be seen as a true innovation at the expense of discounting all those circumstances and constraints that hinder the pursuit of ‘shared’ value at the expense of economic value cre-ation. Though attractive, CSV ultimately falls short. ■



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