Author: HBS Working Knowledge

Abstract

David Norton and I introduced the Balanced Scorecard in a 1992 Harvard Business Review article (Kaplan & Norton, 1992). The article was based on a multi-company research project to study performance measurement in companies whose intangible assets played a central role in value creation (Nolan Norton Institute, 1991). Norton and I believed that if companies were to improve the management of their intangible assets, they had to integrate the measurement of intangible assets into their management systems.

After publication of the 1992 HBR article, several companies quickly adopted the Balanced Scorecard giving us deeper and broader insights into its power and potential. During the next 15 years, as it was adopted by thousands of private, public, and nonprofit enterprises around the world, we extended and broadened the concept into a management tool for describing, communicating and implementing strategy. This paper describes the roots and motivation for the original Balanced Scorecard article as well as the subsequent innovations that connected it to a larger management literature.
36 pages.

Located in Mumbai, India, Dharavi is home to an estimated 700,000 people living on just 551 acres. Featured in the 2008 Oscar-winning film Slumdog Millionaire, Dharavi embodies the characteristics of a slum as defined by the United Nations: inadequate access to safe water and sanitation, poorly built housing, overcrowding, and insecure residential status (i.e., most people hold no legal title to their property).

Despite these difficult conditions, Dharavi’s residents occupy a centrally located parcel of land in a rapidly growing city of some 14 million people with one of the highest real estate values in the world.

In “Dharavi: Developing Asia’s Largest Slum,” HBS assistant professor Lakshmi Iyer and lecturer John Macomber detail the history of Dharavi and examine ongoing efforts to forge a public-private partnership between the state government and for-profit developers. The goal is to transform Dharavi into a neighborhood offering desirable, market-rate residential and commercial real estate while providing its longtime residents with free housing and improved services in the same area.

Written with the assistance of Namrata Arora, a research associate at the HBS India Research Center, the case considers the potential risks and rewards of approaching an area like Dharavi with a new model in mind: slums as lucrative and socially entrepreneurial business opportunities.

“The basic idea is that the slum dwellers are living on very valuable land in one- or two-story shacks,” says Iyer. “If you build multistory buildings, you can give them accommodation and still have space to sell so that it will be a for-profit project.”

When the case opens, a fictitious developer, Rance Hollen, is at a critical juncture: Weighing the cost of capital, construction, and expected market prices for developed units, should Hollen meet the government’s minimum bid for one of five development contracts, submit a proposal well above minimum, or walk away entirely? The case’s calculations show a potential rate of return as high as 40 percent, but there are significant hurdles to clear, too.

For one, private investors could find themselves at the whim of the Maha-rashtra state government, which is itself often swayed by powerful blocks of voters in slums such as Dharavi. And with the daunting prospect of determining which residents would receive 300 square feet of free housing (limited to families in residence before January 2000), it’s easy to imagine a nightmarish scenario of unpopular evictions and shutdowns of thriving, unregistered businesses that would quickly turn public opinion against the project.

“Government is not one person, obviously; it’s many people with many agendas, particularly in India,” says Iyer. “That’s why this project has been starting and stopping.” (Plans for the redevelopment were launched in 2004; expressions of interest were invited in June 2007, but in July 2009, the government postponed the call for bids just a few hours before deadline.)

Taught for the first time

The case elicited a broad range of student responses when HBS associate professor Gunnar Trumbull taught it for the first time last December in the elective course Managing International Trade and Investment. Some said flatly that they would walk away from the deal, while others thought that it was a worthwhile risk to take, particularly since the project could inspire similar such developments. (In fact, two other projects are under way and progressing more quickly in other parts of India.)

Whatever the final outcome of the Dharavi project, the issues it raises are not going away anytime soon, with 200 million people expected to move from the Indian countryside to New Delhi, Kolkata, and Mumbai over the next ten years.

“There are three huge trends occurring in the lifetimes of our students: urbanization, resource scarcity, and the private financing of public infrastructure,” remarks Macomber. “When those three factors come together they alter conventional conceptions of ‘real estate’ and the built environment.”

Dharavi brings students face-to-face with the realities (and potential opportunities) of that change, however bullish or bearish they may be on the role of public-private partnerships in tackling one of the world’s most troubling problems.

Abstract

What does it mean for a nonprofit organization to be accountable? Nonprofit leaders tend to pay attention to accountability once a problem of trust arises – a scandal in the sector or in their own organization, questions from citizens or donors who want to know if their money is being well spent, or pressure from regulators to demonstrate that they are serving a public purpose and thus merit tax-exempt status. Amid this clamor for accountability, it is tempting to accept the popular view that more accountability is better. But is it feasible, or even desirable, for nonprofit organizations to be accountable to everyone for everything? The challenge for leadership and management is to prioritize among competing accountability demands. This involves deciding both to whom and for what they owe accountability. This paper provides an overview of the accountability pressures facing nonprofit leaders, and examines several mechanisms available to them: disclosures, performance evaluations, self-regulation, participation, and adaptive learning. Nonprofit leaders must adapt any such mechanisms to suit their organization – be it a membership-based organization, a service-delivery nonprofit, or an advocacy network. More crucially, they need to pay greater attention to strategy-driven forms of accountability that can help them to achieve their missions.
33 pages.

Abstract

We develop an integrated theory of the social identity mechanisms linking workgroup sex and race composition across levels with individual turnover. Building on social identity research, we theorize that social cohesion (Tyler, 1999; Hogg and Terry, 2000) and social comparison (Festinger, 1954) lead to well-known cooperative effects within subordinate-supervisor pairs of the same sex and race, but potentially competitive effects among demographically similar peers. Analyzing longitudinal human resource data on professionals employed in a large up-or-out knowledge organization, we assess the distinct effects of demographic match with superiors and demographic match with peers on the exit of junior professionals. We find largely cooperative effects of cross-level composition-junior professionals who work in groups with higher proportions of same sex senior professionals are less likely to exit. At the peer level, however, these effects are reversed, and professionals are more likely to leave as the proportions of same sex and race peers within the workgroup increase. The effects hold across demographic groups, but vary by majority/minority status, disproportionately affecting women and underrepresented minorities.
48 pages.

Recently I have revisited a topic that has intrigued me for years, ways in which an organization’s culture affects its economic performance. The basic working hypotheses are that: (1) people put forth more effort and produce better results for organizations whose values they identify with, and (2) therefore, it’s in the best interests of organizations to clearly formulate those values and make them clear to prospective employees in the process of building an organization of people who subscribe to those same values and generally want to “fit in.”

There is some amount of evidence that satisfaction with one’s workplace, as characterized by the poll results for “best places to work” both in the U.S. and the U.K., is related positively to economic performance. Further, intrinsic rewards, such as capable colleagues and recognition for good work, play a larger role in worker satisfaction than extrinsic rewards such as monetary compensation.

A new book, Identity Economics, by Nobel Prize-winning economist George Akerlof and Rachel Kranton, takes this thinking to a macro-economic level. In their view, an organization (and even entire societies) works well when people personally identify with it, so that their self-esteem is tied up with its activities. Identity helps explain why people do things, everything from getting tattoos to volunteering, that aren’t in their immediate best interest. I’m reminded of this when I recall the dedication with which my South Korean business friends doggedly pursued success during the rapid growth period of the country in the 1980s even if it meant weeks of travel and significant strains on their personal lives. They were doing it in part as a personal sacrifice in pursuit of national goals for a better life for future generations of South Koreans.

One has to ask whether citizens in the U.S., who have experienced little loyalty on the part of their employers, can any longer identify with their organizations and, in a broader sense, their economy? Economist Robert Shiller’s response to this question is sobering. He says: “In most civilian fields, job satisfaction may not be a life-or-death matter, but a relatively uninterested, insecure work force is unlikely to bring about a vigorous recovery.” He concludes that “Solutions for the economy must address not only the structural instability of our financial institutions, but also these problems in the hearts and minds of workers and investors-problems that may otherwise persist for many years.”

The questions this raises are: Just what solutions address Shiller’s concerns? How can they be achieved? Can businesses, for example, be provided with incentives to retain their employees and generally improve employee “identity”? Does this require yet one more intrusion by government into the private sector? In fact, is it even achievable in countries like the U.S. at this late date? Will such efforts result in the same slow responses to an economic crisis and sluggish recovery in productivity being experienced at this moment in European countries with their more “humane” laws regarding employment? Or are we confronting a crisis of “identity” so critical that some kind of effort will be well worth the long-term benefits that it might yield in terms of citizen “identity” with the economic success of countries like the U.S.? What do you think?

To read more:

George A. Akerlof and Rachel E. Kranton, Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being (Princeton, NJ: Princeton University Press, 2010).

Robert J. Shiller, “Stuck In Neutral? Reset the Mood,” The New York Times, January 31, 2010, p. BU4.

Toyota’s tragic automobile recalls offer a historic opportunity for Ford’s CEO Alan Mulally and General Motors’ new CEO Ed Whitacre. After years of decline, they can reestablish the preeminence of American-made autos if they are wise at leading through this crisis.

In the past month Toyota has recalled almost 9 million vehicles—more than the entire number it sold the past three years. The irony is that Toyota gained significant market share in the past decade at the expense of its American competitors by offering superior quality vehicles. Now quality has become Toyota’s Achilles’ heel.

No doubt Toyota will regain some of its lost market share in the short term, to the extent the automaker’s production systems can respond by increasing production rates without incurring problems of their own. The bigger question is, will Ford and GM be able to capitalize on this opportunity for the long term?

I was with Whitacre when he initially learned that Toyota was suspending sales of 57 percent of its autos sold in the United States. He responded immediately by directing his executives to ramp-up production as quickly as possible.

While Whitacre and Mulally maximize current sales, taking advantage of this opportunity in the near term is not a long-term strategy. All too often, both GM and Ford have squandered similar opportunities by simply raising prices and profits, as they did during the three-year import quotas in the mid-1980s. They must recognize that no matter how wounded Toyota is in the short term by its quality problems, this company is a very tough and able competitor that will move quickly to revamp its quality and its product offerings.

On the march

GM and Ford need to move aggressively to secure their market share gains by investing windfall profits to make their auto lineups more competitive for the next decade. That means introducing new designs that offer attractive features, improved fuel efficiency, and better customer value along with superior quality. This will take enormous effort, ingenuity, and discipline along with massive investments.

In this regard, Ford has the jump on GM. When Mulally was hired from Boeing in 2006, Ford was in trouble. The company was stretched thin with too many product lines spanning too many countries and appealing to too few consumers. Mulally’s first act was to borrow $23.5 billion by mortgaging the entire company to give Ford the runway necessary to retool its aging lineup.

Mulally moved fast, trimming unpopular lines, cutting management layers, and insisting on an R&D overhaul that hurt short-term profits. Having weathered the 2008 crisis without U.S. government support, Ford has $23 billion in cash in the bank and a lineup of eco-friendly automobiles to which U.S. consumers are gravitating.

GM only emerged from bankruptcy last July, when Whitacre was installed by the Obama administration as its new board chair. Since that time, he has acted decisively, removing Fritz Henderson as CEO and assuming the mantle himself. Whitacre quickly reorganized the company from top to bottom, cut out layers of middle management, initiated new product development programs, and revamped GM’s international sales and marketing. He also put himself on the firing line, publicly taking ownership for GM’s turnaround and appearing in a series of advertisements challenging consumers to compare GM autos with its competitors.

Glimmers of Ford’s and GM’s potential shone brightly at the Detroit Auto Show last month. Mulally showcased his new model range. Car experts and reviewers alike agreed the new models revitalized Ford. Whitacre also unveiled a new line of cars, admittedly trailing Ford, particularly in hybrids. He boldly predicted GM would be profitable in 2010 and would pay off its government loans.

January sales for Ford and GM jumped 24 percent and nearly 14 percent, respectively, year over year, in spite of high unemployment and low consumer confidence.

Chrysler falls further

In contrast, look at Chrysler and its new CEO, Sergio Marchionne. He ambitiously projected that Chrysler would become profitable in 2010 on an 18 percent increase in sales. Instead, Chrysler sales dropped 8 percent in January. Marchionne has not been aggressive in revamping Chrysler vehicles, repositioning the company’s brand, or reorganizing its beleaguered management. As a result, it is falling further behind and missing this golden opportunity.

The last and perhaps most important lesson for leaders going through a crisis is that they cannot just play defense by cutting costs and waiting for the crisis to pass. They have to go on offense simultaneously by transforming their organizations and investing heavily in revamping their products and their marketing to focus on winning now.

That’s precisely what Mulally and Whitacre are doing. They may not be automobile industry veterans, but they are highly competitive leaders, skilled at winning in the marketplace. The American automobile industry is a lot stronger today because of their decisive, visionary leadership.

Observing and understanding the tasks and challenges that workers face every day is important. But managers who merely put in time “walking the floor” are not doing enough; in fact, it can make employees feel worse about their situation.

In their working paper “Going Through the Motions: An Empirical Test of Management Involvement in Process Improvement,” HBS professor Anita L. Tucker and Harvard School of Public Health professor Sara J. Singer show that communicating with frontline workers can backfire if managers make only a token effort to resolve issues their staff is encountering.

Drawn from the health-care industry, the research is based on a sample of 69 randomly selected hospitals, 20 of which participated in a three-part cycle of process improvement activities. Focusing on one area of the hospital at a time, the hospital’s top administrative and medical officers spent 30 to 60 minutes with frontline workers involved in the processes of a particular unit. In addition, they held open communication forums related to patient safety. After generating a list of issues from these two activities, the group decided which ones to solve, and senior leaders communicated to workers what actions had been taken.

The 20 hospitals identified 1,732 safety-related problems in areas such as facility design and maintenance, equipment and supplies, communication, staffing, and medication issues. On average, hospitals identified 86 problems, took action on 67 percent, and provided feedback to frontline workers on 24.5 percent.

The researchers reviewed surveys taken before and after process improvement activities, supplementing them with in-person interviews with frontline staff, department managers, and the CEO.

Following the findings

Some of the findings supported what Tucker and Singer had already hypothesized. For example, when the hospital took action on a higher percentage of problems, it had a positive effect on organizational climate. The researchers also confirmed their belief that identifying those problems more negatively affected senior managers’ perceptions of the organizational climate for improvement than the frontline workers who observed and lived those problems every day.

However, there were surprises, too. Identifying many problems to correct had a somewhat negative impact overall. Most significantly, Tucker and Singer found that senior managers’ communications with frontline workers regarding their corrective actions had a clear negative impact on frontline workers’ perceptions of the organizational climate for improvement—quite the opposite of what they had anticipated.

“When we went into this study, I really believed the common theory behind improvement thinking, which is that you first go out and find a lot of issues,” Tucker says. “You obviously can’t address everything, so you pick one or two, fix them, and then explain why you weren’t able to get to the others. In fact, identifying all these issues dredged up negative sentiment, fixing only one or two amplified that feeling, and then telling frontline workers what had been done made it even worse.”

Ironically, the process improvement approach used in the study mirrors that of the incident reporting systems employed in many hospitals. Tucker notes that these systems have their place, as they provide the opportunity for workers to anonymously report safety violations being made by physicians and other health-care workers. But her research shows that they can also be counterproductive on many levels when used as a vast collection vehicle.

“It’s a bit of a Pandora’s box,” she says. “Identifying more is not necessarily better if the organization then ignores the majority of the concerns.”

A Pareto problem

The philosophy behind incident reporting systems is similar to that seen in a Pareto chart, Tucker adds.

“Pareto’s theory was that 80 percent of the cost is caused by 20 percent of the problems, so you find lots of issues, identify patterns, and select the one or two most highly leveraged problems to solve to get the biggest results. Instead, our findings suggest that solving issues as they arise with intense and substantive actions is much more productive in creating a climate where it’s clear that the manager is concerned enough to improve the systems.”

Of the 20 hospitals that participated in the program, 9 registered greater improvement in organizational climate and performance. Some of the negatively performing hospitals engaged in low levels of activity, but one poorly performing hospital in particular caught Tucker’s eye.

This institution had high levels of activity when it came to gathering information and acting on problems, reporting 66 safety-related problems, taking action on a well above average 91 percent, and providing feedback on 83 percent. So why wasn’t this organization rewarded with a better organizational climate and performance? Tucker and Singer went back to the interviews and observational data.

The answer, they say, is because management was auditing workers by catching them on technical mistakes and telling them how to do something the right way.

“You can see how that would erode the staff’s trust in management,” Tucker says. “A worker might think, ‘Leadership just doesn’t get it. I’m not doing these things because I don’t know any better. Look at this environment and the complexity of issues I have to deal with. Instead of helping, they’re basically slapping me on the wrist.’ “

In contrast, hospitals that were able to improve their safety climate took action on the issues raised, and conducted site visits “in the spirit of being truly curious about the problems they observed and how they could help people do their job better,” Tucker says.

The same findings can be applied to any industry or organization. “What we’re finding is more related to human psychology than anything health-care specific,” Tucker says.

It’s helpful for managers to be reminded that their symbolic physical presence on the frontlines does not necessarily have a positive impact.

“Yes, it’s important to interact with employees, but understand that the most effective question to ask is, ‘What can I do to make your job easier?’ ” she adds. “It’s all about working with the unit manager to help people be more effective, not just looking for positive or negative actions.”

Long tail problems

Tucker hopes to focus future research on figuring out how organizations can successfully attack what she calls the “long tail” of problems.

While it’s highly visible mistakes such as medication errors that make the headlines, health-care managers need also be concerned about less dramatic infrastructure-type problems—such as insufficient supplies of pumps or intravenous poles—that are easily ignored but eventually add up to real trouble.

“In complex services like health care, there are many opportunities for systems to fail because of the multiple interactions and hand-offs between people of different disciplines. It is more like 50 percent of the problems cause 80 percent of the issues, rather than there being just a handful of highly significant problems,” she says.

“People get discouraged because they fix something and don’t see the needle move in a big way. It’s my belief that management and frontline workers in the health-care industry are going to need to address many issues on multiple dimensions, and figure out how to do so in a cost-effective manner.”

Abstract

This working paper offers concrete examples of improved productivity and efficiencies at the district level, drawing from the author’s experience working with districts and developing such case studies for Harvard Business School. Childress makes the point that given the rarity of the strategic approaches to resource allocation, district leaders need more guidance and tools to help them make better decisions and manage the consequences, particularly when they are under enormous fiscal pressure.
32 pages.