Ebisre11-12 16

The
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Have we lost the ability

to listen to bad news?
Future Work: Changes,

Choices & Consequences
Your customer is not

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The Future of Customer

Relationships
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NOVEMBER - DECEMBER 2016
Have We Lost the Ability to Listen to Bad News? p. 9
Decision Making
9
Entrepreneurship
Have We Lost the Ability to Listen to Bad News?

Kim E. van Oorschot, Luk N. Van Wassenhove, Kishore
Sengupta & Henk Akkermans
56
Ethics
59
Your Customer is Not Just King. He or She Can Be Your VC, Too!
John Mullins
Marketing
15
Values, Values on the wall, Just do business and forget them all:
Wells Fargo, Volkswagen and others in the hall
Avi Liran and Simon Dolan
A New Model for the Future of Customer Relationships

Yoram (Jerry) Wind and Catharine Hays, with Alexa
de los Reyes
Branding
Politics
22
65
5 Ways Donald Trump Could Make Government Run More

Like a Business
Howard Schweitzer
Lifestyle
24
Passports for Sale

Interview with Till Neumann, IMCM
founder and managing partner of Citizen Lane
Governance
69
Future of Work
33
Future Work: Changes, Choices & Consequences

Jonathan Trevor
And They Lived Happily Ever After The Value of Storytelling

in Consumer-Brand Interaction
.ODXV3HWHU:LHGPDQQ(YPRUD.DUDPSRXUQLRWL
and Nadine Hennigs
A Wake-Up-Call for the Boards on Innovation

Alessandro Di Fiore, Jonas Vetter and Joachim von
Heimburg
Business Model
72
Technology
What causes managers to change their business model?

Tina Saebi, Lasse Lien and Nicolai Foss
Innovation
40
The Impact of Blockchain on the Energy Sector

Expectations from German Energy Executives
Christoph Burger, Andreas Kuhlmann, Philipp Richard
& Jens Weinmann
75
45
FED Up With Big Data Hype? How Central Banks Struggle

with Digital Disruption
Christopher Surdak
80
Reverse Innovation: A New World Order for Global

Innovation?
Simone Corsi & Max von Zedtwitz
Supply Chain
Risk Sharing in Joint Product Development Lessons
from 787 Dreamliner
Yao Zhao
Management
50
Creating Effective Organisational Systems through

Experimenting with Human Nature
David De Cremer and Tian Tao
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From the Editors

The Rise and Crash of Hillary Clinton
illarys journey has been fuelled by a blind ambition for

power. And while efforts were made by her propaganda machine to imbue her campaign with some passion,
some humanity, womens issues, black lives matter, Hillary Clinton
herself could not deliver.
During the course of the 2016 presidential race, Hillary Clinton
FRQUPHGZKDWSHRSOHKDGVXVSHFWHGIRUDORQJWLPHVKHLVDOODPbition, blind ambition and no passion.
Hillarys journey has been fuelled by a blind ambition for power.
,W LV LPSRVVLEOH WR QG DQ\WKLQJ WKDW RQH FDQ VD\ +LOODU\ LV SDVsionate about, except of course her relentless pursuit of power.
And while efforts were made by her propaganda machine to
imbue her campaign with some passion, some humanity, womens
issues, black lives matter, Hillary Clinton herself could not deliver.
Nothing rang true. Her so called passion for womens issues is
under cut by her hostile stance towards the women who accused
her husband of improprieties in the 1990s. Her so called passion
for black people is undermined by her support for, campaigning
and lobbying for her husbands crime and social security reform
acts in the 1990s. Her promise that she wants to be the president
of all of America does not extend to those she has put in a basket
of deplorables. She did not care for them, she forgot that her husEDQGVGHUHJXODWLRQRI WKHQDQFLDOPDUNHWVFRQWULEXWHGWRKRPHlessness, joblessness, loss of pension, and the deplorable state in
ZKLFKVZDWKVRI $PHULFDQYRWHUVQRZQGWKHPVHOYHV7KH\DUH
in deplorable states because the new Democratic Party abdicated
its own mission to take care of the poor. She and her husband
fashioned a new Democratic Party, which had no conscience, no
passion and no loyalty to the poor, the deplorables as she described
them. Apologies are not enough to right those wrongs.
Hillarys problem started a long time ago, her wagon was hitched
IURPVWDUWWRQLVKWRWKDWRI KHUKXVEDQG%LOO&OLQWRQ6KHZDV
not a passive, stay-at-home, bake cookies, host tea party type of
UVWODG\6KHZDVRQHRI KLVELJJHVWVXSSRUWHUVVKHOHQWKHUYRLFH
to many of his laws and policies. In return the Clinton connection
brought her many rewards too, a Senate seat in New York City, a
bid for the presidency in 2008, a Secretary of State slot under the
Obama administration and another shot at the presidency in 2016.
And not just that, her friends in high places are the ones that beneWHGIURPKHUKXVEDQGVODUJHVVWKHEDQNHUVWKHELJFRUSRUDWLRQV
and the media conglomerates who threw their weight behind her
campaign and propped her up throughout the whole journey.
In preparation for her second bid for the White House she
embarked on a revisionist agenda with the help of her husband who hit
the campaign trail apologising for the excesses of his regime and trying
to distance her from those excesses. Her email debacle and FBI investigations, her misadventures in Libya and Iraq, made her the most unsafe
candidate in the running for the Democratic ticket. These and the fact
that she is one of the most disliked candidates in recent times did not
deter her from believing that she could win this thing. With the mainstream media behind her, they believed they could make all these go
away. They gave her a whole lift up and went about a character assassination of anyone who stood in her way. Her main message in the end
was the Trump tapes which were released by her media partners during
the Presidential debates. But she could not keep the skeletons in her
cupboard jangling louder and louder.
She could not see beyond what she wanted. This is 2016, and the mood
has changed. The MSM no longer monopolise the news. The Internet is
all pervasive. Wikileaks is still leaking. The poor people also have eyes
and ears and they can read too. Poor people are fed up. After many years
of recession, robbed of their homes and livelihood, they felt left out,
they wanted change. They recall that the Clintons did not do anything
for them, and apologies were simply not going to do it this time around.
Hillary was blind to all these, standing opposite Donald Trump, she believed that the presidency was hers to take. She was wrong. In the words of
Niccolo Machiavelli, He who blinded by ambition, raises himself to a position whence he cannot mount higher, must fall with the greatest loss.
+LOODU\&OLQWRQFDPHFUDVKLQJGRZQ6KHORVWWRDQRSSRQHQWOHVVTXDOLHG
than her, who throughout this campaign had been ridiculed by the media as
inept, racist, sexist you name it. Hillary Clinton would have done better if
VKH KDGUHWLUHGWRWKDWJORULHGSODFHJLYLQJVXFFRXUWRWKHSRRUDQGDEXVHG
women, she would have been a welcome champion. Lets hope she will
accept the message from the American people with grace they said it once,
they have said it again, they just dont want President Hillary.
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Feature
Decision Making
Have We Lost the Ability

to Listen to Bad News?
BY KIM E. VAN OORSCHOT, LUK N. VAN WASSENHOVE,
KISHORE SENGUPTA & HENK AKKERMANS
Research shows that project managers

continuously prioritised good vibes
(positive, but subjective signals) over bad
news (negative, but objective signals),
which resulted in decisions of poor quality.
Without understanding the root causes that
generate the bad news and the good vibes,
managers could make the wrong decisions.
1. Introduction
Managers are frequently surprised by problems
in complex new product development projects
(Browning and Ramasesh, 2015). Often these
surprises come from unknown-unknowns:
the things we dont know we dont know. In
response, many tools have been developed to
help managers discover these unknown unknowns: to turn them into known unknowns
to which risk management procedures can be
applied. These tools are both hard and soft,
targeting both the analytical, mechanical side
of the project, and the behavioural, organic
side. Examples of the former are: checklists,
decomposition, scenario analysis (Browning
and Ramasesh, 2015) and stage gates (Cooper,
2008). The latter includes: informal dialogues
with project sponsors (Kloppenborg and Tesch,
2015), building a wide range of experiential
expertise (Browning and Ramasesh, 2015), frequent communication (Laufer et al., 2015), help
seeking (Sting et al., 2015), and focusing on weak
signals (Schoemaker and Day, 2009).
What all these tools have in common is that
they aim for clarity in projects that follow an uncertain path through foggy and shifting markets
and technologies (Eisenhardt and Tabrizi, 1995).

The price to pay for this is more information that
needs to be processed by the project manager.
Project managers need to make sense of all sorts
of signals, whether they come from analytical
tools or informal dialogues and communication, whether they are strong or weak, positive
or negative, objective or subjective. Eventually,
all signals need to be merged to make project
decisions. Yet, little is known about how project
managers actually make sense of a multitude of
(often mixed) signals.
2. Information Overload
Managers operating in fast-paced and
demanding environments face the dilemma
that numerous factors and options surround
Project managers
need to make sense
of all sorts of signals,
whether they come
from analytical tools
or informal dialogues
and communication.
Decision Making
and measurable information. This is the slower

system and involves conscious deliberation and
analysis (Dane and Pratt, 2007; Fenton-OCreevy
et al., 2011). Using both sides not only improves
the speed of the decision making process, but
also the quality of the decision (Damasio, 1994).
7R UHDS WKH IXOO EHQHWV RI WKH UDSLG LQIRUmation processing system, and to prevent the
potentially harmful biases that can be induced
by this system (Dane and Pratt, 2007; Fentonevery decision (Seo and Barrett, 2007). They OCreevy et al., 2011; Seo and Barrett, 2007), inmust make decisions against a background of tuition and gut feelings need to be attributed to
ambiguous information, high-speed change and correct causes (Forgas and Ciarrochi, 2002; Seo
a lack of ability to verify all facts (Bourgeois and Barrett, 2007; Schwarz and Clore, 1983).
and Eisenhardt, 1988; Oliver and Roos, 2005). However, for managerial intuition to be effec7KLV PDNHV LW H[WUHPHO\ GLIFXOW RU HYHQ tive, years of experience in problem solving is reimpossible to make an optimal decision within quired (Dane and Pratt, 2007; Fenton-OCreevy
a limited time frame. Information overload et al., 2011; Khatri and Ng, 2000). Research
occurs because either too many messages are has tended to characterise intuition as integral
delivered and it appears impossible to respond to expert performance (Dreyfus and Dreyfus,
to them adequately or incoming messages are 2005). Experts seem to be better calibrated and
QRWVXIFLHQWO\RUJDQLVHGWREHHDVLO\UHFRJQLVHG OHVV RYHUFRQGHQW WKDQ QRYLFHV .RHKOHU et al.,
(Antioco et al., 2008). To prevent overload, in 2002; Tsai et al., 2008). Experts are accurate
SUDFWLFH SHRSOH VDWLVFH RU VHHN VROXWLRQV and quick to make decisions in ill-structured
that seem good enough in a given situation, situations because they use their experience to
making decisions that are at best based on recognise a situation, and then make decisions
bounded rationality (Oliver and Roos, 2005); i.e. that have worked previously. Over time, experts
the limits upon the ability of human beings increasingly use their accumulated knowledge
to adapt optimally, or even satisfactorily, to to make decisions and take advantage of their
complex environments. (p. 132, Simon, 1991). prior knowledge (Gonzalez and Quesada, 2003;
Information overload and bounded rationality Gonzalez et al., 2003).
But, experience also has a darker side. It inforce decision-makers to use heuristics,
standard rules that implicitly direct our troduces the possibility of biases (Sleesman et
judgment [and] serve as a mechanism for coping al., 2012; Staw, 1981). Furthermore, people tend
with the complex environments surrounding to access previous knowledge that bears surface
(or what is most accessible in memory), rather
our decisions. (p. 6, Bazerman, 1994).
Previous research shows that decision-mak- than structural (what is more useful), similaring improves when both the right and left side ity to the problem at hand (Thompson et al.,
of the brain are used (Seo and Barrett, 2007; 2000). In a stable decision making context, it
Oliver and Roos, 2005). The right side has been is expected that eventually decision makers, by
referred to as information processing system mere repetition, will learn what is useful and
1 (Kahneman, 2003). System 1 is rapid. This what not. However, in a complex and changprocess is non-conscious, with important par- ing context, experience is often a poor teacher.
allels to perceptual processes and linked to in- Even highly capable individuals are confused by
tuitive and experiential decision-making (Dane WKH GLIFXOWLHV RI XVLQJ VPDOO VDPSOHV RI DPand Pratt, 2007). The right side reads between biguous experience to interpret complex worlds
the lines, uses intangible information, gut (Levinthal and March, 1993). Especially in dyfeeling and previous experiences. The left side, namically complex environments, characterised
system 2, uses the facts: tangible, objective, by a large number of interacting components
PREVIOUS RESEARCH SHOWS THAT

DECISION-MAKING IMPROVES
WHEN BOTH THE RIGHT AND LEFT
SIDE OF THE BRAIN ARE USED.
Left:
conscious
deliberation
and analysis
Right:
Intuitive and
experiential
decision-making
10
The European Business Review November - December 2016
Feature
WKDW IHHGEDFN WR LQXHQFH WKHPVHOYHV OHDUQing can break down and lead to the experience
trap (Diehl and Sterman, 1995; Sengupta et al.,
2008). As a result, individuals can create their
own potentially inaccurate beliefs, based on subjective interpretations of events (Lapr and Van
Wassenhove, 2003; Staats et al., 2015).
When learning breaks down, we cannot
trust our gut feeling that is based on previous
experiences. As such, we expect that when
decision makers use both system 1 (gut feeling)
and 2 (rational) to process large amounts of
information in complex dynamic situations, like
new product development projects, the quality
of their decisions will suffer. Over time, poor
quality of decisions will lead to problems in
the project. These problems will generate more
information that needs to be processed, which
forces managers to rely even more on system 1,
thereby only making matters worse. Although
some project problems may indeed have been
caused by unknown unknowns (Browning and
Ramasesh, 2015), it is likely that some project
problems are generated as side effects of project
managers past decisions.
Through an in-depth study of a multimillion
dollar new product development project in the
VHPLFRQGXFWRULQGXVWU\ZHQGWKDWPDQDJHUV
discuss both objective and subjective information before making decisions. However, due to
the lack of time to process every piece of information, they rely more on subjective information. This becomes problematic in situations
characterised by mixed signals of bad news
(negative, measurable project facts) and good
vibes (positive, subjective feelings). An example
of such a mixed signal is: the project is delayed
with one week (bad news), but we have made
great progress and team spirit is high (good
vibe). Without understanding the root causes
that generate the bad news and the good vibes,
managers can make the wrong decisions.
It took the project management team in our
study over 80 weeks to realise that the project
could not be realised within the given time,
budget and quality constraints and the project
was cancelled after spending over 20 million
dollars. During these 80 weeks, the team was
FRQYLQFHG WKDW WKH\ FRXOG QLVK WKH SURMHFW
successfully. How could they make themselves

and the steering committee believe this?
3. Feedback Loops of Information Processing
From analysing the discussions the team had
during their weekly project management meetLQJVZHQGWKDWWKHWHDPUHSHDWHGO\PDGHWKH
decision to postpone the due date of the current
project phase, at the expense of the due date of
the next phase, but not at the expense of the
QDO SURMHFW GHDGOLQH :KHQ WKHVH GHFLVLRQV
were made, negative facts were outnumbered
by positive feelings. The team seemed to give
more weight to good vibes than to bad news. As
such, the team members persuaded themselves
that they could make up for current delays in
the future, thereby enabling them to stick to the
original deadline that was communicated to the
customer. This decision to allow more time for
the current phase gave instant relief. Therefore,
this decision seemed to be good and helped to
resolve a lot of the current scheduling problems in the project. The project seemed to be in
control. This is expressed by a balancing feedback loop. (See Information, Gut Feeling, and
Quality of Decisions.) This feedback loop describes that when managers need to process a lot
of information, they do not have the capacity
to analyse every signal rationally and as a result
they have to rely on gut feeling. In doing so,
Without
understanding
the root causes
that generate
the bad news
and the good
vibes, managers
could make the
wrong decisions.
11
Decision Making
Our findings indicate that the more

information managers need to process in a
short time, the more managers tend to rely
on their gut feeling when making decisions.
they increase their ability to process information
which reduces the number of pending information or signals waiting for a response.
However, when the next phase in the project
approached, it became clear that the short time
that was allocated to this next phase was not
a solution but a huge problem. This problem
created more information that needed to be
processed, forcing the team to rely even more
RQ JXW IHHOLQJ 7KLV LV UHHFWHG E\ D UHLQIRUFing feedback loop that spirals the system out of
control. Gut feelings lead to decisions of poor
quality which cause problems that increase the
amount of information that needs to be processed. This only reinforces the need to use gut
feeling in dealing with the information overload.
VHHJXUHEHORZ
FIGURE 1. Information, gut feeling and quality of decisions
Making decisions based on gut feeling in dynamically complex projects seems
to help on the short term but it only makes matters worse on the long term
available rational
information processing
capacity
desired information
processing capacity
+
-
information pending
(signals waiting to be
processed)
instant relief
reliance on
gut feeling
+
information generated
by new problems
quality of decisions
long term disaster
new problems
12
4. Trusting gut feeling leads to poor decision quality

Our results indicate that managers discuss
both objective and subjective information
before making decisions. However, due to the
lack of time to process every piece of information, they rely more on subjective information. This becomes tricky when the signals
consist of a mix of bad news and good vibes.
By not focusing on the root causes, managers
could make wrong choices. Because these decisions seem to be good on the short-term, it
takes a long time before they realise that the
project is in trouble and that problems are aggravated instead of solved. When problems
suddenly escalate, this may seem surprising,
but these problems are simply a side effect
of poor decisions made in the past, not by
unknown unknowns that are usually blamed
for project failures.
In dynamically complex projects, managers surround themselves by all sorts of Gantt
FKDUWV 06 SURMHFW OHV WDVNV OLVWV WUDFNLQJ
LWHPV UHG DJV RXWSXW FKDUWV DQG UHVRXUFH
SUROHV ,W VHHPV WKDW WKH PRUH FRPSOH[ WKH
project is, the more information is desired. But
more is not always better. Paradoxically, our
QGLQJV LQGLFDWH WKDW WKH PRUH LQIRUPDWLRQ
managers need to process in a short time, the
more managers tend to rely on their gut feeling
when making decisions. Our study shows that
this can be very dangerous. Managers should
not ignore their feelings (or the feelings of
their team members). But, feelings should be
KDQGOHG ZLWK FDUH ZKHQ WKH\ LQXHQFH GHcision making. When in the face of project
problems, team members report how well they
are working together, that they are making
good progress, or that they are expecting to
make good progress in the future, managers
should be careful. Where do these statements
come from? Is it sheer hope, or is the remark
based on an actual understanding of how
the dynamic system works? In the former, it
is recommended to ignore the good vibe and
stick to the facts, in the latter, it is better to
acknowledge the vibe and use it as a decision
facilitator (and as such, use gut feeling to make
decisions). In case managers operate in a dynamically complex system that they fail to fully
Feature
understand, it doesnt mean that they are bound to make

the wrong decisions. In these situations, managers should
carefully consider what kind of information they need. For
example, project managers could ask someone to tally the
QXPEHU RI HYHQWV WKDW UHHFW JRRG RU EDG QHZV DQG JRRG
or bad vibes, and then to plot these events over time. Such
graphs provide deeper insight into the status of the project
and project managers perceptions of this status and can
serve as a starting point for an improved understanding of
the situation which will lead to a better use of both facts
and feelings about the project.
About the Authors
Kim E. van Oorschot (kim.v.oorschot@bi.no)
is a professor of project management at BI
Norwegian Business School. She received her
PhD in industrial engineering from Eindhoven
University of Technology. Her research interests
include decision making, trade-offs, and tipping points in
dynamically complex settings such as new product
development (NPD) projects.
Luk N. Van Wassenhove is the Henry Ford
Chair of Manufacturing at INSEAD and a
Fellow of POMS, EUROMA, and MSOM. He is
also a Gold Medalist of EURO. His recent work
focuses on sustainability (circular economy) and
humanitarian operations.
Kishore Sengupta (kishore.sengupta@insead.
edu) is a Reader in Operations at Cambridge
Judge Business School, University of
Cambridge. His research examines managerial
behaviours in the execution of complex projects, and their consequences for the outcomes of such projects. His more recent work focuses on the role of stakeholders in large innovation projects.
Henk Akkermans is a professor of Supply
Chain Management at Tilburg University and
the director of the World Class Maintenance
foundation in Breda, The Netherlands. His
research addresses the issue of how interorganisational supply chains and networks, where no single
party exerts full control, can nevertheless effectively coordinate their behaviour.
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13
Ethics
Values, Values on the wall,

Just do business and
forget them all: Wells Fargo,
Volkswagen and others in the hall
BY AVI LIRAN AND SIMON DOLAN
There is a growing discrepancy between

the values stated on the wall and values in
action. In the case of Wells Fargo, most
of the companys values and visions were
breached. In this article, the authors
discuss effective ways to practice values in
action to align it with a companys mission
and vision.
nrons heyday ended long ago. We all

hoped that other companies would have
learned their lesson and paid more attention to the issue of ethical or value-based management. However, the global business community is now watching a painful new chapter
in this saga. On the 8th of September 2016,
Richard Cordray, director of the Consumer
Financial Protection Bureau, announced that
:HOOV )DUJR ZRXOG SD\ PLOOLRQ LQ QHV
for illegally creating unauthorised deposit and
credit card accounts across the USA.
The saddest part of Wells Fargos fraud is
that no one is surprised. The leading Israeli
humorist, gestalt master and coach, Lenny
Ravich is quoted to say: 99% of bankers give
a bad name to this profession. We would go
as far as to add, Many bankers nowadays are
ashamed to introduce themselves as bankers
in public presentations.
Wells Fargos stock price dove, shaving 24

billion dollars from its investors. 5,300 emSOR\HHV ZHUH UHG EXW VXUSULVLQJO\ IHZ VHQLRU
executives among them.
On the 20th September 2016, at the
Senate Banking Committee Hearing, Senator
Elizabeth Warren questions Wells Fargos
CEO and Chairman of the Board John G.
Stumpf about accountability. He then made
a strategic media mistake. He refused to share
any opinion on any matters regarding personnel, senior leadership resignations or claw
back. He was evasive and claimed that he did
not know all the details. Considering that this
investigation is not new to the bank, these
answers were an insult to our intelligence. That
unprepared, indecisive and evasive answers
will be probably part of PR case studies in
universities across the globe on how not to
handle the media during a crisis.
To that hearing day, there have been no
senior-level resignations nor returned personal
windfalls generated from the fraudulent
activities. On the contrary, Carrie Tolstedt, the
former head of the consumer banking division
and executive who has been directly responsible
for overseeing the retail banking sector of the
company where the fake accounts were created,
ZDVUHZDUGHGIRUKHUDFW,QVWHDGRI EHLQJUHG
$24bn
Wells Fargos stock
price dove, shaving
24 billion dollars
from its investors
5,300
employees
were fired,
but surprisingly few
senior executives
among them
15
Ethics
On the 28th of September it

was announced that John
Stumpf (center), Wells Fargo
CEO, has agreed to give up
$41 million in unvested stock
awards following the board
of directors investigation.
Photo courtesy:
Gerald Martineau/
Washington Post/Getty
In the case of Wells

Fargo, most of the
companys values
and visions were
breached not
merely a few rotten
apples but 5,300
employees broke
the code of ethics.
16
VWDWHG UVW FRUH YDOXH RI VDIHW\ FDXVLQJ WKH

largest, most harmful and costly oil spill in
history, bringing BP almost existential risk.
The cost of not delivering on organisational
values is massive. Today many organisations
are teaching their values only from the wall,
UDWKHUWKDQWKURXJKWKHLUDFWLRQVLQDQLQHIcient manner.
Adding insult to injury are John G. Stumpf s
values and vision for Wells Fargo as included
in their website: We believe in values lived, not
phrases memorized. If we had to choose, wed rather
have a team member who lives by our values than one
who just memorizes them.
In the case of Wells Fargo, most of the
companys values and visions were breached
not merely a few rotten apples but 5,300 employees broke the code of ethics. These employees did not do it for a day or two; they did
it daily over a period of several years.
7KHVHHPSOR\HHVGHVHUYHWREHUHGEHFDXVH
they committed criminal offences. They
and denied a bonus, she was allowed to retire in cheated. Regardless of explicit core values, in
July of this year, holding roughly $96.6 million virtually all societies, stealing is treated as a
criminal act. However, when you are a lowin various stock awards.
On the 28th of September it was announced wage earner whose livelihood depends on
that John Stumpf has agreed to give up $41 reaching an unrealistic sales target, you somemillion in unvested stock awards following times prefer to comply rather than hold on to
the board of directors investigation. Carrie your values. If your colleagues are all involved
Tolstedt, Wells Fargos former head of com- in a fraud that clearly is making your bosses
munity banking, will forego all her unvested happy, you are actually being taken advantage
equity stock awards valued at $19 million and of by your superiors in the organisation (see:
ZLOOQRWUHFHLYHUHWLUHPHQWEHQHWVZRUWKPLO- Albrecht et al, 2015). It seems that not only
lions more. Tolstedt was responsible for the GLGOHDGHUVKLSIDLOWRSURYLGHHIFLHQWWUDLQLQJ
division during the time employees allegedly and compliance, but also avoided taking any
created sham accounts to meet sales targets. responsibility in the case of Wells Fargo.
Economist Milton Friedman has argued
She has announced she will retire at the end
that it is the social responsibility of corpoof year.
But public opinion and sentiments towards the UDWLRQV WR LQFUHDVH SURWV WKHUHE\ SXWWLQJ
more people to work and paying more taxes
leadership of Wells Fargo became very negative.
It must be ironic and sad to see statements like WR VXSSRUW SURJUDPV WKDW EHQHW WKH JHQHUDO
WKHIROORZLQJLQWKHRIFLDOGRFXPHQWVRI :HOOV public. On the other hand, business ethicists
Fargo: Leaders are accountable. They share the credit caution against a myopic pursuit of earnand shoulder the blame. They give others the responsibil- ings. The quarterly reporting syndrome that
ity and opportunity for success. ~ (from Wells Fargo pressures companies to meet earnings expectations promotes temptation that can push
9LVLRQDQG9DOXHVRIFLDOGRFXPHQW
7KLVLVQRWWKHUVWWLPHLQWKHKLVWRU\RI some to distort the truth.
In the case of Enron, 16 former execs were
business that greed has overpowered values.
A few years ago, BP compromised on their sentenced to prison. Its former chair, Ken Lay,
was also convicted, but passed away before his

guilty verdict could be appealed, so the case
was thrown out. Additionally, in the unfolding case of Wells Fargo, former and present
HPSOR\HHVKDYHOHGDELOOLRQFODVVDFWLRQ
against the bank in Los Angeles County
Superior Court on September 24th 2016. The
biggest victims of this scheme are a class of people
that nobody else has talked about. The biggest victims
of Wells Fargo's scam is the class of victims that were
UHGEHFDXVHWKH\GLGQRWPHHWWKHVHFURVVVHOOTXRWDV
by engaging in the fraudulent scam that would probably end up in the CEOs pockets (taken from the
26 pages class lawsuit).
Senior executives at Wells Fargo might ask
themselves, What are we doing wrong in the
hiring and orientation processes? What are
we missing in our training and compensation
models that encourage so many of our employees or colleagues to cheat on our behalf ?
Wells Fargo did wrong for their customer by
faking their authorisations and charging them
XQNQRZLQJO\ 'LG OHDGHUVKLS SURYLGH VXIFLHQW
training of their values and code of ethics or
supervisory effective compliance? How could
they expect employees to follow their values
while concurrently applying relentless pressure
to achieve unrealistic sales targets?
From a leadership perspective, cross-selling and providing one-stop-shop servicHV IRU WKH QDQFLDO QHHGV RI \RXU FXVWRPers is a legitimate goal. Yet, there must be a
balance between greed goals that feed the
stock value and practicing the value of whats
right for the customers. The desire to satisfy
shareholders must be balanced with the need
to service all corporate constituents all of
whom contribute to a companys worth. That
structure must be reinforced with values that
build trust, as well as by more cognizant oversight and notable penalties for egregious acts.
,I \RX ZHUH D &(2 ZRXOG \RX UH WZR
best-performing sales persons who contribute
RI \RXUFRPSDQ\VSURWV",VLWWUXHWKDW
it is kosher to do anything for short term
share value growth?
In contrast, one should assuredly mention
the case of the Chinese giant Ali Baba. In
2002, an internal investigation at Ali Baba
There is a growing
discrepancy between
the values stated
on the wall and
values in action.
found that two sales persons were violating

the values and paying off hefty sums to the
company. Jack Ma, the founder and legendary
CEO, had to make a painful decis`ion. Keep
in mind that this was 2002, before Ali Baba
became worth more than even Wells Fargo
bank. This was a time when the money in
question could have been the determinant of
Ali Babas survival. Jack Ma said, ,I ZH UH
WKHPLPPHGLDWHO\WKHFRPSDQ\ZLOOQRWPDNHDSURW
if we do not kick these two employees out, then what
does this signify about us? It would imply that our
ZRUGV DUH HPSW\ 6R ZH QDOO\ GHFLGHG WR OHW WKHVH
two employees go. Furthermore, in a later interview he said, We focus on the employees and the
culture. Everybody is helping each other instead of
just making money.
Would Jack Ma have opted to pressure employees to meet cross sales quotas? Well, here is
another anecdote connected with his value proposition: he dismissed a sales trainer for teaching
poor practices. He said, The training instructor was
speaking about how to sell hair combs to monks. After
YHPLQXWHV,JRWH[WUHPHO\DQJU\DQGH[SHOOHGWKHLQstructor. I thought the instructor was a cheat. Monks do
QRWQHHGFRPEVLQWKHUVWSODFH
In our work on coaching and managing by
values across the globe, with many of the best
global organisations, we continually witness a
crisis of values in action. For example, we
were involved in a process of culture reengineering of a large auto manufacturing company
belonging to the Volkswagen group. We found
a general company attitude whose values
were unclear and unshared. Working with the
company executives, we started revising the
PLVVLRQYLVLRQDQGFRUHYDOXHV6SHFLFFKDQJHV
followed, affecting the policies and practices of
HR. A scandal emerged in the larger Volkswagen
group, proving employees were involved in tampering with vehicle emission systems, and the
manufacturing process was halted. Had the head
RIFHRI 9RONVZDJHQLQWHUYHQHGHDUOLHUWKHOLNHlihood of engineers engaging in such unethical
and unprofessional practices would have been
VLJQLFDQWO\GHFUHDVHG,WLVHVWLPDWHGWKDWLQDGGLWLRQWRDVLJQLFDQWVFUDWFKLQWKH9RONVZDJHQ
brand, the scam will cost Volkswagen over 17
billion dollars in total costs.
17
Ethics
In 2002, an internal
investigation at Ali Baba
found that two sales persons
were violating the values
and paying off hefty sums
to the company. Jack Ma,
the founder and legendary
CEO, decided to let these
two employees go.
Photo courtesy:
Kiyoshi Ota/Bloomberg
There is a growing discrepancy between

the values stated on the wall and values in
action. Here is another example that we had
experienced. A few years back, we trained the
senior executives of a large telecommunication
company. Over 50 senior executives (many of
them were VPs) participated in the program.
At one point during the training, they were
DVNHG WR ZULWH GRZQ WKH RIFLDO YDOXHV RI WKH
company; to our surprise, only 2 of the 50
H[HFXWLYHV DFWXDOO\ LGHQWLHG WKH FRPSOHWH OLVW
RI YDOXHV RI WKH UP ,PDJLQH WKDW \RXU WRS
managers in your company do not know the
FRUH YDOXHV RI \RXU UP 2QH ZRXOG ZRQGHU
what the day-to-day management practices
will be in your company. It is said that changes
have taken place and this is no more the
case, but we do not have recent evidence to
support such claim. The data that we have
accumulated over the years, and across the
globe, show that over 75% of companies have
D VLJQLFDQW JDS EHWZHHQ WKH VWDWHG YDOXHV
(the values on the wall or on their website),
and the values in action (the values actually

being practiced). The most common current
employee training methods largely reinforce
values by using a push strategy, which relies
KHDYLO\RQPHPRULVLQJWKHRIFLDOYDOXHVDQG
retaining them, but not on pull strategy, which
means incorporating and practicing them
proactively on a day-to-day basis.
One reason that companies do not practice
YDOXHVLVWKHGLIFXOW\RI PHDVXULQJYDOXHVDQG
of aligning them with the company mission
and vision. This is the essence of the process
of cultural re-engineering that we have proSRVHG DQG LQWURGXFHG WR UPV RYHU WKH SDVW
20 years (See: Dolan et al (2006) Managing
by Values: A corporate guide to living, being alive
and making a living in the 21st century (Palgrave
MacMillan); or Dolan (2011): Coaching by
Values. iUniverse). An effective way to practice values in action focuses on the process of
identifying core values, measuring the practice
RI YDOXHV LQ WKH UP DQG LQWURGXFLQJ SROLFLHV
to reinforce it and align it with their mission
and vision.
Perhaps one example can show the level of
complexity in selecting a core value that will
not become just another eloquent phrase on
the wall. Teamwork is one such value. IDEO,
one of the most famous and successful design
companies in the world, has chosen Teamwork
as a value, rather than Collaboration. They
consider Teamwork to be a dynamic action
that provides a clear path of action and inspires result-driving behaviour. IDEO reinforces this value with their HR policies and
practices (i.e. team incentives and bonuses).
,Q FRQWUDVW LQ PDQ\ UPV SHRSOH DUH VWLOO
being paid on the basis of individual performance. This creates the paradox If we wish
to encourage teamwork, why pay individuals
and not the team? In the North American
continent a very individualist, dog-eat-dog
competitive market the concept of teamwork is a wish, even a clich, but very seldom
We focus on the employees and the culture. Everybody is helping each

other instead of just making money. Jack Ma, founder and CEO of Ali Baba
18
a reality. If I compete with my team, why

should I collaborate and work as a team?
Organisations spend billions of dollars on
HQJDJHPHQW VXUYH\V FOLPDWH DQG SUROLQJ
tools, yet they seldom inquire about the personal values of their team members. As new
generations grow into the workforce, there
is a need to help them connect with the core
values of the organisations they serve and take
ownership of them. Valid and quality value
audits are no longer bonus management practices, but rather are mandatory requirement.
Today, we need to retain and motivate millennials. The individuals in this demographic
are not only looking for values; they want to
have greater sense of purpose and meaning.
Learning what their personal values are helps
them to connect with the corporate culture,
to scan for similarities, and to develop respect
for diversity. Moreover, our data shows that
alliance of values also contribute to greater
innovation (see: Brillo et al. 2015). Which
company doesnt want to have a creative
and innovative workforce? Companies, thus,
should focus on value alignment.
Here is a checklist of questions that may
KHOS \RX UHHFW RQ WKH QHHG IRU DOLJQPHQW
between your company culture and your employees values:
1. 'R \RX SUDFWLFH KLUH DQG UH IRU YDOXHV"
Do you put an emphasis on attitude and suitability for your company culture and values?
2. Do you tolerate deviation from your culture
and values, giving concessions and turning
a blind eye to revenue-generating but
ethically questionable performance when it
is needed for your short term results?
3. Are your policies and processes aligned
with your values? Do you create paradoxes
by setting unrealistic targets?
4. When was the last time that you conducted a value audit to identify the current gap
between the values on your wall and values
in practice?
5. With new generations and disruptive technologies and business models, are your
values still relevant? Do you need to refresh
and update them?
6. Are you at liberty to review and update your
existing values? Are you willing to explore

change and solicit wide based feedback to
improve existing values or are you forced to
live with the words on the wall?
7. Do you provide tools to help teams in your
organisation understand the values of their
team members?
8. How do you teach your values? Do you emphasise only verbal memory retention or
do you have procedures to check if values
are actually practiced? Do you expect role
modeling and sense of ownership?
9. Do you involve many of your employees
in your strategic sessions or do you work
traditionally top down?
10.Are the words on the wall an empowering, vigorous, and effective call to action?
We wish to conclude this paper with a visionary view that can help mitigate or reduce
the kind of issues that we were discussing in
this paper. It is time for business, governments
DQG VWRFN H[FKDQJH RIFLDOV WR FKDQJH WKHLU
PLQGVHWFRQQHFWHGZLWKWKHZRUOGRI QDQFH
as well as with culture and values. We cant
expect the cat to guard over the milk. There
VHHPV WR EH DQ LQKHUHQW FRQLFW RI LQWHUHVW
in the current business model, where public
companies appoint both their boards and their
auditors. Both are paid by the company and
Millennials are not

only looking for
values; they want
to have greater
sense of purpose
and meaning.
19
Ethics
PERHAPS THE TIME HAS

ARRIVED TO CONSIDER
THE UNDERTAKING OF
TWO TYPES OF AUDITS:A
FINANCIAL AUDIT AS WELL
AS A CULTURE AUDIT.
obviously have an inherent personal interest
to maintain their position or source of continued revenue. Thus, why would an individual
go against the management of the company?
In public companies, the role of the auditor
is to protect the true owners of the company
the shareholders. We propose a scenario
where auditors are nominated by the respective stock exchange in which company stocks
are traded. This would result in rotation of
DXGLWUPVVD\HYHU\WZR\HDUVDQGDXGLWRUV
would know that they too would be checked
E\WKHLQFRPLQJDXGLWRUUP7KLVSURFHGXUH
might bring about a higher level of professionalism and prudence. In this proposed model,
SXEOLFFRPSDQLHVZRXOGSD\D[HGIHHWRWKH
stock exchange to cover auditing costs. The
VWRFN H[FKDQJH ZRXOG QG D EHWWHU SULFH IRU
volume using a RFP system. Auditors working
for the exchange to represent the public interest, would be impartial and objective; their
duty and loyalty would be to the public and the
audited companies would be transparent. Last,
but not least, perhaps the time has arrived to
consider the undertaking of two types of
DXGLWV $ QDQFLDO $XGLW ZLWK WKH LGHD H[pressed above), as well as a Culture Audit. The
tools, methodologies and processes are available today for both types of audits, and we
hope that in the future we will see more legisODWLRQDQGDFWLRQWDNHQE\UPVWKHPVHOYHVWR
offer these new procedures.
A condensed version of this paper has been published
20
in Business Times on September 28th, 2016. Copy

can be downloaded at: http://itemsweb.esade.edu/
research/fwc/news/BT28Sep16.pdf. We wish to
acknowledge the comments of Dr. Chad Albrecht, an
H[SHUWLQRUJDQLVDWLRQDOIUDXGIRUKLVVXJJHVWLRQVRI
an earlier version of this paper.
About the Authors
Avi Liran (Economist, MBA) is
global leader on delivering delight,
speaker and consultant to top
companies on appreciative culture
WUDQVIRUPDWLRQ+HLVFHUWLHGDV
a Coach by Value and collaborator with the
Future of Work Chair at ESADE Business
School. He is an angry social capitalist and
humanitarian activist. He can be reached at:
www.ha-p.com/contact
Simon L. Dolan (Ph.D) is the
Future of Work Chair at ESADE
Business School and co-founder
of the new Global Future of Work
Foundation. He is the author of 68
books dealing with work, future trends & and
transformation (www.simondolan.com). He is
also the creator of the Managing and Coaching
by Values concept, methodology and tools.
He can be reached at: simon.dolan@learningabout-values.com
References
Albrecht, C., Holland, D., Malagueo de Santana, R.,
Dolan, S. & Tzafrir, S. (2015). The role of power in
financial statement fraud schemes. Journal of Business
Ethics, 131 (4), pp. 804-813.
Brillo, J., Kawamura , K. M., Dolan, S. & Fernndez
Marn, X. (2015). Managing by sustainable innovational
values (MSIV): An asymmetrical culture-reengineering
model of values embedding user innovators and user
entrepreneurs. Journal of Management and Sustainability,
5 (3), pp. 1-13. DOI: 10.5539/jms.v5n3p.
Dolan S.L. (2011) Coaching by Values: A guide to success in
the life of Business and the Business of Life. Bloomington,
IND. iUniverse.
Dolan S.L. Garcia S., Richley B., (2006) Managing
by Values: A Corporate Guide to living, Being Alive
and Making a Living in the 21st Century. London.
Palgrave-MacMillan.
Liran A., Dolan S.L., (2016) Values, values on the
wall: Who practises, who recalls?, Business Times,
September 28.
Politics
5 Ways Donald
Trump Could
Make Government
Run More Like
a Business
BY HOWARD SCHWEITZER
tantrums on Twitter about his own party.

Trumps core campaign theme is: Ive been personally
successful and made a lot of money, so you should trust me
to do the same thing for the country. With less than 30 days
to Election Day, its past time for Trump to put some meat on
the bones of his campaign premise.
What could an effective business leader bring to the federal
hroughout the presidential campaign, much has been said
about Donald Trumps extensive business experience government? Quite a lot, actually. Here are just a few ideas
mostly by Trump himself. The GOP nominee has taken Trump could be talking about if he was serious about transIXOODGYDQWDJHRI $PHULFDQYRWHUVORQJVWDQGLQJLUWDWLRQZLWK lating success in business into better government:
the take-charge CEO from corporate America Lee Iacocca,
+LUH D &KLHI 2SHUDWLQJ 2IFHU IRU WKH 8QLWHG
5RVV3HURW0LFKDHO%ORRPEHUJWXUQHG:DVKLQJWRQ[LWJXUX
States. As head of state and commander-in-chief,
Yet more than a year into his campaign, Trump has yet to
the president has a myriad of responsibilities. One of
articulate a single concrete idea for reforming Washington. these is running the massive, antiquated and change-resistant
While his ability to draw eyeballs to TV screens, Twitter feeds federal bureaucracy a full-time job on its own (and one that
and skyscrapers is indisputable, if he wins in November the Trump, even if he were elected, would be loath to bother
public is going to expect much more than slapping a Trump with1). So why not make it someone elses full-time job? The
sign on the State Department and decorating the entrance to SUHVLGHQWVKRXOGFUHDWHWKHSRVLWLRQRI &22DQGOOLWZLWK
the White House in gold leaf.
a seasoned business executive, ideally with some Washington
Applying business concepts to government is not a expertise, whose job is to cut through years of accumulated
fantasy. With the right leader, a heavy dose of patience and UHGWDSHDQGLQVWLWXWHLQHIFLHQFLHVDFURVVDOOJRYHUQPHQWGHJRRGLGHDVJRYHUQPHQWFDQEHFRPHPRUHHIFLHQWGHOLYHU- partments and agencies. The COO would report directly to
ing more value at decreased burden to taxpayers. Someone the president, and be empowered by the president to impleshould bring a much needed corporate savvy to the $4 tril- ment change in the face of any interagency territorialism or
lion operation that is the United States government, but if other bureaucratic spats.
Donald Trump really wanted to do that he would be talking
Audit government departments.Unfortunately, in
about solutions to actual Washington problems instead of
government or the corporate world there are always
focusing on building beautiful walls or throwing temper
going to be bad operators who try to game the system.
1RWH7KLVZDVUVWSXEOLVKHGDW)RUEHVRQ2FWREHU
Applying business concepts to government is not a
fantasy. With the right leader, a heavy dose of patience
DQGJRRGLGHDVJRYHUQPHQWFDQEHFRPHPRUHHIFLHQW
delivering more value at decreased burden to taxpayers.
22
We were given a poster child for that sort of

EHKDYLRXUQRWORQJDJRZKHQDQRIFLDODWWKH
General Services Administration was photographed2 luxuriating in a Vegas hot tub on a
taxpayer-funded boondoggle. Internal, annual
audits conducted by the governments COO will
help root out misuse of taxpayer funds before
they rise to such levels of absurdity. Not only
would these annual assessments catch criminal activity early on, but they can also expose
WKHPRUHEHQLJQLQHIFLHQFLHVLQVSHQGLQJWKDW
plague too many government agencies.
Treat cabinet members like senior
VPs. There was once a time when a post
DVD86&DELQHWRIFHUPHDQWVRPHWKLQJ
7KHVH ZHUH SHRSOH RI VLJQLFDQW DFFRPSOLVKment and reputations whose opinions carried
weight. Now many, if not most, of the faces who
sit around the cabinet table are unknown quantities with little power because all major decisions
are run out of the White House. Meanwhile,
the departments they ostensibly head only grow
bigger and more powerful. Its time to reinvigorate the idea of the presidents Cabinet and
make these department heads the equivalent of
senior VPs in a corporation entrusted with authority, accountable to the boss, and responsible
for reporting to the nation on a regular basis on
how their dollars are being spent, and where excesses have been corrected.
5HZDUG HIFLHQF\ In a corporate
setting, every dollar saved is highly valued
and those who save money are rewarded
and promoted. In government, its quite a different story. Many government agencies feel
the need to spend every dollar thats allocated
to them, creating a use it or lose it mentality.
This is not responsible stewardship of taxpayer
funds. Instead, departments should be incentivised to save money, not spend it. Government
bonus pools should be restructured based on
year-over-year cost savings and money saved.
7KH2IFHRI 0DQDJHPHQWDQG%XGJHWFDQEH
UHFRQJXUHG DQG GHFHQWUDOLVHG ZLWK LQGLYLGXDODJHQFLHVHQFRXUDJHGWREHPRUHHIFLHQWDQG
self-sustaining.
Rebrand the government. Fewer than
20% of Americans say they trust the
government today. By any corporate
Government should change how it relates to

the people it is designed to serve its time
to think of the taxpayers as shareholders.
VWDQGDUG WKDW LV WHUULEOH EUDQG LGHQWLFDWLRQ
If Trump should excel at anything, its branding. Love him or hate him, he knows how to
promote. So why no concrete ideas on earning
back the publics trust? To do that, government
should change how it relates to the people it
is designed to serve its time to think of the
taxpayers as shareholders. And how does a responsible corporation treat its shareholders?
It demonstrates a return on their investment.
The American people cough up their investment every year in the form of taxes, and the
government should be transparent about how
that investment is used. To drive this home,
the president could address Congress every
\HDU VSHFLFDOO\ RQ QDQFLDO DQG RSHUDWLRQal performance. It may not be as popular as
the wide-ranging State of the Union address,
but it will show a dedication to transparency
and accountability.
None of these strategies are enough to solve
all of governments problems. Their purpose is
to start a conversation. Anyone can talk in generalities about cutting major deals and making
this or that great again. But harnessing the
disruptive and innovative power of the private
sector and making it work for an entire nation
of shareholders the American people will
take a serious commitment and real ideas.
Featured image courtesy: Getty Images
About the Author
Mr. Howard Schweitzer is the
managing partner of Cozen
OConnor Public Strategies, served
as COO of the TARP for George
W. Bush and Obama.
References
1. http://www.politico.com/magazine/story/2016/08/7-reasonswhy-trump-would-hate-being-president-214192
2. http://www.politico.com/media/story/2012/04/a-ridiculouspicture-of-jeff-neely-destroyer-of-taxpayer-money-000413
23
Citizenship programs are

nowadays viewed as perfectly
respectable due to the fact
that they have proper legal
frameworks, providing
the legal certainty that
an applicant needs.
- Till Neumann
Lifestyle
Passports for Sale

INTERVIEW WITH TILL NEUMANN, IMCM
FOUNDER AND MANAGING PARTNER OF CITIZEN LANE
The luxury of a global lifestyle and world travel

can be achieved through acquiring a second
passport. Citizenship-by-Investment (CBI)
programs are a respectable way to acquire
this. A second passport presents holders with
YDULRXV EHQHWV VXFK DV HDVLHU WUDYHO DGGHG
security, and simpler tax situations. In this interview with Till Neumann, IMCM, founder
and managing partner of Citizen Lane, he
shares to our readers the numerous opportunities with CBI programs and why Citizen Lane
should be your preferred partner in acquiring
an alternative citizenship.
We have heard from some of our journalist
colleagues that it is possible to buy a passport
and citizenship. What are these such called
Citizenship-by-Investment programs and
ZKDW DUH WKH EHQHWV RI DFTXLULQJ DQ DOWHUQDtive citizenship?
Indeed some countries not only offer the
well-known routes to citizenship such as ius sanguinis and ius soli the law of the blood and law
of the soil; they go one step further and offer
their citizenship through an investment. This
route is actually quite similar to the residency
practice of many countries, including the USA,
Great Britain, and almost every other country in
the world: Residence-by-Investment.
Citizenship-by-Investment (CBI) programs
offer investors and wealthy individuals easier
ways to attain citizenship through economic investments in the country.
Citizenship programs are nowadays viewed
as perfectly respectable due to the fact that they
have proper legal frameworks, providing the legal
certainty that an applicant needs. Compliance
with the increasingly strict rules set by the responsible authorities is essential. Even though
some people would call these countries banana
republics, regarding legal set up they are on
western standards; most of these countries have
been former British colonies or territories.
A second passport is a product with several
VHULRXV EHQHWV IRU WKH FLWL]HQVKLS LQYHVWRU )RU
our clients the relative investment hurdle varies deSHQGLQJRQWKHLUQDWLRQDOLW\DQGQDQFLDOFDSDELOity as they are having different aims. Whereby the
usual non-western client has probably 1-5m US$
in assets and looks for a solution, which facilitates
traveling and provides more security, chooses a
country like Vanuatu, St. Kitts & Nevis or Antigua
& Barbuda. A western client who is rather interHVWHGLQWD[EHQHWVRUPRUHDQRQ\PRXVWUDYHOLV
rather more wealthy than a non-western individual. In general one can say a wealthier client prefers
Cyprus or Malta, as these offer European Union
citizenship and passport. But the reasons and decisions are always very individual.
But why is somebody willing to pay several
hundred thousands or even millions for a passport? What are the advantages of getting an alternative citizenship over getting a visa in terms
of travelling?
First of all we are talking about a citizenship
investment not only a passport. Acquiring an
alternative citizenship provides investors benHWV VXFK DV HDVLHU WUDYHOOLQJ VHFXULW\ WR DYRLG
compulsory military service, tax optimisation,
and last but not least an attractive investment
opportunity, if one decided wisely.
Just imagine you want to take your wife out for
a shopping weekend in Paris. If you are an EU
Citizenship-byInvestment (CBI)
programs offer
investors and
wealthy individuals
easier ways to
attain citizenship
through economic
investments in
the country.
25
Lifestyle
With the rise of economic and political

instability around the world, an alternative
citizenship gives people threatened by
political, religious or ethnic persecution
independence and freedom.
citizen or a US citizen: No problem. If you are a
Russian, UAE or Chinese citizen, you are facing
the problem: You need a visa. Same happens if
you have urgent business meetings which you
cannot attend because of visa applications or
even delays in issuing a visa, which forces you to
FDQFHO LJKWV DQG KRWHO DFFRPPRGDWLRQV
A second passport not only gives one visa-free access to more countries, it also facilitates in some cases the application procedures
and in case one needs to apply nevertheless for
a visa: these visas are granted usually for a much
longer period.
Acquiring the passport of certain countries
through Citizenship-by-Investment programs
grants wealthy people more freedom of movement. This creates new opportunities with
higher levels of travel comfort and convenience.
You see, the luxury of a global lifestyle and
world travel, which is normal for Europeans
RU $PHULFDQV LV RIWHQ DVVRFLDWHG ZLWK GLIFXOW
visa requirements.
These passports also provide additional privileges which may not be available to visa holders.
Additionally, travelling with a small, politically
XQDIOLDWHG FRXQWU\V SDVVSRUW JLYHV WKH FLWL]HQ
and his family more anonymity and security.
You say alternative citizenship provides investors security. How is an alternative citizenVKLS UHOHYDQW WRGD\ ZLWK WKH RQJRLQJ FRQLFWV
and wars in numerous countries?
With the rise of economic and political instability around the world, an alternative citizenship
gives people threatened by political, religious or
ethnic persecution independence and freedom.
Should the situation arise, a second passport
from Cyprus or Malta is the best preparation to
be able to immediately leave ones home country
and relocate to any EU country. Furthermore,
26
diplomatic services abroad are also available to

TXDOLHG KROGHUV
How does an additional citizenship simplify
the tax situation of a person?
In certain situations, an additional citizenship
can simplify the tax situation of a person, or
make it clearer. The respective situation is always
to be discussed in detail with a tax expert.
Usually, tax lawyers refer clients to us for different reasons: tax optimisation in regards of
income tax, inheritance tax. Beyond this, many
French and German citizens want to be preSDUHG WR UHQRXQFH WKHLU UVW FLWL]HQVKLS EHFDXVH
it might soon be reality that they even have to
pay income taxes to their home country if they
are living abroad, like US citizens.
How can investors take advantage of business opportunities in a country with an alternative citizenship?
Well, a residence permit or citizenship in a
country makes the founding of a company in
ones own name possible without having to
involve third parties. This can ease market entry
into other countries for entrepreneurs and thus
save time and costs.
Can anyone buy an alternative citizenship
through a CBI program? What are the procedures and requirements involved?
CBI programs do not automatically enable
someone who has the funds to buy citizenship.
%H\RQGVXIFLHQWQDQFLDOUHVRXUFHVLWLVHVVHQWLDO
to have a clean criminal background and a good
reputation in order to qualify for a Citizenship- or
Residence-by-Investment Program.
The serious citizenship programs maintain
tough application procedures and these applicants are by far much deeper checked than
anyone else applying for residence or citizenship
in a country (e.g. If you apply for citizenship
because you stayed a certain number of years in
a country or if you are marrying someone).
Thorough background checks on CBI
program applicants ensure that both the client
and countrys government get a mutually benHFLDO VWURQJ DQG WUXVWZRUWK\ SDUWQHUVKLS
These conscientious background checks are
furthermore essential for third party countries,

to which the second passport grants visa free
travel. The countries offering CBI programs are
absolutely aware that they would risk their visa
waiver agreements if they would grant citizenship and issue passports without the thorough
background checks. These due diligence processes are much more in depth as any visa check
of any other country.
How does Citizen Lane handle clients who
might be considered as an eventual risk to a
countrys reputation?
Impunity is essential. Thats why we use for
our internal due diligence background checking tools as they are used by Swiss banks. The
due diligence checks of the governments are
even much broader. A criminal background is
a no go for applicants. Serious governments
like Cyprus, Malta, Vanuatu, St. Kitts & Nevis
and Antigua & Barbuda, engage private inYHVWLJDWLRQ UPV VXFK DV ,36$ ,QWHUQDWLRQDO
BDO and others to check the background of
applicants. There are also checks against international wanted lists. Even negative media
reports about an applicant can also prompt the
authorities to reject an application. Any persons citizenship application which might be
considered as an eventual risk to a countrys
reputation will be denied.
HIFLHQWO\H[HFXWHWKHDSSOLFDWLRQSURFHVVIURP
VWDUWWRQLVK
Citizen Lanes sound knowledge on various
citizenship programs and our expertise on
the local situation make it possible for us to
SURYLGHDTXDOLW\SHUVRQDOOHDQVHUYLFHWIRU
our clients needs.
What differentiates Citizen Lane from other
VHUYLFH SURYLGHUV DQG ODZ RIFHV"
Citizen Lane is one of the very few companies providing international Citizenship-byInvestment advisory and processing for a broad
choice of citizenship programs. This allows us
to consult a client and provide him the best
VROXWLRQ,WLVREYLRXVWKDWDODZ\HURI DVSHFLF
country wants to sell his own solution. We are
consulting independently. Thats a big advantage. It is important to us that the client receives
honest and independent advice and that we do
not just sell a product.
Furthermore, Citizen Lane places great value
on individual care, on support even after the
approval process, and offers services free of
third-party costs, making it different from other
VHUYLFHSURYLGHUVDQGODZRIFHV
We understand ourselves as a dedicated
Acquiring the
passport of certain
countries through
Citizenship-byInvestment programs
grants wealthy
people more freedom
of movement.
Petra tou Romiou, Cyprus

"Rock of the Greek" or
"Aphrodite's Rock"
According to one legend
this rock is the birthplace
of the goddess Aphrodite.
What are the issues faced by clients and

governments in Citizenship-by-Investment
and Residence-by-Investment programs and
how does Citizen Lane help its clients overcome them?
The philosophy of Citizen Lane consists of
providing personal and customised services for
discriminating clients in the areas of Citizenshipby-Investment and Residence-by-Investment.
Citizen Lane works closely together with its
clients tackling issues like tax, individual security needs and personal conceptions of freedom,
language, political and legal aspects and local
practices and customs.
Citizen Lane takes into consideration the
clients personal and family situation regarding
the selection of the right citizenship program
and the best investment category possible. We
27
Lifestyle
ERXWLTXH FRQVXOWLQJ UP ZKLFK RIIHUV DOVR

processing of the most common and also
niche solutions in regards of Citizenship-byInvestment and Residence-by-Investment.
We have been working on a few projects with
immigration lawyers of other jurisdictions,
as our clients appreciate having a company
leading the process which has knowledge of
the typical hurdles in an immigration process.
The clients advantage is then a solution provided of one company.
Coming back to the passport schemes:
such as CBI programs. I assume these do also
attract bribes and illegal interest, how does partnering with Citizen Lane assure clients legitimacy, quality and correct ethical behaviour of their
provided solutions?
As a member of the Investment Migration
Council (IMC), Citizen Lane follows its IMC
Code of Ethics and Professional Conduct,
which assures clients legitimacy, quality and
correct ethical behaviour of the provided solutions. At Citizen Lane we only offer solutions
which are based on a legal basis which has been
gazetted by the parliaments and governments of
one country. Nevertheless, the share of applicants with criminal motivation is due to the high
investment amounts, the thorough background
checks and the availability of much cheaper
illegal passports obviously very limited.
What CBI programs are the most popular and
attractive for investors who would want to acquire
a second passport? What opportunities and benHWV GR WKHVH SURJUDPV RIIHU SRWHQWLDO LQYHVWRUV"
Currently the Cypriot citizenship program
is one of the most attractive programs. Various
AT CITIZEN LANE WE ONLY OFFER

SOLUTIONS WHICH ARE BASED ON
A LEGAL BASIS WHICH HAS BEEN
GAZETTED BY THE PARLIAMENTS AND
GOVERNMENTS OF ONE COUNTRY.
28
opportunities are available to those who wish

to invest in Cyprus through the CBI program.
The scheme of the program is attractive since its
processing times are just three to four months
RQDYHUDJHPDNLQJLWRQHRI WKHPRVWHIFLHQW
CBI programs in the world. Furthermore, acquiring Cypriot citizenship has relatively low
and effective related costs, as the major part of
the spent amount is an investment: for example
in real estate, a company or government bonds
which must be held for three years only. The
minimum investment amount is 2 million.
Cyprus corporate tax rate is among the
lowest in the world at 12.5% which is an advantage since Cyprus signed a number of agreements avoiding double taxation.
Cyprus is a member of the European
Union and has agreements for visa-free travel
with currently 157 countries. It also grants its
holders to seek residence, work, and subject to
local reporting obligations in every EU country
and Switzerland.
What about the risk of the involved investments in Cyprus? How does the increase in
WRXULVP LQ &\SUXV EHQHW DQG DWWUDFW LQYHVtors in pursuing a Cypriot citizenship through
investment?
Cyprus boasts of at least 320 days of sunshine
a year and world-class beaches to enjoy making
it an appealing country to invest in or migrate
WR 7KH LQX[ RI YLVLWRUV FUHDWHV DQ LQFUHDVH
in lodging requirements and higher property
values. This creates opportunities for holders
of property in Cyprus to rent their properties
during parts of the year to generate income.
$IWHU WKH QDQFLDO FULVLV SURSHUW\ SULFHV
dropped and they have been recovering steadily
during the last years. Having a broad network
in Cyprus, we know the real estate market in
Cyprus quite well; currently we see the trend
continuing. Nevertheless all investments are carrying risks. But exactly those are the reasons why
clients prefer to talk to us, as we can give also in
this regard an independent advice.
An increase in property values can also be
EHQHFLDO WR KRPHRZQHUV ZKR ZRXOG ZDQW WR
VHOOWKHLUSURSHUWLHVIRUDSURW
According to what we have read, another

attractive option is Vanuatus Citizenship-byInvestment program which offers the best
value for money for its donation option, as a
family of four only needs to pay US$230,000.
:KDW DUH WKH EHQHWV IRU LQYHVWRUV WR DFTXLUH D
Vanuatu citizenship?
The citizenship program of Vanuatu, the
Vanuatu Economic Rehabilitation Program
(VERP), was introduced by the government
with the aim to raise money for the reconstruction of infrastructure after the cyclone Pam hit
the country in March 2015.
Like the Cypriot citizenship program, the
Vanuatu CBI program is also attractive because
of its short processing times of just one to two
PRQWKV PDNLQJ LW SUREDEO\ WKH PRVW HIFLHQW
program in the world.
For most of your readers, Vanuatu probably just well known as an off-shore jurisdiction,
which of course offers lots of possibilities in
this regard. Investors in Vanuatu appreciate also
that they have no income tax, no capital gains
tax, no wealth tax and no inheritance tax and
last but not least the trust law and available asset
protection solutions.
Currently we are processing the case of an
American citizen who is explicitly not looking for
a Caribbean citizenship solution. He is interested
in having a safe hideaway, far from the Western
World, far away from terrorism and warfare.
Vanuatu has been criticised in the past for not
being a-jour with anti-corruption compliance,
but it has caught up. How does Vanuatus anWLFRUUXSWLRQ SROLF\ EHQHW SRWHQWLDO LQYHVWRUV
and the countrys government?
Thats a good point! Not even a month ago
I have had a meeting with the ambassador of
Vanuatu in Brussels, HE Mr Roy Mickey Joy.
This topic has been an important point on our
agenda. As many other countries, Vanuatu has
realised that anti-corruption is essential for a
prospering country. Vanuatu has given an unwavering commitment to keep the countrys reputation for integrity spotless. In 2015 there have
been trials and more than a dozen high-ranking
RIFLDOV KDYH EHHQ VHQWHQFHG WR SULVRQ IRU D
Iriki island, Vanuatu.

The Vanuatu CBI program is
probably the most efficient
program in the world.
Photo courtesy:
Michael Schilling
https://flic.kr/p/Kh7ten
Vanuatu has
given an
unwavering
commitment to
keep the countrys
reputation for
integrity spotless.
29
Lifestyle
As part of its role to assist

St. Kitts & Nevis in the
development of human
capacity and the
transformation of the
economy, the SIDF designed
the REACH program
(Recognising Everyones
Ability to Climb Higher) to
provide equitable access to
long time. This is a strong sign that they not only

VDFULFHG D SDZQ EXW DOVR WDNH DQWLFRUUXSWLRQ
really seriously. They know that this is indispensable also for the reputation of Vanuatu and its
citizenship program.
This safeguards the best economic interests
RI 9DQXDWX DQG LWV FLWL]HQV DQG FRXQWHUV QDQcial crime in the country and elsewhere. One
should congratulate the country for these steps.
Alternatively, investors can choose to donate

WRWKH6XJDU,QGXVWU\'LYHUVLFDWLRQ)RXQGDWLRQ
(SIDF). The SIDF subsidises government projects in sectors which promote prosperity in
health, care, education, culture, environmental
protection, and the like.
As explained, investors can choose to invest
in state-approved real estate properties which
are one of the most beautiful places on earth.
Besides the investment of at least US$400,000
there are only additional fees and costs of about
US$90,000 for a single applicant. The propHUW\ FDQ EH VROG DIWHU YH \HDUV ,I RQH ZRXOG
choose the donation option, total costs of about
US$290,000 would arise for a single applicant.
The Citizenship by Investment Program in
St. Kitts & Nevis was introduced in 1984. Being
a pioneer in developing a citizenship program it
has had a rough history. It was recently reformed
OHDGLQJWRIRUWLHGWUXVWDQGFRQGHQFHIURPLQvestors. Also the International Monetary Fund
FRQUPHGWKHSRVLWLYHHIIHFWRI WKHFLWL]HQVKLS
program to St. Kitts & Nevis.
Similar to Vanuatu also St. Kitts & Nevis is
advantageous to wealthy people who wish to be
SDUW RI D SURSHU QDQFLDO DQG WD[ SODQ ,W KDV
a special tax environment with no income or
capital gains tax. The Nevis trust law offers investors solutions for estate planning and asset
protection Nevis trusts are exempt from tax
and stamp duties.
post secondary education

for qualified students. Under
this program, two-year
scholarships are awarded to
students to pursue studies
e.g. at the Clarence
Fitzroy Bryant College
(pictured above).
St. Kitts & Nevis

is advantageous to
wealthy people who
wish to be part of
a proper financial
and tax plan.
30
:KDW RSSRUWXQLWLHV DQG EHQHWV DUH DYDLODble for those interested in becoming a citizen
through an investment in St. Kitts and Nevis?
The two islands of St. Kitts & Nevis are
currently pretty well developing, not only
economically, where the tourism industry is
growing steadily. But also the real estate market
is well developing. From this perspective the least
expensive, and relatively secure citizenship option
comes with a real estate investment in St. Kitts
& Nevis. Just to name one example: in the south
of the island at Christophe Harbour are some
outstanding villas available, and furthermore just
this year the Caribbeans new super yacht marina
has opened at this site and attracts a lot of new
tourists. No doubt, St. Kitts & Nevis is developing
to a prudent planed paradise jet-set destination!
About the Interviewee

Till Neumann is founder and Managing partner
RI &LWL]HQ /DQH D FRQVXOWLQJ DQG ODZ UP IRcusing on investor migration. Previously he has
been department head at Henley & Partners,
the leading company in the industry of investor
migration. As an expert in the industry he is an
eligible speaker on industry conferences. With a
view to independent and holistic consulting and
execution of related processes he assists wealthy
individuals from all over the world.
For more information, please contact:
Till Neumann, IMCM
Managing Partner, Citizen Lane LLC
Bnirainstrasse 14-16 | 8800 Thalwil-Zurich | Switzerland
Phone +41 55 511 54 00 | info@citizenlane.ch | www.citizenlane.ch
Bringing Captive
Insurance into Focus
SINGLE PARENT STRUCTURES GROUP/ASSOCIATION CAPTIVES SEGREGATED PORTFOLIO COMPANIES
2nd Floor, Genesis Building, George Town

P.O. Box 10027, Grand Cayman KY1-1001, Cayman Islands
345.946.2100
www.kensingtonmanagement.ky
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Future of Work
Future Work: Changes,

Choices & Consequences
BY JONATHAN TREVOR
want. Vertical career progression up the corporate

greasy pole will be replaced by portfolio working,
with versatile individuals developing their own
do-it-yourself career packages of complementary
roles in multiple overlapping networks. This is a
bright future of strong personal brand, constantly interesting work, instant results (and perhaps
JUDWLFDWLRQ JOREDO FRQQHFWLYLW\ DQG SRVLWLYH
t is axiomatic to say that everything is chang- (and ceaseless) progress.
For others, it is a potentially scary future of
ing in the world of work. For many, these are
exciting times with much to look forward to high personal uncertainty. The economist, John
as we develop new technologies and capabilities Maynard Keynes, issued a cautionary note in the
to make our world a better place. The infor- 1920s about the risk of technological unemmation revolution has brought many surpris- ployment.2 Echoing the fears that stoked the
LQJ HYHQ GLVUXSWLYH DQG SRVLWLYH EHQHWV Luddite riots a hundred years earlier, Keynes
Knowledge is abundant and more readily acces- envisaged a scenario in which advancing indussible than at any time in our past. Complex and trial technology would supersede the producclever supply chains deliver simultaneous choice, tive capabilities of humans for routine manual
convenience and value for money for consum- blue collar work (faster than alternative forms
ers. Platform technology has turned established of employment could be found). One hundred
industries upside down, creating exciting oppor- years later, technological unemployment remains
tunities and challenges for innovation: Uber, an uncomfortable prospect as digital technology
the worlds largest taxi company, owns no vehi- advances to supersede potentially the cognitive
cles. Facebook, the worlds most popular media capabilities of humans for white collar and
owner, creates no content. Alibaba, the most val- professional work. A study by the Oxford Martin
uable retailer, has no inventory. And Airbnb, the School forecasts that forty-seven percent of ocworlds largest accommodation provider, owns cupational categories, including accountancy,
no real estate. Something interesting is happening.1 Visions of our work future are similarly
bold. Optimistic futurists predict the demise of Platform technology has turned established
WKH QLQH WR YH JULQG :RUN LQ WKH IXWXUH WKH\
say, will be highly discretionary, with folk working industries upside down, creating exciting
on what they want, how they want and when they opportunities and challenges for innovation.
Despite enabling widespread automation of
routine tasks, mechanical technologies have
created many more job opportunities than
they have replaced in our Industrial Age
past. How will the rapid progress of digital
technologies affect work in our Information
Age future?
33
Future of Work
legal work and technical writing, are at risk of

being automated within two decades.3
Technology is also indirectly transforming
work by irrevocably changing the marketplace
for goods and services. To better respond to
intense competition and free market forces,
employers will likely continue to seek greater
H[LELOLW\ RI HPSOR\PHQW IRU DOO VHFWLRQV RI WKH
workforce. According to the United Kingdom
8. 2IFH RI 1DWLRQDO 6WDWLVWLFV RI WKH
UK adult working population was employed
on zero hours contracts in 2015, an increase of
19% over 2014.4 Very few expect a job for life
in the 21st century, but will it become the new
normal in future to have no job at all?
However, there are strong reasons for optimism when considering the future of work. Past
experience shows that technology has cumulatively created many more employment opportunities than it has eroded in our history.5 We need to
understand the changing context of the world of
work if we are to consider the world-scale political,
economic, social and technological consequences
for economies, organisations and individuals.
Our Industrial Past
How we work today has strong roots in the organising logic of 19th century Western Europe
and early 20th century United States. The later
stage of the European Industrial Revolution
(and early US) was a period of explosive growth
and radical transformation of the economic,
social, political and technological circumstances
of entire nations. The order of the day for the
burgeoning business class was to create surplus
economic value by maximising economies of
scale in the production of goods. What were
previously craft industries grew very large very
rapidly. Industrial centres became established
cities by vacuuming up workers from rural areas
in a process of breakneck urbanisation to provide
labour for factories. Many British communities
remain built around the labour demands of declining or now non-existent industries, whether
VWHHOLQ6KHIHOGFRDOLQ'XUKDPRUVRDSLQ3RUW
Sunlight. In Britain and the USA, this revolutionary period was the crucible from which the
business magnate, the corporation, the career
manager, and the management consultant all
34
emerged. This was the start of the era of big

business and professional management.
Operating at scale became a key management
challenge, as businesses grew large by creating
markets for affordable products previously out
of reach of the majority of consumers. Mass
production fuelled mass consumption, and
vice versa. Maximising productivity and lowering costs was made possible by simplifying
work to the point where literally anybody could
perform it. The abundance of labour for simple
and routine work provided businesses with the
ZDJHH[LELOLW\WRHPSOR\ZRUNHUVHQPDVVHDWD
predictable cost. Colonialism, and more recently
globalisation, exported these principles of industrial work organisation across the world to
make them a global phenomenon.
19%
2.4% of the UK adult
working population
was employed on zero
hours contracts in
2015, an increase of
19% over 2014
The Machine Bureaucracy

Much like the industrial technologies they relied
upon, organisations came to be thought of as machines, to be rationally designed and managed as
if an engineering problem. Rationalist organisaWLRQDOGHVLJQZDVUHHFWHGLQWKHSULQFLSOHVRI WKH
ideal-type bureaucracy described, most famously and ambivalently by German sociologist,
0D[LPLOLDQ :HEHU 7R EH DV WHFKQLFDOO\ HIFLHQW
as possible, work in the ideal-type bureaucracy was
divided into specialist tasks (i.e. a high division of
ODERXUSHUIRUPHGDVDQRIFLDOGXW\IRUZKLFKLQdividuals were paid a wage (i.e. employment); with
DXWKRULW\FRQIHUUHGXSRQDQRIFHRUDSRVLWLRQ
and not a person (i.e. managers); and governed
through an escalating hierarchy of authority (i.e.
seniority); and in which staff and customers were
treated uniformly and impersonally (i.e. no personal exceptions, whether for promotion or product).
By organising work according to these principles,
management (not owners or workers) were able to
control productivity with great precision. This was
key to growth and competitiveness: the most effective enterprises were those that could best match
predictable demand for goods and services with
predictability of supply in terms of volume, quality
and cost.
Accompanying the technological revolution
was a revolution in managerial technique. Task
VLPSOLFDWLRQ OHQW LWVHOI WR V\VWHPDWLF DQG LPpersonal measurement; by performing highly
detailed time and motion studies, managers were

able to quantify almost every aspect of work performance and establish norms and benchmarks
against which all employees were appraised as
standard. Performance against established norms
ZDV WLHG H[SOLFLWO\ WR QDQFLDO UHZDUGV DQG SHQalties), with work becoming, inevitably, routine,
transactional and intense. Workers who were able
to perform the same simple routine task faster than
WKHLUSHHUVZHUHUHZDUGHGQDQFLDOO\([SHULPHQWDO
time, motion and measurement studies of worker
output performed in the early twentieth century
by the prototypical management consultant, F.W.
7D\ORU JUHZ WR EHFRPH D UHFRJQLVHG VFLHQWLF
discipline management science through which
managers could optimise and objectively prescribe
performance, independent of the thoughts and
feelings of those performing the work. There was
D FOHDU SD\RII LQ WHUPV RI HIFLHQF\ &RQVLGHU
Ford, arguably the most innovative company of its
time. In 1908, when the Model T was introduced,
Ford was capable of producing twenty seven cars
per day. By 1923, factory output exceeded an astonishing two thousand cars per day due to continuous improvement of management technique and
the introduction of the rolling production line.
mass-produced products were highly standardised,

and typically as simple as the methods used to
produce them. As Henry Ford famously remarked:
Any customer can have a car painted any colour
that he wants so long as it is black. Production
was supply and not demand-led, with the customer
occupying a position at the end of a very long and
hierarchically managed supply chain.
But thats all changed. Todays environment
Limitations to Efficiency
)RUWKHDOOWKHHFRQRPLFEHQHWVWKHUHZHUHHUFH requires organisations to respond rapidly to the
FULWLFVRI WKHVRFLDODQGSROLWLFDOUDPLFDWLRQVRI PXOWLIDULRXVDQGFKDQJLQJSUHIHUHQFHVRI FNOH
these new ways of working. Many, including Marx customers not something the bureaucracy
famously, railed against the apparent separation was ever designed to accommodate. So whats
between individuals and the fruits of their labour the alternative?
an inevitable result of the capitalist mode of
production referred to as alienation. The relative The Future of Work Is Uber. Discuss.
disempowerment of labour within the employ- Post-bureaucracy is the not-so-catchy catchPHQW UHODWLRQVKLS SUHFLSLWDWHG LQGXVWULDO FRQLFW all term used to describe idealised principles for
on a scale to match the times. Labour movements organising work in the dawning Information
across the industrial(ising) world were formed in Age.6 More popular terms, no less buzz-wordy,
exactly these circumstances in the late nineteenth include the adhocracy, organic (as opposed
and early twentieth centuries. Workers organised to mechanistic) organisation, the network orcollectively in an attempt to match the considera- JDQLVDWLRQ DQG PRVW DVK\ RI DOO WKH KXPDQ
ble wage bargaining power of their employers. As cloud. All of these conceptions share a number
individuals, workers were simply cogs in the cold, of common traits and choices for leaders
KDUGDQGUXWKOHVVO\HIFLHQWORJLFRI WKHPDFKLQH radically different to the Industrial Age logic of
EXUHDXFUDF\ JHDUHG VROHO\ WRZDUGV WKH IXOOPHQW the machine bureaucracy.
of managerial goals and the creation of economic surplus. For customers there were limitations Strategy and Decision Making in Future
too. Whilst more affordable than ever before, A growing (and glowing) consensus from
Todays
environment
requires
organisations
to respond
rapidly to the
multifarious
and changing
preferences of
fickle customers
35
Future of Work
The democratisation of decision-making requires that information be shared

freely throughout the network to permit members to reflect meaningfully on
the well-being of the whole, and not simply their own individual interests.
optimists casts a vision in which hierarchies
DUH UHSODFHG E\ DW QHWZRUNV RI KLJKO\ FRQnected and versatile actors (or nodes), each in
possession of complementary capability and
knowledge. When integrated, the whole of the
network is far more valuable than the mere sum
RI LWVSDUWVZLWKVLJQLFDQWYDOXHUHVLGLQJLQWKH
connections. In place of the traditional boundary between internal and external actors, the
boundary of the post-bureaucratic network
organisation is fuzzy. The distinction between
internal and external becomes less meaningful
in the open system of the organisation, as
knowledge pours in from multiple sources and
fuels innovations. Knowledge is shared widely
DFURVVWKHHQWLUHQHWZRUNDQGRZVLQDOOGLUHFtions to wherever it is required.
The bureaucracy was characterised by formal
planning made in advance of implementation,
and enforced by impersonal rules, policies and
procedures devised by management. Strategy
in the post-bureaucracy is emergent in nature,
SHUKDSV UHHFWLQJ ZKDW +HQU\ 0LQW]EHUJ GHscribed as mere patterns in a stream of decisions.7 Moreover, it is predicted that decisions
ZLOO UHHFW WKH FROOHFWLYHZLOO RI WKH ZKROH RI
the informed network, as opposed to the judgement of a few individuals at the top of a hierarchy. The democratisation of decision-making requires that information be shared freely
throughout the network to permit members to
UHHFWPHDQLQJIXOO\RQWKHFROOHFWLYHZHOOEHLQJ
of the whole enterprise, and not simply their
own individual area or interests.
Social and Digital Connectivity in Future
To mobilise its collective wisdom to address
complex problems and new discoveries, the
network relies upon a web of weak and strong
relationships. Strong relationships involve a
degree of interdependence between network
actors, such as mutual accountability for the
completion of a shared task. Weak relationships
36
might simply extend to spontaneous knowledge sharing. Nevertheless, all relationships are
valuable forms of social capital through which
the network is enriched and made resilient.
Informal relationships allow the organisation
WRFRQJXUHDQGUHFRQJXUHUDSLGO\WREHVWWits
changing circumstances (e.g. changing customer preferences or environmental disruption).
Whereas economies of scale characterised the
organising logic of the machine bureaucracy,
economies of association will determine strategic
value in this conception of the future organisation. Maximising the potential for sustained
distinctiveness in the marketplace by constantly reinventing work will be the top priority for
custodians of the network overall.
The relationship between human capital
(people) and technological capital (machines)
will cease to be that of master and servant. In
D UHYHUVDO RI UROHV VLJQLFDQW DVSHFWV RI ZRUN
performed by people will be dictated by machine
intelligence. Moreover, humans will lose their
monopoly on the creative process. According
to the United States Air Force, machines will contribute more and more to innovation capability.
Where tasks are not delegated entirely to capable
machines, machines will augment the performance of their human counterparts as man and
machine become closely coupled to cope with
the enormous data volumes, processing capabilities, and decision speeds that technologies
either offer or demand.8
Freelance and T-Shaped Talent in Future
Human capital in the post-bureaucracy will be
split into two main categories between which
individuals will likely switch according to circumstances network custodians and performers. Network custodians will primarily invest
their time in maintaining the health and vitality of the network. They will work to secure
the requisite variety of expertise and knowledge necessary for the network to respond to
complexity, challenge and opportunity within

its environment. They will also serve to reinforce and enrich existing connections between
network members whilst also establishing new
connections for both expressed and opportunistic purposes. To succeed in the knowledge rich network environment, network
custodians will need to become T-shaped,
capable of developing a depth of specialLVW H[SHUWLVH LQ D UHOHYDQW HOG EXW UHWDLQLQJ
JHQHUDONQRZOHGJHRI RWKHUHOGVVRWKDWYDOuable connections and new combinations of
knowledge might be forged.
Performers will focus on the completion of
DVSHFLFWDVNDOLJQHGWRWKHFRPPRQDLPVRI TWO CATEGORIES OF
the network. Tasks may be narrow or broad HUMAN CAPITAL IN THE
POST-BUREAUCRACY
in scope, short or long term in horizon and
H[LEO\ VRXUFHG )RU H[DPSOH platform principles are already being applied to match individuals (labour supply) to work opportunities
(labour demand). Amazons Mechanical Turk
is one such platform, connecting prospective
requesters (aka employers) to over 500,000
Network custodians
taskers in over 150 countries. As matching
will primarily invest
EHFRPHVPRUHHIFLHQWDQGOHVVULVN\H[SHFW maintaining the health and
vitality of the network
to see casual relationships between organisations and freelance talent blossom, even for
complex and high value roles.9
Many of these developments are countercultural in the contemporary workplace.
Consider Master of Business Administration
0%$ GHJUHHV 7KH UVW 0%$ ZDV FUHDWHG
at the Wharton School of Management at
Performers
the University of Pennsylvania in the late 19th
will focus on the
century for the expressed purpose of training
completion of a specific
a cadre of professional administrators (hence task aligned to the common
the name) to service the needs of the bureauaims of the network
cracy. T-Shaped talent will require a holistic
education in the interrelatedness of many different subjects. Successful network relationship brokers will be polymaths (i.e. know a
little about a lot of things) necessarily to make
novel and high potential connections between
individuals and groups with potentially similar
interests but dissimilar backgrounds. Thinking
horizontally about career progression runs
contrary to the functional (and specialist by
GHQLWLRQ GHPDQGV RI HVWDEOLVKHG YHUWLFDOO\
oriented careers. Will moving sideways satisfy
the ambitions of fee paying MBA students as

much as moving upwards?
Mutuality of Means and Ends
The bureaucracy presumed workers to have
different interests to those of their employers
simplistically, employers wanted workers to
work as hard as possible for the least amount of
pay, and workers the opposite. Aligning staff to
the goals of their employing organisation was
achieved by enforcing strict rules, setting precise
WDUJHWV DQG RIIHULQJ QDQFLDO LQFHQWLYHV WR
perform. Those same controls would be entirely
counterproductive in the future workplace. They
would limit the ability of the organisation to
change rapidly by harnessing the discretionary
effort and self-directed creativity of its people.
Motivation will be primarily intrinsic in future,
appealing to the emotive aspect of the work reODWLRQVKLSDQGWKHIXOOPHQWRI VKDUHGSXUSRVH
In the absence of discernible superiors, performance management will likely be peer to peer.
Reputation will never have mattered more for
individuals and for entire networks.
$ QXPEHU RI KLJK SUROH UPV DUH DEDQdoning established performance management
systems in favour of a more holistic and data
driven approach to improving workplace collaboration, discretionary effort and enterprise-level
thinking. For example, Deloitte has made well
publicised changes to the way in which it assesses
performance, breaking its industry norm: Weve
arrived at a very different and much simpler
design for managing peoples performance. Its
KDOOPDUNVDUHVSHHGDJLOLW\RQHVL]HWVRQHDQG
constant learning, and its underpinned by a new
way of collecting reliable performance data.10
Network Thinking and Collective Outcomes
The complexity and dynamism of the marketplace will require wisdom beyond the capability
of any few individuals sitting atop an organisational hierarchy, no matter how heroic or wise.
Post-bureaucratic organisations in future will represent collectives in which individual interests are
subordinate to community interests and ideas are
crowd sourced. The explicit purpose of the organisation will represent a higher purpose for all.
Individuals and groups will willingly be a means to
37
Future of Work
Post-bureaucratic
organisations in
future will represent
collectives in which
individual interests
are subordinate to
community interests
and ideas are
crowd sourced.
WKHRUJDQLVDWLRQVHQGVEHFDXVHLWVSXUSRVHGHQHV
their own. Gary Hamel said of creating superior
engagement for vital talent, create a cause and not
a business. Businesses in future will feel more like
causes for which there is genuine passion, rather
than an impersonal and purely functional employment transaction between capital and labour.
Causes speak to the emotive power of purpose as
the unifying force behind the future of work mutuality, unity and shared identity.
The Likely Reality of Something in Between
The list of likely attributes of the future workplace could go on and on. If only a few of these
developments come to pass, how we work in our
Information Age future will indeed be very different to our Industrial Age past. We can see many
aspects of the envisaged future workplace today.
Collaboration, employee empowerment, emotional intelligence, culture management and so on are
commonplace business practices today. They are
all post-bureaucratic in nature. They are decades
ROGFRQFHSWVLPSOHPHQWHGE\UPVWRDGGUHVVWKH
perceived shortcomings of the bureaucracy.
However, it would be wrong to abandon our
LQGXVWULDO DJH WKLQNLQJ FRPSOHWHO\ (IFLHQF\
will continue to matter as much as ever in future.
Bureaucratic ways of working will always be the
most appropriate way of producing the indispensable commoditised products we consume
on a daily basis. The challenge for organisations
TO BE AMBIDEXTROUS,
ORGANISATIONS MAY
WELL COME TO RESEMBLE
NETWORKS MORE THAN
HIERARCHIES ESPECIALLY
WHEN VIEWED AT THE
ENTERPRISE LEVEL.
38
and leaders in the 21st century is to become ambidextrous capable of being simultaneously
HIFLHQWDWH[SORLWLQJH[LVWLQJRSSRUWXQLWLHVDQG
exploring what capabilities are required for competitiveness in future.
To be ambidextrous, organisations may well
come to resemble networks more than hierarchies especially when viewed at the enterprise
level. However, within these networks there will
be elements that are organised bureaucratically.
The principles of a division of labour, supervision, impersonal rules and formalisation of
work practices will always have a place in the
world of work, whether performed by man or
machine. The networked Enterprise Ecosystem
will provide the umbrella for multiple different
species of sub-organisation, with work organised either bureaucratically, post-bureaucratically, or any point in between, according to requirements. The work challenge in future is therefore
to be bothHIFLHQWand innovative.11
Questions to Ponder and Potential Consequences
There are winners and losers in all change. What
might the future of work envisaged in this article
mean for economies, organisations and individuals? There are many more questions than there
are answers.
)RU LQVWDQFH ZLOO HYHU\ERG\ EHQHW HTXDOO\
from the shift from bureaucratic to post-bureaucratic ways of working? Wage inequality is a
political hot potato. Many commentators see the
United Kingdoms vote to leave the European
Union in a referendum on the 23rd June 2016
the so called Brexit as a backlash against the
perceived ill effects of globalisation, post-industrial economic stagnation and immigration (and
low skill migrant labour especially) by Britains
most economically vulnerable communities.
Similarly, support for Donald Trump in the US
presidential election on the 8th November 2016
was strongest amongst rust-belt working communities hit hardest by the decline in US manufacturing. Figure 1 illustrates the stark disconnect in the US from the 1970s onwards between
stagnating workers wages and productivity. For
decades, the typical worker has not shared in
productivity gains accrued through the opening
up of global markets or the introduction of new
About the Author

Jonathan Trevor is Associate
Professor of Management Practice
at Oxford Sad Business School,
University of Oxford. Jonathans
principal research, teaching and
consulting interests are the linkage between strategic and organisational priorities (people,
FIGURE 1. Disconnect between productivity and a typical workers compensation, 1948 201412
Cumulative percent change since 1948
technologies. Why wouldnt communities that

feel left behind vote to change the status quo?
Is work set to become even more unequal in
our digital future? How many will thrive in the
future workplace or fall by the wayside? What
are the social implications of changes to employment? What new assumptions will we need
WRDGRSWWRUHHFWWKHQHZUHDOLW\RI OLIHOLEHUW\
and the pursuit of happiness through work? Can
we, or should we, even try to sustain those who
cannot or will not change with the times?
For all of the opportunities the future of
work must surely present, how will organisations manage the increased complexity of
network working when stripped of tried and
WHVWHG VWUXFWXUHV" +RZ ZLOO UPV FRQWLQXH WR
generate loyalty and commitment amongst
people they rely upon to perform vital work, but
dont employ? Who is to blame when things go
wrong? Where does accountability reside? What
does good look like? Who decides? Who is in
charge when no one can decide?
How will individuals plan for the future if the
future is inherently uncertain? Is the unavoidable
FRXQWHUZHLJKW WR LQFUHDVHG MRE H[LELOLW\ VXFK
as the ability to work at ones own discretion,
decreased job security? How should we educate
our children to thrive in a post-bureaucratic
world? Mastering technology is perhaps the easy
part. How can we give them the best chance of
developing the self-awareness and sociability to
meaningfully connect with others across the unstructured landscape of the human cloud? Are
we all to become entrepreneurs of our own personal corporation of one? Will we be left bereft
by the absence of established career paths and
easy choices that we currently take for granted?
With choice comes consequence. As individuals,
do we really want to be left to our own devices
completely? Is it even a choice?
300% 1948-1973:
1973-2014:
Productivity: 96.7%
Productivity: 72.2%
Hourly compensation: 91.3% Hourly compensation: 9.2%
250
200
238.7%
Productivity
150
109.0%
Hourly compensation
100
50
0
1960
1980
2000
Note: Data are for average hourly compensation of production/nonsupervisory workers in the private sector and net productivity of
the total economy. Net prodcutivity is the growth of output of goods and services minus depreciation per hour worked.
Source: EPI analysis of data from the BEA and BLS (see technical appendix for more detailed information)
structures, systems and culture) and the development of capabilities that give organisations a
distinctive competitive edge.
References
1. Tom Goodwin, Crunch Network, 2015: http://
t e ch c r u n ch . c o m / 2 0 1 5 / 0 3 / 0 3 / i n - t h e - a g e - o f disintermediation-the-battle-is-all-for-the-customerinterface/#.qwngvf2:0sCd
2. John Maynard Keynes, Essays in Persuasion, New York:
W.W.Norton & Co., 1963, pp. 358-373.
3. Frey, C.B. and Osborne, M.A., 2013. The future
of employment: how susceptible are jobs to computerisation.
Retrieved September, 7, p.2013.
4. http://www.ons.gov.uk/ons/rel/lmac/contracts-with-noguaranteed-hours/employee-contracts-that-do-notguarantee-a-minimum-number-of-hours--2015update-/employee-contracts-that-do-not-guaranteea - m i n i m u m - n u m b e r - o f - h o u r s - - 2 0 1 5 - u p d a t e.
html#tab-conclusions
5. http://www.economist.com/news/briefing/21594264previous-technological-innovation-has-always-deliveredmore-long-run-employment-not-less
6. Heckscher, Charles, C. Heckscher, and A. Donnellon.
"Defining the post-bureaucratic type." (1994): 14-62.
7. Mintzberg, Henry. "Patterns in strategy formation."
Management science 24.9 (1978): 934-948.
8. United States Air Force Chief Scientist (AF/ST)
as Report on Technology Horizons: A Vision for Air Force
6FLHQFH 7HFKQRORJ\GXULQJVolume 1AF/STTR-10-01-PR, September 2011
9. www.nytimes.com/2007/03/25/business/yourmoney/
25Stream.html?ex=1332475200&en=cd1ce5cc4ee647d5&
ei=5090&partner=rssuserland&emc=rss&_r=0
10. Buckingham, M. & Goodall, A., (2015), Reinventing
Performance Management, Harvard Business Review, April
11. Gibson, C. & Birkinshaw, J. (2004), The Antecedents,
Consequences, and Mediating Role of Organizational
Ambidexterity, Academy of Management Journal, 47:2 209226; doi:10.2307/20159573
12. http://www.epi.org/productivity-pay-gap/
The work challenge in

future is therefore to
be both efficient and
innovative.
39
Survey shows that German energy executives see a broad range

of possible applications of Blockchain in the energy system, both
in terms of processes as well as platforms.
PHOTO COURTESY:
microgridmedia.com
Feature
Technology
The Impact of Blockchain on

the Energy Sector Expectations
from German Energy Executives
BY CHRISTOPH BURGER, ANDREAS KUHLMANN, PHILIPP RICHARD & JENS WEINMANN
How do energy executives see the potential

of the Blockchain? Is it just hype, or does it
have real potential to disrupt the functioning of the industry? The German Energy
Agency dena and ESMT Berlin have comSLOHG QGLQJV RQ *HUPDQ HQHUJ\ H[HFXtives current opinions, actions and visions
of the Blockchain.
In the financial sector,

cryptocurrencies
have emerged as
an alternative to
the traditional
banking system.
nnovation in the 21st century business world

is driven by peer-to-peer platforms such as
Ebay, Uber, Airbnb, Zipcar, or Kickstarter.
These businesses follow the idea of a sharing
economy by dismantling established hierarchies,
GLYHUWLQJ VRFLHWDO LQXHQFH IURP RUJDQL]DWLRQV
to individuals, often using democratic instead of
autocratic decision processes, and empowering
consumers, based on the claim of high ethical
standards of a new, decentralised world order.
,Q WKH QDQFLDO VHFWRU FU\SWRFXUUHQFLHV KDYH
emerged as an alternative to the traditional banking
system. This is potentially disruptive, as trusted
intermediaries could become obsolete. Banks
ZHUH WKH UVW RQHV WR EHFRPH DZDUH RI WKH WKUHDW
epitomised in the cryptocurrency Bitcoin. All of
Bitcoins transactions are based on the Blockchain,
a distributed, digital transaction technology that
allows for securely storing data and executing smart
contracts in peer-to-peer networks,1 offering both
transparency and anonymity in all transactions.
Using cryptocurrencies for monetary transfers
is Blockchains most obvious use case. Fintech
startups such as Abra allow customers to repatriate
expats remittance money to their home countries
via the Bitcoin Blockchain. The founders of Abra

state that their model is 100% peer to peer, with
no middle man ever holding, managing or touching your funds at any point in any transaction.2
They claim that their service has reduced transfer
times from one week to one hour, and transfer
costs from a 7 percent transaction fee to 2 percent.
The technology gains popularity in other applications, too. For example, ride-sharing startup
Arcade City directly competes with Uber for individual mobility services. Arcade City has established an open marketplace where riders connect
directly with drivers by leveraging Blockchain
technology. Conferences on Blockchain-based
FU\SWRFXUUHQF\ %LWFRLQ DUH RXULVKLQJ VWDUWXS
competitions are held to spot the Blockchain
equivalent of Amazon and Uber, and venture
capital so far has raised $1.1bn to scale business
models of the future.3
The energy sector and in particular the elecWULFLW\ VXSSO\ VLGH H[SHULHQFHV UVW DWWHPSWV WR
use Blockchain, in particular since recent extensions allow for conducting smart contracts via a
Blockchain-based platform called Ethereum. Most
prominent examples of energy exchanges between
decentralised producers and consumers are the USbased startup TransActive Grid and Power Ledger
in Perth, Australia.4 TransActive Grid enables its
members to trade energy using smart contracts
YLD%ORFNFKDLQ,WVUVWWUDQVDFWLRQZDVVXFFHVVIXOO\ODXQFKHGLQHDUO\FRQQHFWLQJYHKRPHV
that produce energy through solar power on one
VLGHRI DVWUHHWLQ%URRNO\QZLWKYHFRQVXPHUV
on the other side of the street, who are interested
41
Technology
TransActive Grid launched a peer-to-peer (P2P) transaction platform that enables Brooklyn
Microgrid members to buy and sell electricity produced from residential PV solar installations.
Photo courtesy: microgridmedia.com
in buying excess energy from their neighbours.5 One application, developed by a

South African startup called Bankymoon,
consists of smart prepaid meters that only
release power to residential customers
once they have topped up their accounts
and transferred money to the electricity
provider a kind of mini smart contract.
7KLV V\VWHP EULQJV EHQHWV IRU WKH VXSSOLer by increasing the payment discipline of
its customers, but it may also have advantages for residential consumers: In counWULHV ZLWK KLJK LQDWLRQ UDWHV SD\PHQWV
result in lower expenses for them if they
have paid in advance, precluding any accumulation of debts.
The value proposition that these
new ventures present to potential
customers and investors is similar to
initiatives in the banking sector: Any
necessity for an intermediary between
two parties is removed.
Meanwhile, a major change is occurring
in global energy supply. Renewable energies, in particular solar power and wind,
become major primary energy sources
in the generation portfolio of countries
such as Australia, Denmark, or Germany.
Several states in the US experience a steep
rise of photovoltaic power often delivered from micro-producers with rooftop
panels via the conventional distribution
grid. In 2015, approximately a third of
Germanys electricity consumption was
generated from renewables, with more
than 1.5 million photovoltaic micro-generation units,6 26,000 wind turbines,7
and 9,000 biomass power plants.8 These
power units alone amount to an installed
capacity of 97 GW,9 almost half of
Germanys total capacity.
The combination of Blockchain
as emerging peer-to-peer transaction
technology with the rapid growth of
decentralised energy supply bears a
considerable disruptive potential for
the energy supply industry, detaching

QDQFLDOWUDQVDFWLRQVDQGWKHH[HFXWLRQ
of contractual commitments from a
central control unit a next step toward
full decentralisation and a threat for the
business of traditional utilities.
How do energy executives see the
potential of the Blockchain? Is it just
hype, or does it have real potential to
disrupt the functioning of the industry?
How big do they estimate the potential of Blockchain to be, and in which
areas? Will it remain a niche application,
or become a game changer?
The German Energy Agency dena and
the European School of Management
and Technology (ESMT Berlin) have
FRPSLOHG QGLQJV RQ *HUPDQ HQHUJ\
executives current opinions, actions
and visions of the Blockchain. In July/
August 2016, the link to an online questionnaire was sent to members belonging to the dena network as well as ESMT
alumni who work in the energy sector or
energy-related industries. In total, 70 responses were received.
Responses came from executives all
along the value chain in the electricity
industry, starting from manufacturers
to utilities, grid operators and service
providers to employees at the electricity
exchange. The three largest groups of
respondents were employed at electric
utilities, service companies, and grid
operators, respectively.
Almost 70 percent of the respondents have already heard about applications of Blockchain in the energy
sector. When asked whether their respective companies or organisations
have already taken steps in that direction, 13 percent responded that they are
already in the process of experimenting
The combination of Blockchain as emerging peer-to-peer transaction

technology with the rapid growth of decentralised energy supply bears
a considerable disruptive potential for the energy supply industry.
42
Feature
with Blockchain and 39 percent are planning to do so, including pilot tests, studies, analyses, and research projects.
Sixty percent of the respondents believe that a further
dissemination of the Blockchain is likely. 21 percent consider Blockchain a game changer for the energy supply industry,
and 14 percent expect niche applications. Only 5 percent either
do not see any potential or an almost inexistent potential of
%ORFNFKDLQLQWKHHQHUJ\VHFWRUVHHJXUHEHORZ
0RUHVSHFLFDOO\UHVSRQGHQWVZHUHDVNHGWRTXDOLWDWLYHO\
identify potential use cases and applications of Blockchain
in the energy sector and provide a judgment according to
WKHFODVVLFDWLRQXVHGLQWKHSUHYLRXVTXHVWLRQWKDWPHDQV
ranging from small to non-existent potential to game changer.
,QWRWDOUHVSRQGHQWVLGHQWLHGPRUHWKDQSRWHQWLDOXVH
cases and their respective potentials.
The responses can be differentiated into two main clusters: platforms and processes.
As expected, most of the responses in the platforms
cluster relate to public platforms, such as peer-to-peer netZRUNVFRPSRVHGRI UHVLGHQWLDOSURVXPHUVZKREHQHWIURP
Blockchains decentralised structure and engage in decentralised energy management, neighbourhood solutions, and the
coordination of renewable installations. Some respondents
also mentioned the potential of privately owned B-2-B platforms, for example in intraday trading, virtual power plants,
interruptible loads, and storage capacity.
However, energy executives mention an equally high amount
of potential applications in the cluster processes. Most responsHV ZHUH UHODWHG WR ELOOLQJ LQFOXGLQJ DSSOLFDWLRQV LQ WKH HOG
of Smart Meters and micro-payments, followed by use cases

in sales and marketing that range from package solutions for
household devices and the electricity they consume, improvements in customer services and new products, to a change in
existing sales practices. Respondents also saw a future role of
the Blockchain in automation, metering and data transfer, electric mobility, communication, grid management, and security,
LQFOXGLQJWUDQVDFWLRQVVXFKDVDXWKHQWLFDWLRQDQGLGHQWLFDWLRQ
of data, and the protection of the private sphere.
7KHIROORZLQJJXUHVHHJXUHEHORZVKRZVDQRYHUview of the answers according to applications and use cases.
The size of each circle corresponds to the number of individual responses. The color scheme ranges from black (Game
changer) to White (small to non-existent potential).
The survey suggests that Blockchain bears a potential for
FRVWFXWWLQJLQWKHLQWHUQDOSURFHVVHVRI UPVDQGLQWKHLQteraction with clients and customers. In the energy sector,
the availability of increasing amounts of data on the overall
state of the system, on customers, and on internal processes
FIGURE 2. Potential use cases of Blockchain in the energy sector
FIGURE 1. The potential of the Blockchain in the energy sector,

according to German energy executives
43
Technology
The results of the survey show that German energy executives see a broad range of possible
applications of Blockchain in the energy system, both in terms of processes as well as platforms.
coincides with an existential need of many companies to cut
costs. Hence, energy companies may have an intrinsic motiYDWLRQWRH[SORLWWKHHIFLHQF\RI WKH%ORFNFKDLQSURWRFROWR
LQFUHDVHWKHLULQWHUQDOSHUIRUPDQFHDQGHIFLHQF\$FFRUGLQJ
to respondents statements, it has the potential to reduce
costs and to enable new business models and marketplaces;
it will be instrumental to manage complexity, data security,
and ownership.
The results of the survey show that German energy
executives see a broad range of possible applications of
Blockchain in the energy system, both in terms of processes
as well as platforms. However, it is competing with existing
solutions and has to prove its attractiveness to users. From a
market perspective, establishing Blockchain as the dominant
WUDQVDFWLRQ WHFKQRORJ\ PLJKW EH PRUH GLIFXOW LQ H[LVWLQJ
markets than in new markets where new applications do not
yet exist. Taking a practical case from the energy sector, the
rollout of Smart Meters has just begun in countries such as
the United Kingdom, in Germany a sequential rollout will
start at the beginning of 2017. Many countries plan the ofFLDOVWDUWRI WKHUROORXWLQWKHQH[WRQHRUWZR\HDUV,WLV
not clear which software solution will become dominant in
multi-directional Smart Meter transactions. Similarly, establishing a homogeneous payment system for public charging
stations of electric vehicles is still a work in progress. Startups
such as BlockCharge are trying to push a standard based on
Blockchain. Wherever a peer-to-peer trading network that
does not rely on an intermediary a trusted institution has
not yet been established on a large scale, Blockchain has the
chance to become the dominant design.
Blockchain might have a more contestable position in
applications where technologically sophisticated platforms
and processes already exist and are accepted among market
participants. Electricity exchanges such as the European
Electricity Exchange in Leipzig (EEX) serve as platforms
that were established under the paradigm of liberalisation
to allow parties to trade energy, emissions, and their deULYDWLYHV(YHQWKRXJK%ORFNFKDLQDOWHUVWKHFRQJXUDWLRQ
of trading by establishing a peer-to-peer network, it has to
compete with the existing solution. Only if its applications
have tangible, monetary, or timely advantages, Blockchainbased solutions will be able to convince a critical number of
market participants to switch from the current status quo to
WKHQHZSODWIRUPJHQHUDWLQJVXIFLHQWOLTXLGLW\DQGHVWDElishing itself as an attractive alternative.
44
About the Authors

Christoph Burger is senior lecturer and senior
associate dean executive education at the
European School of Management and
Technology. He is a speaker in conferences of
World Alliance of Decentralized Energy,
Cornwall Energy, Oxford Energy, a member of the jury of
the GreenTec Awards and a mentor at accelerators such as
the Startupbootcamp or GTEC.
Andreas Kuhlmann is Chief Executive of
the German Energy-Agency (dena). Among
others, the graduate physicist has held positions at the German Association of Energy
and Water Industries (BDEW), the German
Embassy in Stockholm and the European Parliament, the
German Parliament and the Federal Ministry of Labour
and Social Affairs.
Philipp Richard is Project Director at the
German Energy-Agency (dena). Since 2011 he
KDVEHHQLQYROYHGLQYDULRXVSURMHFWVLQWKHHOGV
of digitisation, smart grids, smart metering and
market integration of renewable energies. He
was responsible for the dena Smart Meter Study (2014) and is
head of team for a digitisation project supported by the
Federal Ministry for Economic Affairs and Energy.
Dr. Jens Weinmann is Program Director at the
European School of Management and
Technology (ESMT), Berlin. He is Chairman of
the Judging Committee at the Product Innovation
Awards of European Utility Week and mentor at
the Startupbootcamp Berlin, an accelerator focusing on innovations in energy and transport.
References
1. Swan, M., Blockchain: Blueprint for a New Economy. 2015: OReilly Media.
2. Abra. How it Works. 2016 [cited 2016 2 Sep]; Available from: https://www.goabra.com/technology/.
3. Weusecoins.com. Venture Capital Investments in Bitcoin and Blockchain Companies. 2016 [cited 2016 22 Sep]; Available
from: https://www.weusecoins.com/en/venture-capital-investments-in-bitcoin-and-blockchain-companies/.
4. Potter, B., Blockchain power trading platform to rival batteries, in AFRWeekend. 2016, The
Australian Financial Review Magazine.
5. Rutkin, A., Blockchain-based microgrid gives power to consumers in New York, in New Scientist. 2016.
6. BSW, Statistische Zahlen der deutschen Solarstrombranche (Photovoltaik). 2016, Bundesverband Solarwirtschaft.
7. BWE, Anzahl der Windenergieanlagen in Deutschland. 2015, Bundesverband WindEnergie.
8. Fachverband Biogas, Branchenzahlen 2015 und Prognose der Branchenentwicklung 2016. 2016,
Fachverband Biogas.
9. BMWi. Entwicklung der erneuerbaren Energien in Deutschland im Jahr 2015. 2016 [cited 2016
20 Sep]; Available from: http://www.erneuerbare-energien.de/EE/Navigation/DE/
Service/Erneuerbare_Energien_in_Zahlen/Entwicklung_der_erneuerbaren_Energien_in_
Deutschland/entwicklung_der_erneuerbaren_energien_in_deutschland_im_jahr_2015.html.
Technology
FED Up With Big Data Hype?

How Central Banks Struggle
with Digital Disruption
BY CHRISTOPHER SURDAK
Since releasing his latest book, Jerk: Twelve Steps to

Rule the World, Christopher Surdak have spoken with
thousands of business and governmental leaders about
Big Data, Analytics and Digital Transformation. With
this experience, he tries to answer in this article, all
the important questions revolving how central banks
struggle with digital disruption.
rapidly. Perhaps it is no surprise that the open source group

Apache has created a software platform called Zookeeper
to help manage this growing herd of software tools. This
rapid evolution, combined with the enormous hype around
Big Data, is driving many organisations to build expansive
Big Data platforms. These initiatives are loaded with potential, but frequently short in actual business value.
Insights Arent Enough

A consistent theme in all of the conversations I have had
with executives has been the gap between Big Datas theoretical promise and its operational reality. We are engulfed
with the message that we must embrace Big Data in order
to survive, yet few organisations seem to gain actual busiQHVV EHQHWV IURP WKHLU %LJ 'DWD LQYHVWPHQWV , ZRXOG
argue that the recent shift in focus from Big Data to
Digital Transformation is a direct result of this trend.
In most cases, this shouldnt come as a surprise. Many
are simply doing the same analyses theyve always done,
only faster, cheaper or with more data than before. While
incremental improvement has been a canon of business
management for the last 20 years, it is clearly not a path for
breakthrough results.
Some organisations actually gain new insights by analysLQJ QHZ VRXUFHV RI GDWD EXW WKH\ DOVRQGWKDWLWVGLIFXOW WR EHQHW IURP WKHLU HIIRUWV ,Q WKHVHFDVHVRUJDQLVDtions havent changed how they operate to take advantage
of these insights. Organisations must be able to act at their
new speed of insight, otherwise the insights will only be a
source of frustration; and frustration is a common theme
in Big Data discussions. IT departments have learned
how to build new analytics platforms to answer entirely
new questions in entirely new ways, but they do not know
what questions to ask. Conversely, business and operations
people know that they need to work in new and different
o any of these sound familiar to you: I need to

monetise my data. How do I get value from my
DQDO\WLFV HIIRUWV" 0\ GDWD VFLHQWLVW QGV ORWV RI
interesting relationships, now what? How will Hadoop
increase my revenues? Why dont my forecasts and
models work anymore?
If so, youre not alone. Since releasing my latest book,
Jerk, earlier this year I have spoken with thousands
of business and governmental leaders about Big Data,
Analytics and Digital Transformation. From startups to
Fortune 50 goliaths, from government agencies across the
world, to global NGOs such as the World Bank, everyone
LV VWUXJJOLQJ WR JXUH RXW KRZ WR EHWWHU SXW GDWD WR XVH
while they still have time.
Many organisations have invested heavily in Big Data
technology, deploying a virtual Noahs Ark of new software tools such as Hadoop, Hive, Pig, Impala and so on.
Each new tool attempts to address the shortcomings of its
predecessors, and the Big Data ecosystem is evolving very
Some organisations actually gain new insights by

analysing new sources of data, but they also find
that its difficult to benefit from their efforts. In
these cases, organisations havent changed how
they operate to take advantage of these insights.
45
Technology
negative interest rates in the hope that this

would push more money into circulation.
Despite these efforts (arguably the very definition of anti-capitalism) economic growth
seems elusive. As Yellen pondered the reasons
that global central bank policies have fallen
short of expectations, she posed four questions to the assembled audience of economists, bankers, bureaucrats and policy wonks.
From the perspective of a data analyst, I
found these questions fascinating as they inGLFDWH ERWK ZKHUH 7KH )HG QHHGV WR QG
new answers, and how Big Data and Digital
Transformation might lead to them. Lets
look at her questions in turn, from a Big
Data perspective.
Question 1: Are there circumstances in
which changes in aggregate demand can
have an appreciable, persistent effect on
aggregate supply? Yellen postulated that
most economists would historically answer
no to this question. However, evidence
since 2007 tend to suggest that lower aggregate demand may suppress aggregate supply.
Experimentation Changes the Experiment
I recently came across a speech by Janet Yellen, For data scientists the operative words here
Chair of the Board of Governors of the are aggregate, suggest and may. As an
United States Federal Reserve which shows analyst, I love these words because they indithat organisations of all shapes and sizes are cate areas where modest improvements in data
struggling to adapt to a changing world.1 Yellen and math might completely change existing
spoke about Americas continuing efforts to understanding and dogma.
7KH RSSRUWXQLW\ KHUH LV WR QG DQG XVH
recover from the Great Recession of 2008.
Like central banks around the world, The Fed much more detailed data to disaggregate the
KDV WULHG WR XVH LWV QDQFLDO OHYHUV WR UHWXUQ relationships that are currently estimates.
the world economy to steady, stable, predict- Supposed correlations often fail once more
and better data becomes available. Supposed
able growth.
7KLV KDV SURYHQ PXFK PRUH GLIFXOW WR causation is even more likely to fail under the
achieve than anticipated. Despite implement- greater scrutiny provided by zettabytes of
LQJKLVWRULFDOO\ORRVHVFDOSROLFLHVWKHJOREDO actual data. For Fed analysts, detailed data on
economy remains in a funk. Indeed, many actual purchase behaviours might shift both
central banks have actually implemented economists understanding of supply and
GHPDQGDQGWKHQDQFLDOWRROVXVHGWRPDQDJH
the economy.
From the perspective of a data analyst, I
Question 2: whether individual differences within broad groups of actors
found these questions fascinating as they
LQ WKH HFRQRP\ FDQ LQXHQFH DJJUHindicate both where The Fed needs to find gate economic outcomes in particular,
effect does such heterogeneity have
new answers, and how Big Data and Digital what
on aggregate demand? If Yellens question here seems rhetorical, its likely because
Transformation might lead to them.
ways, and they often know what questions
need to be answered. However, business
people may not know what questions are answerable, or what it takes to get there.
This dynamic has existed for decades, and it
is nothing new to information technology professionals. Deploying technology-based busiQHVVVROXWLRQVRIWHQIHHOVOLNHDWWHQGLQJDUVW
dance at a middle school; the young women
line one wall of the gymnasium, the young
men the opposite wall, while music drones
RYHUDQHPSW\GDQFHRRU%RWKJURXSVZDQW
to interact with the other in order to enjoy
each others company. But, each enters the
event with completely different perspectives,
fears, wants and expectations, leading to lessthan-optimal results. Over time, the music has
changed from A Flock of Seagulls to Nirvana
to Lady Gaga, and the technology has changed
from Lotus Notes to Java to Python. But, the
theme of IT-doesnt-play-well-with-the-business has
remained regrettably consistent for decades.
46
it is. As anyone who logs into Amazon, eBay

or Facebook knows, every broad group of
actors in a population is actually made up of
people who frequently think or act across a
broad spectrum. As recently as 10 years ago,
advertisers might talk in broad terms like
Millennials, Hispanics, or middle-class,
middle-aged, male professionals when they
try to characterise customers or market segments. Increasingly, such broad categorisation
is suicidal for businesses, as people now expect
deep personalisation and independence.
Digital businesses work to understand each
individual as an individual. They realise that
using averages to address customer needs
gives outliers a disproportionate impact on
outcomes. They seek to understand the under-served ends of each populations distribution; what I call the Hightail and Lowtail
in Jerk. In this case, The Fed may do well
WRORRNDWKRZGLJLWDOPDVWHUVVXFKDV1HWL[
or Starbucks use deeply intimate and personalised data to better understand the outliers in
populations, and how these players may have
outsized effects on their peers.
4XHVWLRQ +RZ GRHV WKH QDQFLDO
sector interact with the broader economy?
Implicit in this question is the notion that The
Fed has less control over economic conditions
WKDQSUHYLRXVO\EHOLHYHG,QUHVSRQVHWRWKHnancial crisis of 2008 The Fed cut the prime
interest rate to near zero. It also started to pay
interest on reserve deposits, bought banks
assets (such as mortgages) to prop them up,
and became more explicit in its forward guidance on interest rates. Despite these steps,
the recovery has been weaker than expected. New policy tools were required to impact
the broader economy, which implies that there
have been fundamental changes to how our
economy now operates, versus 10, 20 or 50
years ago.2
How the global economy develops in the
IXWXUH DQG ZKDW FRQWURO WKH QDQFLDO VHFWRU
will have over this development are key questions for central banks, governments and businesses world-wide. If existing controls continue to fall short what new tools will be required
to drive predictable growth? If central banks
use new policy tools to generate desired results,

are those results likely to occur? If these approaches are supported by the same data and
analyses that fell short over the last eight years,
one wonders how effective they may be.
This is where Big Data may apply to this
question. These new approaches, tools, policies and stimuli will be applied in new ways
to address unforeseen problems. This means
a great deal of uncertainty and risk. Unless
new data and new models are used to assess
these new policy tools, how likely are they to
succeed? The relative shortcomings of existing tools imply that we dont fully understand
what is driving current economic conditions.
Introducing additional variables into our existing equations may lead to even greater unintended consequences. We will need to extenVLYHO\PRGHOWKHLPSDFWRI QHZVFDOSROLFLHV
and monitor their impact on the economy, to
GHWHUPLQHH[DFWO\KRZPXFKFRQWUROWKHQDQcial sector maintains over the global economy.3
4XHVWLRQ :KDW GHWHUPLQHV LQDtion? <HOOHQVQDOTXHVWLRQLQKHUSUHVHQWDtion may further demonstrate the need for new
tools, new data and new analysis. Controlling
LQDWLRQ LV RQH RI WKH FRUH PLVVLRQV RI 7KH
Fed. So, for the chair of The Fed to ask what
GHWHUPLQHV LQDWLRQ LV DQ H[SOLFLW DGPLVVLRQ
that the world has changed and we need to ask
new questions.
Controlling inflation
is one of the core
missions of The Fed.
So, for the chair of
The Fed to ask what
determines inflation
is an explicit
admission that the
world has changed
and we need to ask
new questions.
47
Technology
To expand our understanding of our businesses, our economy and our world we
must recognise that our attempts at prediction and control change the very things
that we are trying to control. And, the more we believe we have achieved control
the more disruption we are likely to feel once we realise things have changed.
In her speech, Yellen gave a range of economic assumptions that require added scrutiny, including the impact that present policy
statements have on future behaviours. This
sounds remarkably similar to predictive analytics performed by digitally-savvy insurance
companies, e-tailers, and social media advertisers. Such analyses are core to contemporary Big Data practices, although in the case
of The Fed Big Data may have to become
Humungous Data, given the scope of these
questions, and the potential implications of
their answers.
Micro Principles, Macro Scale
5HHFWLQJ RQ &KDLUZRPDQ <HOOHQV TXHVWLRQV ,
QG WKH VDPH FRQFHUQV WKDW , KHDU LQ VSHDNLQJ
with leaders of every organisation; although
scaled up rather dramatically. The same old
analyses of the same old data, using the same
old interpretations and biases are no longer
leading to the same results. Instead, many attempts at applying traditional business thinking either falls short of expectations, or leads
to completely new, and undesirable, results.
This shouldnt be a surprise. Rather, the decreasing effectiveness of our reporting and
controls is a direct consequence of our success
in managing what is known. The better we are
at managing these knowns, the more likely we
are to be impacted by unknowns. To maintain
some control over our environment, we must
ask new questions of new data. To expand our
understanding of our businesses, our economy
and our world we must recognise that our attempts at prediction and control change the
very things that we are trying to control. And,
the more we believe we have achieved control
the more disruption we are likely to feel once
we realise things have changed.
Like central banks around the world, The
48
Fed has many challenges ahead. Our economy

is behaving in unexpected ways not because
our policies are off. Rather, we are experiencing a global social change brought about by
the Digital Trinity of Mobility, Social Media
and Analytics, which changes the rules of how
our economy operates.4
As Albert Einstein once said, We cant
solve todays problems with the same thinking that created them. And this is the essence
of Big Data. Regardless of whether youre analysing clickstreams, Facebook posts or macroeconomic trends, to understand our rapidly
changing world you must ask new questions
of new data. In each case the answers are out
there, waiting to be discovered.
About the Author
Christopher Surdak is an Engineer,
Juris Doctor, Strategist, Tech
Evangelist, 2015 Benjamin Franklin
Innovator of the Year, and Honored
Consultant to the FutureTrek
Community, Beijing, China. He has recently
ODXQFKHG KLV RZQ FRQVXOWDQF\ UP 6XUGDN
Company. His latest book is Jerk: Twelve Steps to
Rule the World. He is also the author of Data Crush:
How the Information Tidal Wave is Driving New
Business Opportunities, which is GetAbstracts
International Book of the Year for 2014.
References
1. The Elusive Great Recovery, 60th Annual Economic
Conference, October 14, 2016, Board of Governors of the
Federal Reserve System, https://www.federalreserve.gov/
newsevents/speech/yellen20161014a.htm
2. The Federal Reserves Monetary Policy Toolkit, August 26,
2016, Board of Governors of the Federal Reserve System, http://
www.federalreserve.gov/newsevents/speech/yellen20160826a.htm
3. What are the Federal Reserves objectives in conducting
monetary policy? Board of Governors of the Federal Reserve
System, https://www.federalreserve.gov/faqs/money_12848.htm
4. World Economic Outlook, 2016, International Monetary Fund,
http://www.imf.org/external/pubs/ft/weo/2016/02/
Management
Creating Effective Organisational Systems through
Experimenting with Human Nature

BY DAVID DE CREMER AND TIAN TAO
man is an illusion and that organisations continuing to treat their most important asset
humans in ways that do not accommodate
their irrationalities will not go far.
Despite the rise of
Despite the rise of automation processes
automation processes
and the use of robots, people are still at the
and the use of robots,
heart of organisations. Organisations neverpeople are still at the
theless base their management processes,
heart of organisations.
systems and even HR policies on outdated
ideas of human behaviour and organisational design. This is a serious limitation to the calthough effective organisations that pacity of any organisation trying to balance
create joint value combined with a improving productivity and at the same time
long-term view are predicted to be the NHHSLQJ WKHLU HPSOR\HHV VDWLVHG DQG PRWLfuture model, they are still considered to be vated. What is needed is that HR managers
a rarity. A contemporary problem is that all and organisational leaders adopt an attitude
too often performance systems are focused to design systems that are based on the best
on achieving results with not enough atten- understanding of human nature. This kind
tion to the human aspects of the work that of attitude requires that organisations conLQXHQFH WKH HIIHFWLYHQHVV RI WKH V\VWHP sider themselves to be architects of organisaitself. Indeed, performance is still believed to WLRQDO GHVLJQV WKDW W KXPDQ QHHGV DQG LUimprove by employing systems that are tailor- rationalities. Relying on the best insights on
made on the assumption that rational actors what motivates people and what the irratioSRSXODWHRUJDQLVDWLRQV$VDUHVXOWWKHLQX- nal biases may be underlying their pursuit
ence of emotions, irrationalities and psycho- of those desires will allow organisations to
logical forces at large are discounted when de- design systems that are not only more effecsigning these organisational systems. Research tive in getting the best out of people but also
RQ KXPDQ GHFLVLRQ PDNLQJ DZV KDYH LGHQ- UHGXFHFRVWVRQWKHORQJWHUPVLJQLFDQWO\$W
WLHGYHU\FOHDUO\QRZWKDWWKHLGHDRI UDWLRQDO the end of the day, organisations with such
an architect mindset will be able to create
more joint value for all of their stakeholders
An important problem that prevents companies to
(society, customers and employees).
An important problem that prevents most
foster an architect mindset concerns the fact that
companies to adopt this strategy and foster an
experimenting and learning about the beneficial
architect mindset concerns the fact that eximpacts of human nature on organisational design
SHULPHQWLQJDQGOHDUQLQJDERXWWKHEHQHFLDO
requires short-term losses to achieve long-term gains. impacts of human nature on organisational
If organisations are serious in building
cultures that can translate the desire to
create joint value into a competitive advantage, it is needed that they become
architects of systems that account for
the human nature of its employees. One
company that has become known to implement experimental approaches based
on insights on how human nature works is
the Chinese telecom giant Huawei.
50
design requires short-term losses to achieve

long-term gains. Because of the pressure of
many companies to satisfy and meet the requirements of their shareholders, this tradeoff is hard to achieve. As a result, we see
less experimentation based on sound reasoning happening. One company that does
not face the pressures of public shareholders
and consequently has become known to implement experimental approaches based on
insights on how human nature works is the
Chinese telecom giant Huawei. The company
is a leading global information and communication technology (ICT) provider that
was founded in 1988 in Shenzhen, by Ren
Zhengfei. Today it employs more than 170 000
staff and serves more than 3 billion customers worldwide. It is the only Chinese company
that receives more sales revenue from markets
outside (67%) than from inside China. In the
VFDO\HDURI +XDZHLVUHYHQXHUHDFKHG
CNY395 billion (US$60.8 billion) and
CNY36.910 billion (US$5.68 billion) in
QHWSURW
A feature relevant to the purpose of the
present article is that Huawei is an employee-owned company facing no pressures
from any private investors. This allows the
company to develop long-term strategies and
HQJDJH LQ WKRXJKWIXO UHHFWLRQV RQ WKH EXVLness models Huawei will employ. It is an understatement to say that Huawei breeds an intellectual climate fostering thoughts and ideas
about a wide variety of business challenges.
In fact, Ren Zhengfei is repeatedly quoted as
saying that the most important thing to value
is the power to think. It is the belief of the
company that innovation without a solid academic foundation is never going to be big
business. It is just messing with the details.
Ren Zhengfei has the belief that the Internet
DJHKDVFUHDWHGDJHQHUDWLRQRI LQDWHGLGHDV
in Chinas young people and therefore fears
WKDWVHULRXVVFLHQWLFUHVHDUFKLVODFNLQJWKHVH
days. The only way to achieve great leadership is therefore to do some hard learning
and this idea has become a mission for all of
Huawei employees.
So, how has this intellectual look at business challenges resulted in Huaweis experimentation with human nature with the aim
to promote organisational effectiveness? We
identify three important experiments that
KDYHDQGDUHGHQLQJ+XDZHLDVWKHFRPSDQ\
it has become today. Each of these three behavioural-based interventions are derived
from insights into the drives of humans and
their corresponding biases.
Ren Zhengfei
has the belief
that the Internet
age has created
a generation of
inflated ideas in
Chinas young
people and
therefore fears
that serious
scientific research is
lacking these days.
Staff at Huawei Global

Headquarters in Shenzhen.
HuaweiPress
51
Management
Intervention 1: Being Employee-owned as a way to

distribute power
Huawei is an employee-owned company because it uses
the self-designed Employee Stock Ownership Plan
(ESOP). In this ESOP, Ren Zhengfei holds 1.4% of the
companys total share capital whereas around 84 000 employees hold the rest of the shares (see Figure 1 below).
This employee shareholding system is referred to within
Huawei as the silver handcuff system, which is different
from the more common stock option arrangement, which
is usually termed the golden handcuff .
The idea of employees owning the company is something that has only recently received serious attention in
the West. Indeed, building on the observation that wealth
inequalities are damaging productivity and feelings of
ownership of employees, Hillary Clinton, for example,
argued in her race for the US presidency that the time is
WKHUHWKDWFRPSDQLHVKDYHWRRIIHUSURWVKDULQJSODQVWR
their employees. Clinton noted that in order to increase
productivity wages have to go up and to achieve this comSDQLHVKDYHWRDOORZHPSOR\HHVWREHQHWIURPWKHSURWV
that companies make an idea that basically encourages
companies to implement a structure that allows employees
to own (at least partly) the company.
The reason why Huawei has initiated such a unique
system has to do with their idea that people are motivated
WRVHFXUHQDQFLDOVHFXULW\DQGLQRUGHUWRDFKLHYHWKDWVHcurity they are willing to perform. Of course, Huawei does
QRWZDQWWKHLUHPSOR\HHVWREHFRPHIRFXVHGRQWKHQDQcial value only. Turning employees into capitalists without
a concern of the broader and organisational context will
deteriorate on the long term the quality and prosperity
of the company. Therefore, Huawei adds to the idea that
HPSOR\HHV VKDUH LQ WKH SURWV DOVR WKH QRWLRQ WKDW WKH\
FIGURE 1. Distribution of Shares Within Huawei

Ren Zhengfei, 1.40%
84,500 employees
98.6%
52
FIGURE 2. Huaweis Annual Value Distribution Structure

A Look Back at Huawei's Annual Value
Distribution Structure (US$ billion)
60.84
46.51
32.39
27.62
2010
2011
/,1
35.35
2012
39.46
2013
Employee Overhead
2014
2015
Revenue
As of June 2016
want their employees to perform in responsible ways. A

sense of responsibility is achieved by making employees
co-owners, accountable for both inputs as consequences.
$VWKHQDQFLDOFULVLVKDVVKRZQSXUVXLQJQDQFLDOJDLQV
but then with the money of someone else does not breed
responsible behaviour. In this set-up the employees are
working for and with their own welfare.
The underlying message is that distributing wealth
will create joint value that will unite efforts and longterm success. As the Chinese saying goes: If you distribute wealth, people will come together, if you keep
the wealth, people will be isolated. In line with this
idea, in 2015, Huawei spent 23.6% of their revenue to
salaries and bonuses (a total of $14.85 billion), whereas
the average number in the industry is about 12% (see
Figure 2 above for a visual demonstration of the increasing use of revenue for employee overhead).
Important to note is that this act of distributing wealth
JRHVWRJHWKHUZLWKDVSHFLFLQWHUSUHWDWLRQRI ZKDWSRZHU
means. As a matter of fact, turning your company into an
employee-owned one makes that power is redistributed in
VXFKDZD\WKDWWKHERVVHVFDQQRWLQXHQFHWKHHPSOR\HHV
anymore in ways they would like to see. This consequence
LV YHU\ PXFK UHHFWHG LQ 5HQ =KHQJIHLV VXJJHVWLRQ WKDW
employees should turn their eyes to the customers and
turn their back to the bosses. Huawei being a customer-focused company thus wants to create a culture in
which employees are willing to work harder to better serve
the customer and in doing that are willing to take up their
responsibilities to achieve this result themselves without
their bosses. It is a sense of pride and ownership that will make a company sustainable
and nevertheless fast moving. Huawei as such
GHQHV SRZHU PRUH LQ WHUPV RI WKH GHVLUH
of employees to gain freedom to perform
better. This perspective on power is different from the one that most companies use.
In fact, most organisations still stick to the
old idea that power corrupts because they see
power as having the ability to control others.
Recent behavioural research, however, has illustrated that people, in general, want to be in
charge because it offers freedom, not because
it allows people to control others. This idea of
power to have more freedom to excel brings
us to a second behaviour-based intervention
of Huawei.
Intervention 2: Creating freedom to excel
At Huawei, 1 out of 2 employees are engineers and therefore involved with some aspect
of R&D. They are knowledge workers and
one very typical feature of this kind of workforce is that they want freedom in how they
do their job. In fact, places that rely on human
capital which creative sectors do display
wise leadership if they provide their employees a measure of freedom. Wise leadership is
what Ren Zhengfei has been attributed to. The
story goes that Ren was so impressed by the
AT&T Bell labs in the early years of Huawei
that he used it to model his thinking on how
research should be done. Although AT&T
Bell labs gradually departed from their curiosity driven research climate after the break-up
of AT&T, Huawei made it one of their corner
stones, relying on the innate desire of human
intellectuals to work with freedom.
Providing this freedom also has its limitations and it is one of the reasons why so many
companies have problems installing systems
that rely on promoting the autonomy of their
workforce. An important limitation is the fact
that the human motive to value freedom and
autonomy of actions goes together with the
irrational tendency to avoid irreversible deFLVLRQV 6SHFLFDOO\ LI VWULYLQJ IRU IUHHGRP
is the dominant motive people will feel less
compelled to commit to anything, anyone or
any choice as they wish to preserve their

freedom. A result of this is that people will
choose often the least risky choice or even
stick to the status quo. Of course, knowledge
workers are expected to deliver the newest
and brightest ideas around and this goal
implies that risks are being taken and commitment is shown to taking unknown paths.
To counteract this irrational human tendency,
it is necessary that the architects of organisational designs create conditions under which
this fear of risk and change is overruled.
One way to do this is to ensure that failure in
their search for creative solutions is allowed
and not used against them. In other words,
create a system that tolerates failure and includes it in their feedback loop to enhance
learning. This brings us to the third-behaviour
based intervention.
Intervention 3: Failing to innovate
In the ICT industry innovation is a key issue.
For that reason companies invest considerable
amounts in R&D. Huaweis investments have
always been above 10% of their revenue and
plan to double those investments in the next
\HDUV:KDWLVVSHFLFDERXW+XDZHLVDSproach is that they want to foster the development of creative ideas and implementation
of innovation itself in the purest form possible. Therefore, in line with their intellectual climate they use 30% of their R&D inYHVWPHQWVIRUIXQGDPHQWDOVFLHQWLFUHVHDUFK
)XUWKHUPRUH WR FRXQWHUDFW WKH LQHIFLHQFLHV
of intellectual freedom as discussed under
intervention 2 Huawei has agreed with a
policy that of this 30% investment failure in
50% of the projects will be accepted. This decision as such removes the human tendency to
avoid commitment to risky choices and reverses it by motivating their knowledge workers to
take paths unknown.
By contributing such large amounts of revenues with the aim to foster curiosity-driven research climates the company takes risks,
but by doing this signal in an unambiguous
way to their employees that their mission
to connect people by means of their inventions is something to be proud of. Despite
THREE BEHAVIOURALBASED INTERVENTIONS
Being Employee-owned
as a way to
distribute power
Creating freedom
to excel
Failing to innovate
53
Management
IT IS CRUCIAL FOR ORGANISATIONAL ARCHITECTS TO COME UP WITH SYSTEMS

THAT WILL REMOVE THE EMERGENCE OF THESE BIASES TO PROMOTE THE
HIGHER GOAL IN THIS CASE BEING CREATIVE WITHOUT THE FEAR TO FAIL.
the behavioural-based approach of this intervention, many organisations nowadays do shy
away from accepting failure in such blatant
ways. Why?
Organisations do not like failure for several
UHDVRQV $ UVW UHDVRQ FRQFHUQV WKH QHJDtive impact it may reveal on the reputation of
the company. Blinded by a desire to see only
growth, public companies face the challenge
not to disappoint their external shareholders.
Any signal that failures occur imposes quickly
fear that short-term costs will be high, making
that such news is hardly ever communicated. As a result, we see many companies that
install cultures where not accepting failure
becomes the norm, and those failures that
do occur will go underground and stay there
until they explode and cause much more harm
to the company on the long term. A second
reason has to do with the irrational phenomenon called the illusion of control. Feeling
in control is a valuable business asset because
LWLQFUHDVHVFRQGHQFHWKDWRXUEXVLQHVVSODQV
and forecasts are worth pursuing. Control as
such has been elevated to the highest goods in
the corporate world as a whole. The problem,
however, is that this kind of culture makes
people believe that they control situations that
are actually determined by chance, hence, the
idea of the illusion of control. A third reason
for not willing to consider failures has to do
with the irrational tendency that we call input
bias. This bias refers to the tendency of people
to use signs and evidence of effort to evaluate the outcomes that are achieved. In other
words, we like to use the simple belief that any
effort will produce something and as such can
be judged and rewarded. Of course, if efforts
lead to failures when pursuing innovation, it is
GLIFXOWRQWKHVKRUWWHUPWRMXGJHWKHYDOXH
of those efforts as a successful outcome is
missing. Because of these reasons; it is crucial
for organisational architects to come up with
54
systems that will remove the emergence of

these biases to promote the higher goal in
this case being creative without the fear to fail.
To conclude, if organisations are seriously
in building cultures that can translate the desire
to create joint value into a competitive advantage it is needed that organisations become architects of systems that account for the human
nature of its employees. It is therefore necessary that the latest behavioural insights are used
to build cultures that use the human potential
available in the best way possible and at the
same time design corrective systems that can
prevent or neutralise the emergence of irrational biases undermining the long-term value of
this exact potential.
About the Authors
David De Cremer is the KPMG
professor of management studies at
the Judge Business School,
University of Cambridge, UK, and a
fellow of the Ruihua Innovative
Management Research Institute at Zehjiang
University, China. He is the head of the department of Organisational Leadership and DecisionMaking at Judge Business School and was currently named one of the 2016 Global Thought
Leaders on Trust. Before moving to the UK, he
was a professor of management at China Europe
International Business School in Shanghai. He is
the author of the book Pro-active Leadership: How to
overcome procrastination and be a bold decision-maker
(2013) and his new book together with Tian
Tao Huawei: Leadership, culture and connectivity
will be out in print early 2017.
Tian Tao is codirector of Ruihua
Innovative Management Research
Institute at Zehjiang University. He
is the founder and Editor in Chief
of Top Capital magazine and his
newest book Huawei: Leadership, culture and connectivity will be out in print early 2017.
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Entrepreneurship
Your Customer is Not Just King.

He or She Can Be Your VC, Too!
BY JOHN MULLINS
The Customer-Funded Business: A Better

Way to Grow
Its long been the case that the most sure-footed source of funding for companies that grow
is their customers cash. Thats right: they use the
revenue they get from what they sell to their customers, collected as early as possible, to cover the
amounts they owe to their employees and their
suppliers, paid as late as possible, to provide the
long-accepted notion in entrepreneurial necessary fuel for survival and growth.
5RFNHWVFLHQFH"1R,WVOLYLQJRQRQHVRDW
circles is that the way to start and grow
a thriving business is to come up with a really. But with VCs having hogged the entregreat idea, write a great business plan, raise preneurial limelight for the past couple of genFDSLWDO IURP DQJHOV RU 9&V DZOHVVO\ H[HFXWH erations, customer funding as source of cash
the plan, and (Voila!) get rich! But it hardly ever for growth has been understudied and largely
happens this way, and the vast majority of suc- RYHUORRNHG<RXOOVFDUFHO\QGPHQWLRQRI LWLQ
cessful businesses dont ever raise venture capital. business school classrooms or in textbooks on
In fact, the majority of small businesses after HQWUHSUHQHXULDOQDQFH
This is sad, really, as some of the 20th centurys
all, start-ups are always small businesses, for at
least some time simply remain small business- best-known entrepreneurs Michael Dell, Bill
es, despite their ambitions to grow.
Gates, and Banana Republics Mel and Patricia
Despite the daunting barriers, most entrepre- Ziegler, to name just a few have done just
neurs still want to grow, for lots of good reasons: that. The bright side of the story is this: there
PRUH SURW WR WDNH KRPH PRUH RSSRUWXQLWLHV DUH YH QRYHO FXVWRPHU IXQGLQJ DSSURDFKHV
for their employees, greater give-back to their that scrappy and innovative 21st century entreFRPPXQLWLHVDQGPRUH6RKRZPLJKWWKH\QG preneurs have ingeniously adapted from their
the cash they need, without going hat-in-hand to predecessors like Dell, Gates, and the Zieglers.
reluctant bankers or pandering to VCs?
Heres how they do it:
Matchmaker models: By bringing together
buyers and sellers, but not owning what is
bought and sold, matchmakers build great
companies with virtually no startup capital.
By bringing together buyers and sellers, but not
For Airbnb, the initial investment in 2007
owning what is bought and sold, matchmakers build
was for a couple of air mattresses on the
IRXQGHUV6DQ)UDQFLVFRDSDUWPHQWRRU%\
great companies with virtually no startup capital.
Are you looking for a venture capitalist
WR QDQFH RU JURZ \RXU VWDUWXS EXW \RXUH
struggling in doing so? Surprisingly,
perhaps, the vast majority of fast-growing
companies get the funds they need from a
much more hospitable and agreeable source
WKHLUFXVWRPHUV-RKQ0XOOLQVVKDUHVYH
effective ways to do it.
56
narrowly focusing on conventions that were

too big for a citys hotel inventory, Brian
Chesky and Joe Gebbia built their business
one step at a time until they got noticed at
the Democratic National Convention in
Denver in 2008. VC funding followed, and
the rest is history: 600,000 properties for
rent in 192 countries!
Pay-in-advance models (a la Michael
Dell and the Zieglers): Bangalores Vinay
Gupta built Via into the Intel Inside of
the Indian travel industry. How? By asking
Indias mom-and-pop travel agents for a
rolling $5,000 deposit in advance in return for
real-time ticketing capability and better commissions than the airlines were giving them.
6LJQLQJXSDJHQWVLQWKHUVWIHZPRQWKV
gave Gupta $1 million in cash his customers cash with which to start and grow his
prices, and paying his vendors long after
business! It was much like Michael Dells
the goods had been ordered and shipped,
approach, which required his customers to
Granjon didnt need any additional capital
pay for their custom-built PCs in advance,
to sell their unwanted styles online and to
but with a 21st century twist! Similarly, the
grow what became Frances 5th most popular
Zieglers charged $1 a copy for their initial
fashion brand.
Banana Republic mail-order catalogs, and
convinced their key suppliers to give them Service-to-product models (a la Bill
Gates): Claus Moseholm and Jimmy
30 to 90 day terms.
Maymann of GoViral, a Danish company
Subscription models: Krishnan Ganesh
created in 2003 to harness the then-emergstarted TutorVista with three Indian teaching power of the internet to deliver adverers and a VoIP Internet connection reachtisers video content in viral fashion, funded
ing American teens who needed help with
their companys startup and growth with the
their homework. He quickly learned that
proceeds of one successful viral video cam$100 per month for all you can learn
paign after another. In 2011, after having
paid monthly in advance was just what the
turned their service business (creating and
teens parents wanted. When renewal rates
hosting viral video campaigns) into a product
after the trial subscriptions quickly materialplatform that stood on its own, GoViral was
ised at north of 50%, growing the business
sold for $97 million, having never taken a
was simply a matter of adding more fuel. VC
single krone or euro of investment capital.
funds provided it, and Ganesh sold the busiGates and his buddy Paul Allen, who got
ness to Pearson in six short years for more
started by writing operating system softthan $200 million.
ware for most of the early PC makers a
Scarcity models: Jean-Jacques Granjon and
services business deftly made the transiKLVSDUWQHUVFUHDWHGWKHDVKVDOHVSKHQRPHtion to a product business when they started
non by doing something simple for Parisian
selling Windows, Word, Excel and the rest in
designer apparel makers who needed to move
shrink-wrapped boxes.
unwanted inventory. By collecting immediate
credit card payment from members who
responded to the limited 3-day online sales Does Venture Capital Have its Place?
and limited quantity available at discounted 7KH YH FXVWRPHUIXQGHG PRGHOV DUH QRW IRU
The five models apply

much more widely
than might appear
at a first glance in
both services and
product businesses,
and in both B2B
and B2C settings.
57
Entrepreneurship
In the words of The Darden Schools Saras Sarasvathy, Treat your first customers
as your partners they are your earliest investors and your best salespeople.
every company, of course. If you want
to build a dam and a hydroelectric power
plant on some fast-moving water, youll
probably need capital up front, and lots
of it. The same goes for other capital-intensive businesses, including many kinds
RI PDQXIDFWXULQJ %XW , QG WKH YH
models apply much more widely than
PLJKWDSSHDUDWDUVWJODQFHLQERWK
services and product businesses, and in
both B2B and B2C settings.
If yours is a business for which customer-funded models do have applicability, once your business has won the
traction you were dreaming of, then
you may well decide that funding from
an angel or a VC is just what you need
to take your business to the next level.
Indeed, as Kleiner Perkins partner
Randy Komisar notes, Even if you
plan on eventually scaling with venture
capital, customer funding can be a
smart path to experiment and prove
your business in advance.
The best news is this. If you raise
money at a somewhat later stage of
your entrepreneurial journey, once your
EXVLQHVV LV ULQJ RQ DOO F\OLQGHUV ZLWK
proven customer traction in hand, youll
be in the drivers seat, and the queue of
investors outside your door will have to
compete for your deal!
Why Not VC?

On the other hand, there are numerous reasons why entrepreneurs might
not even want to take VC: one, its a
distraction, as raising capital is a fulltime job; two, the stake theyll probably have to give away in return for the
capital they raise; three, the advice
and support they probably will get
from their VC, whether they need it or
want it (not to mention whether it is
sound); and more. For these and other
reasons, for many businesses, raising
capital is off the radar; for some of
them, appropriately so.
Is Customer Funding a Better Way To Go
and Grow?
3HUKDSV WKH PRVW LPSRUWDQW EHQHW RI
funding your company with your customers cash is freedom. According to
Hussein Kanji, founding partner of
Hoxton Ventures, I wish more entreSUHQHXUV XQGHUVWRRG WKH VLJQLFDQFH
and freedom that cash generation can
EULQJ WR \RXQJ HGJLQJ EXVLQHVVHV ,W
puts an entrepreneur in the drivers seat.
$VHFRQGEHQHWLVWKHJRRGWKLQJV
that can happen by directing your
primary attention to customers, rather
than to investors. In the words of
The Darden Schools Saras Sarasvathy,
7UHDW \RXU UVW FXVWRPHUV DV \RXU

partners they are your earliest investors and your best salespeople. Putting
your customers at the forefront of your
thinking can only pay dividends.
Third, and thinking pragmatically,
with the cost of building many kinds
of businesses including software
and Internet businesses that are on so
many entrepreneurial agendas today
lower today than ever, you may not
need very much cash to cover your
modest costs. Your customers cash
IURPRQHRUPRUHRI WKHYHFXVWRPHUIXQGHGPRGHOVPD\VXIFHIRUTXLWH
some time, maybe forever.
The Way Forward
If youre an aspiring entrepreneur
lacking the startup capital you need or
trying to get your cash-starved venture
into take-off mode, or an angel investor, mentor, or business accelerator or
incubator professional who supports
high-potential entrepreneurial ventures,
a customer-funded approach may offer
WKHPRVWVXUHIRRWHGSDWKWRVWDUWLQJnancing, or growing your business or one
you support. In the words of Shanghais
entrepreneur and angel investor Bernard
Auyang, The customer is not just king,
he can be your VC too!
About the Author
TABLE. Yearning for venture capital? Maybe you should forget it!
Funding Sources
Rejection rate
The Details
YCombinator
97.2%
Only 74 of 2,600 applicants were accepted into their

latest cohort.
AngelList
98.8%
Only around 1,000 of the 85,000 deals listed on the AngelList site
in 2013 won funding, according to The Economist.
Andreessen
Horowitz
99.3%
Of some 3,000 inbound deals a year, 15 to 20 are funded. As

Mark Andreessen puts it, Our day job is crushing entrepreneurs
hopes and dreams. Our main skill is saying no, and getting
people not to hate us.
58
John Mullins is
a three-time entrepreneur and
an
Associate
Professor
of
Management Practice at London
Business School. His latest book is The
Customer-Funded Business: Start, Finance,
or Grow Your Company with Your
Customers Cash.
Marketing
A New Model
for the Future
of Customer
Relationships
BY YORAM (JERRY) WIND AND CATHARINE HAYS, WITH ALEXA DE LOS REYES
The fundamental relationships among

brands, media, and people are being transformed at an unprecedented rate, necessiWDWLQJ D QHZ GHQLWLRQ RI FXVWRPHU UHODWLRQVKLSV 7KLV DUWLFOH RIIHUV VSHFLF DQG
practical guidelines for brands to understand, develop, and improve all points of
interaction with people by adopting new
mindsets and approaches.
ow do most brands view people today?

As masses of consumers categorised by
purchasing power? Potential customers
WR EH ZRRHG DWWHUHG DQG HHFHG" 2U PD\EH DV
SDUWLFLSDQWV LQ D PXWXDOO\ EHQHFLDO V\PELRVLV"
While that last one may sound a bit farfetched, it is clear that the fundamental relationships among brands, media, customers, employees, and other key stakeholders are being
transformed at an unprecedented rate. How
people and businesses encounter, experience,
and purchase products and services continues to evolve as new technologies and interfaces proliferate, and the implications for brands
are profound. The role and empowerment of
customers are also transforming, and there
is nothing riskier than choosing to operate as
though nothing has changed.
For the Wharton Future of Advertising
Programs (WFoA) Advertising 2020 project,
over 200 thought leaders from around the world
and across disciplines point the way to a new

paradigm of customer relationships, which is
expanded to include every point of interaction
between people and brands, no matter where,
when, or how the interaction occurs. The shift
requires not only a change in perspective but
also a transformation that has implications at
every level throughout an organisation.
A New Mental Model for Customer
Relationship Management
Fundamental to this transformation is the
mindset that consumers are actually people.
They also known as you, me, all of us deserve
and demand respect. We are empowered to act
when brands and their messages cross the line,
DVWKHHUFHGHEDWHVDERXWDGEORFNLQJGHPRQstrate. This shift in the balance of power has
many brands feeling disoriented and uncertain.
Fortunately, the WFoA has developed a model
of new mindsets and approaches based on the
insights and contributions to the Advertising
2020 project and termed the All Touchpoint
Value Creation Model (ATVC). The model provides guidelines for building two-way and mutuDOO\EHQHFLDOFXVWRPHUUHODWLRQVKLSV
Challenging the mental model of CRM, or
customer relationship management, is a key
part of this transformation. For the future,
CRM ought to become CMR, or customer
managed relationships. CRM is used primarily to
How people and

businesses encounter,
experience, and
purchase products
and services continues
to evolve as new
technologies and
interfaces proliferate,
and the implications for
brands are profound.
59
Marketing
WKH$79&PRGHOLVFHQWUHGDURXQGFUHDWLQJPXWXDOO\EHQHcial relationships among the brand steward network, people,

and culture, society, and the world. When business objectives
are aligned with the objectives of each of these parties, more
positive multi-win outcomes for both short and long-term
impact are more achievable.
The second element of the model is a brand purpose that
LV GHQHG DQG VXSSRUWHG E\ WKH HQWLUH RUJDQLVDWLRQ FRPbining analytical, operational, creative, and design brilliance.
A compelling, unifying brand purpose that resonates with
people on a deeper level than sales serves as a north star
for both external and internal brand perception, which are
equally important for authentic and sustainable brand building. Also, research shows that purpose-driven companies
outperform their peers with better client retention, better
margins, stronger loyalty, and higher valuations.1
Third, the brand purpose is orchestrated across all touchThe All Touchpoint Value Creation Model
points every point of interaction between people and a
The ATVC model captures the key elements of this desired brand, such as product design, package design, and customer
future of multi-win outcomes and is summarised as:
service. This requires a wholesale change in mindset across
The ongoing, synergistic orchestration of All Touchpoint Value and throughout the organisation, including bridging some
creation among an enterprise, the people in its network, the people of the most persistent internal and external silos.
it seeks to reach and serve, and the societies and cultures in which it
Fourth, each touchpoint is designed for both content and
H[LVWVDQGKDVUHVSRQVLELOLW\
context following the R.A.V.E.S. and M.A.D.E.S guidelines,
7KHUVWDQGIXQGDPHQWDOHOHPHQWRI WKH$79&PRGHO described in detail below. These guidelines take into account
is aligned objectives among the key players. This is probably and take advantage of the dramatic changes in our social
the most essential shift necessary for the future of custom- and technological environments, while being grounded in
er relationships. Rather than thinking about consumers, a deeper understanding and appreciation of our hearts and
which implies a one-sided and limited conception of people, minds. (See Figure 1 below)
collect and analyse data about customers so the company
can design messages to reach and manage them. CMR, on
the other hand, empowers people to manage their own relationships with the brand and its competitors. This approach
has far-reaching implications for how a brand encounters,
interacts with, and develops relationships with people.
When the customer manages the relationship it becomes
tailored to the distinctive nature of individuals and relies on
their choice: whether to have a relationship with a brand and
to what extent. Think for example of SABRE, a technology
platform developed by American Airlines in the 1950s that
empowered travel agents to access information from every
airline, not just American. The platform, an effective tool
that solved a genuine need, eventually became more valuable than the airline itself and is the foundation for many of
todays travel sites, such as Travelocity.
Figure 1. The All Touchpoint Value Creation Model
ALIGNED
OBJECTIVES
People
Culture,
Society,
& the
World
Brand
Steward
Network
COMPELLING
BRAND PURPOSE
Analytical
Brilliance
Creative
Brilliance
Social
Networks
Operational
Brilliance
Design
Brilliance
ALL TOUCHPOINT
ORCHESTRATION
Employees
Customer
Service
Media
Website &
Apps
Experience
Public
Relations
Sales
Force
Packaging
Design
People
Games
Word of
Mouth
Messaging
Other
TOUCHPOINT
VALUE CREATION
Maximised Substance
R.A.V.E.S.
Store
Design
Payment
Internet of
Things
60
Product
Design
R elevant & Respectful

A ctionable
V aluable & Value-Generating
E xceptional Experience
S hareworthy Stories
+
Maximised Content
M.A.D.E.S
M ultisensory
A udience
D elivery Mechanism
E nvironment
S ynergy
Below we explore how successful brands are rethinking

WKH VLJQLFDQFH QDWXUH DQG VFRSH RI FXVWRPHU UHODWLRQships, using the All Touchpoint Value Creation model as
DJXLGH7KHUVWVWHSWRZDUGVLPSOHPHQWLQJWKHSURSRVHG
changes is to challenge mental models. Of course not all
current mental models are wrong nor need to be changed,
but all should be challenged to ensure that the mindsets we
have are by choice and based on new and future realities. As
Albert Einstein famously asserted, Without changing our
patterns of thought, we will not be able to solve the problems we created with our current patterns of thought.
Next, after implementing the key elements of the model,
it is essential to adopt a culture of adaptive experimentation to demonstrate the impact of the brands initiatives,
learn how to be most effective, and ignite creativity and
risk-taking.
1. Aligned Objectives for Win-Win-Win Outcomes
For brands looking to generate a network of customers,
dedicated employees, and supporters, what we are calling
brand stewards, the following qualities are required: a
clear and consistent purpose in the world and in peoples
lives; authenticity and authority; trust and transparency.
A clear and consistent purpose is essential to attract and
engage talented employees and collaborators as well as customers. When a brand acts on an authentic purpose, it naturally generates trust, which is more important than ever as
people become increasingly skeptical and distrustful of suSHUFLDO DGYHUWLVLQJ )LQDOO\ WUDQVSDUHQF\ LV D JLYHQ WRGD\
whether desired or not, so it might as well be part of the
business plan.
Patagonia provides a powerful example of how brands
with purpose and aligned objectives create multi-win scenarios. The company launched its Dont Buy This Jacket
campaign in 2011, encouraging customers to reuse and
recycle their Patagonia gear rather than buying new products. The ideals of durability, conservation, eco-friendliness, and respect are key to the brands purpose. After
nine months, Patagonia had a one-third increase in sales
and opened 14 new stores;2 a perfect example of multiwin outcomes for the entire brand steward network. More
recently REI initiated a similar strategy in 2015 with their
#OptOutside campaign, announcing that all stores would
be closed on the busiest shopping day of the year and encouraging people to spend time outdoors instead. As this
effort is in line with their core company values, it resonates
rather than coming across as a gimmick. They earned a 26
SHUFHQWKLNHLQRQOLQHWUDIFDQGZRQVHYHUDOPHGLDDZDUGV
including the Titanium Grand Prix at Cannes.3
Without changing our

patterns of thought, we will not be
able to solve the problems we created
with our current patterns of thought.
-Albert Einstein
2. Converging Analytic, Creative, Design and Operational
Brilliance to Bring a Compelling, Unifying Brand Purpose
to Life
As discussed above, a unifying purpose is essential for establishing the role of brands in peoples lives and in the world.
In order to identify and bring this purpose to life over time,
all functions of the organisation must work together, recognising that creative ideas can come from everywhere
from brand managers, technologists, creatives, or anyone in
the organisation.
Many brands today provide successful examples of analysts, creatives, designers, and operational experts working
hand in glove to design and unleash exceptional experiences in support of a compelling brand purpose.
T h e
brand purpose of SAP, for example empowering their
customers to improve the economy, the environment, and
society through technology is integral to their whole business model. The technologies and platforms developed
by SAP are used around the world in creative initiatives to
tackle pressing environmental and societal problems such as
RRGLQJLQ%XHQRV$LUHVLPSURYLQJHQHUJ\HIFLHQF\LQWKH
Netherlands, and personalising cancer care.
3. Orchestrating Value Creation across All Touchpoints
The increasingly sophisticated and nuanced ways to reach and
interact with customers requires that brands move past the
severe limitations of the media mix approach and consider creating platforms for two-way value creation. Connected
transportation, homes, appliances, health, pets, gardens, education, waste, clothes, leisure...all are potential value creation
touchpoints, and importantly, all are platforms for meaningful interaction, not one-way messaging.
A great example of a brand doing all touchpoint orchestration well is Bonobos, the mens clothing company
launched in 2007 as an exclusively online company. They
have become renowned for their intense dedication to customer service, which extends throughout their customer
61
Marketing
THE KEY ELEMENTS OF

ALL TOUCHPOINT VALUE
CREATION MODEL
1
Aligned Objectives
2
Compelling
Brand Purpose
3
All Touchpoint
Orchestration
4
Touchpoint
Value Creation
62
service, store design, shopping experience, sales

policies, packaging, social media, and organisational culture. In addition to pioneering exceptional e-commerce, in fall 2011 they launched
brick-and-mortar stores called Guideshops that
HQDEOH FXVWRPHUV WR UHTXHVW WWLQJ DSSRLQWments online to try out products with personalised service. In 2015, Bonobos hired a Chief
3HRSOH 2IFHU WR PRYH WKH HPSKDVLV RI WKH +5
UROH IURP EHQHWV WR FXOWXUH DQG SHRSOH
The depth and breadth of Bonobos dedication
to its customers as well as its employees has bred
impressive success.
4. Touchpoint Value Creation Guidelines:
Customisable Content and Maximised Context
Brands need to earn peoples attention, engagement, and ideally their enthusiasm in order to
acquire and retain customers. If you offer something that people want, you dont have to interrupt them or force or bribe them to pay attention. Think substance instead of content.
To make this happen, every touchpoint
between people and brands could and should
be R.A.V.E.S.:
Relevant and Respectful: Customise for the
individual without overstepping the line
of privacy.
Actionable: Enable people to take frictionless
action; discuss, interact, share, learn more, cocreate, purchase, etc.
Valuable and Value-generating: Provide emotional value, as well as cognitive and economLF EHQHW IRU WKH DXGLHQFH ZKLOH UHWXUQLQJ
long term value for the brand.
Exceptional Experience: Make it memorable.
Shareworthy Story: Tap into our deep and
universal human emotions.
In addition to content, weve also distilled
six design dimensions that expand the consideration of context for the future. We suggest that
the context be M.A.D.E. to the power of S,
where synergy with other touchpoints can have
exponential impact:
Multisensory Aesthetic: Leverage the power
RI HDFK RI WKH YH VHQVHV
Audience Frame of Mind: Understand and
tailor to the emotional state, frame of mind,
mood, and mode of the audience.
Delivery Mechanism, Interface, and

Platform/Medium: Consider the distinctive
characteristics and properties of the particular interface.
Environment and Location: Where are they,
whats taking place, and whats the tone and
manner in the surrounding environment?
Synergy: One context can become exponentially more valuable for all by leveraging synergies with and among other touchpoints.
I Build America, a 2016 initiative by HCSS,
a construction operations software company, illustrates the compelling impact of R.A.V.E.S.
and M.A.D.E.S. According to HCSSs vice president of marketing Dan Briscoe, the company
made the explicit decision to put the complete
focus of their marketing efforts on their customers stories as indicated by the name of
the initiative instead of tooting their own
horn as a way to generate sales. HCSS launched
#IBuildAmerica on social media to engage
people who were passionate about construction,
building up a portfolio of user-generated videos
and stories of proud and dedicated construction
workers and impressive construction feats featuring the IBA branded clothing and stickers.
,QWKHUVWHLJKWPRQWKVRI WKHFDPSDLJQZKLFK
again, was focused completely on customers and
not at all on their product, HCSS saw a 53.6%
increase in annualised revenue.4 The inspiring
content with R.A.V.E.S. and M.A.D.E.S features
demonstrated that HCSS and its employees understood and cared about construction workers
and the state of the industry; their aligned objectives generated immense support and enthusiasm as well as increased sales.
Initiate Innovation and Use Adaptive
Experimentation
After closely examining the mental models that
inform a brands relationship to customers and
considering adopting the new approaches suggested by the ATVC model, the next important
step is to start experimenting with the different
aspects of the model. Some experiments might
include new performance measures such as customer satisfaction, or new platforms to engage
with people in unexpected ways.
Adaptive experimentation enables actionable
learning from new approaches, which is more

important than ever today, while providing a
competitive advantage. It is the best way to determine the causal link between your actions and
business outcomes, leading to better decisions
for both the short and long term. Perhaps most
importantly, adaptive experimentation leads to
innovative organisations. As everyone knows
that not all experiments succeed, a culture of
experimentation gives people permission to
try truly innovative initiatives without fearing
failure. Transform long-held ideas about risk
and failure into practices that embrace creativity.
Concluding Thoughts
The All Touchpoint Value Creation Model aims
to make sense of our roles, challenges, and opportunities during this era of profound transformation. Our research points the way to understanding how all interactions online, real-time,
in a store, on the street, in groups or in the
privacy of our homes can be orchestrated in
D ZD\ WKDW LV EHQHFLDO QRW MXVW WR D FRPSDQ\
or brand but to the many parties involved and
impacted. Challenging mental models, adopting
new standards for content and context, and experimenting to activate innovation are concrete
steps that will help brands meet peoples needs
with multi-win outcomes.
([FHUSWHG DQG DGDSWHG ZLWK SHUPLVVLRQ IURP %H\RQG
Advertising: Creating Value Through All Customer
Touchpoints, by Yoram (Jerry) Wind, Catharine
Findiesen Hays, and the Wharton Future of Advertising
Innovation Network. New Jersey: John Wiley & Sons,
2016. Copyright 2016 by Yoram Wind and Catharine
Findiesen Hays. All rights reserved.
About the Authors
Yoram (Jerry) Wind is the Lauder
Professor and Professor of
Marketing at the Wharton School
and the founding Director of the
Wharton SEI Center for Advanced
Studies in Management, the Wharton Fellows
program, and co-founder of the Wharton
Future of Advertising Program. He led the development of the Wharton globalization strategy, the creation of the Wharton Executive
Adaptive experimentation enables actionable

learning from new approaches, which is more
important than ever today, while providing a
competitive advantage. It is the best way to
determine the causal link between your actions
and business outcomes, leading to better
decisions for both the short and long term.
MBA program, as well as the reinvention of its
curriculum. Wind has won the four major marketing awards and was selected as one of the
Legends of Marketing with Sage publishing
eight volumes of his work. He is an active conVXOWDQW DQG DGYLVRU IRU )RUWXQH UPV
and start-ups.
Catharine Findiesen Hays is the
founding Executive Director of
the Wharton Future of Advertising
Program, a leading global research
collaboration bridging academia
and practitioners. Previously, she led pioneering marketing, strategy, and sales teams during
a 15-year career at AT&T. She is co-author of
Beyond Advertising: Creating Value through All
Customer Touchpoints (Wiley) and is the Wharton
Marketing Departments co-host for the
Marketing Matters radio show on Business
Radio Powered by the Wharton School on
Sirius XM 111.
Alexa de los Reyes is the Editorial
Manager of the Wharton Future of
Advertising Program. She has
worked for the program since 2010,
providing editorial support for the
Programs diverse print and online publications.
References
1. Pursche, Oliver. Investor Tip: Look for Purpose-Driven
Companies. Forbes.com, July 6, 2016.
2. Stock, Kyle. Patagonias Buy Less Plea Spurs More Buying.
Bloomberg.com, August 28, 2013.
3. Beer, Jeff. How Values and Purpose Made REIs OptOutside
a Big Winner at Cannes. FastCoCreate.com, June 27, 2016.
4. Eckerle, Courtney. Make Your Customer Your Hero: How
HCSS saw a 54% increase in annualized revenue without
mentioning the product. Marketingsherpa.com, September
15, 2016.
63
British Columbia, Canada

District of Kitimat I Economic Development
Rose Klukas I 250.632.8921 I rklukas@kitimat.ca I www.kitimat.ca
Branding
And They Lived Happily Ever After

The Value of Storytelling
in Consumer-Brand Interaction
BY KLAUS-PETER WIEDMANN, EVMORFIA KARAMPOURNIOTI AND NADINE HENNIGS
Storytelling has become an essential element of the

business environment to deliver information, manage
FRQLFWV VXSSRUW WHDP EXLOGLQJ SURFHVVHV DQG
create emotional bonds with a companys stakeholders. This article will explain how you can effectively adapt the storytelling approach from a consumer
brand perception.
The best brands are built on great stories. Ian Rowden, Chief
0DUNHWLQJ 2IFHU 9LUJLQ *URXS
Introduction
Throughout the ages, all aspects of life in societies and culWXUHV KDYH EHHQ LQXHQFHG E\ VWRULHV WKDW IRUP KXPDQ YDOXHV
and dreams. As the oldest and most effective form of passing
knowledge between generations, the art of storytelling represents the way people perceive and interpret past, present and
future events. Instead of facts, stories are easy to remember and
live on telling and re-telling. In our everyday life, the success of
storytelling is widely apparent and becomes visible in music and
books, movies and media, architecture, paintings and religion.
Besides, storytelling has become an essential element of the
EXVLQHVV HQYLURQPHQW WR GHOLYHU LQIRUPDWLRQ PDQDJH FRQLFWV
support team building processes, and create emotional bonds
with a companys stakeholders. Particularly, in a brand management context, storytelling is supposed to be a valuable instrument to positively affect consumer brand perception and related
behaviour. The aim of this article is to provide insights in the effective adaption of a storytelling approach against the backdrop
of value creation and consumer brand perception. Based on the
main dimensions of storytelling such as the plot, the story archiWHFWXUHVSHFLFWXUQLQJSRLQWVWKHH[SHULHQFHRI DFRQLFWWKH
interaction of characters, the text style, the narrative form and
the key lesson, it will be shown how a credible story has to be arranged in relation to the core elements of a brand.
The History of Storytelling
The historical origins of storytelling cannot be traced to a particular time in the past, nevertheless, it can be stated that the desire
to hear and tell stories has existed even before humans had the
capacity to speech: Cave paintings are the earliest form of storytelling in a time long before languages and writing existed.
Stories about past events and warnings of dangers and risks were
painted on cave or rock walls to entertain and educate children.
Over the times, the development of languages led to the oral
tradition of storytelling that spread stories between groups of
people through word-of-mouth at e.g., tribal events and campUHV3DVVLQJIURPJHQHUDWLRQWRJHQHUDWLRQVWRULHVLQWHUPVRI
myths, legends, fairytales, paintings or songs about heroic adventures, experiences, dangers, rituals and natural events were told
and retold. Through stories, humans tried to explain the inexSOLFDEOHDQGQGDUHDVRQIRULQFLGHQWVLQWKHLUSDVWDQGSUHVHQW
world. As stated above, before people had the ability to read and
write, oral stories represented not only entertainment but also
As the oldest and most effective form of passing

knowledge between generations, the art of
storytelling represents the way people perceive
and interpret past, present and future events.
65
Branding
Telling tales as
a trump card in
brand building
and brand
communication
in general,
addresses the
emotional world
of a consumer and
aims to construct
a particular
mental image/
representation of
a brand
common knowledge and education: Stories transported wisdom and beliefs as part of a cultural heritage and preserved historical record. Reasoning
the importance of storytelling, the ability to effectively tell stories was a valuable skill and vest power
DQG VRFLDO LQXHQFH 6WRU\WHOOHUV KDG D NH\ UROHLQ
their community and kept important knowledge
alive by inspiring their audience.
Even in our modern times, the power of storytelling is an important part of everyday life and
business contexts: Stories transport content and
messages better than sheer facts. Referring to
the connection between consumers and brands,
a creative, authentic story that is told and shared
allows the creation of an individual bond that represents a key success factor in a competitive environment. Particularly in marketing and management, storytelling has become increasingly
of interest to create desirable images and foster
consumer-brand-interaction.
The Secret to Storytelling Engaging Hearts
and Heads of Your Audience
Telling tales as a trump card in brand building
and brand communication in general, addresses the emotional world of a consumer and aims
to construct a particular mental image/representation of a brand (Glvez, 2016). Despite the numerous advantages and the increasing popularity
Figure 1. Conceptual Framework

The Storyteller's Perspective
Story
Characters/
Archetypes
Brand Value
Perception
Course of
Action
Transportation/Immersion
Narrative
Presence
Brand-related
Behavior
Brand
Perception
Attentional
Focus
!"+1& 1&,+
Cognitive
!"+1& 1&,+
Emotional
!"+1& 1&,+
The Story-Receiver's Perspective
66
Mental
Imagery
of storytelling in business and research areas, little

is known about the fundamental elements and underlying mechanisms of successful stories. Hence,
creating and telling a persuasive, emotional, experienceable and credible story which creates symSDWK\ FORVHQHVV DQG LGHQWLFDWLRQ EHWZHHQ
consumers and brands, necessitates a holistic
framework that considers both perspectives the
storytellers and story-receivers as appears in Figure
1 (see Figure 1 below (van Laer et al. 2014).
How Storytellers Rule the World
Referring to the storyteller, creating substantive
story elements and building a harmonised narrative is one of the major hurdles. Story characters
FDQLQLWLDOO\EHLGHQWLHGDVHVVHQWLDOFRPSRQHQWV
since every story needs a protagonist possibly
even a hero who is a focal point of a story and
with which the audience can identify. Usually, the
protagonist goes through a process of transformation within a story. This process is commonly accompanied by an opponent (antagonist) representing and supporting the contrary standpoint
of the protagonist. Nike for example, sees an inner
hero in everyone, and frames its advertisements
around challenging oneself to take action on lifes
most impossible and unimaginable challenges. The
endless human potential, as an important part of
the protagonists characteristics, is continuously conquering its antagonist that is represented by
ones weaker self. Just Do It is no longer a trivial
motto or phrase, but a movement symbolised by a
dynamic attitude toward life.
Beyond the characters, that can be embodied
by different archetypes (e.g., hero, rebel, jester etc.),
the course of action constitutes a key element
of every successful and compelling brand story.
Segueing from an initial situation to a rising action
and turning point of the protagonists experience
(e.g., the ugly duckling becomes a beautiful swan),
RFFXUULQJFRQLFWVXQNQRWGXULQJWKHIDOOLQJDFWLRQ
DQG EULQJ WKH VWRU\ WR D QDO UHVROXWLRQ ZLWK DQ
(hopefully) overall satisfaction at the end. Structural
story elements can be motives, goals, problems,
FRQLFWV DQG WKHLU VROXWLRQV DQG WUDQVIRUPDWLRQV
that increase the emotional involvement (Escalas et
al. 2014), depending upon which missions, visions
and values brands need to effectively convey to
the audience.
Being Hooked by a Story The StoryReceivers Perspective

Referring to the consumption of the story and
hence to the perspective of the story-receiver,
transformative effects can occur through an immersive transportation into narratives. A narrative is not simply read or seen, but is literally experienced through the immersion into a story,
leading to long term impacts on consumers perFHSWLRQDQGYDOXDEOHEHQHWVIRUEUDQGVYDQ/DHU
et al. 2014). Narrative transportation occurs whenHYHU WKH FRQVXPHU H[SHULHQFHV D IHHOLQJ RI HQWHULQJ
the world evoked by the narrative (van Laer et al.
2014, p. 798) and acts as a mediator for attitudes,
brand choice and behaviour (Escalas et al. 2004).
Simply said, narrative transportation combines affective and cognitive processes, by which recipients
get mentally immersed into the world of the story
or take a journey into the story-world (Escalas et
al. 2004; Green & Brock 2000). Throughout the
journey into the brand cosmos, positive feelings
are caused that prevent critical scrutiny of the
brand (Escalas 2004). Due to transformative experiences through narrative transportation, compelling stories have long term impacts on consumers perception and behaviour. The brand Red Bull
for example, has made its energy drink known by
stories related to extreme sports. Through its effective storytelling, consumers get immersed into a
world full of adventures in which critical thoughts
such as the high sugar content (which is in contrast
to the sporty image) can be suppressed.
)URPDVFLHQWLFSRLQWRI YLHZQXPHURXVH[planations for the phenomenon of transportation exist. Most of the research emphasises on the
feeling and the experience of being present in the
described story-world (Escalas et al. 2004; Lessiter
et al. 2001; Busselle & Bilandzic 2009; De Graaf
et al. 2012). The audience gets immersed into the
whole story environment and responds cognitively as well as emotionally to the perceived events
(Sestir & Green 2010). Often referred to as narrative presence, this process is accompanied by the
entry into time and space of the story contingent
upon a loss of reality or ones own self-perception
(Hall & Bracken 2015).
Consumers attentional focus constitutes a
central prerequisite for narrative presence and is
closely intertwined with narrative transportation.
By seeing in the eye, hearing in the head and

imagining the feel of the story characters, consumers
experience themselves as acting and integral story
components, hence, occurring events, motives
and attitudes are interpreted from the characters
perspective (Busselle & Bilandzic 2009), which is created
according to the brands values, beliefs and vision.
Research on transportation into narrative worlds
determine that narrative transportation is compaUDEOHWRWKHH[SHULHQFHRI RZ&VLNV]HQWPLKDO\L
1990; Green 2004), which is conceived as a complete
focus on an activity accompanied by a loss of conscious
awareness of oneself and ones surroundings (Busselle
& Bilandzic 2009, p. 324). As a result, fully concentrated story-receiver with a shifted reality perception, relocate their attention and awareness from
the immediate physical and social space toward
the world of the story environment (Busselle &
Bilandzic 2009). Hence, the audiences [] attention is completely absorbed by the activity [and individuals] stop being aware of themselves as separate from
the actions they are performing (Csikszentmihalyi,
1990, p. 53).
Seeing in the Characters Eye Identification
Between Audience and Characters
While being transported, immersion processes
allow consumers to identify with story characters
and brands and increase the perceived plausibility of narratives. Throughout the absorption into a
characters emotional state and personality (Cohen,
2001; Slater & Rouner, 2002) the audience experiences an imaginative process through which an audience
member assumes the identity, goals, and perspective of a
character (Cohen 2001, p. 261). Emotional and
cognitive states and relationships to the characters
occur, whereby feelings, emotions, memories and
thoughts can be easily recognised and understood
(Cohen 2001; Oatley 1999; Green et al. 2004). In
DGYDQFHGFRQGLWLRQVRI LGHQWLFDWLRQGHQRWHGDV
mental imagery, consumers ideally get entirely absorbed and thus cognitively and emotionally
became a part of the story world. By seeing in the
eye, hearing in the head and imagining the feel
of the story characters, consumers experience
67
Branding
It is a matter of telling comprehensible

and credible stories that immerse
consumers into the brands world of
values, and specific mission and vision.
themselves as acting and integral story components, hence, occurring events, motives and attitudes are interpreted from the
characters perspective (Busselle & Bilandzic 2009), which is
created according to the brands values, beliefs and vision.
If brands successfully manage the implementation of the
above mentioned elements, there is no obstacle to a credible
story, which transfers the brand values to its audience and effectively impacts brand perception and brand-related behaviour. In
a broader sense, audience members become part of a community within the story and meet their social needs. For this purpose,
brands increasingly take advantage of the interactive nature
of social media platforms and enable consumer to co-create
and retell stories. Social media offers a lot of stages for storytelling and enables brands to mingle with people and close virtual
friends. TOMS shoes for example, asked its audience to go barefoot for one day and to share their story and barefoot experience
via social media platforms. Since shoes are part of a journey on
every single day TOMS makes use of this campaign to demonVWUDWHKRZGLIFXOWDVKRHOHVVOLIHFRXOGEH7ZRPDMRUJRDOVRI
this campaign were to raise awareness about worse living conditions of people in poorer countries, and to charge the brand and
its products with social and philanthropic values. Consumers
hence, who buy a pair of shoes and simultaneously donate a pair
to people in poorer countries, get the feeling of doing something
good with their purchase decision and perceive themselves as a
rescuing hero within the brands story world.
Conclusion and Outlook: Tell, Don't Sell
To sum up, successful storytelling goes far beyond incoherent stories, metaphors and rash social media posts. Rather, it
is a matter of telling comprehensible and credible stories that
immerse consumers into the brands world of values, and speFLFPLVVLRQDQGYLVLRQ%UDQGVDQGFRPSDQLHVDUHIXOORI SUHcious stories that need to be told. Therefore, businesses necessitate identifying the core elements and emotional heart of their
individual story as a basis of their entire brand communication.
Hence, as a part of the entire brand community, consumers are
able and willing to retell compelling and immersive stories and
to convincingly spread the message throughout the whole world.
After nourishment, shelter and companionship, stories are the
thing we need most in the world. Philip Pullman
68
About the Authors

Prof. Dr. Klaus-Peter Wiedmann is a Full
Chaired Professor of Marketing and Management
and the Director of the Institute of Marketing and
Management, Leibniz University of Hannover,
Germany. He has many years of experience as a
management consultant and top management coach, and takes
a leading position in different business organisations as well as
public private partnerships. Main subjects of research and
teaching as well as consulting are: Strategic Marketing, Brand
and Reputation Management, Corporate Identity, International
Marketing and Consumer Behaviour.
06F(YPRUD.DUDPSRXUQLRWLLVD6FLHQWLF
Research Assistant at the Institute of Marketing
and Management, Leibniz University of
Hannover, Germany. Her main subjects of
research and teaching as well as management
consulting are: International Marketing, Marketing Strategy,
Brand Management and Consumer Behaviour
Dr. Nadine Hennigs is an Assistant Professor at
the Institute of Marketing and Management,
Leibniz University of Hannover, Germany. Her
main subjects of research and teaching as well as
management consulting are: International
Marketing, Marketing Strategy, Consumer Behaviour and
Luxury Brands.
References
Busselle, R., Bilandzic, H. 2009. Measuring Narrative Engagement; Media Psychology, Vol.
12, No. 4, pp. 321-347.
Csikszentmihalyi, M. 1990. Flow: The psychology of optimal experience, New York.
&RKHQ - 'HQLQJ ,GHQWLFDWLRQ $ 7KHRUHWLFDO /RRN DW WKH ,GHQWLFDWLRQ RI
Audiences With Media Characters; Mass Communication & Society, Vol. 4, No. 3, pp. 245-264.
'H*UDDI$+RHNHQ+6DQGHUV-%HHQWMHV-:-,GHQWLFDWLRQDVD0HFKDQLVP
of Narrative Persuasion; Communication Research, Vol. 39, No. 6, pp. 802-823.
Escalas, J.E. 2004. Imagine Yourself in the Product. Mental Simulation, Narrative
Transporation, and Persuasion, Journal of Advertising, Vol. 33, No. 2, pp. 3748.
Escalas, J.E., Moore, M.C., Britton, J.E. 2004. Fishing For Feelings? Hooking Viewers
Helps!; Journal of consumer psychology, Vol. 14, No. 1&2, pp. 105-114.
*iOYHV&0LQXWHQ6WRU\WHOOLQJ$XDJH2IIHQEDFK
Green, M.C., Brock, T.C., Kaufman, G.F. 2004. Understanding Media Enjoyment: The
Role of Transportation Into Narrative Worlds; Communication Theory, Vol. 14, No. 4, pp.
311-327.
Hall, A.E., Bracken, C.C 2015. I Really Liked That Movie. Testing the Relationship
Between Trait Empathy, Perceived Realism, and Movie Enjoyment; Journal of Media
Psychology, Vol. 23, No. 2, pp. 90-99.
Lessiter, J., Freeman, J., Keogh, E., Davidoff, J. 2001. A Cross-Media Presence
Questionnaire: The ITC-Sense of Presence Inventory; Presence, Vol. 10, No. 3, pp. 282-297.
2DWOH\.0HHWLQJVRI PLQGV'LDORJXHV\PSDWK\DQGLGHQWLFDWLRQLQUHDGLQJ
FWLRQRoetics, Vol. 26, No. 5-6, pp. 439-454.
6HVWLU0*UHHQ0&<RXDUHZKR\RXZDWFK,GHQWLFDWLRQDQGWUDQVSRUWDWLRQ
effects on temporary self-concept; 6RFLDO,QXHQFH, Vol. 5, No. 4, pp. 272-288.
Slater, M. D., & Rouner, D. 2002. Entertainmenteducation and elaboration likelihood:
Understanding the processing of narrative persuasion. Communication Theory, Vol. 12, No.
2, pp. 173-191.
Van Laer, T., De Ruyter, K., Visconti, L. M., & Wetzels, M. 2014. The extended
transportation-imagery model: A meta-analysis of the antecedents and consequences of
consumers narrative transportation. Journal of Consumer Research, Vol. 40, No. 5, pp. 797-817.
Governance
A Wake-Up-Call for
the Boards on Innovation
BY ALESSANDRO DI FIORE, JONAS VETTER AND JOACHIM VON HEIMBURG
long term companys survival and prosperity is

the very essence for which Boards and CEOs are
paid. In fact, in many countries, board members
can be made personally accountable by law if
WKH\QHJOLJHQWO\IDLOWRPDNHWKHEXVLQHVVWIRU
the future.
Why do they not deal with this challenge apf you were to ask your Board What are your propriately? Boards are mostly composed of
main priorities? chances are high that the re- highly respected, former and active CEOs or repsponse contains the terms strategy and in- UHVHQWDWLYHV RI LQYHVWRUV 7KH\ IRFXV RQ WKH novation. In other words, formulating a strate- nancial performance of their companies. Thats
gy and setting a plan in motion that ensures the like driving a car by looking into the rear mirror.
In addition, the agendas of Board meetings are
companys prosperity in the long term.
In fact, a recent study at Yale School of SDFNHGE\RSHUDWLRQDOLWHPVOLNHDSSURYDORI Management has found that the average life- nancial reports or risk management compliance
span of a S&P company dropped from 67 years items. Or the same agendas must cover pressing
in the 1920s to 15 years today. On average a S&P issues that need formal approval like the authorisacompany is now being replaced every two weeks, tion of investment decisions over a certain threshand an estimated 75 percent of the S&P 500 old. The topic of strategy is usually addressed
by the CEO in a presentation style, i.e. sharing
UPVZLOOEHUHSODFHGE\QHZUPVE\
Poking further, most Boards will also agree with the Board a super-executive summary of the
that in the face of rapid technology advance- companys strategic plan with a time lot conment and digitalisation, this is not only an strained by the other pressing agenda items.
This is a pity. Boards are packed with smart
R&D job, but increasingly means putting innovation at the centre of the overall company. and experienced people who could provide
Hence, today innovation is not limited to pro- quality input to the future of the company. It is
ducts, but includes business models. So it requires not only an opportunity, but a must do for the
cooperation and collaboration. Innovation should ERDUGPHPEHUVRI PDQ\FRXQWULHVGXHWRWKHLUduciary duty vs. shareholders.
be everybodys concern!
The business routine of today kills the focus
So far so good. Yet, we observe that Boards
frequently fail at spending enough quality time on of the management on the future. The risk of
the innovation strategy of the company. Given missing the next strategic and innovation S-curve
WKHLUGXFLDU\GXW\YVVKDUHKROGHUVHQVXULQJWKH is high and there are many emblematic cases and
Today, innovation is not limited to products,
but includes business models. Boards can
play a critical role in shaping a balanced ambidexterity, raising the company executives
strategic attention on the future prosperity of
the company.
Boards are packed

with smart and
experienced
people who could
provide quality
input to the future
of the company.
69
Governance
horror stories. For example, Nokias

former CEO Stephen Elop said We
didnt do anything wrong, but somehow,
we lost after Nokia was devastated
in a few years by Apples iPhone and
more in general by the new smartphone
S-curve. Elop, however, is wrong. Nokia
failed to foresee market trends and shifting user needs. Like in the computer industry earlier, the value creation moved
from hardware to software. Nokia was
good at designing and engineering physical devices. In fact, the company had
been working on touch screen phones
since the nineties. But they had nothing
WR JKW RII $QGURLG DQG L26 ZKLFK
opened a whole new world of apps and
utilities to Smartphone users.
Luckily, there are some exceptions
most of which at companies that have
been around for a long time. DSM for
instance a company which has been
constantly reinventing itself. DSM
stands for Royal Dutch State Mining.
Indeed, the company was founded in
1902 to mine coal in the Dutch province of Limburg. The last coal mine in
Limburg closed in 1973. How did they
survive and even prosper becoming a 8
billion turnover company? By reinventing its products range again and again
and adapting the organisation and business models accordingly. The red thread
for their journey was the carbon atom.
DSM started with mining carbon as coal,
then morphed into producing chemicals
from coal, then moved to petroleum as
a source for carbon atoms. At that time
coal mining became irrelevant for DSM.
In parallel they moved up the value chain
from basic materials to simple chemicals
to polymers and complex bio-chemicals.
Under constant pressure of

quarterly earnings, executives
tend to focus too much on
the day-to-day operations.
70
Today, they produce products for nutrition and health for humans and animals
like vitamins, and high performance materials for many industries (like Dyneema
WKH ZRUOGV VWURQJHVW EHU '60 UHLQvented itself multiple times in its history,
ensuring the companys prosperity in the
long term. So, it can be done as proven
by DSM but this seems more to be an
exception than the norm. Why?
Striking the right balance between
managing the current and developing
future businesses at the same time is one
of the biggest challenges for management. Under constant pressure of quarterly earnings, executives tend to focus
too much on the day-to-day operations.
Boards can play a critical role in
shaping a balanced ambidexterity,
raising the company executives strategic
attention on the future prosperity of the

company. Boards should not be killed
like executives by the routine of the
current business and the related pressing agenda items. They have the right
and the duty to act as constant stimulus to the CEO and management of
the company.
They should lead the discussion
instead of becoming passive recipients
of agendas proposed by management.
To guide the conversation, we have deVLJQHGDVHWRI YHVLPSOHTXHVWLRQVWR
ask management.
The five questions Boards should ask
to lead Innovation
1. Will our todays business exist
in 10-20 years from now? Can the
company be disrupted, as it happened
The Board should always have

a clear innovation roadmap
and portfolio strategy for
the long term, which can be
dynamically updated based
on external changes.
with digital photography which killed

Kodak? Are there fundamental shifts
expected in terms of value appropriation within the industry value chain, as
it happened with hardware and software players in the computer industry?
Are there new entrants and/or business
models at the horizon, as in the Taxi
business with Uber?
2. What is the companys innovation strategy to address above threats
and opportunities? To answer this
question, managers dont need to know
exactly what products the company will
launch in 10 years from now. However,
the Board should always have a clear innovation roadmap and portfolio strategy
for the long term, which can be dynamically updated based on external changes.
3. Where is the money? The nice
slides presented to the Board should

have investments, real dollars behind it,
which are included in the budget and
strategic plan of the company as clearly
LGHQWLDEOH LWHPV $VNLQJ IRU ULQJ
fencing can protect these long term investments by the inevitable cut frenzy
of the quarter when earnings are not
on target. Boards should also ask for
early reviews on how the money has
been spent.
4. Do existing culture and skills
support the future? Changing culture
is a multi-year journey. Boards should
develop their own view on the current
culture and people skills and if they can
sustain the future. If not, they should act
as stimulus to the CEO and management
to initiate a rejuvenation program of the
company. Keeping in mind that culture
and skills transformation of multi-billion

companies can take up to 10 years.
5. What is the progress? Boards
should ask regularly about progress,
measures and how we are doing vs. existing and new competitors to attain our
desired future. If there are gaps, which
are the plans to close them. Boards
should also ask for the lessons learned
and how management intends to use the
learning to revisit the innovation strategy
and roadmap.
$VNLQJ WKHVH YH TXHVWLRQV WR GULYH
companys management toward a more
balanced short vs. long term focus is
probably one the most valuable roles
that modern Boards can play.
7KLV LV WKHLU XOWLPDWH GXFLDU\ GXW\
mandate vs. shareholders. So, why
not? We just need a wake-up call to
get started.
About the Authors
Alessandro Di Fiore is
the Founder and CEO at
ECSI (European Centre
for Strategic Innovation)
and ECSI Consulting based London.
Jonas Vetter is Senior
Consultant
at
ECSI
Consulting.
Dr.
Joachim
von
Heimburg is an independent Innovation Architect
helping companies to
improve their innovation processes.
He is the founder of the Open
Innovation Alliance (OPINA).
71
Business Model
to change their
business model?
BY TINA SAEBI, LASSE LIEN AND NICOLAI FOSS
%XVLQHVV PRGHOV GHQH KRZ FRPSDQLHV FUHDWH GHOLYHU

and capture value. But business models are not static
they need to be adapted to changing conditions. This
article discusses what causes managers to change their
existing business models.
The Idea in Brief
%XVLQHVV PRGHOV GHQH KRZ FRPSDQLHV FUHDWH GHOLYHU DQG
capture value. They specify the companys value proposition,
target customers, and mechanisms for value delivery and value
capture (see Figure 1 below).
But business models are not static they need to be adapted
FIGURE 1. The four components of a business model
72
Target Segment
Value Proposition
Value Capture
Value Delivery
to changing conditions. So what causes managers to change

their existing business models? Are they more likely to adapt
business models under conditions of perceived threat or under
perceived opportunity? In other words, is the carrot or the stick
more likely to induce business model change and adaptation?
8VLQJWKHQDQFLDOFULVLVDVDQDWXUDOH[SHULPHQWWKDWVLPXOWDQHously created both threats and opportunities, we attempted to
QGRXWPRUHDERXWWKLVTXHVWLRQ
A Bit of Theory: Two Opposing Views
How do you react under conditions of threat? Imagine that you
are confronted with numbers showing declining margins or a
diminishing customer base. Does this spell stick to what you
know best, now is not the time to experiment (risk-averse) or
does it spell we surely must try something new, the old ways
are no longer working (risk-seeking)?
What about an unexpected growth of your customer base,
or surprisingly high margins in some part of your business?
Would such surprises indicate that you may need to change
something to fully capitalise on the opportunity (risk-seeking),
or does it tell you that the status-quo is working really well and
should not be tampered with (risk averse?)
Proponents of threat-rigidity theory predict that managers are
more likely to be risk-averse under conditions of perceived
threat, but to engage in more risk-taking behaviour when facing
an opportunity. In contrast, proponents of prospect theory predict
the exact opposite: managers are more risk seeking under conditions of threat than under conditions of opportunity.
:HZDQWHGWRJXUHRXWZKLFKRI WKHVHRSSRVLQJSUHGLFtions hold true when it comes to business model adaptation.
Changing an existing business model is in most cases costly,
with an uncertain outcome. Therefore, it seems reasonable to
consider business model adaptation a risky undertaking. Figure
2 (see Figure 2 next page) summarises our hypotheses.
Method
In 2010, Professor Lasse Lien and Eirik Knudsen
from the Norwegian School of Economics collected data on a representative sample of 1195
1RUZHJLDQ FRPSDQLHV H[SHULHQFHV GXULQJ WKH nancial crisis. Using CEOs as respondents, data
ZDV FROOHFWHG RQ KRZ UPV ZHUH DIIHFWHG E\ WKH
UHFHVVLRQ LQ WKH ZDNH RI WKH QDQFLDO FULVLV DQG
ZKLFK PHDVXUHV WKH UPV XQGHUWRRN WR DGDSW WKHLU
business model in response to this. In our sample
WKHUH ZHUH UPV WKDW ZHUH ERWK SRVLWLYHO\ DQG
QHJDWLYHO\ DIIHFWHG E\ WKH UHFHVVLRQ :H GHQHG
threat as the perception of being negatively affected, and opportunity as being positively affected. For
a more detailed account of our method, data collection and statistical analysis, please see our full
journal article published in Long Range Planning.
Managers are
more willing
to take on the
risk of adapting
business models
when faced by
a significant
threat, and less
willing to do so
when faced by
an opportunity.
$UH UPV HTXDOO\ VXEMHFW WR WKLV SDWWHUQ" 7KH

short answer is no, among other things because
VRPH UPV DUH PRUH XVHG WR PDNLQJ PRGLFDtions to their business models than others, and
VXFK UPV EHFRPH EHWWHU HTXLSSHG WR GR VR
6SHFLFDOO\ ZH QG WKDW WKRVH UPV WKDW KDYH
VWUDWHJLF RULHQWDWLRQV WKDW HPSKDVLVH H[LELOLty and seizing opportunities are more likely to
make business model adaptations for any level
RI UHFHVVLRQ LPSDFW WKDQ UPV PRUH RULHQWHG
WRZDUGV FRVW DQG SURFHVV HIFLHQFLHV 7KLV HIIHFW
DOVR KROGV ZKHWKHU WKH UPV DUH IDFHG ZLWK HLWKHU
a threat or an opportunity. So in a sense practice
makes perfect, also in the context of business
model adaptations.
For the full paper, please check What drives business
model adaptation? The impact of opportunities, threats
and strategic orientation by Tina Saebi, Lasse Lien and
Nicolai Foss. Published in: Long Range Planning, 2016.
Findings
2XU UHVHDUFK QGLQJV VKRZ WKDW PDQDJHUV DUH
more likely to adapt their business model under
conditions of perceived threats than under conditions of perceived opportunity. To be more
precise, we found that the more severe the exWHUQDO WKUHDW WKH PRUH OLNHO\ WKDW WKH UP ZRXOG
change their business model. While an increase
in the perceived opportunities only increased the
OLNHOLKRRG RI VWDWXV TXR 6R RXU PDLQ QGLQJ LV
in line with prospect theory. Managers are more
willing to take on the risk of adapting business
PRGHOV ZKHQ IDFHG E\ D VLJQLFDQW WKUHDW DQG OHVV
willing to do so when faced by an opportunity.
FIGURE 2. Two contradicting views
Threatrigidity
theory
Managers are risk

averse under threat
& risk seeking
under opportunity
No to BMA under
threat; Yes to BMA
under opportunity
Prospect
theory
Managers are risk

seeking under threat
& risk averse
under opportunity
Yes to BMA under

threat, No to BMA
under opportunity
About the Authors

Tina Saebi is Associate Professor
in International Strategy at the
Norwegian School of Economics
(NHH) and research director for
the theme Business Model Innovation at
the Center for Service Innovation (CSI). Her research focusses on business model design for entrepreneurs as well as the drivers, barriers and facilitators of business model innovation in
established, international companies.
Lasse B. Lien is Professor of
Strategy at the Norwegian School
of Economics (NHH) and director
of the Center for Strategy,
Organization and Performance (S
T O P). His research focuses on strategy and
business cycles, strategic human capital, and the
RZQHUVKLS DQG ERXQGDULHV RI WKH UP
Nicolai J. Foss is Professor of
Organization Theory and Human
Resource Management at the
Bocconi University, Milano. A proOLFFRQWULEXWRUWRWKHPDQDJHPHQW
research literature, his research focuses on the
performance effects of organisational design
and HRM, and the drivers and consequences of
UPOHYHOHQWUHSUHQHXUVKLS
73
Innovation
Reverse Innovation
A New World Order
for Global Innovation?
BY SIMONE CORSI & MAX VON ZEDTWITZ
Recognising the growing role that emerging economies play in the global innovation
landscape, the article provides a measure
for the extent of the phenomenon identifying Asia as the main source of a new threat
and opportunity for Western companies:
reverse innovation.
Indian companies start to out-innovate us now?

How serious is this threat?
The Threat of Insignificance

2I FRXUVHUPVIURP$VLD3DFLFKDYHRXWLQnovated us in the West already for decades.
-DSDQHVH UPV KDYH GRQH VR VLQFH WKH V
DQG .RUHDQ UPV VLQFH WKH V $V VLJQLcant their contribution to global R&D and inIntroduction
With production and the supply chain increas- novation was at the time (and still is), it pales to
ingly moving to low-cost countries in Asia- the rise of China and India that is supported by
3DFLF DQG ORFDO PDUNHWV LQ &KLQD DQG ,QGLD the even more impactful growth in their local
expanding at three to four times faster than in markets. This has, for a time, redirected innovathe US and Europe, creativity and innovation tion to domestic needs and markets, and misdiwere among the few advantages global manag- rected Western companies to believe that they
retained an upper hand in their own R&D and
ers thought that could be retained in the West.
It appears that even this domain is being innovation effort.
This is no longer the case, as one can easily
taken over by competitors from the Far East.
Reverse Innovations, i.e. innovations that see from Table 1 (see table 1 on next page).
DUHDGRSWHGUVWLQDSRRUFRXQWU\EHIRUHEHLQJ :HVWHUQ UPV KHOG D VWURQJ DQG FRPIRUWDEOH
adopted in rich countries (Immelt et al., 2009, SRVLWLRQ DPRQJ WKH WRS 3&7 OHUV LQ
and later Govindarajan and Ramamurti, 20111), 3&7 DUH JOREDO SDWHQWV OHG XQGHU WKH 3DWHQW
or also innovations that were explicitly designed &RRSHUDWLRQ7UHDW\2QO\YH\HDUVODWHUWKUHH
and invented in such developing markets and
later spilled over into advanced country markets
(von Zedtwitz et al., 20152), are more and more
Reverse Innovations are innovations that
capturing our attention and our fears: Are
established companies in Europe and the US were explicitly designed and invented in
QDOO\ORVLQJWKHLUODVWUHPDLQLQJHGJHWKHLUIXQsuch developing markets and later spilled
damental source of long-term competitiveness,
to new upstarts from Asia? Will Chinese and over into advanced country markets.
75
Innovation
Overall, PCT patents

filed by Chinese
companies rose an
average of 27.5%
per year from 2000
to 2015 the highest
growth of any
country over this
time span.
Japanese companies were in the top-10, with the

number one spot going to Panasonic. Just last
year, in 2015, six companies in the top-10 are
IURP$VLD3DFLFZLWKWZRRI WKHWRSWKUHHSRsitions being held by companies from an emerging country: China.
The same picture presents itself in the
top-100 PCT rankings. In 2005 Europe led the
HOG ZLWK FRPSDQLHV WKH 86 KDG DQG
Japan 27. By 2015 the US dropped to 24 companies, Europe declined to 28, while Japan rose
WR &KLQD MXPSHG IURP RQH WR UPV LQ
just 10 years, with two of these companies
Huawei and ZTE often topping the ranking.
2YHUDOO3&7SDWHQWVOHGE\&KLQHVHFRPSDnies rose an average of 27.5% per year from
2000 to 2015 the highest growth of any
country over this time span. Korea, India, and
Japan, even Mexico all had growth rates exceeding 10% over the same period, while countries such as the US, the Netherlands, the UK,
and Sweden all rose by no more than 3% (see
Figure 1 on next page).
China especially has increased its R&D
spending, starting from as little as 0.54% of
GDP in 1996 to 2.0% in 2012, and planning
to invest 2.5% by 2020. In comparison, the US
spent 2.8% of their GDP in 2012, while the EU
average was at 1.7% yes, Europe now is more
similar to a developing country when it comes to
R&D investments.
It is therefore no surprise that managers of
Western companies look towards Far-East Asia

with some apprehension, and a fair amount of
uncertainty as to their own long-term innovation prospects. The good news is that so
far few reverse innovations have truly made
a global impact. Much of the talk is perhaps
just hype, as many of these reverse innovations appeal more strongly to low and mid-end
markets in their own home countries than
they do to the sophisticated customers in the
West. However, this really is bad news, since
it is presently predominantly Western compaQLHVWKDWFRQWUROWKHRZRI LQQRYDWLRQVIURP
China and India, and thus this is a sign that the
West has still not even started to comprehend
how to really leverage the creativity and innovation that emerges in the East. All the R&D
investment in Asia, especially China, will take
decades to ferment before it reaches market
maturity in the form of new product innovations, and we expect a tide of reverse innovaWLRQVWREHODXQFKHGE\$VLDQUPVLQWKHQH[W
few years. While this sounds like bad news for
Western companies, the good news ultimately
is that these new technologies and innovations
will increase the quality of life for everyone
including us Westerners whether they are
invented and originally owned by companies
from China, Europe or the US.
The Challenge Ahead
Reverse innovation will therefore impact us in
TABLE 1. Top-10 Ranking of PCT Applicants and Country of Origin, 2005, 2010, and 2015
2005
2010
Country
PCT App.
Company
Country
PCT App.
Company
Country
PCT App.
Philips
NL
JP
DE
2,483
2,024
Panasonic
ZTE
Qualcomm
JP
CN
US
2,155
1,872
Huawei
Panasonic
Siemens
Qualcomm
ZTE
CN
US
CN
3,898
2,442
Nokia
Bosch
Intel
FI
DE
US
Huawei
Philips
Bosch
CN
NL
DE
KR
JP
SE
DE
US
LG
Sharp
KR
JP
1,573
1,433
1,313
1,297
1,287
Samsung
Mitsubishi
Ericsson
BASF
3M
899
847
696
654
614
LG
Sony
KR
JP
1,683
1,593
1,481
1,457
1,381
Motorola
US
586
Ericsson
SE
1,144
Philips
NL
1,378
Daimler
DE
573
NEC
JP
1,108
HP
US
1,310
1,379
Source: WIPO.
76
2015
Company
1,675
2,155
many different ways. Let us focus on

implications for managers in charge of
companies that invest in and facilitate
the spread of global innovations.
Executives of Western multinationDOUPVZLWKUHVSRQVLELOLWLHVIRUSURGucts and markets in Europe and the
US will see reverse innovation both as
an opportunity and as a threat. On the
one hand, there is the potential to pass
on reduced costs and improved prodXFWPDUNHWWWRFXVWRPHUVKHOSLQJWR
secure a market premium for themselves. Companies have successfully
pursued this strategy for decades, redesigning products to suit emerging
market niches and pricing them gainfully. Defeatured and cost-redesigned
products sourced from inventors in
China and India are just an extension
of this long-established approach.
One of the inspirations for reverse innovation is exactly one such example:
GEs development of low-cost electrocardiogram devices in India, or
its portable ultrasound machines in
China. On the other hand, much more
so than before, they will not only pass
on cost advantages but also product
risks and liabilities, further kindled by
actual or perceived quality differentials
between Chinese and Western products, and requiring substantial attention to retain the premium value label
PDQ\ :HVWHUQ UPV KDYH HQMR\HG IRU
so long. Already now, companies are
stretched to demonstrate that their
products perform as promised, especially if components are built by
third-party providers in countries of
very different ethical and operational
VWDQGDUGV )RU LQVWDQFH 6ZLVV UPV
are permitted to use the label Swissmade only if at least 50% of the production costs are borne in Switzerland,
and the most important part is carried
out in Switzerland. This threshold is
raised to 60% for electronic watches,
and 80% for mechanical watches.
FIGURE 1. Total PCT patents filed by country, 2000 to 2015, top-10 filers only
70,000
60,000
50,000
40,000
30,000
20,000
10,000
US an
y
p
Ja man ina
r Ch rea
e
G
Ko ance K
U
Fr
ds
an
nd
erl
rla den
h
t
e
e
z
e
it
N
Sw
Sw
2014
2012
2010
2008
2006
2004
2002
2000
Source: WIPO, own calculations.
Western managers are thus very concerned about the potential of low-cost
but good-enough quality competition
from reverse innovation, and see even
products from their own Asian subsidiaries as undermining their own livelihoods at home.
Directors of Western subsidiaries
in China, India and other emerging
markets will need to be sensitive to
this attitude by their home-based colleagues. At the same time, they see
the opportunity of tapping into the
local ingenuity and fast-developing
expertise in many product and technology sectors that were transferred
IURP WKH :HVW UVW E\ PRYLQJ SURduction and later by shifting R&D
resources. They would be poor managers if they overlooked this potential. In addition, their local teams are
itching to prove their worth to the

global headquarters, to shed the perception that they only produce low
quality results at low labour costs. If
they are held back, they will quit and
join more open-minded competitors
RU ORFDO VWDUWXS UPV 6XFK ZDV WKH
case for the Italian mid-sized company
Speres, whose Suzhou-based R&D
team developed an innovative product
well ahead of everybodys expectation
(Corsi et al, 2014).3 Fearing product
cannibalisation at home, the HQ initially blocked further development activities until the local general manager
XVHG DOO KLV SHUVRQDO VNLOO DQG LQXence to convince his superiors of the
appropriate way forward. Without his
ability to champion for his Chinese innovation team, this reverse innovation
ZRXOG KDYH EHHQ VWLHG DQG UHVXOWHG
77
Innovation
PHOTO COURTESY: Feng Li/Getty Images
From left to right: Chinese

baby stroller maker Goodbaby
became the largest stroller
company in the world;
Huawei is undisputedly
one of the leaders in the
telecommunications industry.
LQ D TXLFN GHDJUDWLRQ RI WDOHQW IURP WKH

companys China subsidiary. Local subsidiary
directors will need to skilfully orchestrate the
powers in charge HQ-based global business
development, global R&D strategy, product
category boards, and so on to allow them the
freedom to develop reverse innovations that do
not challenge home-turf markets outright, that
GR QRW FDQQLEDOLVH UHYHQXHV DQG SURWV DW WKH
JOREDO VFDOH IRU D ORFDO EHQHW
Last but not least, there are more and
more executives of those emerging market
UPV WKDW KDYH DQ LQFUHDVLQJO\ LQWHUQDWLRQDO
well-informed outlook on business development. Their advantage lies in their superior
understanding of local talent and technology,
lest not their ability to control local resources
better than the foreign Western multinationals. Perhaps they started to internationalise
DV 2(0 SDUWQHUV WR JOREDO UPV VXFK DV WKH
Chinese baby stroller maker Goodbaby. Over
the course of two decades, this Kunshan-based
Local subsidiary directors will need to skilfully

orchestrate the powers in charge to allow them
the freedom to develop reverse innovations.
78
PHOTO COURTESY: Romani Insider
startup became the largest stroller company in

the world, with nearly 40% worldwide share
of strollers rolling over the streets in New
York City, Amsterdam or Moscow. Their
global network of design centres is a constant
source of new designs and market input. Their
strollers are made to the highest standards,
and they have gone for over a decade without
a single product recall on a stroller that they
designed internally (as opposed to the designs
requested by foreign client companies).
Or perhaps they attack global markets on
their own, such as telecom giant Huawei did
in the 1990s, initially in markets more similar
WR WKHLU RZQ LQ 5XVVLD $VLD3DFLF DQG 6RXWK
$PHULFD EHIRUH LW KDG EXLOW XS VXIFLHQW H[perience and market might to go after hightech high-demand customers in Europe and
the US. Their foray into North America was
marred initially by strong opposition of local
multinational companies defending their
home market such as Cisco and others, but in
the meantime Huawei is undisputedly one of
the leaders in the telecommunications industry, and its R&D centres in China are a source
of new technology and products globally
a new form of reverse innovation that was
unheard of until just a few years ago.
What Should We Do Now?

Luckily, all is not lost, even though we are sure
WKDWPDQ\:HVWHUQUPVZLOOQRWEHDEOHWRFRSH
with the new changed world order.
)LUVW:HVWHUQUPVPXVWDFFHSWWKDWOHDUQLQJ
is a two-way street, and that the knowledge and
technology transfer that has gone to China and
India for so long has resulted in highly talented
and skilled innovators in former fringe markets.
It is high time that we start learning from them,
for instance, how to adopt frugal innovation into
our own high-cost systems, or how to accelerate
decision-making at home so that we no longer
miss out on emerging business opportunities in
fast paced markets.
Second, if we want to protect our home turf,
we need to be more determined in defending it.
Updating our own skill base and technologies, as
mentioned just above, is just one element in this
game plan. For too long we have been too careless
about our technological advantage, believing in the
illusion that we could hide behind sophisticated
technologies that would take emerging country
competitors generations to understand and reverse
engineer. We also have been too short-sighted in
believing that our closest competitors are those
nearest to us: In fact, most of us dont even have
the faintest idea of how ruthless competition is in
the cut-throat business environments of China or
India. A bit more cooperation rooted in domestic
collaboration might prove useful.
Third, we need to recognise and accept that
the West is not the sole possessor of modern
WHFKQRORJ\7KH-DSDQHVHZHUHWKHUVWWRVKRZ
us, then the Koreans, and now even the most
conservative business owner in Europe knows
about the threat coming from China and India.
We are sure that this is not yet the end, and we
will see even more talented entrepreneurs and
innovators come from e.g. South America and
$IULFD %XW IRU RXU PXWXDO EHQHW ZH FDQ DQG
should reach out to capable partners irrespective of their ethnic or cultural origin. Based on
a position of strength, as perhaps established
by heeding the advice laid out in the previous
two paragraphs, such a partnership can have trePHQGRXVEHQHWVIRUERWK:HVWHUQDQG(DVWHUQ
UPV DQG FRQVHTXHQWO\ WKH ELOOLRQV RI FXVtomers and consumers that rely on them.
Western firms must accept that

learning is a two-way street, and
that the knowledge and technology
transfer that has gone to China
and India for so long has resulted
in highly talented and skilled
innovators in former fringe markets.
About the Authors
Simone Corsi is Programme
Manager of the Lancaster China
Catalyst Programme and Research
Fellow at Lancaster University
Management School. His work
focuses on helping UK SMEs developing R&D
collaborations with Chinese organisations. His
research interests include R&D internationalisation and reverse innovation. He has a PhD in
Management from SantAnna School of
Advanced Studies (Italy).
Max von Zedtwitz is Professor of
International
Business
and
Innovation at Kaunas University of
Technology, and Director of the
GLORAD Center for Global R&D
and Innovation. Previously, he was Professor at
Tsinghua, Tongji, and Peking Universities in
China, as well as Vice President Global
Innovation for PRTM Management Consultants
based in Shanghai.
References
1. Immelt, J.R., V. Govindarajan, and C. Trimble 2009.
How GE is disrupting itself. Harvard Business Review
87 (10): 56-65. Govindarajan, V., and R. Ramamurti
2011. Reverse innovation, emerging markets, and global
strategy. Global Strategy Journal 1(3-4): 191-205.
2. von Zedtwitz, M, S. Corsi, P. Soberg, R. Frega 2015.
A Typology of Reverse Innovation. Journal of Product
Innovation Management 32(1): 12-28.
3. Corsi, S., A. Di Minin, and A. Piccaluga 2014. Reverse
innovation at Speres: a case study in China. ResearchTechnology Management 57(4): 28-34.
79
Supply Chain
Risk Sharing in Joint Product Development
Lessons from 787 Dreamliner

BY YAO ZHAO
Background
1.1 The 787 Development Program. 787,
the Dreamliner, was believed to be the most advanced commercial aircraft ever built and the
PRVWHIFLHQWWRRSHUDWHGXHWRLWVXQSUHFHGHQWHG
use of the lightweight composite materials.3 The
Dreamliner is also unprecedented in the scale of
development outsourcing 65% of the development work is outsourced to more than 100 suppliers from 12 countries.4 Exhibit 1 (see next page)
1. Introduction
provides details on tier-1 suppliers.
The Boeing 787 Dreamliner was the fastest-sellTier 1 suppliers design and fabricate 11 major
ing plane ever in the commercial aviation industry,2 subassemblies, Boeing integrates and assembles.
but its development was a nightmare. In this article 6SHFLFDOO\%RHLQJGHQHVWKHSDUWVDQGLQWHUIDFwe analyse Boeings traumatic experience, discover es, but leaves the detailed design to suppliers who
what really happened, identify the root causes, and can optimise within each work package, and must
offer ways to avoid similar disasters in the future. work with each other on the interfaces. In case of
We believe that such lessons can provide valuable disputes, Boeing serves as a referee to assist the
insights for companies around the world to ensure suppliers.5 Development outsourcing provides
successes in joint product development.
%RHLQJVLJQLFDQWEHQHWV
Our conclusion is simple. A majority of 787 de- 1. Market expansion. Outsourcing workload to
velopment delays may be deliberate and thus could
other countries helps to secure sales of the airhave been avoided! The root cause of these delays
plane to these countries before product launch.
is a subtle incentive trap in the risk sharing partnerDevelopment outsourcing is instrumental in
ship induced by the wrong risk shared among
making the Dreamliner the fastest-selling plane.
%RHLQJDQGWKHVXSSOLHUV7KLVOHGWKHUPVLQWRD 2. Technology. Development sourcing enables
prisoners dilemma wherein delays were in their
Boeing to utilise the best in-class expertise and
best interests even while they were driving themknowledge worldwide, and thus reduces the
selves into a disaster. We reconcile an empirical
technological risk.
study of the actual events with an economic anal787 does not stand alone in workload outsourc\VLVRI QDQFLDOLQFHQWLYHVDQGUHYHDOWKHUDWLRQDOH ing. Other noticeable examples include Airbus 380
behind many seemingly irrational behaviours that and the Global Hawk; statistics shows that, on
delayed the 787 program. We show that properly average, about 50% of the revenue of Raytheon
distinguishing different types of risk and sharing was paid to the suppliers.6
only the right risk can help aligning the interests
1.2 The Risk Sharing Partnership.
RI SDUWQHUVDQGWKXVVLJQLFDQWO\UHGXFHRUFRP- Development outsourcing is not without challengpletely avoid such deliberate delays.
HV8QOLNHWKHPRGHORI RQHUPGRHVDOOGLIIHUHQW
Reconciling an empirical study1 of 787 delays

ZLWK DQ HFRQRPLF DQDO\VLV RI QDQFLDO LQcentives, we reveal a subtle incentive trap in
the risk sharing partnership that encouraged
Boeing and the suppliers to delay deliberately despite the disastrous effect. We suggest a
remedy to avoid the trap and greatly alleviate delays for joint development programs of
this kind.
787, the Dreamliner,

was believed to be
the most advanced
commercial aircraft
ever built and the
most efficient to
operate, due to its
unprecedented use
of the lightweight
composite materials.
80
EXHIBIT 1. The 787 tier-1 suppliers (KHI Kawasaki Heavy Industries, FHI Fuji Heavy Industries, MHI Mitsubishi Heavy
Industries, KAL-ASD Korean Airlines - Aerospace Division)
Vertical Fin
Boeing-Fredrickson
20")$"
(S47, S48) Vought
Forward Fuselage
(S43) KHI
Center Fuselage (S44,

S46) Alenia
Fixed Trailing Edge
KHI
Horizontal Stabiliser
Alenia
Wing Tips KAL-ASD
Wing Box MHI
Leading Edge Spirit
Main Landing Gear

Wheel Well KHI
WDVNVWKDWFRQVWLWXWHDSURMHFWDUHSHUIRUPHGE\GLIIHUHQWUPV
who rely on each other to control their cost and schedule. Thus,
DFULWLFDOLVVXHLVLQFHQWLYHDOLJQPHQWEHFDXVHUPVPD\RSWLPLVH
IRUWKHLURZQEHQHWUDWKHUWKDQWKDWRI WKHSURMHFW
Development projects typically require iterations. Thus to
align incentives, Boeing must ensure that no supplier can cash
out before the project completes. This requirement rules out
WKH[HGSULFHFRQWUDFWVDVLQVXEFRQWUDFWLQJZKHUHWKHVXSSOLers are paid upon job completion, and thus can walk away from
future iterations. Furthermore, Boeing must motivate the suppliHUVWRZRUNKDUGDQGFRVWHIFLHQWO\7KLVUHTXLUHPHQWUXOHVRXW
the time-material contracts (as in consulting), which may encourDJHVXSSOLHUVWRZRUNVORZO\DQGLQDWHWKHLUFRVW
To manage development outsourcing, Boeing came up with
an ingenious idea the risk-sharing partnership, which makes
the suppliers the stakeholders of the 787 program.76SHFLFDOO\
Boeing asked the risk-sharing partners to bear the up-front nonrecurring R&D investment for their work, and wait until the
SODQHLVFHUWLHGDQGGHOLYHUHGWRJHWSDLG6RWKHVXSSOLHUVVKDUH
the risk of program delays. The payment follows a pre-negotiated price per unit, and so the more planes Boeing sells, the
more money each supplier makes. To compensate the suppliers
for taking the risk, Boeing assigned them the intellectual property rights of their work, and so the suppliers have the assurance
from Boeing that they will not be replaced down the road.
Center Wing Box (S11)

FHI
Forward Fuselage
(S41) Spirit
The risk-sharing partnership promised tremendous beneWVWR%RHLQJUVWLWUHGXFHVVXEVWDQWLDOO\%RHLQJVXSIURQWLQvestment.8 Second, it reduces Boeings exposure to delay risks
because Boeing only bears the cost of its own investment if the
project is ever delayed. Finally, suppliers may be motivated to
ZRUNHIFLHQWO\DQGKDUGEHFDXVHWKH\VSHQGWKHLURZQPRQH\
and share the loss of delays.
Development outsourcing plus risk-sharing (dubbed Buildto-Performance) seems a wonderful idea. Boeing strongly believed that risk sharing provides the right incentives and
so left the selection and control of subtier suppliers to its risk
sharing partners.9
1.3 The 787 Disaster. In reality, 787 development was a
GLVDVWHUWKHUVWLJKWZDVGHOD\HGE\PRQWKVDQGWKHUVW
delivery was delayed by 40 months with a cost overrun of at
least $ELOOLRQE\WKHUVWGHOLYHU\10 including write-offs due
to defects (~$2.5 billion), excessive R&D costs (~$3.5 billion),
customer contract penalty (~$5 Billion). It was the worst delay
in the commercial aviation industry (see Exhibit 2 next page,
upper left).
Naturally, people asked, what caused the delay? How could it
have been avoided? Three conjectures were proposed:
1. 8QLRQVWULNHV.12 If we look at the actual events, union strikes
only delayed 3 out of the 40 months total. So the unions had
an impact but not substantial.
81
Supply Chain
Exhibit 2. Comparing Boeing 777, Airbus 380 and Boeing 78711

& &)
launch
date
Planned
1st
delivery
date
Planned
program
duration
(months)
Actual 1st
delivery
date
Actual
program
duration
(months)
Delay of
the 1st
delivery
(months)
Total
Development
,01))/*0
involved)
777
1/1990
5/1995
64
5/1995
64
~$6-7 billion
12/2000
2/2006
62
10/2007
82
20
~$13 billion
787
1/2003
5/2008
64
9/2011
104
40
billion
Exhibit 3. 787 major delays

Time
anounced
10/
2007
Duration
7 months
on the 1st
&$%1
Causes
given
Responsible
/*0
Parts shortage
(e.g., fasteners)
Alcoa
Vought
Alenia
Spirit
GA
Honey-well
etc.
Defects.
++&0%"!
work from
suppliers
1/
2008
3 months
on the 1st
&$%1
Issues with production capacity &

scale economies
Lack of testing & quality assurance
equipment & personnel, workers lack of
training and FAA compliance, had to use
student inspectors
Design issues
Vought had no engineering dept.

when selected
Missing
documentation
Suppliers had to rush to meet the schedule
Flight control
0,4/"
The supplier underestimated the time
++&0%"!
work from the
suppliers
Vought
Alenia
GA
Boeing
Slow assembly
progress at
Boeing
Suppliers: the same
Boeing: we underestimated how long

it takes to do someone elses work
4/
2008
6 months
on the 1st
&$%1
Same as above
Same as
above
Same as above
12/
2008
6 months
on the 1st
&$%1
Wrongly
installed
fasteners at
Boeing FAL
Boeing
Poorly written instructions by Boeing

engineers confused and misled its
workforce
6/
2009
+!"+&1")6
on the 1st
&$%1
Defects at
wing-body
joint
Boeing
Fuji
Mitsubishi
1/2 12/)4&+!"0&$++!
engineering
8/
2010
3 months
on the 1st
delivery
Uncontained
engine failure
& availability
issue
Boeing
Rolls Royce
Unknown
12/
2010
+!"+&1")6
on the 1st
delivery
An on-board
")" 1/& )/"
Hamilton
Sundstrand
Foreign debris in electric cabinets,

and more
82
Explanations
2. Technical issues.13 It is true that the

composite materials have never been
applied so extensively to a plane of
this size; but such materials were not
new as they were applied to the 737
and 777 programs. A thorough examination of the actual events shows
that only 3 out of a total 7 major
delays are probably caused by unexpected technical issues.
3. Too much outsourcing. This is the
most popular conjecture.14 However, it
is yet supported by practical evidence
and also too vague to provide actionable guidelines.
2. The Empirical Study: What Happened?
In January 2003, Boeing started to design
and sell a new plane, later named the
787 Dreamliner. The original plan is to
have the suppliers complete and deliver
all subsystems by June 2007. Boeing integrate and assemble the plane in June-XO\ WHVW WKH VW LJKW LQ $XJXVW
2007, and make the 1st delivery in May
2008.15 In May 2007, all subsystems of
WKH UVW 'UHDPOLQHU /1 ZHUH GHOLYHUHGWRWKHQDODVVHPEO\SODQWZLWKWKH
following status:16
After fuselage (by Vought) structure is 16% complete, systems
integration 0%.
The nose-and-cockpit session and
the forward fuselage (by Spirit &
Kawasaki) sagged out of shape in
transit due to incomplete frame and
RRUEHDPLQVWDOODWLRQ
Redesign for interfaces and body joints
made by different suppliers.
Due to a fastener shortage issue, temSRUDU\IDVWHQHUVZHUHXVHGIRUWKHUVW
few 787s. However, the replacement
of these temporary fasteners is hampered by a lack of documentation.
LN 1 status marks the start of 7
major delays, summarised in Exhibit
3 (see Exhibit 3 at lower left) by duraWLRQGLUHFWFDXVHVUHVSRQVLEOHUPVDQG
their explanations.17
Out of the 7 major delays, the last 3

PD\EHFDXVHGE\WHFKQLFDOLVVXHVWKHUVW
4 of them are caused by some irrational
behaviours of Boeing and its suppliers, as
summarised at the right.18
These irrational behaviours represent human errors and mismanagement
so obvious and trivial that Boeing and its
suppliers must already know. Thus, the
question to ask here is not how to correct
these errors, but, knowing it was wrong,
why did Boeing and suppliers still do it?!
3. The Economic Analysis: The
Incentive Trap
7R VHH WKH QDQFLDO LQFHQWLYHV WKDW OHG WKH
UPV LQWR WKHVH HUURUV ZH UVW FODVVLI\
costs for development projects:20
Direct costs: expenses for research,
engineering and testing, workforce
and training, equipment, materials, and
transportation. One can reduce the
direct costs by delaying the task.
Indirect costs: including overheads
XWLOLWLHV IDFLOLWLHV DQG EHQHW FDSLWDO
costs, contract penalty, and order cancellations. Indirect costs increase in
project duration.
Under the risk-sharing partnership,
HDFK UP LQYHVWV RQ LWV WDVN DQG JHWV SDLG
when the whole project is completed.
7KXV LI D UP GHOD\V LWV WDVN LW VDYHV LWV
direct cost but everyone suffers a higher
indirect cost due to the resulting project
delay. Firms completed their tasks on time
DUH SHQDOLVHG DQG WKH UP GHOD\HG LV QRW
fully responsible for the damage it caused.
,QWXLWLYHO\ LI RQH UP FDQ EHQHW IURP D
delay and have others share the damage,
WKH UP PD\ GHOD\ 7KLV VXEWOH LQFHQWLYH
trap is related to the moral hazard issue
in the economics literature21 and can be
deadly for development projects.
Under the risk-sharing

partnership, each firm invests
on its task and gets paid when
the whole project is completed.
Exhibit 4. The irrational behaviours of Boeing and the suppliers

Irrational behaviours
Why irrational?
Boeing selected Vought to design and manufacture

the worlds 1st)) ,*-,0&1"#20")$"21
Vought had no engineering department
when selected
Boeing knew Vought well as a longtime customer.19

,4 ,2)!,"&+$0")" 1/*4&1%)&*&1"!
engineering capability to design and fabricate one of
the most technical and novel parts?
General Aeronautica used ),44$"1/&+"!

on-the-job workers with no previous aerospace
"5-"/&"+ "1,00"*)"#20")$"0" 1&,+0+!
didnt train them for FAA compliance until the job
is past-due
0',&+13"+12/""14""+14,"5-"/&"+ "!&/ /

manufacturers (Alenia and Vought), it is impossible for
GA to not know the very basics training its workforce
for the FAA compliance.
Alcoa quoted a lead time of 4""(0 for fasteners

&1&+$&002"0,# - &160 )"" ,+,*&"0
contributing to 1%"/01!")6+/"0-,+0","&+$
$$/"$1"!#01"+"/-/, 2/"*"+1"+02/&+$
favourable pricing
No matter how sophisticated the fasteners are,

they wont take 60 weeks to make. Alcoa was
bargaining for a better deal
Rather than giving Alcoa a better deal to reduce the
lead time, Boeing pressed Alcoa further on pricing,
which prolonged the lead time.
Tier-2 suppliers lack of Q/A equipment and personnel

to do testing at component and subsystem levels.
Tier-1 suppliers deferred testing to FAL
%1(&+!,#"+$&+""/&+$+!*+2# 12/&+$/*04&))
design and fabricate a new part without testing it?
,2$%1%/)"01,+%!1,20"novice student
inspectors because it had problems attracting
competent technicians
Using interns to assure the quality of the worlds 1st

)) ,*-,0&1"#20")$",4,+!"/4%6+2*"/,20
defects have gone unnoticed.
Production records on suppliers work were found

incomplete or lost in transfer resulting in a loss of
,+$2/1&,+ ,+1/,)
0"5-"/&"+ "!&/ /*+2# 12/"/0&1&0&*-,00&)"

for them to forget production records or get them lost
in transit, against common sense.
Poorly written instructions led to the embarrassing

wrongly installed fasteners at Boeing
It is such a careless mistake for Boeing, a company

holding such a high reputation in engineering, to mess
up instructions for installing fasteners.
A simple example (see appendix), resembling Dreamliners workload distribution, manifests this incentive issue and
reveals a deep insight: the risk sharing partQHUVKLS FDQ SXW WKH UPV LQWR D 3ULVRQHUV
Dilemma although keeping the planned
GXUDWLRQ EHQHWV WKH HQWLUH SURMHFW LW FDQ
EH LQ HDFK UPV EHVW LQWHUHVW WR GHOD\ ,Q
summary, although risk sharing may seem
WR PRWLYDWH SDUWQHUV WR ZRUN HIFLHQW DQG
hard, it actually provides a strong incentive for them to delay deliberately so that
they can save their own cost at the expenses of others.
4. Reconciliation: What Caused
The Delays?
We now reconcile the analysis in 3 with
the events in 2, to reveal the rationale
behind the irrational behaviours. We

UVW GLVFRYHU ZKDW WKH VXSSOLHUV UHDOO\ VDLG
behind their explanations for the delays
(see Exhibit 5 next page, upper left).
The reconciliation implies that the
delays occurred not because the suppliers werent able to do their jobs well
but because they just didnt want or care
enough to do it well. These suppliers were
delaying their work as much as possible
and doing it in the cheapest possible way!
Lets now discover what Boeing really
said behind its explanations for the delays
(see Exhibit 6 next page, lower left).
The reconciliation indicates that
Boeing was really just concerned about its
own cost and risk rather than the delays
of the 787 program.
These irrational behaviours are
83
Supply Chain
Exhibit 5. The rationale of suppliers

What did the
suppliers really
say?
Reasoning
Lack of testing and Q/A

equipment and personnel
0"!),44$"1/&+,+
the-job workers to assemble
fuselages
Inability to attract competent
1" %+& &+0%3"1,20"
novice student inspectors
I dont want to spend

money on it
If you paid the salary of an

intern, you only get interns.
If the suppliers really cared
about their work, they
shouldnt have saved money
from necessary equipment
+!.2)&"!-"/0,++")
Workers lack of training & FAA

compliance
Incomplete documentation or
lost in transit
I dont care much to

manage it well
The FAA compliance training only

takes a couple of days.22 Even the
documentation was lost in transit,
how careless they were!
,2$%14&1"!1&))1,
build the plant (job assigned
!2"23
I wish I could delay

it more
Vought took 2 years to build

1%"-)+1,+)6)"&10")#6"/
to build the part. Recall that the
part is only 16% complete (2).
Suppliers irrational
behaviours (explanations for
delays)
) ,.2,1"!4""()"!
1&*"#,/#01"+"/0 &1&+$
capacity issues & scale
economies.
I only care about my

thousand $ setup cost
but your million $ plane
Alcoa was reluctant to speed up

production without obtaining
a better volume and price deal
from Boeing.24
Exhibit 6. The rationale of Boeing

Boeings irrational
behaviours (explanations for
delays)
What did
Boeing really
say?
Reasoning
) ,.2,1"!4""()"!
1&*"#,/#01"+"/0 &1&+$&002"0
,# - &160 )"" ,+,*&"0
,+1/&21&+$1,1%"/01!")6+
/"0-,+0","&+$ ,+0,)&!1"!
&10#01"+"/-/, 2/"*"+1
directly negotiated with
02--)&"/0#,/#3,2/)"-/& &+$
I care more about the

prices than the delays
of the fasteners
If Boeing cared more about the

delays than the prices, it should
have encouraged the fastener
suppliers to reduce lead time by
making a better volume and/or
price commitment, rather than
discouraged them by pressing
them more on pricing.
Boeing selected Vought who

had no engineering department
to develop the worlds 1st all,*-,0&1"#20")$"
I need someone to share

the cost and risk more
than getting the project
done on-time
Had Boeing not known Voughts

engineering capability (as a long
time partner) and the damage of
%&/&+$/*4&1%)&*&1"!1" %+& )
capability? Negative, but the need
of sharing risk dictates.
We underestimated how long it

takes to do someone elses work
0),4-/,$/"001 1,51%"
traveled work.
We estimated delays,
but underestimated
them.
We dont have to
hurry up to save
suppliers money
Boeing was expecting delays

but nothing so bad. Why should
Boeing work hard to catch up the
schedule so that the suppliers
+/"-*,01,#1%""+"125
Embarrassing wrongly installed

fasteners poorly written
doc. by Boeing Engr. misled its
workforce
I dont care much to

manage it well
If Boeing were more committed,

such low-level mistakes should
have been avoided.
84
detrimental to the 787 program, but they can be

UDWLRQDOWRHDFKLQGLYLGXDOUPEHFDXVHGRLQJVR
can save its direct costs, and have the damage, the
H[WUD LQGLUHFW FRVW VKDUHG E\ RWKHU UPV 7KXV
knowing the irrational behaviours were wrong
for the project, Boeing and the suppliers still did it
because it was in their best interests.
5. The Solution: How Could It Have Been Avoided?
The trend of development outsourcing is irreversible because product development today is an undertaking often too complex, expensive and risky
IRURQHUP7KXVWRDYRLGVLPLODUGLVDVWHUVLQWKH
IXWXUHZHPXVWQGZD\VWRPDNHWKHULVNVKDULQJ
partnership work!
&RQWUROODEOHYV8QFRQWUROODEOH'HOD\V
A frequently raised question for the Dreamliner
program is why Boeing did not penalise its partners for their delays? To answer this question, we
must understand that there are two types of risk
in development projects: the risk of uncontrollable delays and the risk of controllable delays. (see
Exhibit 7 next page)
Boeing did not penalise the suppliers for their
delays because Boeing doesnt like to pay penalty to
the suppliers for its own delays. This is the essence
of the risk-sharing partnership: if the delay is
caused by unpredictable and unavoidable events
such as natural disasters and unexpected technical challenges (the uncontrollable delays), no indiYLGXDOUPVKRXOGEHKHOGUHVSRQVLEOH6KDULQJWKH
risk of such delays is not only fair but also effecWLYH DV LW DOORZV WKH UPV WR GLYHUVLI\ WKH ULVN LQ
product development.
The risk sharing partnership of 787, however,
does not distinguish the types of risk but also force
WKHUPVWRVKDUHWKHULVNRI FRQWUROODEOHGHOD\V
ZKLFKLVQRWIDLUEHFDXVHDUPVKRXOGQRWEHKHOG
responsible for others mistakes. More importantly,
sharing the risk of controllable delays encourages
such delays (i.e., the incentive trap in 3) and thus
leads to suboptimal project performance. Thus,
neither penalising nor sharing all types of delay risk
is fair or effective.
5.2 The Fair Sharing Partnership. To align
WKHLQFHQWLYHVRI UPVLQMRLQWGHYHORSPHQWSURMects, we propose a new partnership, namely, fair
VKDULQJZKLFKDOORZVWKHUPVWRVKDUHWKHULVN
RI XQFRQWUROODEOHGHOD\VEXWDVVXPHVHDFKUPWKH
full responsibility for its own controllable delays.

6SHFLFDOO\XSRQDGHOD\WKHUPVVKDOOUVWLGHQtify its type. In case of an uncontrollable delay, the
damage is shared in the same way as under the risk
sharing partnership. But in case of a controllable
GHOD\WKHUPUHVSRQVLEOHVKDOOSD\QRWRQO\IRU
its own damage but also for the damages of other
UPVFDXVHGE\WKHGHOD\,QWKLVZD\WKHUPVFDQ
share the risk of uncontrollable delays and achieve
GLYHUVLFDWLRQPHDQZKLOHWKH\FDQHOLPLQDWHWKH
incentive trap and align their interests with that of
the project.
We must point out that the fair sharing partnership isnt a panacea as its effectiveness relies on the
UPV FDSDELOLW\ WR GLVWLQJXLVK WKH W\SHV RI ULVN
which is not always possible especially in projects
involving creative activities and substantial technical challenges. When such a project is delayed,
LWFDQEHKDUGWRWHOOZKHWKHUWKHUPVLQYROYHG
havent tried their best or they tried but failed.
Fortunately, the fair sharing partnership applies to
complex projects with minor or moderate technical advances, such as extension, upgrading, or new
combinations of existing technologies. These projects represent a vast majority of the development
programs in many industries.
5.3 How Could It Have Been Avoided?
Had Boeing utilised the fair sharing partnership,
WKHUVWIRXUGHOD\VFRXOGKDYHEHHQDYRLGHGRUDW
least mitigated because both Boeing and the suppliers would have taken a much greater responsibility for their delays and thus been much more
committed than they were under the risk-sharing
partnership. That said, there may still be delays,
like the last three, but mostly due to unforeseeable
technical challenges.
On the implementation side, because the fairsharing partnership requires a much greater responsibility than the risk-sharing partnership,
some suppliers may be reluctant to sign on. If
Boeing must use a supplier even if it declines the
responsibility, then knowing the suppliers incentive to delay, Boeing should closely control and
monitor the supplier to prevent potential irrational behaviours.
,QUHDOLW\%RHLQJIRXJKWWKHGHOD\VE\UVWWLJKWening its control of the suppliers (tiers 1, 2, and 3)
around the globe.26 Boeing built a high-tech operations center in a factory in 2008 to monitor the
Exhibit 7. The types of delay risk

The uncontrollable delays
Technical challenges
Natural disasters
Union strikes
Unpredictable and unavoidable
The controllable delays

Careless lapse
Errors due to mismanagement
Firms strategic behaviours
/"!& 1)"3,&!)"6"51/",/1 ,**&1*"+1
suppliers in real time to ensure that the 787 components and modules are tested right away at the
original manufacturers before shipped out to
the next level of integration. Second, Boeing acquired Voughts interest in Global Aeronautica in
June 2008, and bought Voughts 787 operations in
South Carolina entirely in July 2009.27 After these
acquisitions, Boeings share of the delay damages
increased considerably, and it tightened up its internal control. Consequently, there are no more
embarrassing mistakes since then, and the last
three major delays are largely due to unexpected
technical issues.
6. Conclusion
The trend of outsourcing is irreversible in product
development especially for large and complex engineering systems. Although risk sharing may seem a
wonderful idea to manage development outsourcing, it may encourage deliberate delays and cost
overruns if the wrong risk (the risk of controllable delays) is shared. The 787 program manifests
this subtle but deadly incentive trap that management should avoid in joint product development.
Our research suggests that properly distinguishing different types of risk in project execution and
sharing only the right risk (the risk of uncontrolODEOH GHOD\V FDQ KHOS UPV EHWWHU DOLJQ WKH LQFHQtives, and so they may continue development outVRXUFLQJ ZLWKRXW VDFULFLQJ SURMHFW SHUIRUPDQFH
Appendix
In this example, we have two sequential tasks, A
and B, for which, the planned durations are 9 and
5 weeks. We can delay each task by one week, and
save $900 (for A) and $1200 (for B) in the direct
costs. If the project takes longer than the planned
duration, 14 weeks, it suffers an extra indirect cost
of $1600 per week.
We must point
out that the fair
sharing partnership
isnt a panacea as
its effectiveness
relies on the
firms capability to
distinguish the types
of risk, which is
not always possible
especially in projects
involving creative
activities and
substantial technical
challenges.
85
Supply Chain
,QWKHRQHUPGRHVDOOPRGHOWKHUPZRXOGQRWGHOD\
any task because the extra indirect cost of the project upon delay
exceeds the savings in the direct costs of all tasks. In the outVRXUFLQJDQGULVNVKDULQJPRGHOOHWVDVVXPHWKDWUP$GRHV
WDVN$UP%GRHVWDVN%DQGXSRQHDFKZHHNRI WKHSURMHFW
GHOD\UP$SD\VDQH[WUDLQGLUHFWFRVWRI $DQGUP%SD\V
$850 (the total indirect cost is still $ZHHN 7R QG RXW
ZKDWUPV$DQG%ZRXOGGRLQWKHLUEHVWLQWHUHVWVZHFRQVLGer four scenarios:
1. (Win-Lose,I UP$GHOD\VEXWUP%NHHSVLWVWDVNGXUDtion, then the project is delayed by one week. A saves $900
but loses $750 with a net gain of $150, while B suffers a net
loss of $850.
2. (Lose-Win ,I UP $ NHHSV LWV WDVN GXUDWLRQ EXW UP %
GHOD\VWKHQUP$VXIIHUVDQHWORVVRI $ZKLOHUP%
saves $1200 but loses $850 with a net gain of $350.
3. (Lose-LoseLI ERWKUPV$DQG%GHOD\WKHQWKHSURMHFWLV
GHOD\HGE\WZRZHHNVZKHUHUP$LQFXUVDQHWORVVRI $600
(= 2x$750 - $ZKLOHUP%VXIIHUVDQHWORVVRI $500
(=2x$850 - $ 1200).
4. (Win-Win)LUPV$DQG%FDQQHJRWLDWHDPXWXDOO\EHQHcial deal, in which, both keep their task durations and thus
lose nothing.
Exhibit 8. A simple example: the scenarios and pay,0,#/*0+!
Keep
A:

(Lose-Win)

(Win-Win)
Delay
A:
B:
(Lose-Lose)

B:
(Win-Lose)
Firm A
Delay
Keep
Firm B
Exhibit 8 summarises the scenarios and the pay-offs of both

UPV &OHDUO\ WKH :LQ/RVH DQG /RVH:LQ VFHQDULRV DUH
QRW IHDVLEOH EHFDXVH QR UP ZRXOG VDFULFH LWVHOI IRU RWKHUV
From the projects perspective, the Win-Win scenario is the
EHVWRXWFRPHEHFDXVHWKLVLVZKDWDUPZRXOGGRLQWKHRQH
UPGRHVDOOPRGHO8QGHUULVNVKDULQJKRZHYHUWKLVVFHQDULRLVXQVWDEOHEHFDXVHHDFKUPFDQEHEHWWHURII E\GHOD\LQJLWV
WDVNUHJDUGOHVVRI WKHRWKHUVDFWLRQ7KXVHDFKUPZLOOQG
every excuse to delay. Although the Lose-Lose scenario is the
ZRUVWRXWFRPHIRUWKHSURMHFWLWLVLQGHHGVWDEOHDQGWKHQDO
outcome (as in the Prisoners Dilemma).
86
About the Author

Dr. Yao Zhao is a professor in supply chain
management at Rutgers Business School. His
research focuses on supply chain and project
management interfaces, and socially responsible
operations. His works are published in leading
operations management journals and he is the recipient of the
NSF Career Award on project-driven supply chains.
References
1. This research was supported by National Science Foundation (NSF) Awards No. 0747779
and No. 1537591.
2. C.S. Tang, J.D. Zimmerman, Managing new product development and supply chain risks:
the Boeing 787 case, Supply Chain Forum: an International Journal, 10/1 (2009): 74-86; S. Kotha,
R. Nolan, Boeing 787: the Dreamliner (B), Case study, the Foster School of Business at the
University of Washington (October 14, 2008).
3. J. Teresko, The Boeing 787: A matter of materials. Special Report: anatomy of a supply chain,
Industry Week, (December 2007), see http://www.industryweek.com/articles/boeing_787_a_
matter_of_materials_--_special_report_anatomy_of_a_supply_chain_15339.aspx.
4. T.C. Horng, K. Bozdogan, Comparative analysis of supply chain management practices by
Boeing and Airbus: long-term strategic implications, presented at the MIT Lean Aerospace
Initiative, (April 18, 2007); Exostar LLC, Boeing 787: global supply chain management takes
LJKW&DVHVWXG\
5. Horng and Bozdogan, op. cit.
6. B. Ulder, Global Hawk supply chain integration. Presentation at the Aerospace and Defense
conference hosted by Aviation-Week and Space Technology, Phoenix, AZ, August 2011; V.
Kamath, Key challenges for supply chain in A&D. Presentation at the Aerospace and Defense
conference hosted by Aviation-Week and Space Technology, Phoenix, AZ, August 2010.
7. Horng and Bozdogan, op. cit.; Tang and Zimmerman, op. cit.
0 /HH 5 $QXSLQGL %RHLQJ WKH JKW IRU IDVWHQHUV Tauber Institute Case 1-428-787,
(November 17, 2009).
9. Horng and Bozdogan, op. cit.
10. D. Gates, Boeing celebrates 787 delivery as programs costs top $32 billion, The Seattle Times,
(September 24, 2011).
3/DQH'HOLYHU\RI WKHUVWODXQFKLQJ86LQWRWKHVWFHQWXU\%RHLQJ8QLWHG
celebrate new era, The Seattle Times, (May 17, 1995); N. Clark, The Airbus saga: crossed wires
and a multibillion-euro delay business International Herald Tribune, The New York Times,
(December 11, 2006); Gates, op. cit.; X. Xu, Y. Zhao, Build-to-Performance The Boeing 787
Dreamliner, Case study, Rutgers Business School Newark and New Brunswick, NJ, (2010).
12. Kotha and Nolan, op. cit.; D. Turim, D. Gates, Building the 787 Dreamliner: a timeline, The
Seattle Times, (December 15, 2009).
13. Tang and Zimmerman, op. cit.; Horng and Bozdogan, op. cit.; A.J. Shenhar, V. Holzmann, B.
Melamed, Y. Zhao, The Challenge of Innovation in Highly Complex Projects: What Can We
Learn from Boeings Dreamliner Experience? Project Management Journal, 47/2 (2016): 6278.
14. H. Weitzman, Dreamliner lessons to shape Boeing direction, Financial Times, (September
25, 2011); M. Hiltzik, 787 Dreamliner teaches Boeing costly lesson on outsourcing, Los Angeles
Times, (February 15, 2011); Kotha and Nolan, op. cit.; Tang and Zimmerman, op. cit.
15. Turim and Gates, op. cit.
16. B. Domke, Boeing 787 lessons learnt, Airbus, (October 20, 2008), <http://www.
planebusiness.com/buzz/airbus2.pdf>; Kotha and Nolan, op. cit.
17. Domke, op. cit.; Kotha and Nolan, op. cit.; Xu and Zhao, op. cit.; Shenhar, Holzmann,
Melamed, and Zhao, op. cit.; Lee and Anupindi, op. cit.; Turim and Gates, op. cit.
18. Domke, op. cit.; Kotha and Nolan, op. cit.; Xu and Zhao, op. cit.; Shenhar, Holzmann,
Melamed, and Zhao, op. cit.; Lee and Anupindi, op. cit.
19. J.L. Lunsford, Boeing Scrambles to Repair Problems With New Plane Layers of
Outsourcing Slow 787 Production; 'Hostage to Suppliers', The Wall Street Journal, (Dec. 7, 2007).
20. S. Nahmias, Production and operations analysis 5th Edition (McGraw-Hill Irwin, Boston, 2004).
21. B. Holmstrom, Moral Hazard in Teams, Bell Journal of Economics, 13 (1982): 324-340.
22. D. Gates, Boeing 787 supplier halts work for 24 hours after FAA audit, The Seattle Times,
(July 2, 2008).
23. S, Ray, Boeing agrees to buy Vought aircraft 787 operations. Bloomberg news, (July 7, 2009).
24. Lee and Anupindi, op. cit.
25. If Boeing works slowly, it barely incurs any additional cost at that time because the customers
are loyal and the damage of contract penalty has already been done (LN 1 is in such a bad shape,
there is little hope to get it done within 12 months, and Boeing only has to pay contract penalty
IRU WKH UVW PRQWKV :HOOVIDUJR 6HFXULWLHV (TXLW\ 5HVHDUFK %RHLQJ &RPSDQ\ $XJXVW
,I %RHLQJPDNHVDVLJQLFDQWHIIRUWWRFDWFKXSZLWKWKHVFKHGXOHWKHVXSSOLHUVZLOO
UHDSWKHPRVWRI WKHEHQHWEHFDXVHDWWKDWWLPHWKHVXSSOLHUVZHUHSD\LQJIRUDPDMRULW\RI
the development.
26. Exostar, op. cit.
27. Reuters, A wing and a prayer: outsourcing at Boeing, Special Report, (January 2011); Ray, op. cit.
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