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Dear Reader:
I was playing a chasing game with a bunch of six-year-olds the other day and smashed my foot into
the corner of a door. Nothing’s broken—thanks!—but there’s quite a bit of black-and-blue and a whole
lot of stiffness. As painful as it’s been, my injury has put me in mind of two valuable lessons: the firstfrom my mother (Don’t run in the house!), the second from the writers whose work appears in thisissue of Harvard Management Update—remain flexible! My foot doesn’t have much flexibility at the
moment, so my ability to move quickly is severely hampered.The same happens in organizations.
Without flexibility, companies and managers can slow down, sometimes to a dangerous degree.
The issue of flexibility manifests itself in every article of Harvard Management Update thismonth. Not surprisingly, you’ll see some overlap in ideas between several of the articles in thisissue. But read closely, as each author has a distinct take on how companies and managers canachieve and maintain flexibility.
In our cover story, “Five Steps to Thriving in Times of Uncertainty,” business writer Peter Jacobs
considers the ideas of management researchers Michael Hitt of Texas A&M University andKatsuhiko Shimizu of the University of Texas, San Antonio, as well as several other experts andexecutives, to offer a prescription for building and maintaining strategic flexibility. “To thrive
today, managers must find ways to increase their units’ and their organizations’ ability to readand react to industry and market disruptions,” Jacobs writes. In a time when no industry is
fully immune from the unforeseen, this article contains critical lessons for all managers.
We continue with a similar theme in “How Resilient Is Your Company?” on page 5. Booz Allen
Hamilton consultants Gary L. Neilson and Bruce A. Pasternack describe the 10 traits of resilient
enterprises, those that are steadfast enough to weather turbulent times yet flexible enoughto change when change is necessary. Consider how your firm stacks up.
In our Debriefing of Robert Mittelstaedt, dean of the W. P. Carey School of Business at ArizonaState University and author of the book Will Your Next Mistake Be Fatal? (page 10), writer Lauren
Keller Johnson delivers Mittelstaedt’s advice to managers for combating the inflexibility thathas been known to settle in on companies enjoying a run of success. Why look for alternatives
when you’re winning? Because all winning streaks end—usually with unexpected abruptness.
Finally, we get personal in “Who Will Advance Your Cause?” on page 12. Writer Loren Garyworks with Eileen Shapiro, coauthor of Make Your Own Luck: 12 Practical Steps to Taking
Smarter Risks in Business, to cook up a recipe for using empathy to sort out your allies fromthose who may stand in your way. The key is to adopt a more flexible way of looking at theworld so as to see it as others see it.
Enjoy the issue.

Paul Michelman
Editorpmichelman@hbsp.harvard.edu
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December 2005

Volume 10

Number 12n:s o ity
cu i lFo exibFl

harvard

A Newsletter from Harvard Business School Publishingmanagement update

Five Steps toThriving in Timesof Uncertainty

ideas, combined with the insights of other experts and top
executives, provide a valuable framework for increasing
your company’s strategic flexibility.

The critical ability to confront change
and uncertainty
Shimizu and Hitt define strategic flexibility as an organization’s capacity to:by Peter Jacobs

I• Identify major changes in its external environments.
• Quickly commit resources to new courses of action

market with a cheaper product; consumer tastes shift rap-

• Recognize and act promptly when it’s time to halt or

N TIMES OF RAPID CHANGE and heightened uncertainty,

seemingly solid business strategies can derail withastounding speed. An unforeseen competitor enters theidly to a new technology; world events conspire to throttle
your access to key resources. The possibilities for strategic
disruption seem endless.
For a company to thrive today, its
managers must find ways toincrease their units’ and the organization’s ability to read and react toindustry and market changes. Theirgoal: to boost the company’s strategic flexibility by learning how to see
potential disruptions earlier andrespond faster.
For most companies, this does
not come easily, note Katsuhiko
Shimizu of the University of Texas,
San Antonio, and Michael Hitt of
Texas A&M University.
In a 2004 Academy of Management Executive article,
Shimizu and Hitt bring into clear focus the barriers companies face in building strategic flexibility and identify several steps managers can take to overcome them. Theirin response to such changes.

reverse existing resource commitments.

The dynamic competitive landscape of recent years
has made speed a critical component of each of thesecapabilities.
Consider Polaroid. The former
king of instant photography took
years to acknowledge and respondto the advances of digital imaging.
By the time the company finally did,it was too little, too late.
Whether Polaroid was blind toindustry changes, opted to ignore
them, or lacked the resources to
respond effectively is unclear. However, the company exemplifies what
Hitt suggests is a kind of strategic
rigidity. Whatever its corporate
strategy may have been, Polaroid seemed steadfastly committed to that strategy even while technological advances
rendered it irrelevant.
It’s easy enough to scoff at Polaroid’s apparent incompecontinued on page 2

InsideThe 10 Traits
of Resilient
Organizations

HBR Briefings:
Delusionsof SuccessWill Your
Company’s Next
Mistake Be Fatal?

Who Shares Your
Goals? Who Stands
in Your Way?

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How to Thrive in Uncertain Times (continued)

tence, but how prepared is your company to deal with theunforeseen?

Five steps to maintain strategic flexibility
Because managers at every level are subject to psychological and organizational biases, maintaining strategic flexibility is seldom a simple task. The following steps, however,will help.
1. Measure and monitor outcomes.
At Dow Corning Corporation, the senior management
team reviews the strategic performance of each major corporate initiative at least quarterly. “In reality, monitoringis even more fluid because we meet frequently to review
and evaluate project performance against designated targets,” says Scott Fuson, Dow Corning’s chief marketing
officer. “Dow Corning is involved in dozens of diverse
markets where everything changes constantly, so closemonitoring is essential to keep projects on track andwithin budget.”
It is also important, Shimizu and Hitt note, for organizations to think hard about what they measure. For example, if your goal is to capture market share from a rival, you
can’t just measure total sales because the market might wellhave grown and, with it, your rival’s sales as well. Similarly,
if you are shifting focus to new growth initiatives, you can’t
rely on metrics meant to monitor the success of fully
mature businesses.
To further boost organizational adaptability, Fuson
advises companies to keep projects affordable and flexible,
committing resources to new initiatives one stage at a time—
especially at the beginning. “If monitoring suddenly indicates a major change in direction is likely to significantly
improve project outcome but the budget is already stretched
to its limit, the whole initiative could be at risk,” he explains.

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2. Have someone play devil’s advocate.
Leaders need to be aware of their own cognitive biases,
lest they get stuck in a too-rigid way of looking at theworld. Designating a trusted associate—or, better yet,more than one—to assume the role of devil’s advocate
within your team is an excellent way, Shimizu and Hittnote, to uncover our biases.
What about nonteam decisions? Hitt finds that, for lackof time, managers often make key strategic decisions
themselves. But even then, he says, sharing your thinking
with colleagues and seeking their feedback can help you
keep a truly open mind.
The main obstacle to devil’s advocacy is our natural
reluctance to being viewed as a naysayer. The authors point
to General Motors as a telling example. When Roger Smithmanned GM’s helm, anyone who voiced a problem wasquickly dubbed as negative and not a team player. Debra
Meyerson, an associate professor at Stanford University’s
School of Education and (by courtesy) its Graduate Schoolof Business, and author of Tempered Radicals: How Everyday Leaders Inspire Change at Work (Harvard Business
School Press, 2003), says companies need to encourage
people to voice their views even if they disagree with thedominant perspective. “Organizations can’t learn if everyone thinks and speaks in the same tongue,” she says.
3. Pursue external perspectives.
Listening with an open mind to the thoughts and ideasof those with differing viewpoints, whether from outside aparticular business unit or outside the company altogether,is another effective way of countering management biases.
Typically unnoticed, biases such as a tendency to overlook
negative feedback or to act too swiftly grow entrenchedover time, especially if management turnover is low.
Shimizu and Hitt say obtaining fresh external insight is
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• Limit top executives’ tenure. “Arrival of a new out-side CEO,” the authors say, “provides an opportunity
for an organization to revisit old assumptions andcorrect mistakes in past strategic decisions.” Forexample, despite their outstanding performance, thelast two CEOs of Toyota stepped down after four andsix years, respectively.

•

Rotate managers routinely. Many organizations
rotate certain managers and executives as part ofyexternal directors are obliged to learn about the company and, in the process, tend to question policies
and practices long taken for granted.

their training programs, but other companies
leave the same people in the same positions foryears. Stale thinking and inertia inevitably result.
Conversely, cross-training not only broadens anorganization’s knowledge and skills but it also energizes and motivates participants.

lit• Routinely appoint outside board members. Newbitherefore important at every organizational level. Consider
the following steps companies can take to help make it
happen:• Exploit partner alliances. Alliances with otherfirms have become popular strategic moves, usually as a way to mutually capitalize on complementary resources. However, such alliances canalso be excellent sources of fresh ideas, insight,
and learning.

• Create ad hoc advisory groups. A CEO or business

unit leader will often assemble an informal group to
help analyze and assess the potential outcomes ofimportant strategic decisions—for example, whether

MAKING YOUR ORGANIZATION CHANGE-READY
To achieve strategic flexibility, organizations mustembrace change as an inevitable and essential part of anorganization’s growth.
But few corporate leaders do. Indeed, even in unpredictable business climates, managers tend to focus
almost all their energy on successfully executing thecurrent strategy. What they also should be doing is
preparing for an unknown future.
The essential first step in this effort is to ensure thecompany is change-ready at all times—that is, to ensurethat the people within the organization are prepared forand capable of shifting what they do, how they do it, andwith whom they do it.
If such a mindset is not already in place in your company or unit, there are certain steps you can take.

Encourage participative work
Develop more participative approaches to how everyday
business is handled, specifically:• Bring decision making down to the lowest levels
possible.

• Keep the lines of communication open.
• Share information freely.
• Familiarize yourself with the issues faced by frontline
employees.

• Focus on building collaboration through crossfunctional teams.

Drive fear out of your group
Challenge complacency
It’s difficult to motivate people to change when they aresatisfied with their current situation. Explain whychange will inevitably be necessary and provide the relevant information to make employees understand.

Give your employees a voice
Employees who can freely express their ideas—and who
think you will listen to them—will feel more empoweredto act. Encourage open discussions about the change
program, and work to understand resistance by exploring people’s concerns. When people believe their voice
matters, they are more apt to mobilize for change.

Fear encourages people to avoid risks, become internally focused, and stop communicating. It also costs
organizations real money in terms of reduced productivity and diminished quality of work. Aim to reducefear, but do not deny the challenges that come withchange. Employees at all levels in the organization mustfeel free to identify problems and suggest solutions.
They must also feel free to experiment and try new
things without fear of retribution if they fail.
—Siobhan Ford
Adapted from Harvard Business Essentials: Manager’s
Toolkit—The 13 Skills Managers Need to Succeed (Harvard
Business School Press, 2004) and Harvard ManageMentor.

December 2005 3
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How to Thrive in Uncertain Times (continued)

and what the firm should outsource and to which
vendor. Leaders must be clear on their expectations
for what the group will provide and in what form.
Advisory-group participants are most often managers chosen to reflect a broad cross section ofexpertise.

projects and initiatives as a portfolio of options. Doing so
makes it easier to reallocate resources from one project toanother offering even greater promise given the state of themarket.
Smaller organizations tend to have fewer initiatives
under way simultaneously but can easily expand theirdecision portfolios by including small variations andexperiments.

Shimizu and Hitt concede that their suggestions involvesome disadvantages and risk. New executives and managers, for instance, might reshape currently effective
5. Analyze outcomes and apply learning.
strategies simply to add their own distinct mark. The
Flexibility stems from the ability to learn. But do comlearning curve for anyone in a new job also must be a conpanies learn all they can from the strategic initiatives theysideration.
undertake? Probably not. Managers“Be careful about external viewtend to overlook the negative andpoints,” cautions Steve Odland,emphasize the positive. However,“Those who don’t fully
chairman and CEO of Office Depot
only by carefully examining what
(Delray Beach, Fla.). “Those who
understand yourhas led to negative outcomes as well
don’t fully understand your organias positive ones can managers maxiorganization
zation can lead you off track andmize their learning experience.
destroy your brand proposition.
can lead you off
If a corporate acquisition perStrategic inconsistency can confuse
forms poorly, for example, but mantrack and destroy
customers and, ultimately, destroy
agement learns a lot from theshareholder value. Maintaining balyour brand proposition.”experience, the company can divest
ance is therefore critical.”the asset and apply its newfoundknowledge to make future acquisi4. View decisions as ations more successful. Or, if the company’s executive team
portfolio of options.
senses the problem stems from ineffective integration, it
Organizations usually have multiple projects and initiacan postpone divestiture until it better understands thetives under way simultaneously, and it’s critical that leaders
problem.
not let one or two dominate their attention. As markets
Determining the specific value of such learning may notshift, seemingly less significant initiatives may quickly
be possible, but companies ought to consider it as part ofbecome the most valuable.
every project’s return on investment. Often, it will change
One way to maintain a balanced perspective, Shimizu
their perspective significantly.
and Hitt note, is to periodically review the organization’s
A good example, Shimizu and Hitt note, is Cisco Systems. The company has grown considerably through aseries of successful acquisitions. The authors found Cisco
THE IPOD IN THE BIGGER PICTURE
makes a concerted effort to learn as much as possible fromeach acquisition, and takes great care to avoid the deparCompanies cannot allow themselves to make strategic
ture of key personnel who possess significant knowledge
decisions in isolation. When Apple Computerabout the acquired company, its industries, and its mardecided to aggressively enter the personal digital
kets. These employees can become powerful teachers,
entertainment market with its iPod and iTunes, manhelping organizations to see their business and their maragement carefully evaluated the potential impact onkets in a new light. The ability to adopt such new perspecthe firm’s core computer business and focused on how
tives is, of course, a critical element in building strategic
to leverage its potential benefits.
flexibility. ◆“Apple’s strategy has been to use iPod to promote
home entertainment networks powered by its bigticket computers and laptops such as iMac and PowerBook,” wrote Terril Yue Jones in the Los Angeles Times(“King of Music Players,” November 25, 2004).

Peter Jacobs is a freelance business writer based in Wellesley, Mass.
He can be reached at MUOpinion@hbsp.harvard.edu.

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How Resilient Is Your Company?

y

Most resilient organizations share these 10 traits. How does your company measure up?
by Gary L. Neilson and Bruce A. PasternackO

VER THE PAST DECADE, the concept of “resiliency” hasgained a great deal of momentum in management circles. Depending on who is doing the describing, a “resilient”
organization is one that is steadfast enough to weather turbulent times yet flexible enough to change when change isnecessary. Indeed, by some definitions, resilient organizations are characterized by their ability to change beforechange becomes crucial.
In this adaptation from their new book, Results: Keep
What’s Good, Fix What’s Wrong, and Unlock Great Performance, Booz Allen Hamilton consultants Gary L. Neilson
and Bruce A. Pasternack discuss the core attributes of theresilient organization. Our goal in publishing this piece is not
to deliver a formula for how organizations can achieve
resiliency but rather to allow you to compare your company’s
condition with the ideal state as described by the authors.
Understanding where your organization is or is not living
up to the authors’ standards of resiliency may be an essential
first step toward building a healthier company.

—Paul Michelman, editor(From the book Results: Keep What’s Good, Fix What’s
Wrong, and Unlock Great Performance, by Gary L. Neilson
and Bruce A. Pasternack. Copyright © 2005 by Booz Allen
Hamilton, Inc. Published by arrangement with Crown
Business, a division of Random House, Inc.)***

Ten traits of the resilient organization
The hallmark of the resilient organization is the seamlessmanner in which decision rights, information, motivators,
and structure integrate with one another to drive the organization and its performance forward. This seamless alignment is what enables these organizations to demonstrate thefollowing 10 winning behaviors that together drive results.
1. Entertain the inconceivable.
Resilient companies benchmark themselves—not
against others in their industry but against the theoreticallimits of the human imagination. They take the view thatanything that can be conceived can be done. These organizations reach beyond best in class in looking for role models. They look past their market, the next five years, and thestatus quo in preparing their organizations to compete.

They imagine bogeymen around every corner. Resilientorganizations are the first to recognize a burning platform;in fact, they often light the match. They see the handwriting on the wall and anticipate and adapt their organizations to change, always with a focused and productive
sense of urgency. They break the mold, so they can be thefirst to cast the next one.
2. Build a culture of commitment andaccountability.
All organizations make commitments. It’s how they
define these commitments, translate them into decisionrights, and measure performance against them that distinguishes resilient organizations. Commitments and thedecision rights that result are not soft or subject to interpretation; they are etched in stone and obvious to all, particularly to the individuals held accountable. In fact, a resilientorganization’s commitments are hard currency backed by
the “gold standard” of full and clear accountability.
Just as people accept paper money in a gold-backed monetary system, the market invests on the mere promises of a
resilient company, because they know that promises madeby this firm are as good as results. They are backed by appropriate and unambiguous decision rights that are transparent, both internally and externally. There’s nothing to hideand nowhere to hide it. Therefore, shifting blame is a futile
exercise. Welcome to a true meritocracy; this is an organization that extracts the best from its people because it expects
and rewards no less.
Nissan Motor Co. Ltd. distributes a “Values Reference
Manual” to all new managers in which 32 key words are
explicitly defined. Commitment is defined as “taking
responsibility for accomplishing the objective. The objective to be accomplished is expressed by numerical values,
and pledged. Once individuals have committed, they mustachieve the objective except under extraordinary circumstances. When they do not accomplish the objective, individuals must be prepared to accept the consequences.” In
October of 1999, then-COO (now President and CEO)
Carlos Ghosn defined “consequences” in vivid terms when
he put his own job on the line if the company failed toaccomplish the three objectives of Nissan’s Revival Plan
within three years.
“I said that if any one of the three main commitments—
any one of them—was missed, I would resign and, with me,
December 2005 5

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How Resilient Is Your Company? (continued)

all the members of the executive committee,” recalls
Ghosn. “And this helped a lot in communicating the sense
and meaning of ‘commitment’ within the organization.”

fancy of Wall Street. By the same token, resilient companies do not accept the status quo as an article of faith simply because “that’s the way it’s always been done.” They
chart a strategic course based on their best instincts and3. Move the goalposts—every three years.
information, and they stay the course as long as their own
Most resilient companies, like Nissan, are known formarket intelligence validates it. The same holds true for
their rolling and continuous transformations. To motiorganizational changes. They shake up things as necesvate employees and move the organization forward, mansary—that’s part of being resilient—but they don’t change
agement moves out the goalposts, typically every few
for change’s sake or to curry favor with the board, analysts,
years…whether or not they feel the hot breath of compeor shareholders. Resilient organizations have faith in theirtition on their necks. These transformation agendas arepeople and their capacity to make effective decisions andgrounded in the foundational values
execute them even as strategic
and principles of the organization
objectives change. Therefore, theyand have clearly defined end states;
are more sure-footed in pursuing
everyone understands the destinathese objectives—and in dealing
Resilient organizations
tion and the guideposts they mustwith temporary setbacks.
have
faith
in
their
peoplepass along the way. But the route is
They don’t collect “Flavor of the
not mapped. Each unit, team, andMonth” organization improveand in their capacity toindividual must define the journey
ments that others are implementmake effective decisions.
and chart a course.
ing and try to “shoehorn” them into
The organizational building
their model, but they also don’t
blocks are designed and aligned tolook the other way when the needfacilitate their progress, so everyone
for improvement is apparent. They
has the right information, incentives, and authority to be
have a solid foundation built around core values that noteffective. The objectives to be achieved are ambitious; they
only guide decision making but also inspire and motivate
are designed to stretch the organization and the people
employees at all levels.
who populate it, but not until they break. Senior management needs to exercise its best judgment and intuition in
5. Bounce back from adversity.
setting goals that are challenging but manageable.
Even the most resilient organizations encounter setbacks. Healthy DNA does not protect a system from all
4. Show the courage of your convictions.
external risk factors; it does, however, facilitate a quick
Resilient companies do not follow fashion. They do notinternal reaction. When resilient organizations suffer a
succumb to the latest business fads, nor do they court thediscontinuity in their marketplace—be it technologicalinnovation, economic downturn, or competitive challenge—they detect it early and mobilize a response quickly.
UNDERSTANDING RESILIENCY
They don’t waste time and resources assigning blame andapplying makeup. They confront the enemy head on. They
In Results: Keep What’s Good, Fix What’s Wrong, andcauterize wounds and defend core market positions. More
Unlock Great Performance, Gary L. Neilson and Bruce
important, they seize offensive opportunities to pursue
A. Pasternack present their definition of resiliency:
growth aggressively. Resilience is defined as “the ability to
Flexible enough to adapt quickly to external marrecover strength, spirits, etc., quickly.” These organizations
ket shifts, the Resilient organization remains
live up to that name.
steadfastly focused on and aligned behind a coherent business strategy. This forward-looking and6. Think horizontal.
self-correcting type of organization anticipates
When you think of most organizations, you think of achanges routinely and addresses them proactively.
hierarchy, a structure that operates from top to bottom. In
When it does hit a bump in the road—as all combusiness, we are conditioned to think in vertical terms. The
panies do—the Resilient organization distinchain of command runs up and down; you are generally
guishes itself in its response, which is immediate,
promoted up a level. Resilient organizations, however,thorough, and constructive.
manage to introduce a second dimension to their world
view. They capture full value by flattening their organiza6

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tions and working across vertical boundaries, breaking
down silos, transferring best practices, collaborating crossfunctionally, and promoting laterally. They think horizontal—and reap the benefits of a more coordinated, efficient,and broadly competent organization.
The flow of information up and down and across organizational boundaries is critical to maintaining a resilientorganization. If someone in another business unit or function can serve a customer better with information you
have, you give it to her. You do so because you recognizethat a greater good is served and because you are motivatedthrough shared objectives, common metrics, or outrightbonuses for working collaboratively. Silo walls and NIH(“not invented here”) thinking fade into oblivion in theresilient organization. Instead, it’s “How do we get ahead…
so I get ahead?”

input—town hall meetings, ethics hot lines, interviews
with customers and customers’ customers. Employees, inparticular, need to feel free to air substantive grievances
without fear of retribution. All of this is so much posturing,
however, if the organization does not do anything to
acknowledge and address the behavior being questioned.
Resilient organizations act on complaints and end up making positive changes to the organization that accrue to thebenefit of everyone, not just the original complainer.

9. Put your motivators where your mouth is.
The resilient organization does not pay you for one
behavior and promote you for another. All oars—both
financial (e.g., raises, bonuses, benefits) and nonfinancial(e.g., promotions, transfers, exposure)—pull in the same
direction. It’s not “Yes, I know weshould do the right thing for the com7. Self-correct.
pany, but that’s not the signal I’m getting
Resilient organizations havefrom my boss.” Another trademark of
Delivering a negative
developed and institutionalized
the resilient organization is a performreview
isdifficult,butinternal mechanisms for findingance-appraisal system that clearly difand correcting problems before
ferentiates between above-average andthe alternative is anthey reach task-force or profitsubpar performers.
organization overrun
warning proportions. InformaDelivering a negative review is a diffition is timely, robust, andcult, often uncomfortable experience,by mediocrity.
accessible to those who need it,
but the alternative is an organizationand systems and processes haveoverrun by mediocrity—not just because
feedback loops that are autopoor performers stay and fail to improvematic; they don’t have to be triggered from the outside. In
but also because strong performers witness this lack of conshort, resilient companies are self-correcting organisms
sequence and become disillusioned. A resilient organizationthat learn as they grow. As the DNA building blocks are
avoids this dilemma by being straight with employees and byrefined over time, the overall organization becomes more
linking motivators to what matters.
intelligent and agile. It moves up step by step until it reaches
a whole new level of performance. The organizational char10. Refuse to rest on your laurels.
acteristic we’re describing here is more than an earlyResilient organizations are not complacent; in fact, they
warning light; it’s a self-generating remedial system thattake the view that a little paranoia is good for you. Despite
fixes problems before they even reach the radar screen.
irrefutable success, resilient companies never gloat or takesatisfaction in their victories. They reward their people for
8. Listen to the complainers.
a job well done and then move the finish line. To maintain
Resilient organizations do not ignore squeaky wheels;
their market leadership, they need to spend more timethey listen and learn. Complaints are, by their very nature,fine-tuning their organization and less time publicizing
unpleasant. No one likes to hear what he is doing wrong,
their successes. In fact, quite a few resilient companies havebut resilient companies understand that complaints arean active aversion to media exposure, however fawning. It
also opportunities...invitations to improve what isn’t
demotivates employees and takes the organization’s focus
working smoothly. Therefore, resilient companies
off the ball. What matters is what’s measured: results. ◆institutionalize mechanisms for surfacing and addressing
dissatisfaction not only among customers but also among
Gary L. Neilson is a senior vice president at Booz Allen Hamilton
employees.
in Chicago. Bruce A. Pasternack was a senior vice president for
These are the individuals “at the coal face” who reallyalmost 30 years at Booz Allen Hamilton and was a founding
understand how the business operates…or doesn’t. To
partner of its organization and strategic leadership practice.
They can be reached at MUOpinion@hbsp.harvard.edu.
enhance performance, you must find ways to solicit theirDecember 2005 7
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Briefings
In Harvard Business Review Briefings, we present key insights from two
Harvard Business Review articles. To access the full articles, please visit
harvardbusinessonline.org.

>>> Delusions of Success:

How Optimism
Undermines Executives’
Decisionsby Dan Lovallo and Daniel Kahneman
Harvard Business Review, July 2003
HBR OnPoint Reprint # 4279

The Idea in Brief
Three-quarters of business initiatives
flounder—new manufacturing plants
close prematurely, mergers and acquisitions don’t pay off, start-ups fail togain market share. Why? Delusional
optimism: we overemphasize projects’ potential benefits and underestimate likely costs, spinning successscenarios while ignoring the possibility of mistakes.
The culprits? Cognitive biases andorganizational pressures to accentuate
the positive. We can’t eradicate either,
but we can take a more objective viewof an initiative’s likely outcome. How?
Reference forecasting: comparing a
project’s potential outcomes withthose of similar, past projects—to produce more accurate predictions.

The Idea in Practice
ROSE-COLORED GLASSES
We’re subject to numerous cognitive biases:
Anchoring.
Competing for limited funding,we create project proposals accentuating the positive. These initial forecasts skew subsequent analyses of8market and financial information
toward overoptimism: we don’t
adjust our original estimates enoughto account for inevitable problems.
Competitor neglect.
We ignore competitors’ capabilities
and plans. Rushing to secure a newmarket, for example, we forget thatrivals will follow suit. As competitors
ramp up production and marketing,supply outstrips demand—rendering
the market unprofitable.
Exaggerating our abilities
and control.
We take credit for positive outcomes while attributing negative outcomes to external factors, and deny therole of chance in our plans’ outcomes.
Result? We assume we can avoid orovercome all project problems.
We also fall victim to organizational pressures:• We approve proposals with thehighest probability of failure.

• Since only the most promising
proposals attract investment dollars, we make overoptimistic
forecasts. Highly overoptimistic
proposals are approved. We
reward optimism and interpret
pessimism as disloyalty.
Reinforcing one another’s unrealistic views of the future, we undermine
our company’s critical thinking.
THE OUTSIDE VIEW
How to counteract cognitive biases

and organizational pressures? Awareness and a more objective forecasting
method—especially with neverbefore-attempted initiatives. These
steps can give us an “outside view” toaugment our intuitive “inside view”:
Select a set of past projects toserve as your reference class.
A studio executive forecasting salesof a new film selects recent films in thesame genre, featuring similar actors
and comparable budgets.
Assess the distribution ofoutcomes.
Identify the average and extremes
in the reference-class projects’ outcomes. The studio executive’sreference-class movies sold $40 million in tickets on average. But 10%
sold less than $2 million and 5% soldmore than $120 million.
Predict your project’s positionin the distribution.
Intuitively estimate where yourproject would fall along the referenceclass’s distribution. The studio executive predicted $95 million as his newfilm’s sales.
Assess your prediction’s
reliability.
Now counteract your biased prediction. Based on how well your past predictions matched actual outcomes,
estimate the correlation between yourintuitive prediction and the actual
outcome. Express your estimate as acoefficient between 0 and 1(0 = no correlation; 1 = complete correlation). The studio executive expressed
his correlation coefficient as 0.6.
Correct your intuitive estimate.
Adjust your intuitive prediction basedon your predictability analysis.The studioexecutive’s corrected estimate was $62
million: $95M + [0.6 ($40M–$95M)]. ◆harvard management update
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i
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Corporate success has never been so
fragile. Technology breakthroughs,
regulatory upheavals, geopoliticalshocks—these are just a few of theforces undermining today’s businessmodels. With the world growing
increasingly turbulent, perenniallysuccessful companies are failing. Corporate earnings are whipsawing. Performance slumps are proliferating.
Firms can no longer count on the
flywheel of momentum and incumbency to sustain performance.
Instead, they need strategic
resilience: the ability to dynamically
reinvent business models and strategies as circumstances change, to continuously anticipate and adjust tochanges that threaten their core earning power—and to change before theneed becomes desperately obvious.
The quest for resilience starts withthese bold aspirations: a strategy that’s
forever morphing in response to
emerging opportunities and trends;
an organization that’s constantly
remaking its future rather thandefending its past; a company where
revolutionary change comes in lightning-quick, evolutionary steps—withno calamitous surprises, indiscriminate layoffs, or colossal write-offs.
Fantastical, you say? Not if yourcompany addresses four major
challenges.

The Idea in Practice
Any organization striving forstrategic resilience must masterfour challenges:
CONQUER DENIAL
Though warning signs of dramatically changing circumstances abound,• Witness change closeup—and
often. Visit cutting-edge labs,
talk with fervent activists—andanyone under 18. Ask,“What are
the potential consequences of
the changes I’m seeing?”• Find out who in your organization is plugged into the future
and understands its implications for your business model.
Ensure that they have access toyou. Go out to dinner with yourmost freethinking employees.
Talk with potential customers
who aren’t buying from you.
Review proposals that don’t
make it to the top.

• Acknowledge that your company’s strategy will inevitably
get replicated by rivals, supplanted by better strategies,
exhausted as markets become
saturated, or eviscerated whenpower shifts to new players.

y

The Idea in Brief

Example:When domestic-appliance maker
Whirlpool invited 10,000 of its 65,000
employees to brainstorm productbreakthroughs, they generated 7,000+
ideas that spawned 300 small-scale
experiments.
Results? A stream of new products—from Gladiator Garage Works(modular storage units) to the Gator
Pak (an all-in-one food and entertainment center for tailgate parties).

litby Gary Hamel and Liisa Välikangas
Harvard Business Review, September 2003
HBR OnPoint Reprint # 4910

many of us refuse to acknowledge
them because the implications areunpalatable. To boost your corporate
resilience, replace “That can’t betrue” with “We must face the world as
it is.” Become deeply conscious ofwhat’s changing—and perpetuallyconsider how those changes might
affect your firm’s current success.
Here’s how:bi

The Quest for Resilience

LIBERATE RESOURCES
To avoid overfunding moribund
strategies, get cash to people who canbring new ideas to fruition. Create an
investment market inside your firmby giving everyone who controls abudget the ability to provide seedfunding for ideas aimed at transforming the core business.“Investors”
could form syndicates to take on bigger risks or diversify their “portfolios.”
EMBRACE PARADOX
Dedicate as much energy to systematic exploration of new strategic
options as you do to the relentless
pursuit of efficiency. Reward people
for strategic variety, wide-scale experimentation, and rapid resource
deployment.
Your reward? An organization that
responds to change continuously—
without destructive turmoil. ◆VALUE VARIETY
Variety is insurance against theunexpected. Instead of making a single billion-dollar bet, launch a swarm
of $10,000–$20,000 bets—smaller,
lower-risk experiments. Thousandsof ideas will produce dozens of promising ones that may yield a few huge
successes. Test promising ideas
through prototypes, computer simulations, and customer interviews.
Most experiments will fail. But it’s
your experiment portfolio’s performance that matters.
December 2005 9

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Debriefing Robert Mittelstaedt
Dean, W. P. Carey School of Business, Arizona State University

Will Your Next Mistake Be Fatal?
by Lauren Keller Johnson

W

hat’s not to like about success? If you’re not careful,
there’s plenty, says Robert
E. Mittelstaedt Jr., author of WillYour Next Mistake Be Fatal? Avoiding
the Chain of Mistakes That Can
Destroy Your Organization (Wharton
School Publishing, 2004). In manyorganizations, success breeds dangerous attitudes—myopia, hubris,
egocentricity—that may ultimately
cause executives to ignore signs oftrouble because they can’t imagine areason to expect it.
And when such attitudes gounchecked, they can give rise to patterns of repeated mistakes, in which
decision making is not sufficiently
rigorous and the prospect of failure
never seriously considered. In theworst-case scenario, this can lead tothe ruin of once-high-performing
companies (see the sidebar “Where
Strategic Hubris Can Take You”).
Yet many very successful companies
manage to avoid mortal errors. Suchfirms still make big mistakes—but they

commit fewer of them, discover themearlier, and fix them more skillfully andaggressively than less savvy firms.
How to ensure that your company
falls into this camp? Start by understanding the attitudes that spawn aculture of mistakes (see the sidebar“A Bad Attitude” ) and then embed
five principles in your organization’s
culture and management systems.

1.Create systems to detect
patterns of mistakes early
Detecting mistakes promptly is easier
said than done, Mittelstaedt concedes. Yet several techniques canhelp. He recommends training a wide
range of people in your organization
to follow well-established operatingprocedures—especially in functions
related to product or service quality
and customer service—and to watch
for anything that deviates from thenorm. “If you see something you
haven’t seen before—a rise in product defects, a sudden jump in orderdelivery errors—trust the data. Be

A BAD ATTITUDE
A nasty concoction of human tendencies gives rise to the executive shortsightedness, overweening pride, and arrogance that can doom companies.
For one thing, says Robert Mittelstaedt, author of Will Your Next Mistake Be
Fatal?, “If you’re successful, you believe that you know what you’re doing andthat you can and should keep operating in the same way as before.” In addition, “most of us feel compelled to rationalize away bad decisions. It’s a selfprotection mechanism, saying ‘It wasn’t me!’” Finally, a desire to bury failuresoften prevails. “Most physical disasters get investigated,” Mittelstaedt says.
“But in business, people don’t look into disasters as much as they should.”

10

vigilant in finding out what’s goingon,” he advises. And empower people
to address anomalies immediately.
For example, retailer Nordstrom puts
heavy emphasis on making customers happy. Its salespeople are free
to take whatever action they think isrequired to correct a mistake thatrisks angering a customer.
In addition, analyze decisions retrospectively. Ask, “Why did this decision fail/succeed? What have welearned?” In analyzing your successes,“strip out any factors you didn’t control,” Mittelstaedt says. “When external forces are going your way, you
tend to think you did something tocause your success. But, in truth, youwere just in the right place at the righttime. When you remove factors outside your control, you get a clearer
sense of why you really succeeded.”

2.Seek others’expertise
It’s vital for leaders to use advisersand consultants, says Mittelstaedt.
Executives need outsiders’ ideas aswell as someone to help them rise
above the organizational politics thatcan muddy their thinking. Seeking
advice from experts inside and outside the company can serve as a reality check against attitudes that could
blind a leader to ominous signs oftrouble in his organization.
For example, if your unit starts
experiencing difficulty with collections, don’t assume that the problem
is just temporary or minor. Ask yourinternal IT experts to investigate youraccounts-receivable system for
glitches that may have caused the
problem. If your IT people are alreadyoverworked, hire an outside consultant who can investigate the problem.

3.Imagine the unthinkable
Whenever you’re launching a major
initiative—getting a new product tomarket, opening operations in a new
region—use worst-case scenario

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analysis to envision how problems
might play out to their most disturbing end. List all key success factors,
including those beyond your control.
For example, will a positive outcomeof your initiative hinge on sufficient
capital? Or on market acceptance ofyour product by a specific date?
Then describe what could happen
if certain success factors don’t workout: Will you lose a specific amountof money annually? Will you be
forced to scramble for resources?
Come up with a range of potential
scenarios and then make contingency plans for each. Be sure todefine the data points (such as a dropin sales or loss of a key customer) thatwill alert you to the possibility thatsomething has taken a wrong turn.

4.Protect customers at all costs“Too many companies lose track of
their customers,” Mittelstaedt says.
That’s dangerous in a world wherecompetition has reached brutal
extremes. “Customers today getreally mad when they feel they’vebeen badly served. And they can do a
lot of damage.” Indeed, research saysthat customers who aren’t happy withthe way a problem is handled tell
two-and-a-half times as many people

as customers who are satisfied,according to Marc Grainer, chairmanof Customer Care Measurement &Consulting, in Alexandria, Va.
Thus, with every decision you
consider, it’s vital to envision theimpact of mistakes on customers.
Think through the various ways acustomer might perceive a particular
type of mistake and then identify the
implications of those perceptions.
The Coca-Cola Company failed to
do this when it conducted market
research for New Coke. “They had areal disconnect with their current
customers,” Mittelstaedt says. “During the tests, they asked potential
new customers if they liked New
Coke versus Pepsi. They didn’t ask,
‘Do you like New Coke versus old
Coke?’ They focused on the wrong
thing, and the product failed.”

5.Make data analysis a habit“Executives at sophisticated companies don’t go into data denial when
they see an anomaly,” says Mittelstaedt. They don’t blame supply problems on an unexpected weather
problem, for instance. “Instead, theydig deeply into the data to determine
what’s really going on with customers.
And they don’t make light of whatyOverconfidence in your market position can be a dangerous thing. Consider telecommunications giant AT&T. “The company did everythingright in a regulated environment,” says Mittelstaedt. After deregulation,
AT&T’s leaders thought the company was so powerful that “nothing could
dislodge us.”
Owing to this attitude, executives never asked crucial questions, such as“What if the long-distance market becomes more competitive?” “What if
new technologies come along that completely change the market?” Rather
than using scenario planning to envision multiple possible futures and prepare contingency plans for protecting its core long-distance business,
AT&T’s leaders bickered over whether to acquire NCR Corp. (Dayton,Ohio), a move that had nothing to do with strengthening the company’scompetitive position in its core market. In the end, the once-dominant longdistance business sold itself to one of the former “Baby Bells” it used to own.

may strike others as a minor blip.”
For example, suppose your company has recently lost a few customers. “Unhappy customers don’ttake time to complain; they justdefect,” says Mittelstaedt. “And thefew who do take time to squawk call
frontline employees, not the senior
management team. If you’re in a senior managerial role, that means youneed to multiply every lost customer
you do hear about by 10 more thatyou haven’t heard about.” In this case,Mittelstaedt recommends asking
questions about every lost customer,
even if others view your behavior as
overreacting. Your goal? To find out
what caused the defection—and toaddress it promptly.
By taking this approach, youmodel analytical skills and behavior
that can inspire the same in others.
“You need everyone to make a habitof thinking analytically,” says Mittelstaedt. “And that doesn’t necessarilymean thinking quantitatively. It’s allabout wondering why things are happening the way they are.”Moreover, data analysis should be away of life, not a one-time action
intended to address a particular problem. In firms demonstrating this kindof commitment, leaders tolerate being
questioned and challenged. Withstrong data at their disposal, “people
feel they can safely point out that theemperor has no clothes,” says Mittelstaedt. “They focus on data, not opinions or politics. And they’re constantly
trying to get at the root of anomalies.”
By taking this kind of approach,
you create a culture of continual
learning—one in which you andother executives don’t wait for a crisis
to analyze the data. Rather, you conduct regular reviews of what led to
failures and successes. And you
weave analytical thinking into all
your company’s operations. ◆lit

WHERE STRATEGIC HUBRIS CAN TAKE YOU

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Executive Toolkit
by Loren Gary

Who Will Advance Your Cause?

W

ho is going to help you get
the results you are aimingfor? It’s a key question forevery manager. To answer it, you need
to be able to separate out those whoshare your priorities from those who
don’t. But few of us use all the tools at
our disposal to do so.
Determining who is most likely tohelp advance your cause, says Eileen
Shapiro, coauthor with Harvard
Business School professor Howard
Stevenson of Make Your Own Luck:
12 Practical Steps to Taking Smarter
Risks in Business (Portfolio, 2005),
requires you to call on your ability tothink empathetically—to envision
how others view the world.
Without empathy, you can’t judge
whom you may be able to count on
for support or how to encourage it.
“Once you understand how theother person sees the world,” says
Shapiro, a former McKinsey consultant and cofounder of the Cambridge,
Mass.–based consultancy The Hillside Group, “you can focus on creating a large enough area of sharedinterest to get him to invest some of
his time and resources toward yourgoals.”The place to start is using yourpowers of empathy to classify people
into three categories.
Core Allies are those with whom“you have important and enduring
overlaps.” You can trust these people“over a broad range of issues because
you feel fairly comfortable predictingthat their future actions will support

HARVARD BUSINESSSCHOOL PUBLISHING

your mutual goals.”
The Possibles comprise “thosewith whom you can build temporary
or situational overlaps that will bemutually beneficial.” The Possibles are
far more numerous than Core Allies.
You don’t collaborate with them on along-term and trusted basis “as muchas you work alongside them, operating in parallel on particular projects orin particular situations.”
The Null Setters are “those withwhom you have few motivations incommon and who may even stand in
opposition to your goals.” Trying topredict what Null Setters might do in
future circumstances, “you findyourself either at a loss” or worse,pretty sure that they will “try to harm
you in some way.”
As you think about who fits into
which category, look not only inside
your firm but also at the external
players—people and organizations—that can play significant roles in theoutcome of your goals. These external players can include regulators,
customers, or even competitors.
And then beware these pitfalls.

Neglecting your Core Allies
Even though you share fundamental
values and interests with your Core
Allies, you still need to nurture
the bonds that unite you. “Because
the Possibles outnumber your Core
Allies by 10 or even 100 to 1, youhave to spend more time, in absoluteterms, with Possibles than with Core
Allies,” says Shapiro. “But you should

never take your Core Allies for
granted. Time invested here almost
always pays off.”
The flip side is true, too. If you rely
too much on your inner circle ofCore Allies, you can alienate a lot of
valuable Possibles. “‘Big tents’ aretrue in business as well as politics,”
Shapiro says, “so you need to findways to maintain your Core Allies
and include more of the Possibles.”Misreading the Possibles
It’s easy to misread the Possibles. If
you think that your bosses, protégés,joint-venture partners, and investors
are your Core Allies, you’re likely to
be wrong. Usually most or even allthese people are Possibles; their support depends on the situation.
Change the situation, and you change
their levels of support.
By the same token, competingfirms, employee groups, and regulators often also fall into the Possibles
category—when their interests andyours can and/or do overlap. Thenthe key is creating and maintaining alarge enough shared agenda that theother parties are willing to work withyou for your mutual benefit.

Overinvesting in Null Setters
Finally, remember that some people
hold very different goals than you do
and are therefore Null Setters. Trying
to convert these people is usually apoor investment of time and money.
Instead, concentrate yourresources on the people with whom
you have the most significant sharedgoals—your Core Allies and the Possibles. That’s where the power of
empathy comes in—envisioning how
others see the world so you can assessand build areas of shared purpose. ◆Reprint # U0512C: To order a reprint of this article, call
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