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Recognizing a Firm’s Intellectual Assets
Moving beyond a Firm’s Tangible Resources
After reading this chapter, you should have a good understanding of the following learning objectives:

LO4.1 Why the management of knowledge professionals and knowledge itself are so critical in today’s organizations.

LO4.2 The importance of recognizing the interdependence of attracting, developing, and retaining human capital.

LO4.3 The key role of social capital in leveraging human capital within and across the firm.

LO4.4 The importance of social networks in knowledge management and in promoting career success.

LO4.5 The vital role of technology in leveraging knowledge and human capital.

LO4.6 Why “electronic” or “virtual” teams are critical in combining and leveraging knowledge in organizations and how they can be made more effective.

LO4.7 The challenge of protecting intellectual property and the importance of a firm’s dynamic capabilities.

Learning from Mistakes

In September 2008, Bank of America purchased Merrill Lynch (ML) in the depths of the financial crisis for $50 billion. It seemed like a pretty good deal. However, six months later Bank of America reported $15 billion in losses due to ML’s exposure in toxic mortgage-backed securities bonds. This resulted in a class-action lawsuit, with $2.43 billion going to shareholders and $150 million to the Securities Exchange Commission.1 Despite these early legal woes, ML has helped bolster Bank of America, contributing roughly half the bank’s revenue and the bulk of its profits since 2009, according to bank analysts. From 2009 to 2011, Merrill Lynch made $164.4 billion in revenue and $31.9 billion in total profits. Bank of America over that period, as a total entity, made $326.8 billion in revenue and $5.5 billion in profits. Thus, while the bank was hemorrhaging cash and facing a struggling economy, ML was standing strong and keeping the bank afloat with its army of 16,000 brokers.

Investment bankers, senior executives, and brokers receive Bank of America stock as a significant portion of their compensation in order to align their interests with those of Bank of America’s. Yet hundreds of

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high-performing brokers and financial advisors at Merrill Lynch have recently fled the firm. What happened?

Bank of America mismanaged its most valuable asset—its human capital. While it tried to promote the corporate initiative of cross-selling Bank of America’s banking products and services to ML’s clients, it lost many of its star employees and, of course, their networks of high-net-worth clients in the process.

Leveraging ML’s sales force was the focus of Brian Moynihan, chief executive officer. He cited cross-selling as key opportunities for growth, that is, turning brokerage clients into banking clients, and vice versa. However, as Sanford C. Bernstein analyst Brad Hintz pointed out, “the payout on banking products is less to brokers, and they’re being asked to share client relationships with Bank of America. That’s never a good thing for a broker.” Bank of America poorly executed its cross-selling strategy. This left both clients and brokers demanding higher quality levels of service and questioning why they were associated with Bank of America in the first place. Brokers who were managing over $1 billion in client assets were getting calls from their clients dealing with elementary banking and checking issues. For example, one high-end broker was called about misprinted checks! Additionally, the special white-glove service that ML brokers were accustomed to giving their high value clients was falling short: Mortgages for ultra-high-net-worth individuals were taking nine months to complete, and the standard practice of charging maintenance fees to cover expenses when accounts fell below their minimum could not be waived at the discretion of the broker.

Bank of America also had some inflexible human resource practices that alienated the brokers. For example, Patrick Rush had been teaching continuing education courses focusing on retirement planning at local colleges. Although Merrill saw value in his teaching and community involvement, Bank of America told him he had to stop. Rush left in 2011 and started his own wealth management firm.

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Clearly, Bank of America did not realize that their brokers are highly valuable assets (along with their high-net-worth clients). They paid the price for not fostering the environment for these employees to flourish.

Discussion Questions

1. What actions should Bank of America take to retain its top investment advisors?

2. Can they do this while still leveraging value?

3. Should they continue to cross-sell?

Managers are always looking for stellar professionals who can take their organizations to the next level. However, attracting talent is a necessary but not sufficient condition for success. In today’s knowledge economy, it does not matter how big your stock of resources is—whether it be top talent, physical resources, or financial capital. Rather, the question becomes: How good is the organization at attracting top talent and leveraging that talent to produce a stream of products and services valued by the marketplace?

Bank of America’s problems with Merrill Lynch, its brokerage division, illustrate issues related to effectively developing and retaining talent. Faced with pressures to cross-sell Bank of America products to their high-net-worth clients, many Merrill brokers have chosen to leave and, of course, taken their clients with them. Restrictive personnel policies, such as barring them from teaching continuing education courses, didn’t help either. As a recent article commented, “Merrill’s best assets have legs. A heavy corporate hand could send them sprinting.”

In this chapter, we also address how human capital can be leveraged in an organization. We point out the important roles of social capital and technology.

LO4.1

Why the management of knowledge professionals and knowledge itself are so critical in today’s organizations.

The Central Role of Knowledge in Today’s Economy
Central to our discussion is an enormous change that has accelerated over the past few decades and its implications for the strategic management of organizations.2 For most of the 20th century, managers focused on tangible resources such as land, equipment, and money as well as intangibles such as brands, image, and customer loyalty. Efforts were directed more toward the efficient allocation of labor and capital—the two traditional factors of production.

How times have changed. Today, more than 50 percent of the gross domestic product (GDP) in developed economies is knowledge-based; it is based on intellectual assets and intangible people skills.3 In the U.S., intellectual and information processes create most of the value for firms in large service industries (e.g., software, medical care, communications, and education), which make up 77 percent of the U.S. GDP. In the manufacturing sector, intellectual activities like R&D, process design, product design, logistics, marketing, and technological innovation produce the preponderance of value added.4 To drive home the point, Gary Hamel and the late C. K. Prahalad, two leading writers in strategic management state:

The machine age was a physical world. It consisted of things. Companies made and distributed things (physical products). Management allocated things (capital budgets); management invested in things (plant and equipment).

In the machine age, people were ancillary, and things were central. In the information age, things are ancillary, knowledge is central. A company’s value derives not from things, but from knowledge, know-how, intellectual assets, competencies—all embedded in people.5

In the knowledge economy, wealth is increasingly created by effective management of knowledge workers instead of by the efficient control of physical and financial assets. The growing importance of knowledge, coupled with the move by labor markets to reward knowledge work, tells us that investing in a company is, in essence, buying a set of talents, capabilities, skills, and ideas—intellectual capital—not physical and financial resources.6

knowledge economy

an economy where wealth is created through the effective management of knowledge workers instead of by the efficient control of physical and financial assets.

Let’s provide a few examples. People don’t buy Microsoft’s stock because of its software factories; it doesn’t own any. Rather, the value of Microsoft is bid up because it sets standards for personal-computing software, exploits the value of its name, and forges alliances with other companies. Similarly, Merck didn’t become the “Most Admired” company, for seven consecutive years in Fortune’s annual survey, because it can manufacture pills, but because its scientists can discover medicines. P. Roy Vagelos, former CEO of Merck, the $47 billion pharmaceutical giant, during its long run atop the “Most Admired” survey, said, “A low-value product can be made by anyone anywhere. When you have knowledge no one else has access to—that’s dynamite. We guard our research even more carefully than our financial assets.”7

To apply some numbers to our arguments, let’s ask, What’s a company worth?8 Start with the “big three” financial statements: income statement, balance sheet, and statement of cash flow. If these statements tell a story that investors find useful, then a company’s market value* should roughly (but not precisely, because the market looks forward and the books look backward) be the same as the value that accountants ascribe to it—the book value of the firm. However, this is not the case. A study compared the market value with the book value of 3,500 U.S. companies over a period of two decades. In 1978 the two were similar: Book value was 95 percent of market value. However, market values and book values have diverged significantly. Within 20 years, the S&P industrials were—on average—trading at 2.2 times book value.9 Robert A. Howell, an expert on the changing role of finance and accounting, muses, “The big three financial statements … are about as useful as an 80-year-old Los Angeles road map.”

The gap between a firm’s market value and book value is far greater for knowledgeintensive corporations than for firms with strategies based primarily on tangible assets.10 Exhibit 4.1 shows the ratio of market-to-book value for some well-known companies. In firms where knowledge and the management of knowledge workers are relatively important contributors to developing products and services—and physical resources are less critical—the ratio of market-to-book value tends to be much higher.

As shown in Exhibit 4.1, firms such as Apple, Google, Microsoft, and Oracle have very high market value to book value ratios because of their high investment in knowledge resources and technological expertise. In contrast, firms in more traditional industry sectors such as Nucor and Southwest Airlines have relatively low market to book ratios. This reflects their greater investments in physical resources and lower investment in knowledge resources. A firm like Intel has a market to book value ratio that falls between the above two groups of firms. This is because their high level of investment in knowledge resources is matched by a correspondingly huge investment in plant and equipment. For example, Intel recently invested $3 billion to build a fabrication facility in Chandler, Arizona.11

Many writers have defined intellectual capital as the difference between a firm’s market value and book value—that is, a measure of the value of a firm’s intangible assets.12 This broad definition includes assets such as reputation, employee loyalty and commitment,

intellectual capital

the difference between the market value of the firm and the book value of the firm, including assets such as reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees.

*The market value of a firm is equal to the value of a share of its common stock times the number of shares outstanding. The book value of a firm is primarily a measure of the value of its tangible assets. It can be calculated by the formula: total assets – total liabilities.

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customer relationships, company values, brand names, and the experience and skills of employees.13 Thus, simplifying, we have:

EXHIBIT 4.1 Ratio of Market Value to Book Value for Selected Companies

Company

Annual Sales ($ billions)

Market Value ($ billions)

Book Value ($ billions)

Ratio of Market to Book Value

Apple

157.0

510.0

117.2

4.4

Google

47.3

237.8

58.1

4.1

Oracle

37.1

162.4

44.1

3.7

Microsoft

73.7

229.4

66.4

3.5

Intel

53.8

106.1

45.9

2.3

Nucor

19.8

14.2

7.5

1.9

Southwest Airlines

17.0

7.9

6.9

1.1

Note: The data on market valuations are as of January 4, 2013. All other financial data are based on the most recently available balance sheets and income statements.

Source: finance.yahoo.com .

Intellectual capital = Market value of firm − Book value of the firm

How do companies create value in the knowledge-intensive economy? The general answer is to attract and leverage human capital effectively through mechanisms that create products and services of value over time.

First, human capital is the “individual capabilities, knowledge, skills, and experience of the company’s employees and managers.”14 This knowledge is relevant to the task at hand, as well as the capacity to add to this reservoir of knowledge, skills, and experience through learning.15

human capital

the individual capabilities, knowledge, skills, and experience of a company’s employees and managers.

Second, social capital is “the network of relationships that individuals have throughout the organization.” Relationships are critical in sharing and leveraging knowledge and in acquiring resources.16 Social capital can extend beyond the organizational boundaries to include relationships between the firm and its suppliers, customers, and alliance partners.17

social capital

the network of friendships and working relationships between talented people both inside and outside the organization.

Third is the concept of “knowledge,” which comes in two different forms. First, there is explicit knowledge that is codified, documented, easily reproduced, and widely distributed, such as engineering drawings, software code, and patents.18 The other type of knowledge is tacit knowledge. That is in the minds of employees and is based on their experiences and backgrounds.19 Tacit knowledge is shared only with the consent and participation of the individual.

explicit knowledge

knowledge that is codified, documented, easily reproduced, and widely distributed.

tacit knowledge

knowledge that is in the minds of employees and is based on their experiences and backgrounds.

New knowledge is constantly created through the continual interaction of explicit and tacit knowledge. Consider, two software engineers working together on a computer code. The computer code is the explicit knowledge. By sharing ideas based on each individual’s experience—that is, their tacit knowledge—they create new knowledge when they modify the code. Another important issue is the role of “socially complex processes,” which include leadership, culture, and trust.20 These processes play a central role in the creation of knowledge.21 They represent the “glue” that holds the organization together and helps to create a working environment where individuals are more willing to share their ideas, work in teams, and, in the end, create products and services of value.22

Numerous books have been written on the subject of knowledge management and the central role that it has played in creating wealth in organizations and countries throughout the developed world.23 Here, we focus on some of the key issues that organizations must address to compete through knowledge.

We will now turn our discussion to the central resource itself—human capital—and some guidelines on how it can be attracted/selected, developed, and retained.24 Tom Stewart, former editor of the Harvard Business Review, noted that organizations must also undergo

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significant efforts to protect their human capital. A firm may “diversify the ownership of vital knowledge by emphasizing teamwork, guard against obsolescence by developing learning programs, and shackle key people with golden handcuffs.”25 In addition, people are less likely to leave an organization if there are effective structures to promote teamwork and information sharing, strong leadership that encourages innovation, and cultures that demand excellence and ethical behavior. Such issues are central to this chapter. Although we touch on these issues throughout this chapter, we provide more detail in later chapters. We discuss organizational controls (culture, rewards, and boundaries) in Chapter 9, organization structure and design in Chapter 10, and a variety of leadership and entrepreneurship topics in Chapters 11 and 12.

LO4.2

The importance of recognizing the interdependence of attracting, developing, and retaining human capital.

Human Capital: The Foundation of Intellectual Capital
Organizations must recruit talented people—employees at all levels with the proper sets of skills and capabilities coupled with the right values and attitudes. Such skills and attitudes must be continually developed, strengthened, and reinforced, and each employee must be motivated and her efforts focused on the organization’s goals and objectives.26

The rise to prominence of knowledge workers as a vital source of competitive advantage is changing the balance of power in today’s organization.27 Knowledge workers place professional development and personal enrichment (financial and otherwise) above company loyalty. Attracting, recruiting, and hiring the “best and the brightest,” is a critical first step in the process of building intellectual capital. At a symposium for CEOs, Bill Gates said, “The thing that is holding Microsoft back … is simply how [hard] we find it to go out and recruit the kind of people we want to grow our research team.”28

Hiring is only the first of three processes in which all successful organizations must engage to build and leverage their human capital. Firms must also develop employees to fulfill their full potential to maximize their joint contributions.29 Finally, the first two processes are for naught if firms can’t provide the working environment and intrinsic and extrinsic rewards to retain their best and brightest.30

These activities are highly interrelated. We would like to suggest the imagery of a three-legged stool (see Exhibit 4.2).31 If one leg is weak or broken, the stool collapses.

To illustrate such interdependence, poor hiring impedes the effectiveness of development and retention processes. In a similar vein, ineffective retention efforts place additional

EXHIBIT 4.2 Human Capital: Three Interdependent Activities

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burdens on hiring and development. Consider the following anecdote, provided by Jeffrey Pfeffer of the Stanford University Business School:

STRATEGY SPOTLIGHT

4.1 ENVIRONMENTAL SUSTAINABILITY

GOING “GREEN” HELPS ATTRACT TALENT

When companies go “green,” they often find that the benefits extend beyond the environment. Eco-friendly strategies can also help attract young talent and reduce costs. According to Lindsey Pollack, author of Getting from College to Career:

Students are looking to work for companies that care about the environment. They are almost expecting greenness like they expect work-life balance, ethnic diversity, and globalization.

A recent poll on green employment by MonsterTRAK.com, a job website geared toward students and entry-level hires, found that 80 percent of young professionals are interested in securing a job that has a positive impact on the environment, and 92 percent would be more inclined to work for a company that is environmentally friendly. And, in another survey, 45 percent of Millennials would take a 15 percent pay cut for a job that makes a social and environmental impact.

In response, paper maker NewPage Corp. distributes a brochure that highlights the firm’s commitment to environmental responsibility when it recruits on campuses. It showcases the company’s new corporate headquarters, in Miamisburg, Ohio, that uses 28 percent to 39 percent less energy than a standard office building and is furnished with environmentally friendly materials. Says NewPage CEO Mark Sunwyn, “At the end of the day, we are competing with everyone else for the best talent, and this is a generation that is very concerned with the environment.”

Sources: Weinreb, E. 2012. Proof: A strong CSR program can attract, retain talent for less. greenbiz.com , June 6: np; Luhby, T. 2008. How to Lure Gen Y Workers? CNNMoney.com , August 17: np; Mattioli. 2007. How Going Green Draws Talent, Cut Costs. Wall Street Journal, November 13: B10; and, Odell, A. M. 2007. Working for the Earth: Green Companies and Green Jobs Attract Employees. www.socialfunds.com , October 9: np.

Not long ago, I went to a large, fancy San Francisco law firm—where they treat their associates like dog doo and where the turnover is very high. I asked the managing partner about the turnover rate. He said, “A few years ago, it was 25 percent, and now we’re up to 30 percent.” I asked him how the firm had responded to that trend. He said, “We increased our recruiting.” So I asked him, “What kind of doctor would you be if your patient was bleeding faster and faster, and your only response was to increase the speed of the transfusion?”32

Clearly, stepped-up recruiting is a poor substitute for weak retention.33 Although there are no simple, easy-to-apply answers, we can learn from what leading-edge firms are doing to attract, develop, and retain human capital in today’s highly competitive marketplace.34 Before moving on, Strategy Spotlight 4.1 addresses the importance of a firm’s “green” or environmental sustainability strategy in attracting young talent.

Attracting Human Capital
In today’s world, talent is so critical to the success of what you’re doing—their core competencies and how well they fit into your office culture. The combination can be, well, extraordinary. But only if you bring in the right people. 35

Mindy Grossman, CEO of HSN (Home Shopping Network)

The first step in the process of building superior human capital is input control: attracting and selecting the right person.36 Human resource professionals often approach employee selection from a “lock and key” mentality—that is, fit a key (a job candidate) into a lock (the job). Such an approach involves a thorough analysis of the person and the job. Only then can the right decision be made as to how well the two will fit together. How can you fail, the theory goes, if you get a precise match of knowledge, ability, and skill profiles? Frequently, however, the precise matching approach places its emphasis on task-specific skills (e.g., motor skills, specific information processing capabilities, and communication skills) and puts less emphasis on the broad general knowledge and experience, social skills, values, beliefs, and attitudes of employees.37

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Many have questioned the precise matching approach. They argue that firms can identify top performers by focusing on key employee mind-sets, attitudes, social skills, and general orientations. If they get these elements right, the task-specific skills can be learned quickly. (This does not imply, however, that task-specific skills are unimportant; rather, it suggests that the requisite skill sets must be viewed as a necessary but not sufficient condition.) This leads us to a popular phrase today that serves as the title of the next section.

“Hire for Attitude, Train for Skill” Organizations are increasingly emphasizing general knowledge and experience, social skills, values, beliefs, and attitudes of employees.38 Consider Southwest Airlines’ hiring practices, which focus on employee values and attitudes. Given its strong team orientation, Southwest uses an “indirect” approach. For example, the interviewing team asks a group of employees to prepare a five-minute presentation about themselves. During the presentations, interviewers observe which candidates enthusiastically support their peers and which candidates focus on polishing their own presentations while the others are presenting.39 The former are, of course, favored.

Alan Cooper, president of Cooper Software, Inc., in Palo Alto, California, goes further. He cleverly uses technology to hone in on the problem-solving ability of his applicants and their attitudes before an interview even takes place. He has devised a “Bozo Filter,” an online test that can be applied to any industry. Before you spend time on whether job candidates will work out satisfactorily, find out how their minds work. Cooper advised, “Hiring was a black hole. I don’t talk to bozos anymore, because 90 percent of them turn away when they see our test. It’s a self-administering bozo filter.”40 How does it work?

The online test asks questions designed to see how prospective employees approach problem-solving tasks. For example, one key question asks software engineer applicants to design a table-creation software program for Microsoft Word. Candidates provide pencil sketches and a description of the new user interface. Another question used for design communicators asks them to develop a marketing strategy for a new touch-tone phone—directed at consumers in the year 1850. Candidates e-mail their answers back to the company, and the answers are circulated around the firm to solicit feedback. Only candidates with the highest marks get interviews.

Sound Recruiting Approaches and Networking Companies that take hiring seriously must also take recruiting seriously. The number of jobs that successful knowledge-intensive companies must fill is astonishing. Ironically, many companies still have no shortage of applicants. For example, Google ranked first on Fortune’s 2012 and 2013 “100 Best Companies to Work For,” is planning to hire thousands of employees—even though its hiring rate has slowed.41 The challenge becomes having the right job candidates, not the greatest number of them.

GE Medical Systems, which builds CT scanners and magnetic resonance imaging (MRI) systems, relies extensively on networking. They have found that current employees are the best source for new ones. Recently, Steven Patscot, head of staffing and leadership development, made a few simple changes to double the number of referrals. First, he simplified the process—no complex forms, no bureaucracy, and so on. Second, he increased incentives. Everyone referring a qualified candidate receives a gift certificate from Sears. For referrals who are hired, the “bounty” increases to $2,000. Although this may sound like a lot of money, it is “peanuts” compared to the $15,000 to $20,000 fees that GE typically pays to headhunters for each person hired.42 Also, when someone refers a former colleague or friend for a job, his or her credibility is on the line. Thus, employees will be careful in recommending people for employment unless they are reasonably confident that these people are good candidates.

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Attracting Millennials This generation has also been termed “Generation Y” or “Echo Boom” and includes people that were born after 1982. Many call them impatient, demanding, or entitled. However, if employers don’t provide incentives to attract and retain young workers, somebody else will. Thus, they will be at a competitive disadvantage.43

Why? Demographics are on their side—within a few years they will outnumber any other generation. The U.S. Bureau of Labor Statistics projects that by 2020 Millennials will make up 40 percent of the workforce. Baby boomers are retiring, and Millennials will be working for the next several decades. Additionally, they have many of the requisite skills to succeed in the future workplace—tech-savviness and the ability to innovate—and they are more racially diverse than any prior generation. Thus, they are better able to relate rapidly to different customs and cultures.

What are some of the “best practices” to attract Millennials and keep them engaged?

• Don’t fudge the sales pitch. High-tech sales presentations and one-on-one attention may be attractive to undergrads. However, the pitch had better match the experience. Consider that today’s ultra connected students can get the lowdown on a company by spending five minutes on a social networking site.

• Let them have a life. Typically, they are unenthusiastic about their parents’ 70-or 80-hour workweeks. Millennials strive for more work-life balance, so liberal vacations become very important. They also want assurances that they can use it. At KPMG, 80 percent of employees used 40 hours of paid time off in the first six months of a recent year.

• No time clocks, please. Recent graduates don’t mind long hours—if they can work them on their own schedule. Lockheed Martin allows employees to work nine-hour days with every other Friday off. And Chegg, the online textbook service, recently introduced an unlimited vacation policy—turnover rates among the younger workers dropped 50 percent. As noted by its CEO, Dan Rosensweig, “If you provide them with the right environment, they’ll work forever.”

• Give them responsibility. A chance to work on fulfilling projects and develop new ones on their own is important. Google urges entry-level employees to spend 20 percent of their time developing new ideas. PepsiCo allows promising young employees to manage small teams in six months.

• Feedback and more feedback. Career planning advice and frequent performance appraisals are keys to holding on to young hires. Several firms provide new hires with two mentors—a slightly older peer to help them get settled and a senior employee to give long-term guidance.

• Giving back matters. Today’s altruistic young graduates expect to have opportunities for community service. Wells Fargo encourages its employees to teach financial literacy classes in the community. Accenture and Bain allow employees to consult for nonprofits.

A study from the Center for Work-Life Policy sums this issue up rather well: Instead of the traditional plums of prestigious title, powerful position, and concomitant compensation, Millennials value challenging and diverse job opportunities, stimulating colleagues, a well-designed communal workspace, and flexible work options. In fact, 89 percent of Millennials say that flexible work options are an important consideration in choosing an employer.

Developing Human Capital
It is not enough to hire top-level talent and expect that the skills and capabilities of those employees remain current throughout the duration of their employment. Rather, training and development must take place at all levels of the organization.44 For example, Solectron assembles printed circuit boards and other components for its Silicon Valley clients.45 Its employees

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receive an average of 95 hours of company-provided training each year. Chairman Winston Chen observed, “Technology changes so fast that we estimate 20 percent of an engineer’s knowledge becomes obsolete each year. Training is an obligation we owe to our employees. If you want high growth and high quality, then training is a big part of the equation.”

Leaders who are committed to developing the people who work for them in order to bring out their strengths and enhance their careers will have committed followers. According to James Rogers, CEO of Duke Energy: “One of the biggest things I find in organizations is that people tend to limit their perceptions of themselves and their capabilities, and one of my challenges is to open them up to the possibilities. I have this belief that anybody can do almost anything in the right context.”46

In addition to training and developing human capital, firms must encourage widespread involvement, monitor and track employee development, and evaluate human capital.47

Encouraging Widespread Involvement Developing human capital requires the active involvement of leaders at all levels. It won’t be successful if it is viewed only as the responsibility of the human resources department. Each year at General Electric, 200 facilitators, 30 officers, 30 human resource executives, and many young managers actively participate in GE’s orientation program at Crotonville, its training center outside New York City. Topics include global competition, winning on the global playing field, and personal examination of the new employee’s core values vis-à-vis GE’s values. As a senior manager once commented, “There is nothing like teaching Sunday school to force you to confront your own values.”

Similarly, A. G. Lafley, Procter & Gamble’s former CEO, claimed that he spent 40 percent of his time on personnel.48 Andy Grove, who was previously Intel’s CEO, required all senior people, including himself, to spend at least a week a year teaching high flyers. And Nitin Paranjpe, CEO of Hindustan Unilever, recruits people from campuses and regularly visits high-potential employees in their offices.

Mentoring and Sponsoring Mentoring is most often a formal or informal relationship between two people—a senior mentor and a junior protégé.49 Mentoring can potentially be a valuable influence in professional development in both the public and private sectors. The war for talent is creating challenges within organizations to both recruit new talent as well as retain talent.

Mentoring can provide many benefits—to the organization as well as the individual.50 For the organization, it can help to recruit qualified managers, decrease turnover, fill seniorlevel positions with qualified professionals, enhance diversity initiatives with senior-level management, and facilitate organizational change efforts. Individuals can also benefit from effective mentoring programs. These benefits include helping newer employees transition into the organization, helping developmental relationships for people who lack access to informal mentoring relationships, and providing support and challenge to people on an organization’s “fast track” to positions of higher responsibility.

Mentoring is traditionally viewed as a program to transfer knowledge and experience from more senior managers to up-and-comers. However, many organizations have reinvented it to fit today’s highly competitive, knowledge-intensive industries. For example, consider Intel:

Intel matches people not by job title and years of experience but by specific skills that are in demand. Lory Lanese, Intel’s mentor champion at its huge New Mexico plant (with 5,500 employees) states, “This is definitely not a special program for special people.” Instead, Intel’s program uses an intranet and email to perform the matchmaking, creating relationships that stretch across state lines and national boundaries. Such an approach enables Intel to spread best practices quickly throughout the far-flung organization. Finally, Intel relies on written contracts and tight deadlines to make sure that its mentoring program gets results—and fast.51

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Intel has also initiated a mentoring program involving a job titled technical assistants (TAs) who work with senior executives. This concept is sometimes referred to as “reverse mentoring” because senior executives benefit from the insights of professionals who have more updated technical skills—but rank lower in the organizational hierarchy. And, not surprisingly, the TAs stand to benefit quite a bit as well. Here are some insights offered by Andy Grove (formerly Intel’s CEO):52

In the 1980s I had a marketing manager named Dennis Carter. I probably learned more from him than anyone in my career. He is a genius. He taught me what brands are. I had no idea—I thought a brand was the name on the box. He showed me the connection of brands to strategies. Dennis went on to be Chief Marketing Officer. He was the person responsible for the Pentium name, “Intel Inside,” he came up with all my good ideas.

Clearly, not everyone will have the opportunity to be a marketing manager at Intel and work directly with Andy Grove! So, when it comes to getting promoted, one might ask: How do sponsors differ from mentors?53 Some have argued that in today’s hot competition among professionals for advancement in an organization, having a mentor may provide many benefits—but sponsors are more likely to get one promoted. Why? A mentor may coach you, provide advice, and help prepare you for your next position. A sponsor, on the other hand, is someone in a senior position who’s willing to advocate for and facilitate and enjoy more career moves, make introductions to the right people, translate and teach the secret language of success, and most important, “use up chips” for their protégé. Heather Forest-Cummings, a senior director of research at Catalyst claims: “A mentor will talk with you, but a sponsor will talk about you.”

The idea of sponsorship has gained traction lately as more companies aim to move more women into corporate leadership. A recent study of 4,000 high-level employees found that 19 percent of men had a sponsor, but only 13 percent of women. However, women who had a sponsor were more likely to negotiate for raises, seek promotions and higher salaries, and self more career satisfaction—and get to the top. One of the co-authors of the study, Sylvia Ann Hewlett, president of the Center for Talent Innovation, boldly claims: “Sponsorship is the only way to get those top appointments.”

Sponsorships, of course, involve a two-way street. Below, we provide some advice to those seeking sponsors and their responsibilities and obligations to their sponsors after the matchmaking process is completed.

• Your work must be of the highest quality. Executives need to be convinced that you are loyal, trustworthy, and dependable. After all, they are betting their own reputations on your career.

• Don’t just put your head down and work hard. You need to be noticed and become a known quantity. Become active in your industry, volunteer for larger assignments, and attend conferences.

• Keep in mind that relationships evolve naturally. Don’t simply ask someone to be your sponsor. And, be sure to hedge your bets. After all, your sponsor may leave the organization. So, be sure to nurture relationships with several people.

• Sponsors expect you to reciprocate with your loyal support. Sponsors also benefit from the “power of the posse” to enhance their own careers. After all, no one reaches the top of the organization on their own.

Monitoring Progress and Tracking Development Whether a firm uses on-site formal training, off-site training (e.g., universities), or on-the-job training, tracking individual progress—and sharing this knowledge with both the employee and key managers—becomes essential. Like many leading-edge firms, GlaxoSmithKline (GSK) places strong emphasis on broader experiences over longer time periods. Dan Phelan, senior vice

115

president and director of human resources, explained, “We ideally follow a two-plus-two-plus-two formula in developing people for top management positions.” This reflects the belief that GSK’s best people should gain experience in two business units, two functional units (such as finance and marketing), and in two countries.

Evaluating Human Capital In today’s competitive environment, collaboration and interdependence are vital to organizational success. Individuals must share their knowledge and work constructively to achieve collective, not just individual, goals. However, traditional systems evaluate performance from a single perspective (i.e., “top down”) and generally don’t address the “softer” dimensions of communications and social skills, values, beliefs, and attitudes.54

To address the limitations of the traditional approach, many organizations use 360-degree evaluation and feedback systems .55 Here, superiors, direct reports, colleagues, and even internal and external customers rate a person’s performance.56 Managers rate themselves to have a personal benchmark. The 360-degree feedback system complements teamwork, employee involvement, and organizational flattening. As organizations continue to push responsibility downward, traditional top-down appraisal systems become insufficient.57 For example, a manager who previously managed the performance of 3 supervisors might now be responsible for 10 and is less likely to have the in-depth knowledge needed to appraise and develop them adequately. Exhibit 4.3 provides a portion of GE’s 360-degree system.

360-degree evaluation and feedback systems

superiors, direct reports, colleagues, and even external and internal customers rate a person’s performance.

Evaluation systems must also ensure that a manager’s success does not come at the cost of compromising the organization’s core values. Such behavior generally leads to only short-term wins for both the manager and the organization. The organization typically suffers long-term losses in terms of morale, turnover, productivity, and so on. Accordingly, Merck’s former chairman, Ray Gilmartin, told his employees, “If someone is achieving results but not demonstrating the core values of the company, at the expense of our people, that manager does not have much of a career here.”

EXHIBIT 4.3 An Excerpt from General Electric’s 360-Degree Leadership Assessment Chart

Vision

• Has developed and communicated a clear, simple, customer-focused vision/direction for the organization.

• Forward-thinking, stretches horizons, challenges imaginations.

• Inspires and energizes others to commit to Vision. Captures minds. Leads by example.

• As appropriate, updates Vision to reflect constant and accelerating change affecting the business.

Customer/Quality Focus

Integrity

Accountability/Commitment

Communication/Influence

Shared Ownership/Boundaryless

Team Builder/Empowerment

Knowledge/Expertise/Intellect

Initiative/Speed

Global Mind-Set

Note: This evaluation system consists of 10 “characteristics”—Vision, Customer/Quality Focus, Integrity, and so on. Each of these characteristics has four “performance criteria.” For illustrative purposes, the four performance criteria of “Vision” are included.

Source: Adapted from Slater, R. 1994. Get Better or Get Beaten: 152–155. Burr Ridge, IL: Irwin Professional Publishing.

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STRATEGY SPOTLIGHT

4.2

HCL’S EFFECTIVE 360-DEGREE EVALUATION SYSTEM

In order to foster innovation and encourage collaborative opportunities, leaders should be advised to set the tone by being good collaborators themselves. Collaborative leaders can inspire others in the organization to work with individuals outside of their formal line of work and depoliticize interactions. One method to encourage collaboration from the top is to increase transparency.

Take HCL, an Indian technology and IT enterprise operating in 31 countries, for example. CEO Vineet Nayar showed his commitment to collaboration by adopting a fundamentally different 360-degree evaluation for his top managers—he asked lower-level employees to weigh in on the evaluation of top executives. HCL in the past used a more traditional 360-degree evaluation in which each manager was assessed by a small number of people that made up this manager’s work circle. As Nayar states, “Most of the respondents operated within the same area as the person they were evaluating. This reinforced the boundaries between the parts of the pyramid. But we were trying to change all that. We wanted to encourage people to operate across these boundaries.” To create a more collaborative environment, Mr. Nayar was the first to become more transparent, by posting his own 360-degree evaluation on the Web. Once the new transparency became a part of the organizational culture, more managers were included. Ultimately, HCL introduced a feature called “Happy Feet,” allowing employees to evaluate managers who might affect or influence them.

Increased transparency also seems to be gaining acceptance in other companies and contexts. A third of U.S. executives, according to Aon Hewitt Associates, recognize the value potential of more transparency and share their 360 results with direct reports, up from 20 percent a few years ago. For instance, Dell Inc. is one U.S. company that actively encourages transparent 360-degree evaluations and considers it good management practice. As in the case of HCL, Dell CEO Michael Dell led by example and shared his 360 review with other members of the organization—emphasizing the need for CEOs to lead by example.

Sources: Ibarra, H. & Hansen, M.T. 2011. Are you a collaborative leader? Harvard Business Review, 89(7/8): 68–75; Lublin, J. S. 2011. Transparency pays off in 360-degree reviews. Wall Street Journal. online.wsj.com , December 8: np.

Strategy Spotlight 4.2 discusses HCL’s unique approach to 360-degree evaluations.

Retaining Human Capital
It has been said that talented employees are like “frogs in a wheelbarrow.”58 They can jump out at any time! By analogy, the organization can either try to force employees to stay in the firm or try to keep them from jumping out by creating incentives.59 In other words, today’s leaders can either provide the work environment and incentives to keep productive employees and management from wanting to bail out, or they can use legal means such as employment contracts and noncompete clauses.60 Firms must prevent the transfer of valuable and sensitive information outside the organization. Failure to do so would be the neglect of a leader’s fiduciary responsibility to shareholders. However, greater efforts should be directed at the former (e.g., good work environment and incentives), but, as we all know, the latter (e.g., employment contracts and noncompete clauses) have their place.61

Identifying with an Organization’s Mission and Values People who identify with and are more committed to the core mission and values of the organization are less likely to stray or bolt to the competition. For example, take the perspective of the late Steve Jobs, Apple’s widely admired former CEO:62

When I hire somebody really senior, competence is the ante. They have to be really smart. But the real issue for me is: Are they going to fall in love with Apple? Because if they fall in love with Apple, everything else will take care of itself. They’ll want to do what’s best for Apple, not what’s best for them, what’s best for Steve, or anyone else.

“Tribal loyalty” is another key factor that links people to the organization.63 A tribe is not the organization as a whole (unless it is very small). Rather, it is teams, communities of practice, and other groups within an organization or occupation.

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