How Great Companies Think Differently

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Spotlight on the good Company

How Great
Companies Think
instead of being mere money-generating machines,
they combine financial and social logic to build
enduring success. by Rosabeth Moss Kanter
Spotlight on topic

                                          Rosabeth moss Kanter is the
                                          Ernest L. Arbuckle professor
                                          of Business Administration
                                          at Harvard Business School
                                          and the chair and director of
                                          Harvard University’s Advanced
                                          Leadership initiative. Her most
                                          recent book is SuperCorp: How
                                          Vanguard Companies Create
                                          Innovation, Profits, Growth,
                                          and Social Good (crown, 2009).

How Great
Instead of being mere money-
generating machines, they
combine financial and social
logic to build enduring success.
by Rosabeth Moss Kanter

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aRtwoRK Sarah morris, Midtown—HBO/Grace, 1999
Gloss household paint on canvas, 213.4 × 213.4 cm
Spotlight on tHE Good compAny

                            it’S time that beliefS and theories about business            and human values as decision-making criteria. They
                            catch up with the way great companies operate and             believe that corporations have a purpose and meet
                            how they see their role in the world today. Tradition-        stakeholders’ needs in many ways: by producing
                            ally, economists and financiers have argued that the          goods and services that improve the lives of users;
                            sole purpose of business is to make money—the                 by providing jobs and enhancing workers’ quality of
                            more the better. That conveniently narrow image,              life; by developing a strong network of suppliers and
                            deeply embedded in the American capitalist system,            business partners; and by ensuring financial viability,
                            molds the actions of most corporations, constraining          which provides resources for improvements, inno-
                            them to focus on maximizing short-term profits and            vations, and returns to investors.
                            delivering returns to shareholders. Their decisions               In developing an institutional perspective, cor-
                            are expressed in financial terms.                             porate leaders internalize what economists have
                                I say convenient because this lopsided logic              usually regarded as externalities and define a firm
                            forces companies to blank out the fact that they com-         around its purpose and values. They undertake ac-
                            mand enormous resources that influence the world              tions that produce societal value—whether or not
                            for better or worse and that their strategies shape the       those actions are tied to the core functions of mak-
                            lives of the employees, partners, and consumers on            ing and selling goods and services. Whereas the aim
                            whom they depend. Above all, the traditional view             of financial logic is to maximize the returns on capi-
                            of business doesn’t capture the way great compa-              tal, be it shareholder or owner value, the thrust of
                            nies think their way to success. Those firms believe          institutional logic is to balance public interest with
                            that business is an intrinsic part of society, and they       financial returns.
                            acknowledge that, like family, government, and re-                Institutional logic should be aligned with eco-
                            ligion, it has been one of society’s pillars since the        nomic logic but need not be subordinate to it. For
                            dawn of the industrial era. Great companies work to           example, all companies require capital to carry out
                            make money, of course, but in their choices of how            business activities and sustain themselves. How-
                            to do so, they think about building enduring institu-         ever, at great companies profit is not the sole end;
                            tions. They invest in the future while being aware of         rather, it is a way of ensuring that returns will con-
                            the need to build people and society.                         tinue. The institutional view of the firm is thus no
                                In this article, I turn the spotlight on this very dif-   more idealized than is the profit-maximizing view.
                            ferent logic—a social or institutional logic—which lies       Well-established practices, such as R&D and market-
                            behind the practices of many widely admired, high-            ing, cannot be tied to profits in the short or long runs,
                            performing, and enduring companies. In those firms,           yet analysts applaud them. If companies are to serve
                            society and people are not afterthoughts or inputs to         a purpose beyond their business portfolios, CEOs
                            be used and discarded but are core to their purpose.          must expand their investments to include employee
                            My continuing field research on admired and finan-            empowerment, emotional engagement, values-
                            cially successful companies in more than 20 coun-             based leadership, and related societal contributions.
                            tries on four continents is the basis for my thinking             Business history provides numerous examples of
                            about the role of institutional logic in business.            industrialists who developed enduring corporations
                                Institutional logic holds that companies are              that also created social institutions. The Houghton
                            more than instruments for generating money; they              family established Corning Glass and the town of
                            are also vehicles for accomplishing societal pur-             Corning, New York, for instance. The Tata family es-
                            poses and for providing meaningful livelihoods for            tablished one of India’s leading conglomerates and
                            those who work in them. According to this school of           the steel city of Jamshedpur, Jharkhand. That style of
                            thought, the value that a company creates should              corporate responsibility for society fell out of fashion
                            be measured not just in terms of short-term profits           as economic logic and shareholder capitalism came to
                            or paychecks but also in terms of how it sustains the         dominate assumptions about business and corpora-
                            conditions that allow it to flourish over time. These         tions became detached from particular places. In to-
                            corporate leaders deliver more than just financial re-        day’s global world, however, companies must think
                            turns; they also build enduring institutions.                 differently.
                                Rather than viewing organizational processes as               Globalization increases the speed of change; more
                            ways of extracting more economic value, great com-            competitors from more places produce surprises
                            panies create frameworks that use societal value              and shocks. An intensely competitive global econ-

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 idea in brief
traditional theories of the firm    By contrast, great companies         Great companies work to               There are six facets of insti-
are dominated by the notion         use a different operating logic.     make money, but in their              tutional logic, which radically
of opposition between capital       they believe that business is        choices of how to do so, they         alters leadership and corporate
and labor, disconnecting busi-      an intrinsic part of society, and    consider whether they are             behavior: a common purpose;
ness from society and posing        like the family, government,         building enduring institutions.       a long-term view; emotional
conflicts between them. Ac-         and religion, has been one of        As a result, they invest in the       engagement; community
cording to this view, companies     its pillars for centuries.           future while being aware of the       building; innovation; and
are nothing more than money-                                             needs of people and society.          self-organization.
generating machines.

omy places a high premium on innovation, which             117,000 people in 100 countries. Like many emerging-
depends on human imagination, motivation, and              market enterprises, the Mahindra Group operates in
collaboration. Global mergers and acquisitions add         many industries, including automobiles, finance, IT,
further complexity, with their success resting on how      and several dozen others. And like the great compa-
effectively the organizations are integrated. Moreover,    nies, it invests in creating a culture based on a com-
seeking legitimacy or public approval by aligning cor-     mon purpose to provide coherence amidst diversity,
porate objectives with social values has become a          proclaiming that it is “many companies united by a
business imperative. Corporations that cross borders       common purpose—to enable people to rise.”
face questions of cultural fit and local appropriate-          Globalization detaches organizations from one
ness; they must gain approval from governmental au-        specific society but at the same time requires that
thorities, opinion leaders, and members of the public      companies internalize the needs of many societies.
wherever they operate. Their employees are both in-        Establishing clear institutional values can help re-
ternal actors and the company’s representatives in the     solve this complex issue. For example, PepsiCo has
external community.                                        made health a big part of its aspiration to achieve
    Only if leaders think of themselves as builders of     Performance with Purpose. Nutrition, environmen-
social institutions can they master today’s changes        tal responsibility, and talent retention are pillars sup-
and challenges. I believe that institutional logic         porting the slogan. Performance with Purpose pro-
should take its place alongside economic or financial      vides strategic direction and motivation for diverse
logic as a guiding principle in research, analysis, edu-   lines of business in many countries. It requires a
cation, policy, and managerial decision making. In         gradual shift of resources from “fun for you” to “bet-
the following pages, I will describe six ways in which     ter for you” to “good for you,” in PepsiCo parlance.
great companies use institutional logic, how it gives      It provides a rationale for acquisitions and invest-
them an advantage, and how the perspective can             ments. It is the logic behind the creation of a new
radically change leadership and corporate behavior.        organizational unit, the Global Nutrition Group, and
                                                           new corporate roles, such as chief global health of-
a Common purpose                                           ficer. It guides a quest to reduce or eliminate sugar
Conceiving of the firm as a social institution serves as   and sodium in foods and beverages. Above all, it pro-
a buffer against uncertainty and change by providing       vides an identity for the people who work for Pep-
corporations with a coherent identity.                     siCo all over the world.
As companies grow, acquire, and divest, the busi-              Leaders can compensate for business uncertainty
ness mix changes frequently and job roles often vary       through institutional grounding. Great companies
across countries. So what exactly gives a company a        identify something larger than transactions or busi-
coherent identity? Where are the sources of certainty      ness portfolios to provide purpose and meaning.
that permit people to take action in an uncertain          Meaning making is a central function of leaders, and
world? Purpose and values—not the widgets made—            purpose gives coherence to the organization. Insti-
are at the core of an organization’s identity, and they    tutional grounding involves efforts to build and rein-
can guide people in their efforts to find new widgets      force organizational culture, but it is more than that.
that serve society.                                        Culture is often a by-product of past actions, a pas-
   Consider the Mahindra Group, an $11 billion multi-      sively generated outgrowth of history. Institutional
business company based in Mumbai that employs              grounding is an investment in activities and relation-

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Spotlight on tHE Good compAny

                            ships that may not immediately create a direct road         the software could form the basis for commercial
                            to business results but that reflect the values the in-     products, to demonstrate IBM’s commitment to be-
                            stitution stands for and how it will endure.                ing a contributor to society.
                                Institutional grounding can separate the sur-
                            vivors from those subsumed by global change. A              a long-term focus
                            sense of purpose infuses meaning into an organiza-          Thinking of the firm as a social institution generates a
                            tion, “institutionalizing” the company as a fixture in      long-term perspective that can justify any short-term
                            society and providing continuity between the past           financial sacrifices required to achieve the corporate
                            and the future. The name can change, but the iden-          purpose and to endure over time.
                            tity and purpose will live on. In 2007, Spain’s Grupo       Keeping a company alive requires resources, so fi-
                            Santander acquired Brazil’s Banco Real and folded           nancial logic demands attention to the numbers.
                            it into its Brazilian assets. But Banco Real’s spirit in-   However, great companies are willing to sacrifice
                            volved much more than its financial assets. Its then-       short-term financial opportunities if they are in-
                            CEO Fabio Barbosa was put in charge of creating the         compatible with institutional values. Those values
                            combined entity, Santander Brazil. Although the             guide matters central to the company’s identity and
                            new organization faced pressure to increase branch          reputation such as product quality, the nature of the
                            profitability, under Barbosa’s leadership Banco Re-         customers served, and by-products of the manu-
                            al’s focus on social and environmental responsibility,      facturing process. Banco Real, for instance, created
                            along with its private banking model, were infused          a screening process to assess potential customers’
                            throughout Santander Brazil and the parent.                 societal standards as well as their financial standing.
                                Successful mergers are noteworthy for their em-         The bank was willing to walk away from those that
                            phasis on values and culture. When the merger of            did not meet its tests of environmental and social
                            two Swiss pharmaceutical companies formed Novar-            responsibility. This short-term sacrifice was prudent
                            tis in 1996, CEO Daniel Vasella wanted the new com-         risk management for the longer term.
                            pany’s mission to be globally meaningful and central            Companies using institutional logic are often
                            to the integration and growth strategy. The question        willing to invest in the human side of the organi-
                            was how to provide employees with a tangible ex-            zation—investments that cannot be justified by
                            perience that reflected those values. When I floated        immediate financial returns but that help create
                            the idea of a global day of community service—un-           sustainable institutions. In South Korea, after the
                            heard of in Europe at that time—Novartis agreed.            Asian financial crisis of the late 1990s, Shinhan Bank
                            The company allowed each country organization to            set out to acquire Chohung Bank, a larger and older
                            determine how it wanted to serve local communities,         bank that the government had bailed out. The mo-
                            based on its interpretation of what the two histories       ment the acquisition was announced, 3,500 male
                            and one future would suggest. The day of service            employees of a Chohung Bank union, whose ranks
                            has become an annual Novartis event, held on the            extended to management levels, shaved their heads
                            merger’s anniversary.                                       in protest and piled the hair in front of Shinhan’s
                                Affirming purpose and values through service is         headquarters in downtown Seoul. The acquirer then
                            a regular part of how great companies express their         had to decide whether to go ahead with the acquisi-
                            identities. In June 2011, IBM celebrated its 100th          tion and, if it did so, what it ought to do about Cho-
                            anniversary by offering service to the world. Over          hung’s employees.
                            300,000 IBMers signed up to perform 2.6 million                 Shinhan’s leaders applied institutional logic.
                            hours of service on a global service day. They con-         They negotiated an agreement with the Chohung
                            tributed training and access to software tools, many        union, deferring formal integration for three years,
                            of them developed specially for the occasion, to            giving equal representation to both Shinhan and
                            schools, governmental agencies, and NGOs. Proj-             Chohung managers on a new management commit-
                            ects included training on privacy and antibullying in       tee, and increasing the salary of Chohung employees
                            100 schools in Germany; a new website developed             to match the higher wages of Shinhan employees.
                            in India for the visually impaired, with a launch at        The acquirer also handed out 3,500 caps to cover the
                            50 locations; and access to small-business resources        heads of the protestors. Shinhan invested heavily
                            for women entrepreneurs in the United States. The           in what it called “emotional integration,” holding a
                            company gave the tools away, even in cases where            series of retreats and conferences intended not only

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 to spread strategic and operational information but
 also to foster social bonding and a feeling of being
                                                             Great companies identify
“one bank.” According to financial logic, the acquirer
 was wasting money. In terms of Shinhan’s institu-
                                                             something larger than
 tional logic, the investments were an essential part        transactions to provide
 of securing the future.
     The result: Within 18 months, Shinhan had grown         purpose and meaning.
 both banks’ customer bases, and the Chohung union
 was having a hard time fomenting discontent against
 the benign acquirer. Although a formal merger
 wouldn’t occur for another year and a half, Shinhan
 and Chohung employees were working together on
 task forces and discussing best practices, and ideas
 were spreading that began to make the branches              As a Procter & Gamble executive, Robert McDon-
 look more similar. Employees were, in essence, self-     ald had long believed that the company’s Purpose,
 organizing. By the third year, when formal integra-      Values, and Principles was a cornerstone of its cul-
 tion took place, Shinhan was outperforming not           ture, evoking strong emotions in employees and
 only the banking industry but also the South Korean      giving meaning to the company’s brands. Within
 stock market.                                            a month of becoming CEO in 2010, he elevated the
                                                          purpose—improving the lives of the world’s con-
emotional engagement                                      sumers—into a business strategy: improving more
The transmission of institutional values can evoke        lives in more places more completely.
positive emotions, stimulate motivation, and propel           In P&G West Africa, for instance, every em-
self-regulation or peer regulation.                       ployee has a quantitatively measurable purpose-
Utilitarian rationality is not the only force governing   driven goal: How have I touched this year? So P&G
corporate performance and behavior inside organi-         West Africa’s Baby Care Group set up Pampers mo-
zations; emotions play a major role, too. Moods are       bile clinics to reduce high rates of infant mortality
contagious, and they can affect such issues as absen-     and help babies thrive. A physician and two nurses
teeism, health, and levels of effort and energy. Peo-     travel the region in a van, teaching postnatal care,
ple influence one another, and in doing so they either    examining babies, and referring mothers to hos-
increase or decrease others’ performance levels, as       pitals for follow-ups or immunization shots. They
my study of teams and organizations on winning            also register mothers for mVillage, a text-message
and losing streaks reveals (see my book Confidence,       service (many of the poor in West Africa have cell
Crown, 2004). Well-understood values and princi-          phones) that offers health tips and the chance to ask
ples can be a source of emotional appeal, which can       questions of health care professionals. At the end of
increase employee engagement. Having a statement          each mobile clinic visit, everyone gets two Pampers
of values has become common, so the issue is not          diapers. The emotional tugs for P&G employees are
whether a set of words called “values” exists some-       strong; they feel inspired by the fact that their prod-
where in the company. Adhering to institutional           uct is at the center of a mission to save lives. They
logic makes the regular articulation of values core to    also feel proud that Pampers’ sales have soared and
the company’s work. The CEOs of companies I stud-         that West Africa is among P&G’s fastest-growing
ied, whether headquartered in the U.S., Mexico, the       markets.
UK, India, or Japan, allocated considerable resources         In companies that think of themselves as social
and their own time to breathing new life into long-       institutions, work is emotionally compelling and
standing values statements, engaging managers at          meaning resides in the organization as a whole
many levels in the institutional task of communicat-      rather than in a less sustainable cult of personal-
ing values. The point was not the words themselves        ity. Top leaders exemplify and communicate the
but the process of nurturing a dialogue that would        company’s purpose and values, but everyone owns
keep social purpose at the forefront of everyone’s        them, and the values become embedded in tasks,
mind and ensure that employees use the organiza-          goals, and performance standards. Rather than de-
tional values as a guide for business decisions.          pending on charismatic figures, great companies

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the Benefits of institutional Logic
Companies that                     InstItutIonal logIc                 conceIvIng of the fIrm              strong InstItutIonal values
                                   is built on a foundation            as a social institution             can evoke positive
operate using                      of purpose and values,              generates a long-term               emotions, stimulate
institutional logic                which serve as a buffer             perspective. Short-term             intrinsic motivation,
reap substantive                   against uncertainty and             financial sacrifice be-             and propel self- or peer
benefits.                          change.                             comes permissible in the            regulation.
                                                                       interest of positioning
                                                                       the firm for sustainable

                           “routinize” charisma so that it spreads throughout          term volunteer efforts (IBM’s work following the
                            the organization.                                          Asian tsunami, Hurricane Katrina, and earthquakes
                                                                                       in China and Japan to provide software to track relief
                            partnering with the public                                 supplies and reunite families).
                            The need to cross borders and sectors to tap new busi-         In companies that adhere to an institutional logic,
                            ness opportunities must be accompanied by concern          executives cultivate relationships with public offi-
                            for public issues beyond the boundaries of the firm, re-   cials neither as a quid pro quo nor to push through
                            quiring the formation of public-private partnerships       particular deals. Rather, they seek to understand and
                            in which executives consider societal interests along      contribute to the public agenda even as they influ-
                            with their business interests.                             ence it. For example, PepsiCo’s chief global health of-
                            One paradox of globalization is that it can increase       ficer, who came from the World Health Organization,
                            the need for local connections. To thrive in diverse       is planning a cross-sector project to reduce child-
                            geographies and political jurisdictions, companies         hood obesity. IBM’s CEO, Samuel Palmisano, circum-
                            must build a base of relationships in each country         navigates the globe six or seven times a year to meet
                            with government officials and public intermediaries        with national and regional officials, discussing how
                            as well as suppliers and customers. Only by doing so       IBM can help their countries achieve their goals. This
                            can companies ensure that agendas are aligned even         is not sales or marketing; it’s a high-level conversa-
                            as circumstances—and public officials—keep chang-          tion to demonstrate the company’s commitment to
                            ing. Those external stakeholders are interested as         furthering the development of the countries it oper-
                            much in the corporations’ contributions to the local       ates in. Such engagement at the top helps other IBM
                            community as they are in their transactional capabili-     leaders get a seat at the table when discussions about
                            ties. At the same time, great companies want both an       the country’s future take place.
                            extended family of enduring relationships and a seat           Institution building requires the efforts of many
                            at the table on policy matters affecting their business.   people. The more interested that top leaders are in
                                Public-private partnerships to address societal        external relations, the more likely they are to involve
                            needs are growing in number and importance, and            others and to reward them for building relationships
                            are especially prevalent among enterprises that            with the nation and community. Although relatively
                            think institutionally. Partnerships can take many          few people might hold formal responsibility for
                            forms: International activities, conducted in col-         these external interfaces, a great many might per-
                            laboration with the United Nations and other global        form institutional work by volunteering, attending
                            organizations (such as Procter & Gamble’s Children’s       public meetings, and participating in community
                            Safe Drinking Water program with UNICEF and sev-           service. Such activity projects a sense of authentic
                            eral NGOs); large domestic projects, undertaken in         motivation. Community building is not a hard sell
                            collaboration with government ministries and devel-        for people native to an area or for long-term resi-
                            opment agencies (PepsiCo’s agricultural projects in        dents; there is an emotional pull of place that makes
                            Mexico with the Inter-American Development Bank,           such work desirable. For others whose careers take
                            for example); product or service development to ad-        them across geographies, this work is a way to con-
                            dress unmet societal needs (for instance, P&G’s link-      nect their organizational roles with the places they
                            ages with public hospitals in West Africa); or short-      now live, making them feel more rooted.

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great companIes see busIness              the attentIon placed on                    In a fIrm steered by InstItutIonal
as a primary pillar of society.           social conditions often                    logic, employees can be
this focus facilitates the kind           generates experiences and                  treated as self-determining
of cross-border and cross-                ideas that lead to learning                professionals, coordinating
sector engagement needed                  for innovation in products,                and integrating activities and
to tap global opportunities.              services, and business                     producing innovation through
through the formation of                  models.                                    self-organization in addition
public-private partnerships,                                                         to formal assignments.
firms consider the public
interest along with business

    When leaders come to see themselves as having        rial derived from old tires, desirable in countries that
societal purpose, they can choose to get involved at     are building roads rapidly. An idea from Egypt for
local, national, and even global levels. A few years     saltwater-resistant concrete, helpful for harbor and
ago, the head of IBM Greater China organized a           marine applications, became a product launched in
personal diplomatic mission to Washington, meet-         the Philippines.
ing with White House officials and U.S. politicians          Institution building helps connect partners
to discuss the impact of China’s emergence as an         across an ecosystem, producing business model in-
economic superpower. He had a desire to see both         novation. Cemex started Construrama, a distribu-
nations thrive and believed that his role in a global    tion program for small hardware stores, in 2001 as
company afforded him a unique perspective. After         a response to competition from Home Depot and
retiring in 2009, he remained an IBM “super alum,”       Lowe’s, which were then entering Latin America.
in company parlance, and was supported by IBM in         Construrama offers the small stores training, sup-
attending a major U.S. university for a year, with the   port, a strong brand, and easy access to products.
company’s support, to learn about health care. At        In accordance with its values, Cemex sought deal-
the end of 2010, he returned to China and launched       ers who were trusted in their communities, reject-
an initiative with a Chinese government institute to     ing candidates whose business tactics didn’t meet
develop an IT-enabled evidence base for traditional      the company’s ethics standards. Cemex owns the
Chinese medicine that will build on IBM ties.            Construrama brand and handles promotions but
                                                         doesn’t charge distributors, operate stores, or have
innovation                                               decision-making authority. It requires, however, that
Articulating a purpose broader than making money         stores meet its service standards. Among those is
can guide strategies and actions, open new sources for   participation in community-building philanthropic
innovation, and help people express corporate and        endeavors—expanding an orphanage or improving a
personal values in their everyday work.                  school, for instance. By the mid-2000s, Construrama
Companies’ claims that they serve society become         had opened enough stores to qualify as a large retail
credible when leaders allocate time, talent, and re-     chain in Latin America and was expanding into other
sources to national or community projects without        developing countries.
seeking immediate returns and when they encour-              Creating opportunities for individuals to use
age people from one country to serve another. IBM’s      company resources to serve society furthers
Corporate Service Corp, for instance, develops fu-       institution-building goals. Novartis employees serve
ture leaders by sending diverse teams of the com-        in hospitals, where they see firsthand the challenges
pany’s best talent on monthlong projects around the      of disease and how their drugs are used. In 2011, P&G
world. The attention placed on social needs often        employees set out in Tide Loads of Hope vans to
generates ideas that lead to innovations. For Cemex,     visit communities in the southern U.S. ravaged by
operating by institutional logic and considering un-     floods. In the mobile Laundromats, managers and
met societal needs produced innovations such as an-      other professionals washed and folded clothes for
tibacterial concrete, which is particularly important    local people, getting to know them and their circum-
for hospitals and farms; water-resistant concrete,       stances. These kinds of interactions express corpo-
useful in flood-prone areas; and road surface mate-      rate values and produce valuable learning, too.

                                                                                                     november 2011 Harvard Business Review 9
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                                                                                         Managers in great companies understand that
companies’ claims that they                                                          formal structures can be too general or too rigid
serve society gain credence                                                          to accommodate multidirectional pathways for
                                                                                     resource and idea flows. Rigidity stifles innova-
when they allocate resources                                                         tion. Informal, self-organizing, shape-changing,
to community projects without                                                        and temporary networks are more flexible and
                                                                                     can make connections between people or con-
seeking immediate returns.                                                           nect bundles of resources more quickly. Employ-
                                                                                     ees’ formal roles come to resemble the home
                                                                                     base from which they are continuously mobile
                                                                                     as they carry out daily tasks and projects, de-
                            Self-organization                                        velop work relationships, and participate in team
                            Great companies assume they can trust people and         or group activities. Matrix organizations—in
                            can rely on relationships, not just rules and struc-     which individuals report to two or more bosses
                            tures. They are more likely to treat employees as        depending on the different dimensions of their
                            self-determining professionals who coordinate and        tasks—become what I dub a matrix on steroids.
                            integrate activities by self-organizing and generating   People are accountable along many dimensions
                            new ideas.                                               simultaneously, attending to multiple projects
                            Institutional logic holds that people are not            and using their networks to assemble resources for
                            paycheck-hungry shirkers who want to do the bare         all those projects, often without going through a
                            minimum, nor are they robots that can be ordered         decision-making hierarchy.
                            to produce high performance. Instead, employees              Although there is a drudgery and confinement
                            make their own choices about which ideas to sur-         component to many jobs—plenty of Cemex em-
                            face, how much effort to put into them, and where        ployees work in factories, Shinhan’s banks have
                            they might contribute beyond their day jobs. Re-         tellers stuck behind counters, and every company
                            source allocation is thus determined not only by         has stay-at-desk support staff—trusting people to
                            formal strategies and budgetary processes but also       make choices about where, when, and with whom
                            by the informal relationships, spontaneous actions,      they should work makes jobs more engaging. For
                            and preferences of people at all levels.                 example, on any given day about 40% of IBMers in
                                Fully understanding a company requires               the U.S. do not go to an IBM office. They work at
                            knowledge of its social structure and informal net-      home or at customer sites, moving between loca-
                            works, and optimizing performance requires social        tions and taking vacations at times of their choos-
                            investments. At Shinhan Bank, the two banks self-        ing. IBM’s work-at-home programs, such as the one
                            integrated through social bonds and relationships        started in Japan in 2001, have caught the attention
                            well in advance of the three-year mark when of-          of governments interested in keeping women with
                            ficial integration was to take place. The new con-       technical degrees in the workforce. In some cases,
                            nections manifested in such actions as each bank’s       IBM offers allowances to support infrastructure
                            voluntarily hanging the other’s banner in its head-      in the home, which has enabled a Harvard gradu-
                            quarters. At Procter & Gamble, managers in Brazil        ate working in India to combine project work with
                            turned strategic and organizational traditions on        child-rearing, for instance, and a software manager
                            their head to develop low-cost, high-quality alter-      from Egypt to move with her husband to Dubai.
                            natives to premium products. They undertook this             Institutional logic assumes that people can
                            risky initiative on their own and self-organized to      be trusted to care about the fate of the whole en-
                            ensure closer cross-functional teamwork and part-        terprise—not just about their own jobs or promo-
                            nerships with customers. They felt that they had an      tions—and to catalyze improvements and innova-
                            obligation to improve the lives of consumers who         tions without waiting for instructions or sticking
                            could not afford premium products. Similar insti-        to the letter of a job description. Job descriptions
                            tutional logic led the P&G Himalaya team, a global       nowadays document only part of what people do;
                            cross-functional group, to find ways to make Gil-        performance reviews and salary bands capture
                            lette razors affordable and desirable to men often       only some of the activities through which people
                            bloodied by barbers using rusty or worn-out blades.      might add the most value for the company.

10 Harvard Business Review november 2011
                                                          FoR ARticLE REpRintS cALL 800-988-0886 oR 617-783-7500, oR viSit hbR.oRg

   When people self-organize to create networks        too. After a year of informal self-organization, the
to share information, new initiatives or innova-       network found an IBM executive sponsor. IBM
tions are often the result. Organizations must en-     then designated virtualization an emerging busi-
courage the creation of such networks, of course,      ness opportunity and provided funding for it.
and facilitate them through communication plat-
forms or meeting spaces, but the networks usually      my aRgument has come full circle. A logic that justi-
flourish best if they spring from volunteers who       fies treating employees as self-determining volun-
do things that bosses might not have anticipated.      teers—in essence, as true professionals who care
What’s more, these self-organized networks often       about high performance because they believe in
keep good ideas alive long after an organization       the company as institution—makes it important to
would have abandoned them.                             have a motivating purpose and values to provide
    For example, three PepsiCo managers in Latin       coherence and common identity. The first enables
America had shared a dream for around a decade         the last. The six principles I describe in this article
of developing new kinds of potatoes that were          are interrelated and share many characteristics.
suitable for southern climates, less starchy, and      Especially for great global companies, institution
environmentally sustainable. They felt that the ini-   building is not the result of carrying out specific
tiative should be based in Peru, the potato’s birth-   activities but a coherent, holistic pursuit in which
place. The troika remained in contact despite their    elements reinforce one another, are inextricably in-
moving to different locations, and even after years    tertwined, and reflect a logic and leadership style
of ho-hum response, they presented their ideas         that permeate the corporation.
wherever they could. They eventually received              Skeptics abound, of course. Firms that present
a boost when a new Peruvian potato chip whose          themselves as institutions concerned with serving
creation they championed became a sensation.           society often come under more scrutiny than oth-
The chips, which used multicolored potatoes from       ers do, and they must withstand criticism about the
small farmers in remote villages in the Andes, com-    gap between stated aspirations and performance,
bined nutrition, tastiness, and social contribution.   financially and socially. If they make money while
Proof of concept turned the dream into reality: In     doing good, they will be criticized for manipula-
August 2010, CEO Indra Nooyi announced the es-         tion; if they do some good but not enough to solve
tablishment of a global potato development center      complex problems, they will be criticized for lack
in Peru, headed by one of the three champions.         of courage or commitment. Despite a growing
    Self-organizing communities can be a potent        number of advocates for a new kind of capitalism
force for change, propelling companies in direc-       that finds win-win opportunities by creating value
tions they might not have taken otherwise. People      for both business and society, there is still contro-
with no formal orders serve as explorers and en-       versy over the obligations of business.
trepreneurs. For example, had it not been for self-        The great global enterprises are not waiting for
forming networks, IBM might have lagged behind         grand new theories or perfect answers. Their lead-
or even missed out on two big business ideas: vir-     ers already use an institutional or social logic to
tualization and green computing. These emerged         supplement economic or financial logic in guiding
as among IBM’s top strategic priorities after an In-   and growing their enterprises. Institutional logic
novation Jam in July 2006, a web chat spanning         cannot be captured by cost-benefit equations or
several days to which over 140,000 employees           reduced to the language of economics, and yet
contributed ideas.                                     it turns out to be a powerful driver of financial
   The virtualization initiative came together         performance.
outside of formal structures and, initially, as a          Leaders in the great companies can tell a dif-
voluntary activity. Some 200 early adopters of vir-    ferent story about the basis for their decisions. In
tual platforms—such as Linden Labs’ Second Life        so doing, they are able to produce new models for
and similar platforms—found each other through         action that can restore confidence in business and
the company’s chat rooms and created an ad hoc         will change the world in which we live.
group of people who shared ideas in their free time                                        hbR Reprint R1111c
through avatars and weekly phone calls, with con-
ference lines sometimes open in the virtual world,

                                                                                                  november 2011 Harvard Business Review 11

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