How can schools around the world educate their students better? What does the future hold? Most researchers who study these questions in the field of education peer through the lenses of sociology and public policy. HBS professor Clayton M. Christensen and colleagues chose a different approach—the theory of disruptive innovation, often applied to a variety of other industries, such as technology and health care. Christensen's theory was first explored in his two New York Times bestsellers, The Innovator's Dilemma (1997) and The Innovator's Solution (with Michael E. Raynor, 2003).

His latest book, coauthored with Michael B. Horn (HBS MBA '06) and Curtis W. Johnson, shows how the theory of disruptive innovation-which in a nutshell explains why organizations experience difficulty with particular types of innovation and how they might systematically succeed-offers promising insights for improving public education. The book is titled Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns.

According to the authors, "Our goal in writing this book was to dig beneath the sorts of surface explanations for why schools struggle to improve, and the lenses on innovation, which is our field of specialty, proved a great way to help us do just that."

Christensen, Horn, and Johnson recently teamed up via e-mail to answer a few questions from HBS Working Knowledge on the best paths to better education for more schoolchildren.

Martha Lagace: You have decided to study education through the lenses of your research on innovation. How did you come to approach the problem in this way, and what makes the analysis of public education similar to, and different from, other industries you have studied in-depth, such as computers and health care?

Authors: Nearly a decade ago, representatives who had played pioneering roles in the chartered school movement came to us and said, "If you'd just stand next to the world of public education and examine it through the lenses of your research on innovation, we bet you could understand more deeply how to improve our schools."

The ability of these lenses to shed new light on complicated problems has been proven in contexts ranging from national defense to semiconductors; from health care to retailing; and from automobiles to financial services to telecommunications. When we took the people from Education|Evolving up on their invitation, we saw quickly that the same was true in education. Our goal in writing this book was to dig beneath the sorts of surface explanations for why schools struggle to improve, and the lenses on innovation, which is our field of specialty, proved a great way to help us do just that.

Education has many unique facets to it. As people have been quick to point out, in the United States, education is highly regulated; it is first and foremost about the future of children—and thus the future of our country as well—so the stakes are high; and it has certain elements that have made the market difficult to penetrate and lasting reform hard to come by.

That said, our lenses show how any organization can innovate successfully, and the forces at work in schools and districts are the same as those in other organizations. In fact, one very surprising thing is that, on average, schools have done a better job adjusting to disruptions imposed upon them than have companies in the private sector. Our research shows that the classic signs of disruption are now occurring in the world of education, in the same ways they occur in the other contexts we have studied.

Q: As you write, "Disruption is a positive force. It is the process by which an innovation transforms a market whose services or products are complicated and expensive into one where simplicity, convenience, accessibility, and affordability characterize the industry." How in essence do you think about disruption vis-à-vis public education? Where do you see the most room for innovation?

A: The lesson from all industries is that the most promising areas for innovation are pockets of what we call "nonconsumption"—areas that appear unattractive or inconsequential to the industry incumbents and where there are people who would like to do something but cannot access the available offering. By targeting these areas, you have a much greater chance of launching successfully a disruptive innovation that can transform a market.

The puzzle in U.S. education was that, at first blush, there are no obvious areas of nonconsumption; virtually everyone is required to attend school. If you take a deeper look, however, you see that actually there are many pockets of nonconsumption in education in the United States. For example, in many schools, if a student fails a course, he or she has no recourse to make up the class and must simply move on to the next course. There is no option for credit recovery. Likewise, no school can possibly offer all 34 Advanced Placement courses that are out there, and yet there are often students in the schools who would love to take some of the ones that are not offered.

In these foothold areas, computer-based or online learning is beginning to fill the void and plant itself and make inroads in the education system in classic disruptive fashion. Online learning has increased from 45,000 enrollments in 2000 to roughly 1 million in 2007, and shows signs of continuing to grow at an even more rapid pace.

Computer-based learning is an exciting disruption because it allows anyone to access a consistent quality learning experience; it is convenient since someone can take it virtually anywhere at any time; it allows a student to move through the material at any pace; it can customize for a student's preferred learning style; and it is more affordable than the current school system.

Q: What is the promise you see in this regard in the emerging online user networks?

A: Disruption tends to be a two-stage process. In the first stage, although the products are more accessible to users, they are typically still relatively complicated to build. We see this in education; effective and engaging computer-based learning products are not easy to make.

Within a few more years, however, two factors that were absent in stage 1 that are critical to the emergence of stage 2 will have fallen into place. The first will be robust platforms that facilitate the creation of user-generated content. The second will be the emergence of a user network, whose analogues in other industries include eBay and YouTube. A user network is a type of business model in which customers exchange with each other. For example, telecommunications is a user network because we send information to you, and you send it to us.

In education, this will mean that the tools of the software platform will make it so simple to develop online learning products that students will be able to build products that help them teach other students. Parents will be able to assemble tools to tutor their children. And teachers will be able to create tools to help the different types of learners in their classrooms. These instructional tools will look more like tutorial products than courseware initially. And rather than being "pushed" into classrooms through a centralized selection process, they will be pulled into use through self-diagnosis—by teachers, parents, and students who don't have access to another tutoring option.

Q: How would you suggest businesspeople lend their background and expertise to improving education?

A: It's a good question. Given the impact businesspeople have in society, it is crucial that they understand the root causes of why schools have struggled so much and why so many reform efforts have failed historically. Having this understanding will better guide them as they think through which school-improvement programs and initiatives to support.

We are already seeing a relatively big outpouring of activity from businesses, investors, and entrepreneurs behind computer-based learning solutions of various stripes—from mobile-platform solutions to educational gaming to online learning courses for computers in classrooms. This interest and activity should allow us to make great progress in the years ahead.

We also recommend investing in technological platforms that will allow for the robust educational user networks to emerge. Doing so will have extraordinary impact, and funding the development of these platforms and user networks within which learning tools can be exchanged should be financially rewarding for investors.

Q: How would you like to extend this research? What are you working on next?

A: The book is just the beginning. We have founded a nonprofit think tank, Innosight Institute, to promote the ideas from our work to the stakeholders in the system so that we can help create meaningful change. We also are employing the think tank to continue our research and improve our recommendations and understanding of the problems and potential solutions. For example, we are looking at more examples of on-the-ground disruptions in schools to better understand this change and to better understand the key elements of reforms that must be facilitated to bring about improved learning opportunities for everyone. This will help us better inform stakeholders at all levels and in all domains about what they can do to make a positive impact.

We're excited to work with partners and interested parties to make strides in the years ahead in one of the biggest problems facing our country.

Abstract

The ethnic composition of US inventors is undergoing a significant transformation—with deep impacts for the overall agglomeration of US innovation. This study applies an ethnic-name database to individual US patent records to explore these trends with greater detail. The contributions of Chinese and Indian scientists and engineers to US technology formation increase dramatically in the 1990s. At the same time, these ethnic inventors became more spatially concentrated across US cities. The combination of these two factors helps stop and reverse long-term declines in overall inventor agglomeration evident in the 1970s and 1980s. The heightened ethnic agglomeration is particularly evident in industry patents for high-tech sectors, and similar trends are not found in institutions constrained from agglomerating (e.g., universities, government).

To what extent does a leader's inner life affect his or her behavior and actions toward other people?

HBS professor emeritus Abraham Zaleznik, skilled in the practice of psychoanalysis and an admirer of the insights of Sigmund Freud, is well positioned to study the question. Zaleznik has authored or coauthored 15 books as well as the now-classic 1977 Harvard Business Review article "Managers and Leaders: Are They Different?" His latest book, Hedgehogs and Foxes: Character, Leadership, and Command in Organizations, explores motivation, decision making, and leadership skills as they progress in life and in business.

HBS Working Knowledge asked Zaleznik to reflect on the inner life of leaders.

Martha Lagace: Your book is an intellectual and introspective discussion of leadership that seems rare in the literature of leadership today. What motivated you to write the book, and how did you draw on your background in psychoanalysis to approach contemporary characters and issues in leadership?

Abraham Zaleznik: When I wrote my first book on the job of the foreman (1950), an observation and an idea took hold: Leaders have to achieve psychological independence to enable them to apply their talents to the work at hand. This independence frees the leader to expand on his or her talents and thereby become an object to allow subordinates to identify with and to cultivate and apply their own talents in the interests of meeting and even expanding on objectives.

Through years of research work, writing, and reading it became even clearer to me that I was on the edge of understanding and adopting two principles: Leaders need a healthy dose of narcissism to lead, and they also need a healthy dose of paranoia to avoid the trap of group dependency.

While all this was going on, in reflecting on my research and writing, I became absorbed in extensive reading in the social sciences, notably anthropology and above all psychoanalysis. I suppose I could be accused of hero worship when I read intensively and extensively the writings of Sigmund Freud, leading me to apply for candidacy in the Boston Psychoanalytic Institute and then applying for and being granted a waiver of medical and psychiatric prerequisites so that I could receive full training in clinical psychoanalysis. The American Psychoanalytic Association certified me for the practice of psychoanalysis in 1971.

Hedgehogs and Foxes is my 15th book. It is a study of leaders acting in a role but wittingly or unwittingly bringing to this enactment their character. An individual's character is outwardly represented while it is a product of development starting with early childhood. Even when leaders try to hide and disguise their character, their traits are recognizable to others.

Character is on display as leaders structure their organizations and go about making decisions. Some prefer to be intimately involved in the decision process. Others prefer to delegate early on and to remain at a distance from the give-and-take of reaching conclusions. For the research that led to writing Hedgehogs and Foxes, I relied on secondary sources, but focused on critical episodes.

For example, Dwight D. Eisenhower characteristically favored consensus and only reluctantly faced confrontation. The critical episode here was Eisenhower's difficulty during World War II in confronting Field Marshal Bernard Law Montgomery, much to the exasperation of Generals George S. Patton and Omar Bradley. Montgomery fought hard to convince Eisenhower that Eisenhower should remain in England and turn over command to him, with Patton and Bradley as subordinates. To the consternation of Patton and Bradley, Eisenhower first sought to placate Montgomery but finally confronted him when Montgomery failed to follow orders to play his part in the battle plans. An aide to Montgomery intervened and convinced Montgomery that instead of a stern letter, Eisenhower was on the verge of replacing him as commander of one of the armies.

Q: What do the hedgehog and fox metaphors mean in relation to the complexities of leadership?

A: The title of the book is a debt I owe to Isaiah Berlin, the British scholar. Berlin borrowed the notion from the ancient Greek philosophers that hedgehogs know one big thing while foxes know many things. Applied to leadership, hedgehogs reduce reality to one single principle, while foxes know many things and are prepared to adapt to a complex view of the world.

For example, behavioral psychologists have studied pigeons and found that once discovering randomly which button when pressed yielded a corn pellet, pigeons would repeat the act, a form of repetition compulsion. Unfortunately, leaders often become addicted to the compulsion to repeat in the present what succeeded in the past. Human affairs require adaptation and the avoidance of the repetition compulsion.

Q: Your book describes leadership dilemmas facing well-known individuals historically and currently, including Robert S. McNamara, Ronald Reagan, Martin Luther King Jr., and George W. Bush. Could you focus on just one individual and share with us briefly what fascinated you as a scholar of leadership?

A: In addition to the example above of Eisenhower and his reluctance to confront and instead rely on consensus, another example from the book concerns the education of Robert S. McNamara.

He was a brilliant student at the University of California and at Harvard Business School, where he became a member of the HBS faculty. McNamara was a devotee of managerial control, an expertise he applied in his work at the Ford Motor Company and later at the Department of Defense as secretary in President John F. Kennedy's cabinet.

His mantra was measurement. As secretary of defense, McNamara developed, along with key subordinates, including Robert Anthony of the HBS control faculty, long-range procurement cycles. He even tried to get the U.S. Navy to subscribe to a common aircraft for the three branches of the military. The Navy refused to go along, since this branch was concerned about aircraft operating from carriers.

McNamara urged field commanders in Vietnam to apply measurement to enemy losses, but did not realize until it was too late that the measurements were unreliable to assess enemy losses. The most reliable assessments came from correspondents like Neil Sheehan and David Halberstam. McNamara published a book years after he retired to reassess the Vietnam War and his role in it as secretary of defense. His main theme was the failure to examine critically the assumptions leading to U.S. involvement in this disaster. Editorial writers took no pains to spare McNamara's feelings.

The moral I took away from his story is to avoid the perils of the fox and its reliance on a single belief, in this case measurement, and the technology of control.

Q: You authored the 1977 Harvard Business Review article titled "Managers and Leaders: Are They Different?" As you think about business 31 years after that article appeared, do you see changes in the roles you described back then? What have you learned about leaders and managersin business today that encourages optimism, and what gives you concern?

A: Managers are oriented to process, while leaders are attuned to substance. Process is concerned with establishing procedures for solving problems, while substance deals directly with the problems at hand. Process is soon related to obsessive thinking and depressive emotional states, while substance energizes and draws on imaginative thinking. Managers tend instinctively to delegate; leaders like to get involved in working toward solutions to substantive problems.

The picture in business today (along with government) is bleak. The mantra today is to lay off workers and staff, cut costs to the bone. The American automobile industry may not survive as we have known this bellwether star in the industrial firmament. This industry is a prime example of the dangers of the repetition compulsion. I am in a pessimistic frame of mind, and I don't see change until after the U.S. presidential election, and we rid ourselves of the disastrous George W. Bush administration.

Q: How will you continue to explore the rich aspects of leadership that you have described in Hedgehogs and Foxes? What is your next project?

A: I just signed a contract with Palgrave Macmillan for a new edition of a book that I wrote in 1990, Executive's Guide to Motivating People: How Freudian Theory Can Turn Good Executives into Better Leaders. The book is an introduction to psychoanalytic theory and aims to help the executive develop psychological mindedness. It will be sent off to the publisher in December 2008. After that, I will work on two volumes of my collected papers. The first volume will be addressed to an academic audience and the second volume to an audience of practitioners. Both volumes are rich with ideas that have intrigued practitioners and academics, and together will stimulate the imagination of readers.

A proposed advertising deal between Internet competitors Google and Yahoo would reduce competitiveness in the Internet advertising market, likely resulting in higher advertising rates, according to Harvard Business School assistant professor Benjamin Edelman.

In testimony prepared for an appearance before the U.S. House of Representatives Committee on the Judiciary Task Force on Competition Policy and Antitrust Laws, Edelman wrote that the deal could have an anticompetitive effect on Internet advertising. "The proposed agreement creates a serious risk of foreclosing the future of Yahoo's ad platform, and reducing—from three to two—the number of major sellers of sponsored search advertising."

The deal, characterized as a nonexclusive partnership, would allow Google to sell some search ads that display next to Yahoo search results. Yahoo says it would see significant revenue increases from the arrangement, but critics claim Google would be the ultimate winner by consolidating more power in the market.

Edelman prepared the remarks for a June 27, 2008, hearing, which was later rescheduled. Here is the prepared testimony:

Chairman Conyers, Ranking Member Chabot, Members of the Subcommittee:

My name is Benjamin Edelman. I am an assistant professor at the Harvard Business School, where my research focuses on the design of electronic marketplaces, including designing online marketplaces to assure safety, reliability, and efficiency. My full biography and publication list are at http://www.benedelman.org/bio and http://www.benedelman.org/publications. Relevant disclosures appear on the final page of my testimony.

Today the Committee considers the important question of Google's proposed purchase of certain advertising space from Yahoo.

My bottom line:

• Google sets reserve prices and other parameters that substantially determine prices. Contrary to Google's claims, Google's auction does not fully determine prices; Google's actions and policies importantly influence prices.
• Google's purchase of substantial advertising inventory from Yahoo would increase prices for many advertisers that currently buy ads from Yahoo.
• The proposed deal would substantially reduce Yahoo's ability to offer competitive payments to Web site publishers seeking to show pay-per-click ads. Without Yahoo bidding against Google to obtain publishers' inventory, publishers are likely to receive far lower payments.
• Other Google practices, particularly Google's restrictions on export and copying of advertisers' campaigns, further hinder competition in Internet advertising-without any countervailing benefit whatever.

Google Sets Prices

Google has publicly claimed that because it sells ads through an auction, it does not set prices. See, e.g., Larry Page's May 2008 remarks to C|NET: "AdWords is an auction. We're not setting prices. Auctions are determined by supply and demand." 1

I disagree. Google controls a variety of characteristics of its marketplace, and Google can use these characteristics to influence prices.

For example, consider an advertiser that is the sole bidder for a given term, e.g., a product that it alone sells. That advertiser's payment to Google does not reflect bidding to beat a competitor. Rather, that advertiser pays a reserve price set by Google at its discretion.

More generally, Google sets reserve prices for a variety of aspects of its marketplace-including the minimum price for an ad to appear at all, the minimum price for a position in the valuable space at the top of search results, and minimum bids for particular ads and particular keywords.

These minimum bids are not mere baseline requirements that apply equally to all. To the contrary, Google sets different minima for specific ads, specific keywords, and specific advertisers. By raising these minimum bids, Google can increase advertisers' payments.

Furthermore, minimum bids affect the bids of higher-ranked advertisers. Consider an advertiser ("A") who obtains the next-to-last slot. The fee paid by the lowest advertiser ("B") is generally set by Google's minimum bid. But A needs to set its bid high enough to prevent B from electing to raise its bid to take the next-to-last slot. In Internet Advertising and the Generalized Second Price Auction 2 my coauthors and I develop this envy-free condition. In Optimal Auction Design in a Multi-unit Environment 3 my coauthor and I demonstrate that when a search engine raises its minimum bid, the indirect revenue effect (increased payment from higher-ranked advertisers like A can exceed the direct effect (increased payment by the lowest-ranked advertiser, i.e., B. So minimum bids matter even more than intuition suggests.

Other Google decisions can also affect advertisers' payments to Google. Google can elect to increase or decrease the number of advertising positions it shows on a page. Google can change the placement and prominence of ads, or make some ads more prominent than others. Google can reward or penalize advertisers through secret adjustments that only it knows. By making these choices strategically, Google can increase advertisers' costs.

Increased Costs to Advertisers

Once Google controls a substantial share of inventory at Yahoo, advertisers' search advertising options will be severely limited: Save for Google, advertisers will have few viable choices for search advertising. Google will then obtain substantial power to increase prices: If Google increases prices, advertisers will be unable to shift to a competing provider to obtain a comparable quantity of traffic. Shifts to other kinds of advertising—be they banner ads, TV, or print—are similarly unavailing; for typical online advertisers, these are poor substitutes.4

The harm to advertisers will be particularly acute for those advertisers that currently advertise on Yahoo for average to obscure search terms—e.g., small businesses selling unusual products, or local businesses selling in a limited geographic region. At Yahoo, these advertisers currently enjoy prices that are relatively low, because they face relatively few competitors. Once Yahoo begins to sell this traffic through Google, these advertisers will face sharply increased advertising fees. In particular, these advertisers will either have to place their bids through Google, or increase their bids at Yahoo to pay the higher Google price.

Market Concentration and Future Innovation

The proposed agreement creates a serious risk of foreclosing the future of Yahoo's ad platform, and reducing-from three to two-the number of major sellers of sponsored search advertising.

Industry estimates indicate that Google earns dramatically higher fees for each search.5 By assigning substantial traffic to Google, Yahoo can increase its short-run revenues.6

But if Yahoo assigns much of its traffic to Google, advertisers will have little incentive to sign up with Yahoo in the first place. Yahoo will find itself with only the remnants of an ad platform—not a robust marketplace with a wide variety of listings. Yahoo itself has worried that a deal with Google would create "an effective monopoly."7

Serious harms occur to others if Yahoo's ad platform disintegrates. Consumers benefit from diversity in ad platforms so that no single platform can unduly restrict the information available to consumers. Such problems are more than hypothetical. Consider the August 2004 incident in which Google banned an ad critical of President Bush 8—leading to revelation of a variety of Google restrictions on ads about politics, religion, and abortion, among other topics. These are sensitive subjects, and perhaps Google's existing rules are exactly right. But if Google obtains excessive market share, consumers who prefer a different approach will have no viable choice.

The Effect of Market Concentration on Payments to Publishers

The future viability of Yahoo's ad platform is particularly important for publishers seeking to show sponsored search ads in their Web sites or search results. Publishers' payments are set through competition between search providers: To win a publisher's business, Google must offer enough to outbid Yahoo. But if many advertisers cease advertising with Yahoo directly, Yahoo will be unable to offer high payments. Then publishers will have little real alternative to Google—letting Google win a publisher's business while paying far less than current rates.

Google may argue that publishers could show some other kind of advertising in lieu of sponsored search. But sponsored search ads tend to carry higher fees than graphical ads. Moreover, text ads are viewed more favorably by users, e.g., as potentially useful rather than distracting. Also, search ads can better match users' apparent interests. So for many publishers, display ads are not a viable alternative. Nor is any other choice readily apparent.

The Illusory "Non-exclusive" Provision

The parties characterize the proposed relationship as "non-exclusive," which they claim reduces its anti-competitive effect. I disagree. Despite Google's willingness to let Yahoo sell advertising space to others, no other buyer could afford to pay as much as Google. Yahoo is unlikely to exercise its right to sell search ads through other providers, for no such sale is likely to yield revenues comparable to what Yahoo can obtain from Google.

Google's Opaque Approach Hinders Detection of Abuses of Market Power

Google does not disclose the methods by which it sets reserve prices or other details of its dealings with advertisers. Furthermore, Google does not generally disclose the terms of its contracts with publishers.

Due to Google's opacity, advertisers, publishers, and the public face substantial challenges in identifying trends in the terms Google offers. It is therefore unusually difficult to detect any Google abuse of market power; Google can use its market power without leaving a trail of publicly available documents.

API Terms & Conditions as a Further Barrier to Search Engine Competition

I take the Committee's larger concern to be barriers impeding competition among search engines. Looking beyond the proposed Google-Yahoo transaction, I urge the Committee to examine the "may not … cop[y]" provision in Google's AdWords API Terms & Conditions. This provision lacks any plausible pro-competitive benefit, but impedes advertisers' signup with competing paid search providers—thereby hindering competition in search engine advertising.

Google has long offered an application programming interface ("API") by which advertisers can submit advertisements to Google, monitor their advertising campaigns, and update their bids. The API is an automated method for efficient computer-to-computer communications—letting an advertiser use software to manage its account automatically.

The AdWords API provides a function whereby an advertiser can retrieve its ads, and this function would be a natural way to let an advertiser copy ads from Google to a competing vendor. Consider a Google advertiser that wanted to begin to advertise with Yahoo or Microsoft adCenter too. Yahoo, Microsoft, or third-party software developers could help the advertiser use the API to directly download all ads, then reformat the ads for uploading to other providers as desired. In this way, the advertiser could quickly and easily signup-without unnecessary transition costs or delay.

Remarkably, Google's AdWords API Terms & Conditions9 exactly prohibit such copies. The T&C's require, in relevant part, that an "AdWords API Client may not offer a functionality that copies data … from an AdWords account to a non-AdWords account."

The clear effect-and explicitly stated intention-is to impede advertisers' efforts to efficiently copy their ad campaigns to other providers. Instead, advertisers must resort to convoluted procedures to copy their ad campaigns out of Google. For example, Microsoft offers a 17-step procedure to copy Google AdWords ads into Microsoft adCenter. 10

I see no plausible pro-competitive effect of the quoted provision. Moreover, Google's own statements reveal the benefits of data portability. See, e.g., Google CEO Eric Schmidt: "People should be able to move from place to place, and their data is available everywhere" and "open is best for the consumer." 11 In contrast, the quoted provision hinders advertisers considering expanding beyond Google-impeding growth of competing sponsored search providers.

My PPC Platform Competition and Google's "May Not Copy" Restriction 12 presents these API concerns in greater detail.

Disclosures

I appear on my own behalf, not on behalf of Harvard Business School or anyone else.

I serve as a consultant to Microsoft on subjects unrelated to that at issue here.

I serve as cocounsel in Vulcan Golf, LLC, et al., v. Google Inc., et al., Civ. Act. No. 07 CV 3371 (N. Dist. Ill.). I previously served as co-lead counsel in In Re Yahoo Litigation, Master File CV-06 2737 CAS (FMOx) (C. Dist. CA.). These matters are both unrelated to that at issue here.

Companies often manage strategy in fits and starts. Though executives may formulate an excellent strategy, it easily fades from memory as the organization tackles day-to-day operations issues, doing what HBS professor Robert S. Kaplan calls "fighting fires."

A new book by Kaplan and David P. Norton aims to make strategy a continual process. The Execution Premium: Linking Strategy to Operations for Competitive Advantage shows managers how to weave organizational principles into a more effective management system that respects the differences between strategy and operations yet integrates them in a powerful way. Kaplan and Norton introduced the Balanced Scorecard, a performance measurement system, in 1992. The Execution Premium is their fifth book as coauthors.

Kaplan recently explained the ideas behind The Execution Premium and how they bridge the common divide between strategy and operations.

Martha Lagace: What particular issues around execution need to be better addressed in business?

Robert Kaplan: There are two key issues. First is leadership. Without strong visionary leadership, no strategy will be executed effectively.

The second key issue is to recognize that strategy and operations (or tactics) are both important but they are different. The normal course of events is for companies to focus on day-to-day operations and short-term problem solving. Management meetings focus on fighting fires and fixing problems. Often little time and few resources get committed to strategic issues.

We don't advocate abandoning an intense focus on operations and their improvement. But we do advocate planning strategy, not just describing it as important. The senior management team needs to have regular, probably monthly, meetings that focus only on strategy. We describe in the book the different roles, frequencies, participants, and agendas for operational review meetings and strategy review meetings. We open the book with a great quote often but perhaps inaccurately attributed to Sun Tzu in The Art of War: "Strategy without tactics is the long road to victory; tactics without strategy is the noise before defeat." This quote highlights the importance of integrating strategy and operations, a central theme in our strategy execution system.

Q: What are typical challenges and pitfalls when linking strategy with operations? Why is a formal strategy execution system valuable?

A: One challenge or pitfall is that few companies align their operational improvement activities to strategic priorities. Many companies today are practicing Total Quality Management, Six Sigma, or other continuous improvement activities. But these are done across the organization with no sense of priorities or impact from process improvements. Consequently, much effort does not show up in tangible results. Companies need a formal process for using strategic objectives to set priorities for where operational improvements can have the largest impact on strategy execution. We note that quality and process improvement programs are like teaching people how to fish. Strategy maps and scorecards teach people where to fish.

Another pitfall occurs when budgeting and financial planning are done separately from strategic planning. We advocate that the operational plan and budget be driven from the revenue targets in the strategic plan. In The Execution Premium, we describe how a time-driven activity-based cost model provides the previously missing link between the revenue growth targets in a strategic plan and the authorization for spending to supply the quantities of resource capacity that are necessary to fulfill the sales and production needs of the strategic plan. Without this coupling, operational plans either provide too little or too much capacity for the strategic plan.

A third challenge is that most management meetings get consumed with discussions about short-term operational and tactical issues. It is important to meet to discuss and solve operational problems. But companies err when they devote all their time together for fire-fighting and coping with near-term issues. The formal strategy execution system schedules strategy review meetings at a different time from operational review meetings. In that way, each meeting has its own frequency, agenda, information system, and participation, as best meets the goals for that meeting.

Q: Given the proliferation of tools, how should management choose the right one to formulate strategy and improve operations?

A: We don't have a preferred position on strategy formulation methodologies. We have seen each approach lead to success in different circumstances. If, for example, the company has low capital utilization, then some use of a value-based management approach would help to define a financial strategy. If the company does not have a distinctive brand or market presence, a focus on identifying an attractive customer segment, such as through Harvard University professor Michael Porter's positioning framework, W. Chan Kim and Renee Mauborgne's Blue Ocean approach, or C. K. Prahalad and V. Ramaswany's customer co-creation process might prove most relevant.

If the company has distinctive capabilities in important business processes— operations management, customer data mining, or product features and innovation—that are superior to or not possessed by competitors, then the resource-based view and identification of core competencies are effective frameworks for strategy formulation. If the company has a great human capital base, with skilled, experienced, and highly motivated employees, then striving to create a learning organization and encouraging emergent strategies to be proposed can identify promising new strategic approaches.

While we are agnostic with respect to which strategy methodology a company uses to arrive at its strategy, we do believe that creating a strategy map and scorecard for that strategy is the logical and proven next step for putting the strategy into action. That is why we have placed strategy analysis and formulation as Stage 1 of our management system, with planning and translating the strategy as Stage 2.

We take the same position with the various operational improvement methodologies. We don't want to be caught debating the relative merits and shortcomings of TQM, Six Sigma, lean management, and reengineering. We do believe, however, that these methodologies are most effectively applied to the strategic processes identified in a company's strategy map and scorecard. That is why we place planning operations in Stage 4 of the management system, downstream from the Stage 2 processes of translating and planning the strategy. You can't focus on the critical processes for improvement until they have been identified in the strategic planning and translation stage.

Q: What is an Office of Strategy Management, and why is it necessary in a company?

A: The OSM is analogous to a military general's chief of staff. The general is responsible and accountable for developing the strategy to win wars and battles. But a general almost always has a chief-of-staff, often several ranks junior, who leverages the general's time and attention. The chief-of-staff does not create strategy or operational tactics and has no authority or accountability for its execution. A chief-of-staff schedules the general's meetings, ensures that the appropriate people show up at the meeting, attends and takes notes at the meeting, and follows up after the meeting to ensure that the actions decided upon are carried out. The chief-of-staff leverages the general's time by making sure that all the information, people, and follow-up are in place for the general's strategy and tactics to be effectively executed. We recommend that a similar, but expanded, set of tasks be carried out by a small cadre of professionals to orchestrate the various strategy management processes for the executive team.

The Office of Strategy Management has multiple roles and responsibilities. First, as an architect, the OSM designs and embeds any missing strategy and operational management processes into the six-stage strategy execution system. The OSM ensures that all the planning, execution, and feedback processes are in place, and that they are linked together in a closed loop system.

The OSM also serves as the process owner for several strategy and operational management processes, such as those to develop the strategy, translate the strategy, and orchestrate the senior management strategy review meetings. Many of these processes are new to the organization. Since they cross existing business and functional organizational lines, it is natural for the OSM to be their owner. Assigning responsibilities for their execution to the OSM fills a gap in management practice without infringing on the current responsibilities of any existing department or function.

Finally, the OSM is the integrator of many existing activities. This aspect is challenging because organizational and functional units already have primary responsibility for processes such as budgeting, communications, human resources planning and performance management, IT planning, initiative management, and best practice sharing. The OSM must work with the existing owners of these processes to ensure they become aligned to the strategy.

Q: What is the role of leadership in sound execution?

A: While not an explicit part of any of the six strategy execution stages (described below), executive leadership pervades every stage of the management system. Throughout The Execution Premium, we describe organizations that have successfully implemented their strategies. They operate in varied regions and industries, including manufacturing, financial services, consumer services, nonprofit, educational, and public sector. Their strategies differ; some produce low-cost commodity products and services, others deliver complete solutions to their customer, and still others innovate with high-technology products. About the only common element all these diverse successful strategy implementers have in common is exceptional and visionary leadership. In every example, the unit's CEO led the case for change and understood the importance of communicating the vision and strategy to every employee. Without such strong leadership at the top, even the comprehensive management system we introduce in this book cannot deliver breakthrough performance.

In fact, leadership is so important to the strategy management system that we make a rather bold claim that leadership is both necessary and sufficient for successful strategy execution. The necessary condition comes from our experience with the more than one hundred enterprises around the world who have become members of the Balanced Scorecard Hall of Fame. In every instance, the CEO of the organizational unit implementing the new strategy management system led the processes to develop the strategy and oversee its implementation. No organization reporting success with the strategy management system had an unengaged or passive leader.

For Stage 1, the CEO leads the change agenda and drives it from the top to reinforce the mission, values and vision. Leadership sets the ambitious vision and stretch targets. In Stage 2, the executive leader validates the strategy map as an expression of the strategy articulated in Stage 1 and challenges the organization with stretch targets that take all employees outside their comfort zones. In Stage 3, leadership drives alignment of organizational units and is essential for communicating vision, values, and strategy to all employees. Leadership, in Stage 4, supports the cross-organizational unit process improvements. In Stage 5, the leader's openness and skill in running the strategy management review meeting determines its effectiveness for fine-tuning the strategy throughout the year. And in Stage 6 the leader must allow even a well-formulated and executed strategy to be challenged in light of new external circumstances, data collected about the performance of the existing strategy, and new suggestions from employees throughout the organization. Being willing to welcome and subject existing business strategies to fact-based challenges is one of the hallmarks of effective leadership.

Our sufficiency claim, however, is even bolder. The management processes we describe in The Execution Premium give an effective leader a framework for effective strategy execution. None of the six stages in the management system is simple or brief. But collectively, the management processes in the six stages provide leaders with a comprehensive, proven system for managing the development, planning, implementation, review, and adaptation of their strategies.

We believe that our 18 years of observation and work with enterprises in all sectors and regions of the world has led to an emerging science of strategy execution. Each of the six stages in the strategy management system is doable, especially when guided by a senior strategy management office. The one component we cannot provide a blueprint for is visionary and effective leadership. That is why we have come to believe that executive leadership is now both necessary and sufficient for successful strategy implementation.

Q: You have written four other books touching on the Balanced Scorecard (BSC). How has your thinking and your work with this innovation evolved along the way?

A: Our thinking has really evolved from performance measurement, the focus of our first Harvard Business Review article and the first half of the original Balanced Scorecard book, to using the BSC as the cornerstone of a comprehensive management system to help enterprises execute their strategies. We learned early that the BSC was much more than just a better performance measurement system; it can become the basis for a new strategy management system.

Our second book, The Strategy-Focused Organization, identified the five principles we saw successful companies using with the BSC for strategy management: Mobilize, Translate, Align, Motivate, and Govern. In the next three books, including our most recent book, The Execution Premium, we went into more depth in these principles. Strategy Maps focused on principle #2, translate. We described and illustrated how strategy maps and scorecards could be customized to many different strategies. The fourth book, Alignment, described principle #3, how to create and capture corporate synergies through vertical and horizontal alignment of business and support units. The fourth book also contained material on principle #4, aligning and motivating employees for strategy execution in their business or support units.

Our most recent book started out as an in-depth articulation of principle #5, governing to make strategy a continual process." But along the way, my coauthor Dave Norton and I realized that this book was really a synthesis of all our prior work. It encapsulates the latest development in the other four strategy-focused organization principles and integrates them into a comprehensive closed-loop management system that links strategy and operations. Beyond integrating all our prior work, the new book also integrates a wide range of other proven management tools, including mission and vision statements, strategy formulation, target-setting, dynamic budgeting and resource allocation, process improvement, quality methodologies (Six Sigma, lean management, catchball), dashboards, the learning organization, analytics, and emergent strategies.

Q: What's next for you?

A: I have recently become sensitive to a gap in our strategy map/BSC framework by not paying sufficient attention to enterprise risk management (ERM). Obviously, many large financial institutions, despite having risk management departments, have suffered massive losses from failure to understand the risks they took on. All companies, not just financial ones, need to have better methods to assess and monitor their risks. Quantifying financial, operating, technological, and strategic risk is far from trivial, and much needs to be learned to make enterprise risk management more effective. Risk management also requires effective systems for internal control, management control, and governance.

ERM objectives and metrics could certainly have a home in the financial BSC perspective for increasing and sustain shareholder value, along with the traditional objectives of revenue growth and productivity improvements. And companies should have objectives in the process perspective to manage and mitigate the risks associated with their strategies. I am persuaded that embedding risk management objectives in strategy maps and scorecards should be a high priority for where increases in knowledge and professional expertise could add substantial value to an organization. And reviews of a company's risk position should be part of the monthly strategy review meetings. I plan to spend some time in the next few years exploring this issue and hoping to make some progress.