Harvard Business Review_breakthrough ideas for 2009

hbr.org | February 2009 | Harvard Business Review 1920 09Breakthrough Ideas Caught between two elemental forces – one called Calamity and the other called Change – we launch our latest edition of breakthrough articles into the teeth of a gale. A new administration has taken charge in the United States at a time of major challenges on many fronts. The world economy staggers toward stabilization and whatever comes next. Business soldiers on, controlling what it can and coping with what it can’t. This year’s HBR List includes ideas that we think are more useful than fanciful, more immediately practicable than speculative. Although we began compiling and winnowing contenders many months ago, we nonetheless did our best to anticipate the context in which you now read them. Thus some of the articles you’ll fi nd here comment directly on the economic crisis, but most of them address other mat- ters that business leaders must contend with: strategic deci- sion making, tapping new markets, fi nding and keeping top talent, harnessing network effects, dealing with disruptive technologies and business models. As in recent years, we gathered ideas primarily from our editors’ networks of expert authors. In addition, we held a brainstorming meeting in partnership with the World Economic Forum in New York last June. A good many worthy contenders emerged from that day-long session, and four of them made the fi nal cut. (They are branded with a WEF | HBR icon.) We look forward to your reactions to the List as a whole and to any of the individual articles. Our annual snapshot of the emerging shape of business for 2009 HBR LIST 20 0 9 hbr.org Vote on your favorite breakthrough idea of the year at thelist. hbr.org. 1827 Feb09 List Intro 19.indd 191827 Feb09 List Intro 19.indd 19 12/30/08 3:54:52 PM12/30/08 3:54:52 PM 22 Harvard Business Review | February 2009 | hbr.org BY ELIZABETH WARREN AND AMELIA TYAGI In all the fi nger-pointing during the fi nancial meltdown, one major culprit was largely overlooked: the legal structure governing the sale of mortgages, credit cards, and other consumer fi nancial products. Unlike most consumer purchases, consumer credit in the United States is still grounded fi rmly in eighteenth-century contract law. In 2009 the basic premise is what it was in rural England in 1709 – two merchants might dicker over the terms of an agreement, and the courts would enforce whatever they decided. The principle of caveat emptor ruled – anyone who bought goods was stuck with them, no matter their defects and no matter the injury they might cause. This approach made a certain amount of sense for two small-business owners bargaining over the sale of a plow. Government’s responsibility wasn’t to protect consumers from dangerous products but to enforce contracts and keep the wheels of commerce moving smoothly. Today, however, caveat emptor has disappeared. The Consumer Product Safety Commission (CPSC) ensures the basic safety of every type of product sold in the United States save one: In the case of fi nancial products, the two parties no longer vigorously negotiate; consumers typically have little say on the terms of credit agreements – it’s take it or leave it. The notion that the ordinary consumer is somehow on an equal footing with a $1 trillion megabank is absurd. The terms for credit cards, mortgages, and car loans are bloated, eye-straining treatises that even experienced lawyers have diffi culty parsing. The past two decades have brought us universal default, double-cycle billing, teaser-rate mortgages, and negative amorti- zation – concepts whose main function is to confuse and suck money from unsus- pecting consumers. Treating fi nancial contracts like other products would change all that. The current jumble of federal and state regulations should be reconceived and enforced by a comprehensive new regulatory body, analogous to the CPSC. A Consumer Credit Safety Commission would make fi nan- cial products more transparent, get rid of tricks and traps, and give consum- ers the tools to make prudent fi nancial decisions. Ultimately, safety regulations could help make the market for fi nancial products as effi cient as the market for physical products. Shorter contracts and clearer terms could replace lenders’ current race to the bottom with a race to the top, based on consumer friendli- ness and fairness. Obviously, this would benefi t consumers, by reducing loan defaults and foreclosure rates. Equally important, predictable payments and low default rates would benefi t the economy and help avoid the kind of boom-and-bust fi nancial cycle that has proved so devastating. The moment is right to rethink our consumer credit laws. Growing U.S. consumption has supported the global economy, but the American family simply cannot carry that load any longer. Declining median incomes, combined with the rising costs of hous- ing, health care, child care, transporta- tion, and food, have left families in a deeper economic hole than ever before. They have turned to credit to fi nance basic necessities, but that is a short- term strategy, and time is running out. Today one in six mortgages is upside down, and 50 million families can’t pay off their credit card bills. Last year one out of seven households was called by a debt collector. More than a million people declared bankruptcy. Foreclo- sure has reached levels unmatched since the Great Depression. This crisis highlights the urgent plight of the middle class, but the trend started decades ago. America’s advantages in innovation and productiveness are rooted in a vibrant middle class that still believes in the possibility of success. Its members can no longer afford tricky fi nancial products, and the market can’t afford them either – they destabilize families and the economy alike. Applying basic safety standards to this segment would provide badly needed security for consumers, investors, and the global economy. ■ Consumer Safety for Consumer Credit D av id P oh l HBR LIST 20 0 9 1827 Feb09 List 1 22-25.indd 221827 Feb09 List 1 22-25.indd 22 12/30/08 3:53:19 PM12/30/08 3:53:19 PM hbr.org | February 2009 | Harvard Business Review 23 BY PAUL COLLIER AND JEAN-LOUIS WARNHOLZ Over the years many misguided pronouncements have touted the improved economic prospects of Africa, home to a large proportion of the world’s billion poorest people. The late 1990s even saw a slight economic resurgence, dubbed an “African renaissance,” but it fi zzled, and a gloomy view of the continent as too unstable for investment other than in mining and oil seemed to settle over corporate boardrooms. But reliable data show that a number of sub-Saharan nations have emerged from confl ict in stable condition and that new macroeconomic forces are poised to have a profound effect – despite the global economic downturn. For example, the International Monetary Fund’s World Economic Outlook, re- leased in October 2008, projected economic growth of 6.3% for sub-Saharan Africa in 2009, with Uganda, Tanzania, and Nigeria exceeding 8% growth. Our research on African companies indicates that the continent offers competitive manufacturing sites, IT outsourcing, and construction services. There is real opportunity on the ground in Africa. Multinationals and investors should bear these developments in mind: Stability. The periods of catastrophic government action that slowed growth in past decades have become much less frequent. The failures in Ghana, Uganda, Tanzania, and Nigeria in the 1970s and 1980s were profound learning experiences for those countries, which have joined the list of today’s success stories. Nigeria, for instance, has paid off its external debts, enacted prudent fi scal rules, and cleaned up its banking system. Policy. The more favorable policies of developed nations have laid the groundwork for growth: Many of Ghana’s exports, for example, qualify for duty-free access to EU and U.S. markets. Policies within African countries have boosted local economies: Rwanda, for instance, has made information and communications technologies the cornerstone of a new growth strategy, setting up the ICT Park in Kigali, its capital. Profi ts. Our study of 2002–2007 fi nancial data from all the Africa-based publicly traded companies for which data were available (a total of 954, mostly in manufacturing and services) shows that many of these fi rms are highly profi table. (For foreign-owned companies we looked only at the perfor- mance of the African entities.) In part because of low labor costs and gains in operational effi ciency, the average annual return on capital of the companies studied was 65% to 70% higher than that of comparable fi rms in China, India, Indonesia, and Vietnam. The median profi t margin was 11% – better than the comparable fi gures for Asia and South America. Our analysis of World Bank data on 1,869 African companies confi rms these fi ndings. Opportunity. Construction companies, call centers, and IT services are among the region’s most successful businesses. The engineering services company Gasabo 3D Design, located in Kigali’s ICT Park, uses computer tech- nology to transform drawings into three-dimensional models for customers at a highly competitive hourly rate of US$10. Years have passed since investors updated their view of Africa’s promise. The time is ripe for multinationals to rethink sub-Saharan opportunities and simultaneously to help the region achieve its promise by contributing much- needed capital, business skills, and global connections. ■ Now’s the Time to Invest in Africa From 2002 to 2007 the average annual return on capital of African compa- nies was 65% to 70% higher than that of comparable companies in China, India, Indonesia, and Vietnam. The IMF projects a 2009 growth rate of 6.3% for sub-Saharan Africa – and more than 8% for Uganda, Tanzania, and Nigeria. Nigeria has paid off external debts and reformed its banking system. Rwanda’s growth strategy emphasizes information and communications technologies. 1827 Feb09 List 1 22-25.indd 231827 Feb09 List 1 22-25.indd 23 12/30/08 3:53:27 PM12/30/08 3:53:27 PM 24 Harvard Business Review | February 2009 | hbr.org HBR LIST 20 0 9 BY AMY J.C. CUDDY When we encounter someone new, we quickly seek answers to two questions rooted in the evolutionary need to make correct survival decisions: What are this person’s intentions toward me? and Is this person capable of acting on those intentions? Because we lack the brainpower to weigh someone’s true merits quickly, we seize on our sometimes mistaken answers to these questions and rate the person high or low on imaginary scales of intention and capability – or, to use simpler terminology, warmth and competence. Recent psychological research involving thousands of people from two dozen nations shows that this way of thinking is remarkably widespread. Moreover, a number of studies show that warmth and competence assessments determine whether and how we intend to interact with others: We like to assist people we view as warm and block those we see as cold; we desire to associate with people we consider competent and ignore those we consider incompetent. Inevitably, of course, we fi nd clues to warmth and competence in stereotypes based on people’s race, gender, or nation- ality. Thus many of our decisions about whom to trust, doubt, defend, attack, hire, or fi re are based on faulty data. The warmth/competence model, which Susan Fiske, Peter Glick, and I have pre- sented in more than a dozen academic ar- ticles over the past few years, illuminates a great deal of behavior – for example, why people disrespect the elderly while feeling positive toward them (elders are seen as incompetent but warm). Such attitudes weren’t well explained by the prevailing psychological view of preju- dice – namely, that people simply favor “us” and dislike “them.” Inaccurate warmth/competence judgments can lead managers to trust untrustworthy associates or undervalue potentially important connections with people. They can also undermine companies’ efforts to build effective teams, identify lucrative opportunities, and retain good employees. For example, mothers, like the elderly, are chronically stereotyped as less competent (although warmer) than other workers and as a result are often underpromoted and underpaid. Our and others’ research has yielded another important fi nding: People tend to see warmth and competence as inversely related. If there’s an apparent surplus of one trait, they infer a defi cit of the other. (“She’s so sweet....She’d probably be inept in the boardroom.”) So how can managers use the warmth/competence model to make better judgments? I recommend a two-part approach. Don’t take shortcuts. Virtually everyone uses stereotypes to make snap judgments. But when facing personnel decisions, managers should push themselves to be aware of how they form impressions. They should avoid sizing people up on the basis of stereo- typical perceptions of warmth and competence. Separate the two dimensions. It’s not a zero- sum game: Warmth and competence aren’t mutu- ally exclusive. Managers should ask themselves, for example, whether that highly competent technician also has social or customer skills that could be useful to the company. These simple reality checks can help managers see past social categories and recognize individuals’ true talents, thus avoiding the high cost of mistaken judgments. ■ Just Because I’m Nice, Don’t Assume I’m Dumb People tend to see warmth and compe- tence as inversely related. A surplus of one means a defi cit of the other. A na st as ia V as ila ki s w 1827 Feb09 List 1 22-25.indd 241827 Feb09 List 1 22-25.indd 24 12/30/08 3:53:34 PM12/30/08 3:53:34 PM hbr.org | February 2009 | Harvard Business Review 25 BY JOHN SVIOKLA With consumer credit still tight, peer-to-peer lending is on the rise. Why? For one thing, human society naturally evolves to create pools of capital with which to fund ideas and absorb risk. Roman legionnaires insured one another by swearing to care for the families of comrades lost in battle. The creation of the shared stock corporation allowed for bigger and bigger risks to be taken. Whenever people come together to create a pool of capital, the potential for wealth creation blossoms. For another, peer-to-peer lending is cheaper than consumer credit. Lend- ing Club’s rate for the best credit risks is 7.88%, whereas the bank rate for personal loans, on average, is over 13%. A credit-worthy borrower gets the money faster and for 5% less. Why now? First, the internet and social networks enable peer-to-peer interac- tion on an unprecedented scale. Second, electronic mechanisms for assessing po- tential customers are emerging. Lending Club starts with traditional credit scoring and adds a proprietary assessment of customers’ reputations within their social networks. You may think of Facebook as fun and games, but important underwrit- ing information is hidden in there for those who know how to look. So what? A profound secondary effect of the down market will be an increase in the availability of peer-to-peer fi nance and its convergence with traditional lending. My bet is that mainstream investors and banks will cherry-pick the best investors in Lending Club and other systems – re- ducing risk by tapping their superior credit-assessment capabilities – and fund them to grant more and bigger loans. Moreover, within fi ve years every major bank will probably have its own peer-to- peer lending network. If innovative legislation were drafted to allow peer-to-peer risk coverage, similar transactions might begin to fl ourish in the insurance market. Precise knowledge of local conditions would allow individuals to band together in order to underwrite the cost of insuring properties in safe neighborhoods or to make insurance more widely available in higher-risk neighborhoods. The current economic constraints will only accelerate the growth of these new entities. I predict that they will be among the most important fi nancial-services in- novations in the coming decade. ■ BY NOAH J. GOLDSTEIN Marketers are good at using peer infl uence to sell products, but few executives under- stand that it can motivate customers to help companies achieve other goals, such as saving money. Even fewer seem to be aware that the improper use of peer infl uence can elicit behaviors con- trary to what was intended. Hotels, for example, don’t exploit peer infl uence when trying to get guests to reuse towels, even though the daily cost of providing fresh ones can run to $1.50 a room. My colleagues and I set out to see if we could boost participation in one hotel’s towel-reuse program by placing signs with various messages in randomly chosen rooms. We increased participation by 26% over the standard environmen- tal appeal by truthfully stating that the majority of other hotel guests reused their towels. The increase in compliance was even greater when we communi- cated that most of the guests who had stayed in that particular room were reusers. But peer infl uence can have strange effects. In a study led by the social psychologist Robert Cialdini, signs at Arizona’s Petrifi ed Forest National Park lamenting that many previous visitors had stolen petrifi ed wood not only proved less effective at reducing pilferage than signs simply ask- ing visitors not to take souvenirs, but resulted in more theft than when no signs at all were dis- played. And in research I conducted with Wesley Schultz and several colleagues, California house- holds that were informed they were us- ing more electricity than their neighbors reduced their consumption, but those informed that they were using less increased their consumption by 8.6%. The lesson is that people respond strongly to messages about the behav- ior of others, particularly similar others; the more similar the other people, the more potent the effect. But beware: A publicized behavioral norm becomes a “magnetic middle,” drawing people toward it. To avoid inadvertently en- couraging your best-behaved custom- ers to backslide, try showing approval for their behavior. When the message to the below-norm California electricity users included a smiley face as a sign of approval, those households continued to consume at their original low rate. ■ Forget Citibank – Borrow from Bob Harnessing Social Pressure Beware: A publicized behavioral norm becomes a “magnetic middle,” drawing people toward it. 1827 Feb09 List 1 22-25.indd 251827 Feb09 List 1 22-25.indd 25 12/30/08 3:53:40 PM12/30/08 3:53:40 PM 26 Harvard Business Review | February 2009 | hbr.org HBR LIST 20 0 9 BY RAYMOND FISMAN In August 2008 the Swiss police raided a number of offi ces of Alstom, a French company that had paid bribes to secure infrastructure contracts worldwide. The Alstom scandal – and corruption at companies such as Siemens and Halliburton – were uncovered by vigilant auditors and smart law-enforcement offi cials. These aren’t the only people unearthing illicit transactions, however. Some economists have recently turned into detectives, pioneering the fi eld of forensic economics. Forensic economists don’t investigate specifi c crimes or individual wrongdoing; they analyze the incentives underlying criminal activity and then use conventional tools to look for the footprints that wrongdoers’ actions have left in the data. Which companies were shipping arms to Angola in violation of a UN embargo? Economists looked at stock mar- ket