HBR Jan/Feb 2020: The loyalty economy

Harvard Business Review

January/February 2020
Annotated table of contents

1. Adi Ignatius, The real deal on data

Adi Ignatius, the editor in chief of HBR, highlights the article on data and competitive advantage: effectively using data to develop products and services depends to a large extent on developing synergistic organizational capabilities.

Idea watch

2. HBR Staff, Why boards should worry about executives’ off-the-job behavior

Evidence shows that lapses in off-the-job behavior, indicating a propensity to break the law and materialism, can predict problematic behavior on the job in relation to insider trading, reporting to authorities and within the firm, risk-taking and corporate social responsibility. The concern is that despite robust governance structures, personal preferences and inclinations could nonetheless pass unnoticed or uncensored creating long-term risks for a company. An interview with Justus O’Brien of Russell Reynolds Associates shows how recruiters scrutinize candidates for CEO roles taking account of these concerns.

3. Nicole Torres, Advertising makes us unhappy

Torres interviews Professor Andrew Oswald of Warwick University about his research on happiness which has analyzed the links between life satisfaction and aggregate spending on advertising in 27 European countries from 1980 to 2011. Oswald and his co-authors found an empirically robust, negative relationship between happiness and advertising spending. Controlling for the influence of other factors, such as age, marital status, unemployment rate, GDP, starting level of happiness and advertising spending levels, they found that a doubling of advertising spending would lead to a drop of 3% in life satisfaction. This is largely due to the fact that advertising stimulates comparisons in our status relative to others, which are harmful emotionally.

4. Ryan Cohen, the founder of Chewy.com on finding the financing to achieve scale

Chewy, the online pet supplies company, was launched in June 2011 and was bought six years later by PetSmart for 3.5 billion dollars. Cohen, a co-founder, tells the story of how he navigated the skepticism of investors influenced by earlier failures by similar businesses and the power of competition from Amazon, winning funding to scale up the business and reach a leading position in its niche. His work covered all areas: systems, technology, and teams. He focused on several challenges: developing fulfillment capability, including the setting up of a warehouse from scratch in less than six months; marketing through direct response ads; hiring for passion; preparing for an IPO, which became a sale; and eventually exit.

Spotlight: The loyalty economy

5. Rob Markey, Are you undervaluing your customers?

While customer value, ‘the lifetime value of a company’s customer base’ as defined by Markey, is obviously an important factor in financial performance and the long-term prospects of a business, public companies tend to be managed for shareholder value and quarterly reports. In contrast, this article proposes that it would be both possible and beneficial for companies to shift their emphasis toward managing customer value. To do this, they would need to develop specific capabilities, including specific processes and tools, using technologies that earn loyalty, altering the organisational structure, and putting customer loyalty at the center of leadership. Several major companies, usually privately owned, already demonstrate the effectiveness of this approach: those who lead in Net Promoter Score or satisfaction rankings for three or more years grow their revenues up to 2.5 times faster than their peers, delivering between two and five times more shareholder value over 10 years.

6. Daniel McCarthy and Peter Fader, How to value a company by analyzing its customers

McCarthy and Fader present a new tool for corporate valuation, based on the customer cohort chart, C3, which captures yearly acquisition and loss of customers. Together with a customer-base model, which specifies acquisition, retention, purchase (frequency of customer interaction with the firm) and basket-size, it is possible to calculate the customer-based corporate valuation (CBCV) of a firm. Even though few companies disclose data of this kind fully, some of it can be gleaned from public documents to arrive at approximate values of CBCV. In principle, this method offers a more reliable estimate for company value and investors would be well served by insisting that companies gather and make available the necessary data.

7. Daniel McGinn interviews Jack Brennan, Vanguard Chairman Emeritus: “Over time, the market will demand this information”

Jack Brennan has used and promoted CBCV in his investment career and in this interview he shares his insights about the underlying considerations of self-interest that companies have when they adopt or reject this methodology. There is uncertainty about definitions and measurement standards. Change is riskier for more conventional companies, as these numbers may disappoint and generate negative news. Even companies that have good customer numbers may not want to treat CBCV as their leading metric. However, over time the market will likely make the case for regulation to include more customer information in the management disclosure and analysis section of the annual report or in the footnotes.


8. Marco Iansiti and Karim R. Lakhani, Competing in the Age of AI

Iansiti and Lakhani seek to capture a step-change in the competition that occurs when enterprises become AI factories: value is delivered by algorithms and AI is responsible for generating insights, choices, and decisions within some of the most critical processes and operations. Whereas in traditional operating models, additional scale and higher numbers of users stop delivering value beyond a certain point, in the digital operating models, additional users do not create any additional costs while increasing value. The benefits of learning are also much greater and there are fewer costs in expanding the scope of a business to take advantage of synergies in related fields. This gives AI companies a higher upper limit for growth that traditional companies might like to reach for as well. Iansiti and Lakhani provide suggestions for transforming traditional enterprises, by rethinking leadership, strategy, and capabilities.

9. Robert Pearl and Philip Madvig, Managing the most expensive patients

Pearl and Madvig draw on research about healthcare effectiveness and the experience of Permanente Medical Group to suggest a new approach to allocating resources and organizing treatment for high-demand, expensive patients. They observe that there are three distinct cohorts among the 5% of most expensive patients, each accounting for about a third of the total: people with chronic conditions; people who suffer a one-time catastrophic health event; and people whose chronic conditions have deteriorated to the point where they need intensive ongoing treatment every year. Of these cohorts, only the care of the first, as well as that of people who might join them, about 27.5 million Medicare beneficiaries with five or more chronic conditions, could potentially be managed in such a way as to reduce costs without affecting the availability and quality of provision. The Permanente Medical Group has built a systematic approach to monitoring the care of this category of patients with impressive results. The article presents some of the underlying principles and methods which are broadly applicable.

10. Matthew Corritore, Amir Goldberg, and Sameer B. Srivastava, The new analytics of culture

The digital traces left by the interaction between employees can increasingly be captured and analyzed for cultural patterns expressed in language style, and diversity of thoughts, ideas, and meaning. Such patterns could be analyzed in relation to actual behavior. According to Corritore et al. this is a superior approach to the analysis of culture, compared to surveys and questionnaires and they illustrate with research analyzing email, Slack and Glassdoor messages. Their findings offer insights on the relative importance of fit, cognitive diversity, adaptive capability and shared core beliefs during different project stages, for instance, ideation and execution. Attention to these nuances can inform managerial practices to better effect and the article provides some practical suggestions and examples.

11. Abbie Lundberg and George Westerman, The transformer CLO

Lundberg and Westerman draw on extensive interviews at 19 large companies to explore how current practices around learning and development are responding to the fast pace of change in business environments. In the most successful cases, continual learning across the organization becomes an integral part of the strategic agenda. This affects learning goals, methods, and departments. Some of the shifts they observe include an emphasis on capabilities, digital thinking, curiosity, and a growth mindset, using a variety of learning methods, with a large inventory of learning resources, balancing face-to-face and digital provision and going beyond mere instruction. Learning departments are also affected by these changes as they act as curators and co-creators, foster learning from peers and measure impact.

12. Andrew Hagiu and Julian Wright, When data creates competitive advantage

Hagiu and Wright present a framework for assessing the value of collecting customer data by specifying seven relevant questions around determining how much new value is generated by data and how quickly it erodes over time. The value of data depends on the link between the number of customers and new insights; the speed with which the relevance of data is lost; the cost and availability of data from other sources; the ease or difficulty of imitating innovative features based on data; the relevance of data across categories of customers; and the speed at which customer insights can be incorporated in offerings. Every company would have its own take on these issues. Across the examples used for illustration in this article, including many of the large players in our current data economy, time-related issues seem to be as crucial as scale, suggesting that continuous innovation is critical for data-based competitive advantage.

13. Sir Andrew Likierman, The elements of good judgment

The capacity for good judgment draws on a variety of other skills, developed over time. In this article, Likierman sets out the main qualities that contribute to good judgment, in relation to learning, trust, and discrimination, breadth of experience, ability to recognize biases and attain detachment, exploration of options and realism in assessing the feasibility of execution. Each of these areas is defined in some detail and illustrated with examples from the business world. In addition, Likierman provides suggestions about practices that could help build the capacity for good judgment.

14. Martin Reeves, Simon Levin, Thomas Fink, and Ania Levina, Taming complexity

Complexity is one of the main obstacles we face as we try to form judgments and take decisions. In most organizations or business situations, a large number of factors interact in ways that are difficult to tell apart from each other or even describe exactly. As a result, organizational complexity can lead to lower efficiency, less understandability, predictability or manageability. However, Reeves and his co-authors argue that it is important to appreciate the advantages of complexity as well, in terms of resilience, adaptability, coordination, and inimitability. They also propose concrete steps to strike a balance between the pros and cons of complexity: the creation of modular structures; simple operating principles; interest in change; looser control; the use of market responses as a test; and designing and embedding processes to fix, repair and prune.

15. Henry Farrell and Abraham L. Newman, Choke points

Farrell and Newman draw attention to the fact that economic and political competition has intensified in the last few years creating new risks for global businesses. Taken for granted norms, such as free trade, are now more likely to be reassessed from the point of view of national interest, not least in the United States under the Trump administration, multiplying trade disputes and the use of sanctions, to the point that ‘a war is quietly being waged through manufacturing ties and business relationships’. For this reason, companies need to understand their exposure and take active measures to mitigate the risks.


16. Maryam Kouchaki and Isaac H. Smith, Building an ethical career

An ethical career, where virtue is at least as important as achievement, is not usually the result of happenstance. As this article makes clear, in the face of many pressures and pitfalls, not least our own personal biases, behaving consistently in line with our values requires a great deal of thoughtful preparation, deliberate action in the moment and reflection after the fact. Kouchaki and Smith bring together a variety of examples, insights, and techniques to illustrate and support our work through all of these stages.

17. Anthony J. Mayo, Joshua D. Margolis, and Amy Gallo, Case study: Give your colleague the rating he deserves – or the one he wants?

All collaboration entails give-and-take, with a certain amount of understandable variability in performance over the lifetime of a project. This case study explores the signs that poor delivery needs to be called out and the best ways to enforce fair play between colleagues and friends.

18. Nicole Torres, #MeToo’s Legacy

Torres reviews four books that attempt to take stock of gender relations in the workplace in the aftermath of the #MeToo movement. Despite continued difficulties and a certain amount of backlash against women, overall there is a newfound assertiveness and an expectation that women’s word should be taken seriously.

19. Daniel McGinn, Life’s work: An interview with Sugar Ray Leonard

Sugar Ray Leonard won world titles in six weight categories during his twenty-year career in boxing, earning more than 100 million dollars in prizes. He speaks powerfully about his early business savvy, his struggle with personal choices, including addiction to heroin, and the ups and downs of fighting, winning and losing against powerful boxing adversaries.