Text
                    The
European
Business
Review

How to Innovate Without
Changing your Product
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When to Enter a Business
and When to Exit
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Arrogance, Hubris, and Narcissism:
The Over-Confident Leader
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Cultivating Executive Trust in
the Age of AI Governance

March - April 2024
europeanbusinessreview.com

magnetic

empowering communication globally

CRAFTING EFFECTIVE
LOYALTY PROGRAMMES
THAT ATTRACT AND
RETAIN CUSTOMERS

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The European Business Review empowering communication globally MARCH – APRIL 2024 cover story 4 BRAND LOYALTY Magnetic Loyalty: Crafting Effective Loyalty Programmes that Attract and Retain Customers Klaus Heine and Vanessa Brunner 12 INNOVATION Smells Like Patchouli! How to Innovate without Changing Your Product Fernanda Arreola and Johann Vitrey 16 EDITOR'S PICK 58 NEGOTIATIONS A Winning Deal: How Biculturals Can Supercharge Your International Business Negotiations Priyan Khakhar and Jasmina Najjar 64 GENDER EQUALITY Taking a Stand against the Gender Gap in Workplace Flexibility Fiona Wylie 68 SUPPLY CHAIN A Practical Guide to Kick-Starting your Cyber Supply Chain Risk Programme Kamil J. Mizgier 74 ARTIFICIAL INTELLIGENCE A New Business Leadership Paradigm to Understand Signals and Timing: When to ENTER a Business and When to EXIT Peter Lorange and Karin Mugnaini Generative AI Update for 2024 Ray Schroeder and Katherine Kerpan 22 Where FICO Gets Its Data for Screening Two-Thirds of All Card Transactions Eric Siegel LEADERSHIP Trust-Me: A Concept and Metric to Embed in Leaders, Enhancing their Effectiveness Simon L. Dolan, Kyle Brykman and Shay S. Tzafrir 34 PSYCHOLOGY Arrogance, Hubris, and Narcissism: The Overconfident Leader Adrian Furnham 42 AI GOVERNANCE Cultivating Executive Trust in the Age of AI Governance Luca Collina and Ben Warnes 50 LEADERSHIP AND MANAGEMENT Aligning Organisational Ecosystems to be Fit for Purpose Jonathan Trevor and Kazuhiro Asakawa 80 86 ENTREPRENEURSHIP You did not Fail! You are just Rebounding! Olimpia Modorcea and Fernanda Arreola 91 ESG The Fungibility of Environmental, Social, and Governance Reporting Tim Bovy and Ian Hodges 94 SUSTAINABILITY Partnership and Technology: Solving Municipal Solid Waste Management in Developing Economies Sahan J. Fernando and Ambika Zutshi 98 DIGITAL TRANSFORMATION Change or Transformation Nina Mohadjer Production Accounts: Lynn Moses. Head of Design and Production: Kimberly Barrera. Production & Design: Jenya Shliepova Editors: Elenora Elroy, David Lean. International Media Editors: Ariane Cornejo, Maria Carmela Matibag. Editorial and Marketing: Pamela Martinez, Mary Celu Aratas. Digital Content: Angela Lebrino. Print Strategy: Stefan Newhart. Group Managing Editor: Jane Liu. Editor in Chief: The European Business Review Publishing Oscar Daniel. READERS PLEASE NOTE: The views expressed in articles are the authors’ and not necessarily those of The European Business Review. Authors may have consulting or other business relationships with the companies they discuss. The European Business Review: 3 - 7 Sunnyhill Road, London SW16 2UG, Tel +44 (0)20 3598 5088, Fax +44 (0)20 7000 1252, info@europeanbusinessreview.com, www.europeanbusinessreview.com No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without written permission. Copyright © 2024 EBR Media Ltd.All rights reserved. ISSN 1754-5501 empowering communication globally
BRAND LOYALTY MAGNETIC LOYALTY: CRAFTING EFFECTIVE LOYALTY PROGRAMMES THAT ATTRACT AND RETAIN CUSTOMERS by Klaus Heine & Vanessa Brunner Most brand managers today see room for improvement in their repurchase rates, particularly as Generation Z tends to exhibit lower brand loyalty amidst intensifying competition. As it is more difficult to acquire new customers than to retain existing ones, loyalty programmes stand out as a promising tool. This article outlines a sevenstep decision process to create loyalty programmes that are effective because they align with consumer psychology and the brand’s overall purpose. 4 THE EUROPEAN BUSINESS REVIEW A ccording to a McKinsey study (2020), members of loyalty programmes are 30 percent more likely to spend more on the brand after subscribing. Even more, Ourself, a beauty brand recognised for its tech-centric products, attributes 40 percent of its sales to its rewards programme (Morris 2023). Research shows that loyalty programmes are also a crucial step in enhancing the share-of-wallet (Leenheer et al., 2007). Many brand managers have yet to fully realise the great potential of loyalty programmes, given the significant number of brands that resort to unoriginal, standard loyalty approaches like basic point-collection systems for discounts, which may not engage consumers effectively. The cosmetics industry represents a vital area for studying loyalty programme usage, as it remains ahead of many other industries in digital marketing innovation. While smaller companies can greatly benefit MARCH - APRIL 2024
from well-designed loyalty programmes, they face the challenge of competing with established programmes from major players like Sephora, as consumers often hesitate to engage with multiple loyalty schemes. This article aims to persuade brand managers of the critical role loyalty programmes play in accelerating business growth and provides advice on effective implementation. While the focus is on luxury beauty, the findings are applicable across various consumer markets. and overly focused on marketing, which can contradict efforts to foster a sense of “community”. A valuable branding technique involves the use of brand puns, which utilise creative wordplay with the brand name to generate a distinctive name for the loyalty programme. For instance, NARS makeup named its loyalty programme “NARSissist Rewards”, RéVive skincare uses “RéVive RéWards”, and La Mer uses “Waves de La Mer”. Brand puns help make the name more memorable and relatable to consumers while conveying the brand identity, making the loyalty programme stand out from the competition. COMPARATIVE ANALYSIS OF LOYALTY Even more promising is the use of community-driven PROGRAMMES names. Approximately a third of loyalty programmes (17 brands) incorporate terms such as “club”, “society”, We conducted a comparative analysis of loyalty “circle”, or “insiders” into their names. For example, programmes in the high-end beauty segment. To create Valentino Beauty offers the “Valentino Beauty Dreams a representative sample, we gathered all brands availClub”. Our analysis revealed some innovation in rarity able on the websites of the three most prestigious retail marketing, with four brands labelling their programmes stores in the Western world: La Samaritaine Paris, as “VIP” or “VIC” rewards programmes, like Armani Bergdorf Goodman New York, and Harrods London. Beauty’s “VIP Beauty Programme”. Such names leverage Our objectives were to gain insights into the usage rates the rarity principle, implying the opportunity to join an and designs of loyalty programmes. exclusive association not open to everyone. Our findings revealed that Instead of emphasising the high-end beauty segment This article aims to persuade exclusivity, Furtuna Skin calls is driven by 247 entry-prestige its programme “La Famiglia” to ultra-luxury beauty brands. brand managers of the critical (Italian for “The family”), Among these, a quarter of the role loyalty programmes reflecting their slogan “family brands are owned by major Communityplay in accelerating business isdriveneverything”. parent companies, while roughly names tap into the 16 percent belong to parent growth and provides advice passion principle, suggesting that companies that own four or on effective implementation. consumers are deterred by overly fewer brands. Another 58% of commercialised marketing and them are independent brands. are instead drawn to brands that genuinely enjoy and Usage Rate of Loyalty Programmes: From all believe in what they do. Drawing from social identity 247 brands that were covered, only about a quarter theory, loyalty programme memberships offer customers (60 brands) have put a loyalty programme in place. a sense of social identity aligned with their desired selfHowever, an additional two-thirds of the brands (63%) concept, becoming a source of pride and self-esteem. employ other loyalty-building initiatives, such as inviting customers to subscribe to newsletters or create customer accounts. Only 13% (31 brands) do not offer SEVEN KEY DECISIONS IN LOYALTY any loyalty-building initiatives at all. PROGRAMME DESIGN Naming of Loyalty Programmes: The biggest part of loyalty programme names (66%) includes The next step was to gain a general understanding of words like “rewards” or “loyalty program”. While this the loyalty programme designs. Most programmes, approach ensures that customers easily understand specifically 45 out of 60 (75%), employ a straightforward the programme’s purpose, it often sounds commercial www.europeanbusinessreview.com 5
BRAND LOYALTY design that aligns with how customers expect and know loyalty programmes. They typically offer either status tiers or loyalty points that customers can either climb to achieve a higher status or redeem for rewards as a way to incentivise brand loyalty. These insights underscore that customers tend to favour a simple design that is easy to understand and works well – which is one of the key success factors for loyalty programmes. To develop a basic loyalty provgramme design, it is recommended to follow a seven-decision process, which is illustrated in Figure 1 and also outlines the main options available to brands at each stage. DECISION 1 FIGURE 1 The Seven-Decision Loyalty Programme Design Involves choosing between a solo or coalition strategy: Will the programme be operated independently or in partnership with other brands? Most luxury beauty brands prefer to operate an independent loyalty programme to preserve their distinct identity. The primary challenge of coalition programmes is the risk that consumers might develop loyalty to the programme itself rather than to individual brands. As a result, all the beauty brands we analysed have chosen to run independent programmes. However, the potential of the coalition strategy remains largely untapped. The significant advantage lies in crosspromotion opportunities. Instead of competing individually, coalition partners can actively promote each other and leverage their respective customer bases for the benefit of the entire coalition. To avoid collaborating with direct competitors, there are (1.) affinity groups, which unite like-minded entrepreneurs sharing a common interest or affiliation, (2.) sectorspecific programmes, such as those in travel or hospitality, and (3.) multi-partner programmes spanning different industries. 6 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
DECISION 2 Entry Requirements: What are the requirements for joining the loyalty programme? Some brands such as Sephora have minimal entry requirements. Consumers can simply sign up for free without the need to make any purchases and gain instant access to the Beauty Insider Community, including its beauty classes. Sephora's advantage lies in collecting detailed contact information from potential future clients. On the other end of the spectrum, the highest level of entry requirements may be an invitation-only membership to a hidden community that the general customer is not even aware of. of brands (57%, or 34 brands) prefer a three-tiered approach, which seems to be the most suitable and proven choice. This aligns with research indicating that a three-tier structure is the most favoured hierarchical structure (Nunes & Dréze, 2009). Drawing from the Pareto Principle, tiered structures DECISION 3 allow companies to reward the 20% of customers Membership Fees: Does the loyalty programme require responsible for 80% of their profits. The top tier must be a membership fee? A recently emerging trend is the relatively small because the fewer people are granted development of paid loyalty programmes. According to elite status, the more superior these people will feel. a McKinsey survey on loyalty programmes, members of Adding a subordinate elite tier enhances the status paid loyalty programmes are 60 percent more likely to among consumers in the top tier because being ranked increase their spending on the brand after subscribing. above other elites feels better than being above the Furthermore, they drive higher purchase frequency, masses. However, the research did not find evidence basket size, and brand affinity compared to free loyalty that adding a third elite tier would significantly enhance programmes. The landscape of paid the perceived status of the top tier. loyalty programmes today is small but Tiered programmes feed people’s Standard loyalty rapidly expanding. Among the brands desire for status. An interesting strategy we analysed, only the fragrance is to show members what percentage programmes are brand Bond No. 9 offers a paid loyalty typically divided into of the total members are in each tier. programme. Convincing people to This can make elite members feel more tiers, with members invest $950 annually for entry-level special and trigger the competitive membership ensures a dedicated desire to reach the next higher tier. advancing through customer base committed to regular How much do consumers need to these tiers based on purchases. Besides generating a spend to become a member of the top their spending. new revenue stream, it enables the tier? The highest limit, at €5000, is set funding of unique, bespoke, highby Charlotte Tilbury (with 6 tiers) and value rewards, cultivating an exclusive community and Joanna Czech (with 4 tiers). Nevertheless, the industry an air of distinction among its members. Paid loyalty average for the highest tier threshold is around €1500. programmes are particularly well-suited for competing DECISION 5 in highly fragmented markets, such as luxury beauty. Programme Currency: How many points should a DECISION 4 member receive per euro spent? The standard option Number and Type of Tiers: How many and what is “1 point per €1 spent”. The big advantage of this types of tiers does the programme offer? Standard option is its simplicity and ease of understanding. loyalty programmes are typically divided into tiers, with In categories with relatively low prices, the members advancing through these tiers based on their promising option of “multiple points per €1 spent” spending. Approximately 35% of brands use no tiers, 8% often translates to ‘‘10 points for each € spent”. This employ a four-tier approach, and only the makeup brand approach makes the accumulation of points appear Charlotte Tilbury adopts a six-tier system. The majority faster and more rewarding for consumers, thereby www.europeanbusinessreview.com 7
FIGURE 2 Types of Rewards BRAND LOYALTY having a greater perceived value. Conversely, in high-value categories, an appropriate option is “fractional points per €1 spent”, such as 0.5 points per € spent. DECISION 6 Points Earning Criteria: How can members earn points? In the beauty industry, loyalty currencies are a common framework. Approximately 75 percent of loyalty programmes (44 brands) employ loyalty currencies, with points being the most frequent form (also called miles, stars, pearls, etc.). Typically, companies inform customers of the number of points needed to redeem certain rewards, which may include a specific product or a selection of products from which they can choose. The problem is that this prevents any surprise moments – which are a standard tactic in the luxury industry and a key driver of customer delight. In contrast, some brands opt not to have a loyalty currency, choosing instead to keep the details of their rewards secret. This lack of visible benefits might initially deter consumers from 8 THE EUROPEAN BUSINESS REVIEW signing up for any programme, but such “secret” rewards offer unique advantages. Customers are pleasantly surprised with (personalised) gifts, reflecting a gift scheme based on the purchase price. This strategy employs the norm of reciprocity, suggesting that people are inclined to return favours. Unlike typical rewards that are perceived as part of the transaction, surprise gifts create a stronger emotional bond and a sense of obligation for further purchases. NON-MONETARY REWARDS LEAD THE WAY Loyalty point programmes allow customers to accumulate points, which can be redeemed for various rewards. The nature of these rewards is critical, as it significantly influences subscription rates and active engagement with the loyalty programme. Figure 2 presents an overview of the types of rewards that brands can offer their members. MARCH - APRIL 2024
Traditional rewards often include various discounts. Create Sunk and Switching Costs: A crucial success Research indicates that consumers perceive non-monfactor is designing loyalty programmes in a way that etary rewards as “gaining something extra”, whereas encourages regular purchases while deterring members monetary rewards are seen as “losing less than usual”. from leaving. Prospect theory suggests a guiding In essence, non-monetary rewards are framed as gains, principle: People exhibit loss aversion, meaning that and monetary rewards as reduced losses. This framing losses loom larger than gains. Members should feel suggests that non-monetary rewards are generally that leaving the programme would result in signifiviewed more favourably and tend to be more effective cant loss, particularly in terms of status. Common in (Shelper et al. 2023). Therefore, it is advisable to shift frequent flyer and hotel loyalty schemes, this approach from offering discounts to generates switching providing free goods or addicosts for members who Traditional rewards often include tional product quantities. have attained elite tiers, various discounts. Research McKinsey research indicates particularly in the form that such hard-value beneindicates that consumers perceive of status and convenifits are particularly effective ence benefits that would non-monetary rewards as “gaining be lost. Glow Recipe in convincing consumers something extra”, whereas to sign up for loyalty adapted this concept for programmes, while experithe beauty segment: The monetary rewards are seen as ential and status benefits are points earned per unit “losing less than usual”. increasingly important for spent increase with each retaining subscribers. tier – from just 1 point per unit in the first tier to 3 points in the top tier. This is particularly effective when consumers realise the substantial time and money required to attain similar KEY SUCCESS FACTORS IN BUILDING benefits should they rejoin the programme. Groups LOYALTY PROGRAMMES are harder to leave when consumers have invested Award Points for Non-Purchase Activities: There is a trend that people want to use points in new ways and earn points in new ways (Shelper et al. 2023). For example, ‘‘My Lancôme Rewards’’ offers additional points for activities like signing up for text messages or newsletters, writing reviews, referring friends, and completing a virtual service such as makeovers, skin consultations, beauty tutorials or interactive quizzes. Other common activities include event participation, profile completion (which aids in collecting consumer data), and social media engagement like tagging the brand or using specific hashtags. Awarding points for non-purchase activities makes the loyalty programme more dynamic and interactive, which in turn significantly boosts active participant engagement. Furthermore, it can direct participant motivation towards new product offerings and foster a sense of community, particularly as non-purchase points can encourage sustainable or healthy choices, aligning participants with the brand’s overall purpose. www.europeanbusinessreview.com 9
BRAND LOYALTY significant financial, cultural, and social capital. Such sunk costs can be established through one-time membership fees and, more effectively, through social benefits. Glow Recipe ensures that participants feel part of a community, fostering a sense of belonging and possibly status among peers. Leaving the programme would mean losing these social benefits. Gamify Programme Features: When evaluating a programme design, consider whether it enhances (1) repeat purchases, (2) upselling and cross-selling opportunities, (3) active member participation, and (4) alignment with the brand’s values and purpose. The latter two criteria are crucial for evolving a loyalty program into a community. Gamification is a key driver of active participation, yet currently underutilised, with only five (8.4%) out of 60 programmes employing it. NARS, for example, opts for subtle passive gamification elements like game-inspired avatars and a progress tracker, which keeps customers engaged in earning and checking points, adding fun to the programme. Chanel’s ‘‘La Collection’’ card game is a role model for interactive gamification elements, originally designed for video games. Purchases and different tasks unlock new cards and rewards, creating a sense of anticipation and surprise. Provide a Sense of Purpose: Two powerful techniques to increase emotional commitment are often underestimated. Firstly, giving consumers an excuse or justification for consumption can motivate those on the fence to make a purchase, especially when linked to value-based rewards. For instance, Louis Vuitton launched a campaign highlighting their commitment to donate a portion of purchase revenues to the Red Cross. In the Mugler Circle loyalty programme, participants can ‘‘engage with the planet’’ and earn 450 points by refilling their perfume bottles instead of buying new ones. Secondly, people are most motivated when contributing to something larger than themselves that they believe in. Brands have the opportunity to achieve dual goals: striving for a higher purpose beyond making money while convincing consumers that their purchases are contributing to a good cause. Research shows that resistance to leaving a programme is maximised when participants identify with the values and imagery of a brand (Shelper et al. 2023). Without such emotional commitment, consumers are more likely to switch to competitors when a better product is available. REFERENCES: 1 Leenheer, J., van Heerde, H. J., Bijmolt, T. H. A. & Smids, A. (2007). Do Loyalty Programs Really Enhance Behavioral Loyalty? International Journal of Research in Marketing: 42(1): 31-47. 2 McKinsey (2020). Coping with the Big Switch: How Paid Loyalty Programs Can Help Bring Consumers Back to Your Brand, https://www.mckinsey.com/capabilities/ growth-marketing-and-sales/our-insights/copingwith-the-big-switch-how-paid-loyalty-programs-canhelp-bring-consumers-back-to-your-brand. 3 Morris, M. (2023). Building a Rewards Programme That Keeps Fickle Customers Coming Back, January 8, https://www.businessoffashion.com/articles/ direct-to-consumer/rewardsprogramme-to-keep-fickle-customers-coming-back/. 4 Nunes, J. C. & Dréze, X. (2009). Feeling Superior: The Impact of Loyalty Program Structure on Consumers’ Perceptions of Status. Journal of Consumer Research, 35 (6), 890-905. 5 Shelper, P., Lyons, S., Savransky, M., & Harrison, S. (2020). Loyalty Programs: The Complete Guide, Loyalty & Reward Co Pty Ltd: London. ABOUT THE AUTHORS Klaus Heine is a marketing professor at Emlyon Business School and has collaborated with numerous luxury houses in both Europe and Asia. He helps entrepreneurs find out what they want their brands to stand for – to build high-end brands with a higher purpose. Holding an MSc in Luxury Management and Marketing, Vanessa Brunner specialises in enhancing brand-customer relationships in the luxury sector. Her experience and insights from her thesis on loyalty in luxury beauty equip her to guide luxury brands towards customercentric strategies, fostering devoted brand advocates. 10 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
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INNOVATION Innovation is essential, yet not always easy. This article, based on lessons from the perfume industry, discusses how to innovate in business sectors where differentiation is difficult to achieve. SMELLS LIKE PATCHOULI! HOW TO INNOVATE WITHOUT CHANGING YOUR PRODUCT by Fernanda Arreola and Johann Vitrey 12 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
F rance holds a unique position as the epicentre of the perfume world. This is thanks to its historical heritage that has helped build an empire of luxury and mainstream brands that proudly present the citation of Paris on their bottles. Throughout history, people from all corners of Europe have turned to these perfume houses for the latest elegant fragrances, made possible by them capturing scents from flowers, wood, and spices, but most importantly, thanks to nonproduct-related innovation. The roots of French perfumery can be traced The fragrance legacy continued over back to Louis XIV, known also as time, despite a halt as a result of the the Sun King, who played a pivotal Gaining inspiration French Revolution. The execution of the role in its development. Renowned for constructing the opulent Palace from what is done in perfumed nobility led perfumers to scale of Versailles, Louis XIV established the perfume industry down operations and conceive new ways to impulse the popularity of perfumes. what would later be known as can help you look Over time, France’s perfume industry the perfumed court1. Historians narrate that Louis XIV was scared experienced a resurgence, evolving into at your product’s of bathing, believing that doing so one of the largest creators and suppliers commercialisation would make him sick and spread of perfumes. Today, it caters to a diverse and communication disease. Therefore, the members audience, ensuring that everyone, not of his court were encouraged to just the nobility, enjoys a fresh and efforts differently. spray themselves with perfume fragrant experience. upon entering the vicinity of the palace. This particular hygienic belief made perfumery to be treated almost as a science, THE NON-SO-INNOVATIVE implicating the idea that fragrances also have NATURE OF FRAGRANCES medicinal benefits. As a result, both men and women incorporated substantial amounts of Parfums are made of 2 base notes, middle (heart) fragrant elixirs into their grooming routines. notes, and top notes. Base notes include patchFragrances were even sprayed on furniture and, ouli, vanilla, sandalwood, and musk. Heart notes as rumours suggest, the fountains. are made of floral notes, spices, and herbs. Top notes include citrus, fruity notes, and certain herbal notes like basil. After mixing these ingredients, perfumers must apply fixatives (amber or resins) and modifiers (they can give a fresh or cleaner note to the fragrance). Once the perfumer has made a choice, he or she will carefully blend the ingredients to create a fragrance. However, not all fragrances are pleasant to our senses. We are also not all equally sensitive to the sometimes-infinite differences in ingredients between one parfum and another. Perfumers want to evoke in us a sense of www.europeanbusinessreview.com 13
INNOVATION reusable, washable). A recyclable example of a container in perfumes is Bois Imperial3, the bottles are made of glass, without a case, with a sustainable approach. Other examples include SEXY by Honoré des Prés4 with original packaging that exudes authenticity and the charm of yesterday. We can also take the example of Angel by Mugler5, the pioneer of bottle refills. proximity, and other fragrances lost in our memories, which makes it more likely that they will include aromas that were popular in the past. For example, patchouli, a base note, has been used since ancient times. To this date, it is a largely used base note that is included in a wide range of fragrances. Some people even simply use patchouli oil. Yes, we often smell patchouli in our daily lives. CONCEPT: The concept proposed by the product can be altered by simply changing its colour and how it addresses a community (gay pride, cancer survivors, nationality, etc.). An example is Blood Concept6, a brand where choose the blood type you positioning can you want to wear. IF IT IS NOT THE PRODUCT, THEN WHAT? Gaining inspiration from what is done in the perfume industry can help you look at your product’s commercialisation and communication efforts differently. Most importantly, it can give you hints on how to innovate in sectors where competitors propose very similar products and where product innovation is unlikely to provide an edge for differentiation. A product’s be based on the messaging around it, the discourse a vendor uses to present it, or even the concept that the buyer is searching for. CONTAINER: If you cannot change the product then you can change its packaging. Furthermore, this packaging can change in nature (box, bottle) but even in terms of the raw material it uses (recyclable, 14 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024 COMMUNICATION: This consists of changing the messaging. For instance, if you can’t make people smell your product, how do you make them buy it? You can for example evoke other things that can give a sense of the sensorial emotions that will be experienced once used. For example, the candle company Promenade à Auvers7 bases scents on the original scenery that Vincent Van Gogh used to inspire his paintings. As for storytelling, we can also find the incredible job of Eight & Bob8 which comes packaged as a book.
RETAIL: A product’s positioning can be based on the messaging around it, the discourse a vendor uses to present it, or even the concept that the buyer is searching for. The Nose perfume diagnosis9 allows you to create your olfactive portrait and receive personalised recommendations. TECHNOLOGY: Industrial innovation can help producers innovate the processes around the manufacturing of your products. Furthermore, it can make your product available otherwise. A great example is the sniffing device, P’tit Sniff10. Le P’tit Sniff is a mini personal olfactory diffuser to take with you everywhere, adjustable according to your desires thanks to interchangeable cartridges. NETWORK: People rely more and more on where they find the product as a basis for their decision to purchase or not. It is not only about selling online but also about who the distributor is. Perfumist11 is the first collaborative perfume advisory application, created by perfume enthusiasts, to help you discover fragrances that best suit you. REFERENCES 1. LOUIS XIV: ‘THE SWEETEST-SMELLING KING OF ALL’. THE PERFUME SOCIETY. HTTPS:// PERFUMESOCIETY.ORG/HISTORY/LOUIS-XIV-THE-SWEETEST-SMELLING-KING-OF-ALL/ 2. TOP, HEART, BASE - WHAT DOES IT ALL MEAN?!. 07 FEBRUARY 2021. SHAY AND BLUE. HTTPS://WWW.SHAYANDBLUE.COM/BLOGS/JOURNAL/ TOP-HEART-BASE-WHAT-DOES-IT-ALL-MEAN 3. BOIS IMPERIAL BY QUENTIN BISCH. ESSENTIAL PARFUMS HTTPS://WWW.ESSENTIALPARFUMS.COM/PRODUITS/BOIS-IMPERIAL-2/ 4. SEXY ANGELIC. HONORE DES PRES. HTTPS://HONOREDESPRES.COM/STORE/HONOREDES-PRES/21-MON-PARFUM.HTML 5. ANGEL EAU DE PARFUM REFILL. MUGLER. HTTPS://WWW.MUGLER.FR/PARFUM/ ANGEL/M020604263.HTML 6. BLOOD CONCEPT PARFUMS. INSTAGRAM. HTTPS://WWW.INSTAGRAM.COM/ BLOODCONCEPT/ 7. PROMENADE A AUVERS HTTPS://INTERPRET-LAB.COM/COLLECTIONS/ PROMENADE-A-AUVERS 8. EIGHT & BOB. HTTPS://EIGHTANDBOB.COM/ 9. THE OLFACTORY DIAGNOSTIC. NOSE PARIS. HTTPS://NOSEPARIS.COM/EN/ LE-DIAGNOSTIC-OLFACTIF-NOSE/ 10. ACCUEIL – LE PTIT SNIFF. HTTPS://WWW.LEPTITSNIFF.PARIS/EN/ 11. PERFUMIST - YOUR PERSONAL FRAGRANCE GUIDE. HTTPS://PERFUMIST.FR/ ABOUT THE AUTHORS Fernanda Arreola is a Professor of Strategy, Innovation, and Entrepreneurship at ESSCA and a researcher focusing on service innovation, governance, and social entrepreneurship. Fernanda has held numerous managerial posts and possesses a range of international academic and professional experience. Johann VITREY-TARDIF is a lecturer at ISC Paris, IESEG Paris, Paris Perfume School and Thelma Business School in Dakar (Senegal), teaching Luxury Marketing, International Trade and Cross Cultural Communication. He is the founder and CEO of SESAME, an expert in olfactive marketing and olfactive identity. He also owns two niche perfumeries in France. Late deafened, he is the President of the French OHNS Ethics Committee. www.europeanbusinessreview.com 15
EDITOR'S PICK A NEW BUSINESS LEADERSHIP PARADIGM TO UNDERSTAND SIGNALS AND TIMING: WHEN TO ENTER A BUSINESS AND WHEN TO EXIT In business, as in a host of other contexts, timing is everything. While sensing the optimum moment for a given course of action may require more art than science, we can at least be aware of the indicators that we should be looking out for. by Peter Lorange and Karin Mugnaini I n businesses’ quest for profitability, in a world that seems to be more and more demanding, and also in a journey where achieving success is increasingly challenging for most business leaders – high competition, rapid technological changes, various sorts of crises (economic, political, health, …) and so on, to be able to better understand and obtain a certain excellence in timing could the most promising way to secure a reasonable profit margin. To know when to accelerate one’s engagement in a business, as well as when to decelerate, appears key. It seems to be a matter of skill regarding “ins and outs”. It is also important to consider that these “ins and outs” are not only about entering and exiting a business, but rather can also refer to turning on or off a "business dial", which can be more another type of action, e.g. opening or closing a division, changing or upscaling or phasing out a product, growing or stabilising a 16 THE EUROPEAN BUSINESS REVIEW revenue stream, spending or saving, etc. There are signals out there for all of those types of decisions, too. Perhaps by concentrating more broadly on “ins and outs” and its classical reference to only entering and exiting a business, we are thinking too narrowly. We suggest considering timing, breakpoints, and signals in different contexts depending on significant business decisions. Lorange, P. Mugnaini, K., (2024), The Future Ready Leader, Springer Nature. MARCH - APRIL 2024 All businesses are different. This implies that each business leader must develop their own lead indicators. Our book The Future Ready Leader (Lorange and Mugnaini, 2024) provides support when it comes to this. In our work we have reviewed some 70 books and also conducted around 21 high-level interviews. While none of these explicitly identify lead indicators for guiding “in/out” decisions, they all seem to have been developed in this spirit. Thus, many authors whose works we have reviewed, as well as most of the executives interviewed,
ENTER OR EXIT? seem to have had a central concern for lead indicators, i.e., how to perceive indicators and better forecast various types of decisions. Accordingly, leaders might be inspired by our book to establish their own tailored factors. that person or entity, ideally before others see similar or comparable indicators. Our aim, with our book, has been to contribute towards this. To explore how to find such “weak” signals for guiding in/out decisions, we thus surveyed So, how can leaders come 70 books, written by a wide up with better ways of doing array of practitioners totalling this? Are there factors that To know when to accelerate some 15,000 pages. Further, leaders might follow which we interviewed some 21 senior one’s engagement in a might signal that there is time leaders from business and polibusiness, as well as when for action? And such signals tics. The result is summarised may have value only if they can in The Future Ready Leader. In to decelerate seems key. It be considered to be exclusive following, we shall discuss seems to be a matter of skill the for a given decision-maker. If how these learnings could regarding “ins and outs” the signal-reading is available help leaders to improve timing to all, in contrast, there could decisions. We shall offer a be relatively little to gain. In conceptual scheme for coming such cases, it can be unrealistic to come up with up with lead indicators, based on inputs from our better timing decisions, at least those that others book. Further, we will aim to illustrate how our in the market would not have picked up on. The approach might work when applying this to three trick will be to identify factors that are unique to specific businesses. www.europeanbusinessreview.com 17
EDITOR'S PICK We tout the importance of intuitive and counterintuitive thinking, creative thinking, and ways that recognise that weak signals are just as valid or important as strong ones. In other words, learn by the not-so obvious, learn through the “side door”, learn through daily nuggets, not necessarily from the established teacher or guide but also from learners or the unexpected. Thus, it may become critical for an executive to be willing to break typical learning patterns and go beyond what may be at first the most obvious of lessons. In many large organisations, perhaps particularly in significant, bureaucratic ones, it could be particularly important to keep this in mind. Impact from support entities might tend to be particularly “frozen” in many established organisations. A CONCEPTUAL SCHEME FOR BETTER TIMING We have developed a four-step conceptual scheme for coming up with better lead indicators, to make better in/out decisions. Every business is, of course, unique. A senior leader must thus be prepared to strive to identify their own lead indicators, tailored to their own distinctive business, within their relevant market/s. While our book provides valuable inputs in such a process, it is absolutely fundamental that further tailoring of factors take place, such as “combining” the content from our book with the conceptual scheme below: Step 1 : Identify a preliminary set of critical success factors, based on a senior executive’s understanding of their business. Step 2 : List what might influence (“drive”) these critical success factors. Are there other critical success factors that might have been overlooked initially? (Draw on our book). from the decision-maker, so as to create revised inputs. In the following, we shall attempt to illustrate how this process might work through discussing four examples. While all examples are disguised, they nevertheless represent real cases taken from one of the authors’ experiences. There are several bases for support when it comes to this type of exit decision in our book. Particularly, the interview with Kristian Jebsen (Part 4) is useful. Also, the interviews with Jan Jenisch (Part 5) and of Morten Hannesbo (Part 5) are helpful. In addition, many of the book reviews seem relevant, especially several of those in Parts 4 and 5. Step 3: Develop several scenarios for how one’s critical success factors might evolve (again, drawing on the book). EXAMPLE: OFFSHORE SHIPPING Step 4 : Select measurable surrogates for each of these factors to track the development of the scenarios. This process is, of course, both interactive and iterative. There may be iterative loops, triggered by initiatives 18 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024 Offshore supply shipping basically consists of two major segments, anchor-handlers, to assist the redeploying of oil rigs, and platform supply ships (PSVs), to transport supplies to offshore
rigs (provisions, drilling mud, pipes,…). In addition, there are several smaller, specialised, niches (diving support, ROV, …). However, in this example, we shall focus solely on PSVs. 1 Timing decisions (“ins” as well as “outs”) should typically be taken by the CEO alone. If group-based decision-making is at work, then subsidiary factors, such as protecting one's job, safeguarding one's turf, etc., will easily lead to inaction. Also, more decision-makers involved can naturally risk slowing down the speed to decision. After considering several factors for how to decide where to order new PSV ships, and when It follows from the above that these types of decisions to sell, we came up with the following simple often tend to be relatively unpopular. A robust CEO is paradigm, that also was easy to track: tonnage therefore needed. They must be ready to make unpopular of the PSV fleet presently “in the water", relative decisions, anticipating questions, preparing replies, etc. to new tonnage on order. When new tonnage on order shot up, it was perhaps time to sell. When there were A senior leader must thus be EXAMPLE: A MEDICAL relatively few new prepared to strive to identify his/ TESTING FIRM ships on order on the other hand, then her own lead indicators, tailored to A decision to go public was it might be time to his/her own distinctive business, raised by several minority shareorder new buildings, within his/her relevant market/s. holders, but this was rejected by or to buy secondhand the majority shareholder. For the tonnage. majority owner, a more extreme long-term focus seemed acceptable, setting aside aspiration to take advantage of shortAt one point, new building orders could be er-term positive movement in the firm’s share-value cycle. rapidly rising. And the secondhand price for So how might one come up with lead indicators for a more PSVs would thus also tend to be good, as might be specific indication of what may be good timing then, still as expected, since the market would still be strong, seen from the vantage point of the minority shareholders? with nothing of the new tonnage yet depressing the market. One might want to sell. Here are some inputs that might be taken from our book. The book by Rosling (Part 3) offers important analytBut there might be objections, say, from ical support. And Sethi’s book (Part 4) discusses several of employees. Here are two factors to consider these issues directly. Carryou’s book is also relevant. when it comes to exit decisions: www.europeanbusinessreview.com 19
EDITOR'S PICK One important assertion should be made at this stage, namely that it is important that a firm’s top leadership be in a position to actually act when an opportunity comes up. The counterpoint might be more fundamental disagreement among leading stakeholders, such as between various shareholder groupings, top management, the board, and so on. Again, it is important that there is someone at the helm with clear decision-making authority. EXAMPLE: A LAND-OWNING FIRM a pool of ships designated to the transportation of chemicals. There seemed to be signals that it was a good time to enter, with the price of the ship being relatively low, a somewhat low new-building order book, as well as an apparent global uptake for the transportation of chemicals. The reviews and interviews in Part 5 could shed important light on the issues affecting the attractiveness of chemical shipping. Several of the book reviews in Part 3 are also relevant, perhaps above all that of Siilasmaa’s book. The local political authorities have A portfolio strategic perspectentatively approved the building tive is also important here, of several semi-detached dwell- Cycle management is a however, that there should be ings on around one-third of a land key concept here too, enough free cash available to parcel outside a European capital execute attractive investments. namely, to anticipate low city, and the land-owning firm has In-decisions/in-opportunities provisionally sold this land parcel parts of a cycle, and to “get typically come about rather to a developer. A main condition in”, as well as upper parts randomly. Cash is needed to be from the local political authority to act when such opportuof a cycle, and to “get out”. ready to allow the construction to take nities arise. place, however, is a requirement that the local access road should be improved. While the cost of this rests on the local community and county, there might CONCLUSIONS be relatively low willingness by the authorities to go ahead, due to other, competing priorities for them. A large development As we are always stressing, it is especially critical project nearby seems to have led to increased pressure to start to be able to anticipate so-called breakpoints, to the road-improvement project, however. But when could the be able to take timely actions, typically ahead of road construction take place, triggering the land development “the rest of the flock”. By breakpoints, we mean firm to receive its sales compensation from the developer? While there are many inputs from our book that might shed light on this issue, several of the books reviewed in Part 1 may be particularly relevant. Andrew McAfee’s book appears to be particularly so. Also, the book by Sam Zell (Part 8) is also helpful. EXAMPLE: PURCHASE OF A CHEMICAL TANKER There was an opportunity to purchase a part of a secondhand chemical tanker, which was to be operated by a well-represented shipping group, considered to be a world leader with 20 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
doctors, economists, and even security experts or detectives, are examples of professions whose work relies heavily on their ability to look for signals and breakpoints. So, a "new" managerial discipline is emerging – the sensing of signals regarding breakpoints, not only strong, but also weak ones. Effective leaders must develop an approach to understand these themselves. For each business leader, these will be different! Business schools might also be useful here, by focusing more on (typically weak) signals; how to gain understanding and how to measure. But, in the end, it is all about the effective leader him- or herself. Observation, listening, reflection are part of this critical process and mindset. business interruptions that can arise from a variety of reasons, including environment, process, people, and so on. Some breakpoints are expected, others not. For those not anticipated, being in tune with or alert to the not-so-easy-to-see data points or the weak signals can help leaders to catch them. In summary, in-out decisions can yield success if made with the highest degree of observation of patterns, capture of signals, analysis, and solid doses of clear decision-making. We must not only ask our teachers and guides to help us to acquire these skills, but we ourselves must shift our leadership mindsets to that of a “signal sensitivity” mindset. Cycle management is a key concept here too, namely, to anticipate low parts of a cycle and to “get in”, as well as upper parts of a cycle, and to “get out”. In most types of shipping, for instance, this is particularly important. Cycle management does of course apply to many other business areas, too. And we can turn to successful investors who have turned this almost into a science, for inspiration. Breakpoint understanding represents a central premise for successful cycle management! REFERENCE Lorange, P. Mugnaini, K., (2024), The Future Ready Leader , Springer Nature. Do not ignore the weak signals that indicate the existence or probability of breakpoints. In quickpaced environments, we acknowledge how critical speed is. Yet we suggest that you can be fast, and focused (see the review of Hoffman and Yeh’s book in particular – Part 5). You can accelerate forward, you can build an awareness level in such a way that even small, minute impulses can serve as moments of transformation. Weak signals can indicate that change can occur, for example in leadership. While strong signals may stream almost automatically into actions, tiny data points, weak signals are often unseen, set aside or misinterpreted. Scientists, ABOUT THE AUTHORS Peter Lorange, Honorary President, IMD, is a successful entrepreneur and the former owner of a highly diversified family investment company. He is regarded as one of the world’s foremost business school academics, having held the position of President at IMD, Lausanne (Switzerland) for 15 years, having also been President of Norwegian School of Business, as well as a Professor at Wharton and at Sloan School (MIT). He has had several positions on various boards. His entrepreneurial journey spans key areas such as education, shipping, investments, and real estate businesses. Karin Mugnaini is the Head of the International Alumni Association at IMD (Lausanne, Switzerland), and has been involved in international business since 1989, with engagements across the United States, Europe, Hong Kong, and currently in Switzerland. She has held numerous leadership positions in corporations as well as in startups, with a particular emphasis on new business initiatives. Ms. Mugnaini was formerly President & COO of the Lorange Network, working closely with Peter Lorange. www.europeanbusinessreview.com 21
LEADERSHIP A CONCEPT AND METRIC TO EMBED IN LEADERS, ENHANCING THEIR EFFECTIVENESS by Simon L. Dolan, Kyle Brykman and Shay S. Tzafrir Every leader needs to inspire trust in their followers, employees, and stakeholders. Trust is one concept that binds all efforts at relationshipbuilding together, leading to business success. In this article, three experts in business management discuss how leaders can build trust. INTRODUCTION Trust is the foundation of any successful relationship, whether it be personal or professional. Building trust requires effort and time, but the benefits of a trustworthy relationship are immeasurable. Trust can lead to increased communication, better collaboration, and a stronger sense of community. In this article, we will explore the strategies and techniques available to leaders that can be used to establish trust in their relationships. 22 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024 Trust is an essential concept in many of the articles, books, and research focus of the coauthors of this article. Dolan (2011 and 2020), for example, refers to TRUST as the “Super-Value”, the “Value of Values” or the “Mother of all Values”.1 Garti and Tzafrir (2022), in a recent book, suggests trust to be a powerful concept for synchronising work-family relationships.2 As researchers, consultants, and change agents, we argue that a leader who wishes to be effective in his/her role needs to embed the triple anchors in his/her toolbox: 1) A clear definition of what trust means (and what trust is not), 2) a clear methodology to assess trust, and 3) evidencebased tool (or tools) to assess the genuine level of trust that he/she experiences. We therefore believe that the time is ripe to explore these three components, which we have been researching for over 20 years. This is needed because managers, leaders, and employees across organisations frequently
use the term trust, even though it is not very well The objective of this paper is threefold: (1) to understood, and neither is it clear as to how to shed light on what trust means in organisational build it and what measures/tools are available to contexts (2) to describe a 360o methodology to assess the leaders´ trust (ranging from self-trust, enhance it. subordinates´ trust in the leader, and colleagues´ Enhancing trust in organisations is a complex trust in the leader), and (3) to describe the latest and challenging process that requires a well-planned applications of the TRUST-ME methodology and effective tools to achieve success. Trust Trust can mean different things tool that can be used as a gamification tool and online is the foundation of any healthy assessment. and productive relationship. to different people. For some, Without trust, employees can it may be about reliability feel disengaged and unmotiand consistency. For others, vated— resulting in a decline SO, WHAT EXACTLY in productivity or quitting it may be about honesty and IS TRUST? the organisation. It may also transparency. And for others lead to overall poor organisastill, it may be about a sense of Trust is about having confidence tional performance. in someone or something. Trust However, enhancing trust connection and understanding. is about believing that they will within an organisation is not do what they say they will do, it is the ability to reduce an easy task. It requires a significant investment of uncertainty as a result of a shared positive history, time and effort, along with the right “know-how”. and that they have your best interests at heart.3 Leaders must not only be committed to creating However, trust can mean different things to different a culture of trust and be willing to make diffipeople. For some, it may be about reliability and cult decisions to achieve this goal, but also have consistency. For others, it may be about honesty and a firm understanding of how to do so and what transparency. And for others still, it may be about a works against trust. Additionally, trust takes time sense of connection and understanding. One clear to build, and it can be easily lost if not nurtured thing, though, is that trust is vital to any relationship, and maintained. whether it is personal or professional. Without trust, it is difficult to build strong, lasting connections with others and hard to feel secure and confident in your interactions with them. Some regard or consider trust as a concept with two components: trustfulness and trustworthiness. This approach combines the attitude of one actor with the characteristics of another. A host of scholars stress the importance of being trustful. In the idealistic tradition, faith and social education nurturing positive expectations are the keys to trust and cooperation. However, trustworthiness can play a major role in this attitude. Overly optimistic or deceitful promises will fool and disappoint the trustful actor, making him/her distrustful, while the experience of trustworthy partners will enhance further cooperation. Hence, the degree of trustworthiness is the central factor for whether trust increases or decreases.4 www.europeanbusinessreview.com 23
LEADERSHIP Mind you, trustfulness refers to the willingness to trust others and to believe in their intentions and actions without questioning them. It is a positive trait that allows individuals to build strong relationships and foster collaboration. Trustfulness is often associated with openness and vulnerability, as it requires individuals to let their guard down and rely on others. On the other hand, trustworthiness refers to the ability to be trusted, and to act in a reliable and honest way that inspires confidence in others. It is a character trait that is built over time through consistent behaviour and actions. Trustworthiness is often associated with integrity and responsibility, as it requires individuals to be accountable for their actions and to follow through on their commitments. It also involves compassion and benevolence, as one needs to believe that others will act with kindness and with their best interest in mind. While trustfulness and trustworthiness are both important, they are not interchangeable. Trustfulness can be a positive quality, but it can also be risky if it is not accompanied by discernment and caution. Blindly trusting others, unconditional trust, can lead to disappointment and even harm if the other person proves to be untrustworthy. On the other hand, trustworthiness is a foundational quality that underpins all healthy relationships. Without trustworthiness, trust cannot be built or maintained. Trustworthiness requires individuals to be honest, reliable, and consistent in their behaviour, even when it is difficult or inconvenient. All in all, research shows that leaders who display trust, create a positive culture which makes a huge difference in terms of the commitment and productivity of members of the organisation (See Exhibit 1). Exhibit 1: Some tangible consequences connected to leaders who generate trust Enhance Report Report Productivity 74% 106% Less waste by about less more and enhance 40% Stress energetic Experience Over 40% Resource Savings at work Source: https://esp.6seconds.org/2017/08/24/ la-neurociencia-de-la-sala-al-directorio/ THE SPIRITUAL DIMENSION OF TRUST Is there such a thing as spiritual trust? The answer is yes. Among the types of trust, it focuses on faith and religious doctrine. People with this type of trust believe in the spiritual energy that surrounds human beings. It is a very subjective trust that depends on the context and culture. The phrase “In God We Trust” is a well-known and significant motto in the United States. It is printed on its currency, displayed in government buildings, and has been a part of the US national identity for over 150 years. Despite its origins in wartime and Cold War politics, the motto has endured as a symbol of American values and identity. Regardless of one’s personal beliefs, the phrase “In God We Trust” remains an important part of the US national heritage. It represents its history, values, and commitment to a higher power. And it serves as a reminder that, even in times of hardship 24 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
and division, one can find strength and unity in one’s faith. Moreover, the phrase is a testament to the importance of faith and spirituality in American life. It acknowledges that religion and spirituality are not just personal beliefs, but also a fundamental part of the nation's heritage and culture. It is a call to embrace one's faith and to seek guidance from a higher power in times of need. THE BIOLOGICAL AND NEUROSCIENCE BASE OF TRUST We are born to trust — to engage with others and rely on them for survival. This innate human condition served critical evolutionarily purposes in early hunter-gatherer societies that depended on collaboration and concern with non-familial members. The neuroscience base of trust is a fascinating topic that explores the intricacies of the human brain and its ability to build and maintain trust. The neuroscience of trust is based on the understanding of the brain's reward system, which is responsible for regulating our emotions and behaviours. Studies have shown that when we trust someone, our brains release oxytocin, a hormone that is associated with social bonding and attachment. This chemical reaction creates a sense of warmth, closeness, and intimacy, which reinforces the bond of trust between individuals. Furthermore, the prefrontal cortex, a region of the brain responsible for decision-making and social behaviour, is also involved in the process of building trust. This area of the brain is responsible for evaluating social cues and determining whether someone is trustworthy. When we encounter someone who displays trustworthy behaviour, the prefrontal cortex sends signals to the reward system, which reinforces the bond of trust. However, the neuroscience base of trust is not limited to the reward system and prefrontal cortex. Other regions of the brain, such as the amygdala, play a crucial role in the process of building and maintaining trust. The amygdala is responsible for processing emotions, particularly fear and anxiety, which can have a significant impact on our ability to trust others. When we encounter a potential threat, the amygdala sends signals to the prefrontal cortex, which evaluates the situation and determines whether it is safe to trust the other person. In conclusion, the neuroscience base of trust is a complex and multifaceted topic that involves a combination of cognitive, emotional, and social processes. It highlights the importance of social bonding and attachment in human relationships and provides insight into the mechanisms that underlie trust. By understanding the neuroscience of trust, we can develop a greater appreciation for the power of trust in our lives and work towards building stronger, more meaningful relationships with others.5 Studies have shown that when we trust someone, our brains release oxytocin, a hormone that is associated with social bonding and attachment. This chemical reaction creates a sense of warmth, closeness, and intimacy, which reinforces the bond of trust between individuals. THE COSTS AND CONSEQUENCES OF MISTRUST IN AN ORGANISATION´S LEADER Today, mistrust has become a pervasive issue that has far-reaching consequences. In organisations, mistrust can create an environment of fear, doubt, and uncertainty. The costs of mistrust are significant, as it can lead to a breakdown in www.europeanbusinessreview.com 25
LEADERSHIP communication, a lack of collaboration, and ultiperformance. When employees are unhappy in mately, a loss of productivity. their jobs, it can also lead to increased absenteeism In the workplace, mistrust can be equally and presenteeism, which can further impact the damaging. It can create a toxic environment where organisation's bottom line. employees feel suspicious of one another, and where collaboration is difficult to achieve. Mistrust can lead to a lack of innovation and creativity, as employees THE PARADOX OF EMPLOYING are hesitant to share their ideas and opinions for fear “INWARD-TRUST¨ BUT of being judged or criticised. It is difficult to recover “OUTWARD- ZERO TRUST” from mistrust, as research shows that it takes approximately six trust-building actions to compensate for So far, we have argued that trust is a valuable one act that breached trust.6 Mistrust in the workplace can have serious consecommodity. It is especially important to nourish it quences for both employees and the organisation. within the people that work in the same team or organFirstly, mistrust can lead to a toxic work environisation. We call it “inward trust”. But, with the rise ment. When employees don't trust their leader, it of cyber-attacks and political turmoil, it is becoming creates a culture of suspicion and paranoia. This increasingly difficult to rely on others. That's where leads employees to feel isolated and unsupported, the concept of “Zero Trust” comes in. This approach which can have a negative impact on their mental to security is gaining popularity in both international health and well-being. A toxic leader politics and the digital security sector. can also lead to high turnover rates, The idea behind Zero Trust is simple: Mistrust can lead to a as employees may feel compelled to trust no one. This means that every lack of innovation and escape the negative atmosphere. user, device, and application must Secondly, mistrust in the leader- creativity, as employees be verified and authenticated before ship of an organisation can decrease being granted access to a network are hesitant to share productivity. When employees don't or system. It also means that access trust each other, they do not collaborate their ideas and opinions is granted on a need-to-know basis, or communicate effectively leading to for fear of being judged rather than blanket permission. avoidable mistakes. When employees While the concept of Zero Trust or criticised. don't feel comfortable working with may seem extreme, it is becoming their leaders, they may also be less likely to ask for necessary in today's world. Cyber-attacks and polithelp, which can further decrease productivity. ical turmoil are on the rise, and trust is becoming Thirdly, when employees lack trust in their harder to come by. Zero Trust provides a solution to leader, they feel unsupported and undervalued. these problems by ensuring that every user, device, This leads to a lack of motivation and enthusiasm and application is verified and authenticated before for their work, which ultimately impacts their being granted access. This is a small price to pay 26 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
for the security of sensitive information and the protection of our democracy. compass. The consequence is simple: the more a leader uses the word trust (without precision), the more the followers and companions will lose interest in listening to him/her and it will naturally lead to disappointment in our leaders. For this reason, at the beginning of the 2000s, we began to study trust in work settings, in a rigorous and systematic way. In 2004, we published for the first time an article where we identified the three key dimensions of the concept of trust (acronym RCH), as we refined the tools to measure it. The three dimensions that emerged from the numerous scientific studies were: LEADERSHIP AND TRUST: THE USEFULNESS OF THE TRUST-ME SCALE AND TOOLS When it comes to measuring trust, it is important to consider the various factors that contribute to its formation. To measure trust, various concepts and scales have been developed. These include the Trust Scale, the Trust in Organisations Scale, and the Interpersonal Trust Scale, among others. These scales are designed to assess different aspects of trust, such as trust in specific individuals, trust in organisations, and trust in oneself. Many of the conflicts in organisations arise because leaders cannot generate and/or sustain trust. How can a leader have followers if they do not trust him/her? Unfortunately, research suggests that in more and more companies (families included if we use it as a metaphor for an organisation), it seems that people have lost trust in their leaders and their peers. We note this lack of trust in businesses, government agencies, education, and even in our churches (you only must listen to the scandals that are published on the corrupt behaviour of some priests). This general distrust in our leaders points to a cultural breakdown. The problem is not a lack of leaders but a lack of a climate of trust where leadership is possible. Unless followers feel confident in the fairness and reliability of their leaders, they will not continue following them. Trust can significantly alter individual and organisational effectiveness. Trust, more than power and hierarchy, is what makes an organisation work effectively. So, if we know that trust is a prerequisite for any attempt by the leader to change the organisational culture and to sustain the reliability, motivation, and behaviour of the followers, why don’t we help leaders to improve trust? In our opinion, people use the word trust too often in making a generic reference and therefore until we have a clear metric to measure it, we will continue to operate without a R eliability, Concern, and Harmony (See Exhibit 2). Let´s elaborate a bit on each of these dimensions: • Reliability is a leader’s competence that shows that he/she is true to his/her words, makes him/her do what they say, and does it consistently. This dimension is connected to the efficiency of performance. • Concern is equated with the interest that the leader displays in interacting with his/her subordinates. The leader is involved affectively and emotionally in the relationship and shares common and complementary goals. It also shows that the leader is concerned and manifests genuine interest in problems that his/her followers and companions might have and shares values such as empathy or sympathy. • Harmony occurs when there is an ethical–social bond between the leader and his follower. That means that there are elements such as integrity, respect, and other ethical– social facets. Exhibit 2: Tzafrir and Dolan RCH model of Trust7 www.europeanbusinessreview.com 27
LEADERSHIP TRUST ASSESSMENT: A DEMONSTRATION OF TOOLS THAT ARE BASED ON (A) GAMIFICATION (B) DIGITAL ONLINE Entrusting my leader assessment and calculating the trust scores in each dimension is provided in Exhibit 3. Entrusting You: A Scale for measuring the level of trust I have in my Leader/Manager/Boss Exhibit 3: Here are 21 statements that demonstrate dimensions of trust that you have in your manager/leader/boss (select a focal person). The scale is based on the works of Tzafrir and Dolan, 2004).8 Indicate the degree to which you agree with each statement by using the following scale. 1 Disagree strongly 2 Disagree 3 Neither agree nor disagree 4 Agree 5 Strongly Agree Think about yourself and the person in your organisation that you wish to assess. This can be a direct manager, a colleague at work, a leader or the so-called Boss. For each statement, write the number that best describes how much you agree or disagree with each statement. Item # 28 Score (1-5) Statement Card Label 1 My needs and desires are very important to both of us. Shares needs & desires 2 I can count on my manager/leader to help me if I experience difficulties. Lends a hand at difficulties 3 My manager/leader is sensitive and quite open-minded when he /she has to deal with me. Open up 4 People around me succeed because my manager/leader does not let conflicts arise (he/ she does not let people step on each other). Resolves conflicts 5 My manager/leader keeps the promises he/she makes. Keeps promises 6 My manager/leader looks out for me to ensure that I get what I deserve. Ensures equity 7 My manager/leader has lots of knowledge about situations that we are in together and knows what needs to be done. Have knowledge and competence 8 My manager/leader is known to be successful in the things he/she attempts to accomplish. Success track 9 If I make a mistake, my manager/leader will “forgive and forget” in order to not upset me. Forgives unintentional mistakes 10 My manager/leader´s actions and behaviours are supportive and harmonious. Harmonious action 11 My manager/leader´s actions are consistent with their words (he/she “walks the talk”). Walks the talk 12 My manager/leader is known to generate comfort and thus I feel unthreatened in sharing personal or intimate information with him/her. Generates comfort 13 There is a lot of warmth and caring in the relationships between my manager/leader and myself. Warmth & Caring relationships 14 My manager/leader makes personal sacrifices for me to maintain the relationship. Engages in personal Sacrifices 15 My manager/leader expresses his/her true feelings about important issues that concerns us. Manifest true feelings 16 My manager/leader brings the best of his /her humanistic traits in order to sustain our good relationships. Brings the best human character 17 My manager/leader shows genuine concern for my needs and qualities. Shows concern 18 All in all, my manager/leader is a reliable person. Exhibits reliability 19 My manager/leader focuses on the message, (not on his messenger status), to ensure that he/she is aligned with his/her promises. Consistent actions 20 My manager/leader is often collaborative and cooperative with me. Collaborates 21 My manager/leader makes an extra effort to maintain harmonious relationships between us. Maintains harmony THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
THE TRUST KIT 9 Interpreting the results Calculate your total score by adding the following items. Entrust Dimension Items Reliability 2, 5, 7, 8, 11, 18, 19 Harmony 4, 10, 12, 14, 16, 20, 21 Concern 1, 3, 6, 9, 13, 15, 17 The Trust Kit was developed to perform the same exercise as in Exhibit 3 but in a fun and interactive fashion. Research shows that this gamification approach tends to yield more effective results than simple explanations of principles by tapping into psychological and motivational aspects of human behaviour. The Trust Kit contains 21 cards (in alignment with the 21 questions), each of which corresponds with a dimension of the RCH model, with a distinct colour background. Seven cards are Red (representing Reliability), 7 Cards are Green (representing Concern), and 7 cards are Blue (representing Harmony). Players select cards in accordance with the person being assessed (boss, manager, or leader) and place it on the mate (Exhibit 4). Total Score • Please retake the scores obtained before and place them respectively for each dimension in column 2. • Take your score and divide it by 7 and then multiply each by 2, then place each of them in Column 3 respectively. This will generate a final score on a scale ranging from 1-10 to be used in the Template. 2 3 Score obtained before Final calculated score on a scale of 1-10 to be placed on the template 1 Trust Dimension Exhibit 4: The mate of Trust based on the RCH model Reliability Harmony The Trust Mate Concern #2 • Now, mark your final score on each of the corresponding dimensions in the threedimensional ENTRUST template. Once marked, connect the dots with a straight line. Please shade the area. This is your perceived TRUST zone with the person that you are assessing. Charting your perceived three-dimensional zone of Trust Reliability 10 9 Concern 8 7 6 5 4 3 2 1 0 0 1 0 1 2 3 4 5 6 7 8 9 10 Harmony 2 3 4 5 6 7 8 9 10 Lands a hand at difficulties #8 Has a success track #1 Shares needs & desires #9 Forgives unintentional mistakes #4 Resolves conflicts #14 Demonstrate personal sacrifices #7 #5 Keeps promises Is knowledgeable and competent R #11 #18 #19 Walks the talk Exhibits reliability Shows consistent actions #3 #6 Is open minded Ensures equity C #13 #15 #17 Display warmth & caring Manifest true feelings Show concern #10 #12 Promotes harmonious actions Generates comfort H #16 #20 #21 Demonstrate humanistic character Great Collaborator Maintain harmony www.europeanbusinessreview.com 29
LEADERSHIP Exhibit 5a: An example of a leader assessing the level of Trust he/she generates with a subordinate. A DIGITAL ONLINE TOOL TO ASSESS TRUST IN THE ORGANISATION R-zone 7 7 0 C-zone H-zone 7 My Leader Trust zone in his/her self assessment Results show that this leader thinks he/she is perfect in displaying trust. He/she is a: 7 7 7 leader. An example of a leader being assessed Exhibit 5b: by his/her subordinate. R-zone • Leader's self-assessment of the level of trust they generate. (RCH model) • Subordinates (one or many) aggregate assessment of the leader's level of trust (RCH Model). • Aggregate assessment of leaders' "peers" (RCH Model), and • Aggregate assessment of the leader's superior(s) (RCH Model) • At the end of this process, an elaborate automatic (AI-based) report is generated which indicates (a) the diagnosis, (b) the gaps, and (c) the areas for improvement to enhance this important phenomenon of building mutual trust. 7 7 0 C-zone H-zone 7 My Trust zone with my leader Results show that this is a 7 2 5 leader. When you compare the two assessments, and can also see the gap visually, you get an idea of what needs to be worked on to improve the level of trust between a leader and a subordinate. You can add more assessment in the 360o patterns, to identify more gaps (with a team, with peers, etc.,) thereby improving the diagnosis. This will be a cumbersome process, and this is the reason for the development of the digital tool that is described in the next section. 30 The Digital Trust Assessment has been developed as part of a programme and philosophy called “Leadership by Values®”. This programme provides stakeholders with the ability to evaluate their leaders in three areas: 1) assess their core values and measure how well they fit with the organisation's culture, 2) assess their competencies and leadership skills for future success (9 skills total), and 3) assess their overall state of trust. The programme, which incorporates some features of Artificial Intelligence, assesses each of these leadership skills in a 360-degree degree, and uses information on: THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
A FUTURISTIC NOTE AND PREDICTION ABOUT THE ROLE OF TRUST foster global trade and enable individuals from different corners of the world to interact and engage in mutually beneficial exchanges. Moreover, in a future where virtual reality and augmented reality become more prevalent, trust will be vital to foster meaningful connections. As we immerse ourselves in digital realms, we will rely on trust to distinguish between genuine interactions and deceptive simulations. Trust will be the bridge that allows us to form deep and authentic relationships, whether they are virtual or physical. Furthermore, trust will be the backbone of governance and societal systems. In a world where data is the new currency, individuals will need to trust that their personal information is handled responsibly and transparently by governments and corporations. Trust will be crucial to maintain social harmony and ensure that power is not abused. In a futuristic vision, the importance of trust in our lives will be more crucial than ever before. As we progress into an era of advanced technology and interconnectedness, trust will shape the very fabric of our society, economy, and personal relationships. One aspect where trust will play a significant role is in the realm of artificial intelligence (AI) and automation. As machines become increasingly integrated into our daily lives, trust will be essential for us to embrace and fully benefit from these advancements. We will need to trust that AI systems are reliable, secure, and make ethical decisions. Trust will enable us to delegate tasks to machines without fear of them malfunctioning or causing harm. In economic terms, trust will be the foundation of a thriving digital marketplace. With the rise In a future where virtual reality and augmented of decentralised technologies like reality become more prevalent, trust will be blockchain, trust will be inherent in every transaction. People will vital to foster meaningful connections. As we have the confidence to engage in immerse ourselves in digital realms, we will online commerce, knowing that rely on trust to distinguish between genuine their personal and financial information is secure. This trust will interactions and deceptive simulations. Ultimately, in this futuristic vision, trust will be the currency that fuels progress and enables us to navigate the complexities of an interconnected world. It will determine our ability to embrace technological advancements, participate in the digital economy, form meaningful connections, and maintain a just and equitable society. In short, trust will be the cornerstone of our lives in the future. Its importance will extend beyond personal relationships, permeating every aspect of our existence. As we navigate a world shaped by advanced technology, trust will be the glue that holds our society together and allows us to fully embrace the opportunities and challenges of the future. www.europeanbusinessreview.com 31
LEADERSHIP CONCLUSION In this article, we explored the concept of trust in all its complexities. We wish to reiterate that trust is one of the most widely used constructs around the world, but it is poorly understood, defined, and measured. We were trained to think that if any concept is missing these qualities (definition, methodology on how to use it, and metrics) it is useless. An attempt was therefore made to define trust, to look at its dimensions, and to show clearly how it can be applied. We have decided to adopt the RCH three-dimensional Trust model because it was based on empirical research and seems to be used by thousands of researchers around the world. In the article, we introduced the essence of the RCH model and explored its potential use wherever leadership is called for: at home, at work and in the community. And finally, we introduced three tools for measuring trust, which can all be used in different contexts, and, if necessary, in 3600. This allows you to measure your leader's trust either manually, or via the use of a gamification tool or digitally. Gaps between the leader and other stakeholders can be easily detected, displayed, and discussed resulting in the preparation of strategic solutions to enhance trust, which in the end, is a win-win outcome. 8. 9. ABOUT THE AUTHORS REFERENCES 1. 2. 3. 4. 5. 6. 7. 32 Dolan S.L. (2011). Coaching by Values. iUniverse; Dolan S.L. (2020). The Secrets of Coaching and Leading by Values. Routledge. Garti, A., & Tzafrir, S. (2022). Work–Family Triangle Synchronization: Employee, Manager, and Spouse. De Gruyter. See: Tzafrir, S. S., & Dolan, S. L. (2004). Trust Me: A Scale for Measuring Manager-Employee Trust. Management Research: Journal of the Iberoamerican Academy of Management, 2(2), 115-132. See: Tullberg J., (2008) Trust—The Importance of Trustfulness versus Trustworthiness, The Journal of Socio-Economics, Vol 37(5): 2059-2071 In January-February 2017, Harvard Business Review published an amazing article by Paul J. Zak who covers with great details the neuroscience of trust. Highly recommended reading. Baumeister, R., Bratslavsky, E., Finkenaur, C., & Vohs, K. (2001). Bad Is Stronger Than Good. Review of General Psychology 323–370. This model was published for the first time in 2004 but was studied in other contexts many times by Tzafrir and Dolan and many other collaborators. It was tested in many cultures and sectors. Recently; ResearchGate has advised the authors that over 9000 researchers have downloaded and/or used this model in their own research; it seems that of all alternative models of trust, this one has become the most popular and most cited. To read more: Tzafrir S., Dolan S.L. (2004) Trust me: A Scale for Measuring ManagerEmployee Trust, Management Research: Journal of the Iberoamerican Academy of Management, Vol. 2(2):115–132, https://do i.org/10.1 108/1 53654 30480 00050 5; Dolan S.L., Tzafrir S., Baruch Y. (2005) Testing the Causal Relationships between Procedural Justice, Trust, and Organizational Citizenship Behavior, Revue de gestion THE EUROPEAN BUSINESS REVIEW de ressources humanies, Vol. 57:79–89; Mach M., Dolan S.L., Tzafrir S. (2010)The Differential Effect of Team Members’ Trust on Team Performance: The Mediation Role of Team Cohesion, Journal of Occupational and Organizational Psychology, Vol. 83(3):771–794 (https://d oi.or g/10. 1348/09631 7909X 47390 3); Chaluz H., Tzafrir S., Dolan S.L. (2015). Actionable Trust in Service Organisations: A Multi-Dimensional Perspective, Journal of Work and Organizational Psychology, Vol. 31(1):31–39; Capell B., Tzafrir S., Enosh G., Dolan S.L. (2018) Explaining Sexual Minorities’ Disclosure: The Role of Trust Embedded in Organizational Practices, Organization Studies, Vol. 39(7):947–973 https://journal s.sag epub. com/d oi /fu ll/10 .1177 /0170 84061 77080 00. Tzafrir and Dolan 2004. Op. Cit. More information on the Trust Kit is available at: www. learningaboutvalues.com MARCH - APRIL 2024 Simon L. Dolan is a full professor and senior researcher of HRM and Work Psychology at Advantere School of Management (affiliated with Comillas, Duesto and Georgetown Universities). A former Future of Work Chair at ESADE Business School, he has published 85 books (in multiple languages) and over 150 articles in referees’ journals. He is also the co-founder and President of the Global Future of Work Foundation. His work, consulting and research are about values, leadership, coaching, stress management and resilience as well as issues connected to the future of work. He is a member of the editorial board of half a dozen scientific journals. His full bio at: www.simondolan.com Kyle Brykman is an Assistant Professor of Management and the VPRI Early Career Research Chair in Leadership at the Odette School of Business, University of Windsor. Kyle's mission is to help people lead happier, healthier, and more productive lives, which he accomplishes through high-quality research, evidence-based teaching, and engaging training and coaching. Kyle's research focuses on employee voice and interpersonal team dynamics. He holds a PhD in Management (Organizational Behavior) from Smith School of Business at Queen's University, an MSc in Management from Wilfrid Laurier University, and an HBA from Ivey School of Business. Shay S. Tzafrir is the dean of teaching and professor at the School of Business Administration, University of Haifa. A former director of the Center for the Study of Organizations & Human Resource Management, he received his Ph.D. and M.Sc. in behavioural science from the Technion – Israel Institute of Technology and earned a B.A and M.A. in political science, as well as LLB, all from the University of Haifa. He serves as a member of the Editorial Review Board in Human Resource Management. He specialises in issues of people management and trust, focusing on the efficiency aspects of human capital. His current research interests include the role trust plays in various organisational factors such as strategic human resource management, organisational performance, and service quality.

PSYCHOLOGY ARROGANCE, HUBRIS, AND NARCISSISM: THE OVERCONFIDENT LEADER by Adrian Furnham T here is Freudian psychological and psychiatric business literature on narcissism. We are now used to discussing our politicians as well as business leaders, movie stars, and models in this terminology. The PR-hungry narcissistic CEO and politician is clearly driven to gain power, glory, and the admiration of others. They can be visionaries and risk takers, seeing the big picture while downplaying the rules, laws, and conventions which handicap them. They can also be amazingly self-absorbed, deluded, and destructive. Narcissists can be energetic, charismatic, leader-like, and willing to take the initiative to get projects moving. They can be relatively successful in management, sales, and entrepreneurship, but usually only for short periods. However, they are arrogant, vain, overbearing, demanding, self-deceived, and pompous, yet they are so colourful and engaging that they often attract followers. Their self-confidence is attractive. Naively, people believe that they have to have something to be so confident about. Narcissism, like all the personality disorders, must be understood as a spectrum, not a type. It is a matter of degree: confident, very confident, overconfident, sub-clinically narcissist, pathological narcissist. Confident – good (if an accurate assessment of talents); narcissism – bad. When they have some insight and self-awareness of their preferences and abilities and which organisation forces are in place to restrain them, they can act as great forces for positive change and advancement. If articulate and educated as well as physically attractive, they 34 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024 can become great leaders. But many are insufferably egotistical, self-absorbed, and deluded. Several versions of the myth of Narcissus survive. They are warnings about hubris and pride. At the heart of the myth is the caution of misperception and self-love, the idea that inaccurate self-perceptions can lead to tragic and self-defeating consequences. There appears to be a moral, social, and clinical debate about narcissism. The moral issues concern the evils of hubris, the social issue the benefits or otherwise of modesty, while the clinical debate is about the consequences of misperceptions. NARCISSISTIC PERSONALITY DISORDER Many researchers list narcissism-arrogance in their terms as the first (probably major) cause of why CEOs fail. It is a case of “I’m right but everybody else is wrong”, a blinding belief in your own opinions.
So, many have a diminished capacity to learn from others or previous experience. They show an outright refusal (ever) to be accountable and, hence, responsible. They are resistant to change because they know that “my way” is best and always show an inability to recognise their (manifold) limitations. Narcissists seem never to be defensive or embarrassed about their ambition and supremely confident in their ambitions. However, because they are so aware of, comfortable with, and grateful for, their strengths, they are easily and profoundly wounded by any suggestion that they have serious weaknesses or shortcomings. At work, they tend to be high-energy, outgoing, and competitive. They seem instinctively drawn to office politics and how to find and use power. They will charm those in authority or those from whom they believe they have something to gain. The psychiatric manuals list the manifestations of this disorder: Reacts to criticism with feelings of rage, shame, or humiliation (even if not expressed) Interpersonally exploitative; takes advantage of others to achieve their own ends Grandiose sense of self-importance, e.g., exaggerates achievements and talents, and expects to be noticed as “special” without appropriate achievement It is important to differentiate between two rather different types of narcissists: grandiose (e.g., manipulative, egotistical, exhibitionist, psychopathic) and vulnerable (e.g., craving, thin-skinned, hyper-vigilant, shy). Grandiose narcissism is associated with immodesty, interpersonal dominance, self-absorption, callousness, and manipulativeness; they are confident and suffer little stress. Vulnerable narcissists are often distressed, with low self-esteem and feelings of inferiority, yet also egocentric and hostile. Narcissists overall are boastful, pretentious, and self-aggrandising. They overestimate their own abilities and accomplishments while simultaneously deflating others. They compare themselves favourably to famous, privileged people believing that their own discovery as one of them is long overdue. They are surprisingly secure in their beliefs that they are gifted and unique and have special needs beyond the comprehension of ordinary people. Paradoxically for some (the vulnerable, as opposed to the grandiose narcissist), their selfesteem is fragile, needing to be bolstered up by constant attention and admiration from others. They expect their demands to be met by special favourable treatment. In turn, they often exploit others, because they form relationships specifically designed to enhance their self-esteem. They need worshippers and acolytes. Believes that their problems are unique and can be understood only by other special people Preoccupied with fantasies of unlimited success, power, brilliance, beauty, or ideal love Sense of entitlement; unreasonable expectation of especially favourable treatment, e.g., assumes that he or she does not have to queue Requires constant attention and admiration, e.g., keeps fishing for compliments Lack of empathy; inability to recognise and experience how others feel Preoccupied with feelings of envy www.europeanbusinessreview.com 35
PSYCHOLOGY They are also paradoxically envious of others They may try to “buy” themselves into exclusive and begrudge them their success. They are well circles. They often require excessive admiration known for their arrogance and their disdainful, and respect from people at work for everything patronising attitude. As managers, their difficultthey do. This is their most abiding characteristic. to-fulfil needs can lead them to have problematic They usually have a sense of entitlement, that is, social relationships and make poor decisions. unreasonable expectations of especially favourMany are exceptionally sensitive to setbacks, able treatment or automatic compliance with feeling both degraded and humiliated. They their manifest needs. They are unsupportive but mask this with defiant counterattacks demand support for themselves. All and rage. They may withdraw from are unwilling to recognise or identify Narcissists overall are situations that led to failure or try to with the feelings and needs of others boastful, pretentious, mask their grandiosity with an appearin and out of work. They have desperance of humility. ately low emotional intelligence. and self-aggrandising. At work, narcissistic individuals Essentially, narcissism is a They overestimate have a grandiose sense of self-impordisorder of self-esteem; it is essentheir own abilities tance (for example, they exaggerate tially a cover-up. People with NPD their achievements and talents, and self-destruct because their self-agand accomplishments expect to be recognised as superior grandisement blinds their personal while simultaneously without commensurate achievements). and business judgement and manadeflating others. Inevitably they believe that they rightly gerial behaviour. At work, they deserve all sorts of markers of their exploit others to get ahead, yet specialness: bigger offices and salary, inflated job they demand special treatment. Worse, their titles, a bigger budget dedicated to their needs, reaction to any sort of criticism is extreme, more support staff, and greater liberty to do as including shame, rage, and tantrums. They aim they wish. to destroy that criticism, however well-intenMost individuals with NPD are preoccupied tioned and useful. They can be consumed with with fantasies of unlimited success, power, envy of, and disdain for, others, and are prone to brilliance, and money. They believe that depression as well as manipulative, demanding, they are “special” and unique and can and self-centred behaviours. Even therapists therefore only be properly underdon’t like them. stood by, or should associate with, Many researchers have tried to “unpick” the other special or high-status essence of the paradoxical, fragile self-esteem people (or institutions). of the narcissist. The narcissist’s self-esteem is at once unstable and defensive. It seems that their self-esteem is utterly contingent on others’ feedback. Further, it is dissociated between explicit (overt) and implicit (covert) views. What is most distinctive about narcissists is their self-assurance, which often gives them charisma. They are the first to speak in a group and they hold forth with great confidence, even when they are wrong. They so completely expect to succeed, and take more credit for success than is warranted or fair, that they refuse to acknowledge failure, errors, or mistakes. When things go right, it is because of their efforts; when things go wrong, it is someone else’s fault. This is 36 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
a classic attribution error and leads to problems with truth-telling, because they always rationalise and reinterpret their failures and mistakes, usually by blaming them on others. Narcissists handle stress and heavy workloads badly, but seemingly with ease; they are also quite persistent under pressure and they refuse to acknowledge failure. As a result of their inability to acknowledge failure or even mistakes and the way they resist coaching and ignore negative feedback, they are unable to learn from experience. Oldham and Morris note four tips for working with narcissists: Be absolutely loyal. Don’t criticise or compete with them. Don’t expect to share the limelight or to take credit. Be content to aspire to the number-two position. Don’t expect your self-confident boss to provide direction. Likely, he or she will expect you to know what to do, so be sure you are clear about the objectives before you undertake any tasks. Don’t hesitate to ask. You may be an important member of the boss’s team, but don’t expect your self-confident boss to be attentive to you as an individual. Don’t take it personally. Self-confident bosses expect your interest in them, however. They are susceptible to flattery, so if you’re working on a raise or a promotion or are trying to sell your point of view, a bit of buttering-up may smooth the way. This is advice for those working with narcissists. It clearly takes an optimistic perspective, never considering that a narcissistic boss could be both abusive and deeply incompetent. www.europeanbusinessreview.com 37
PSYCHOLOGY THERE ARE MANY MARKERS OF NARCISSISM. HERE IS A CHECKLIST FOR SOMEONE YOU MIGHT SUSPECT OF NPD: manipulate, ply, shape, beguile, machinate, or manoeuvre the feelings or opinions of others. 1 EXPLOITATIVENESS Assessing a tendency to exploit, take advantage of, and use others for their own gain. REACTIVE ANGER Concerning anger and rage in response to perceived slights, criticism, failure, or rebuke. 2 SHAME Concerning shame or humiliation in response to perceived slights, criticism, failure, or rebuke. 3 INDIFFERENCE In response to perceived slights, criticism, failure, or rebuke. 4 NEED FOR ADMIRATION Involving a sense of inner weakness, uncertainty, and insecurity with respect to a desired or perceived greatness. 5 EXHIBITIONISM A seeking of constant admiration, showing off when in the presence of others, and attention-seeking, without reference to feelings of insecurity. 6 THRILL-SEEKING Assessing a tendency to engage in high-risk behaviour for the sake of thrills and excitement. 7 AUTHORITATIVENESS Assessing a tendency to take charge of situations, to authoritatively take responsibility for making decisions, and to perceive oneself as a leader. 8 11 12 ENTITLEMENT Involving feelings and actions of entitlement, presumptuousness, not being satisfied until they get what is perceived to be deserved, or expectation of favourable treatment. 13 ARROGANCE Assessing haughty, snobbish, imperious, pretentious, conceited, pompous, and disdainful beliefs and behaviours. 14 LACK OF EMPATHY Assessing the extent to which the person fails to be aware of, appreciate, or acknowledge the feelings of others, displaying attitudes that are generally uncaring and unsympathetic. 15 ACCLAIM-SEEKING Assessing narcissistic aspirations, working toward acclaim, and an excessive driving ambition to achieve. THE NARCISSISTIC LEADER It should not be assumed that narcissism is necessarily a handicap in business. Indeed, the opposite maybe true. If a manager is articulate, educated, and intelligent, as well GRANDIOSE FANTASIES Assessing fantasies of grandeur and success, preoccupation with fantasies of future glory, and a tendency to distort reality to achieve an overly positive view of past, current, or future accomplishments. 9 CYNICISM / MISTRUST Assessing a sense of cynicism and mistrust concerning the motives, intentions, and reliability of others. 10 38 MANIPULATIVENESS Assessing a tendency to skilfully and characteristically THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
as good-looking, their (moderate) narcissism may be seen to be acceptable. Bright-side narcissists can be good delegators, good team builders, and good deliverers. They can be good mentors and genuinely help others. However, subordinates soon learn that things go wrong if they do not follow certain rules. • • Everyone must acknowledge who is boss and accept rank and hierarchical structure. They must be absolutely loyal and never complain, criticise, or compete. They should never take credit for something but acknowledge that success is primarily due to the narcissist’s talent, direction, or insights. • They should not expect the narcissist to be interested in their personality, issues, or ambitions but they must be very interested in the narcissist’s issues. • They have to be attentive, giving, and always flattering. They need to be sensitive to the whims, needs, and desires of the narcissistic manager, without expecting reciprocity. • Narcissistic managers can be mean, angry, or petulant when crossed or slighted, and quickly express anger, so subordinates have to be careful when working with them. • They must ask for help, directions, and clarity about objectives when they need it. • They need to watch out that a narcissistic manager’s self-preoccupation, need for approbation, and grandiosity do not impede their business judgement and decision-making. • They need to find ways of giving critical feedback in such a way that the manager both understands it and does not get offended. The dark-side narcissistic manager tends to have shallow, functional, uncommitted relationships. Because they are both needy and egocentric, they tend not to make close supportive friendship networks in the workplace. They can often feel empty and neglected as a result. Narcissistic leaders may have short-term advantages but long-term disadvantages, because the narcissist’s consistent and persistent efforts are aimed at enhancing their self-image, which leads to group clashes. Whilst a “touch” of narcissism can be good for leaders, it can be problematic in the long run, particularly if the problem is severe. FREUDIAN CONTRIBUTIONS The business psychoanalyst Manfred Kets de Vries believes that a certain degree of narcissism is essential, a prerequisite for leadership. Narcissism is traced to childhood. It is seen as a problem associated with two related issues – how they perceive themselves, as well as salient others, and, more specifically, how they come to cope with the reality that one is neither omnipotent or omniscient, and nor are parents powerful and perfect. The child’s life-long quest for admiration and approbation is often a mask for self-doubt or hatred, or feeling that one is never properly loved for one’s own sake alone. Whilst a “touch” of narcissism can be good for leaders, it can be problematic in the long run, particularly if the problem is severe. Because of their selfishness and egocentricity, narcissistic managers are more committed to their own welfare than that of their team or, indeed, the whole organisation. Followers of narcissistic leaders encourage two types of behaviours in their leaders which are very bad for both leader and follower. First, there is the process of mirroring, where followers use leaders to reflect what they want to see. Narcissists get the admiration they crave and there occurs mutual admiration. Second, there is idealisation, in which followers project all their www.europeanbusinessreview.com 39
PSYCHOLOGY hopes and fantasies on to the leader. Thus, leaders find themselves in a classic hall of mirrors, which further reduces their grip on reality. Where narcissistic leaders become aggressive and vindictive, Kets de Vries claims that some followers, in order to stave off their anxiety, do identify with the aggressor. Followers impersonate the aggressor, becoming the tough henchman of the narcissistic manager. Inevitably, this only exacerbates the problem and begins to explain the vicious cycle of narcissistic management failure. The central question is how they can set up processes, apart from careful selection, that help prevent narcissistic-induced management failure occurrences. Can one reduce the possibility of appointing, promoting, or encouraging narcissistic managers? Clearly, this has a great deal to do with selection policies. However, Kets de Vries offers three other strategies that may help to “downsize” the narcissist. • Ensure distributive decision-making to ensure checks and balances. Do not combine roles like CEO and chairman. • Educate the CEO and board to look out for signs of narcissism and to have strategies to put in place when they do spot the signs. This involves clear systems of accountability and involving shareholders in crucial decisions. • Offer coaching and counselling to those clearly identified as reactive narcissists, although few seem willing to accept help, because, by definition, they rarely take personal responsibility for their failure. 40 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024 Perhaps certain organisations attract narcissists more than others. It is therefore highly recommended that these organisations become aware of the psychological processes associated with narcissism and be willing and able to do something about them. HUBRIS AND NEMESIS IN POLITICIANS A British politician (once foreign secretary) and a trained doctor, Lord David Owen, has paid particular interest to narcissism in politicians. Rather than use the term “narcissism” or “megalomania”, he used the word “hubris” (overconfidence and exaggerated pride, and a contempt for others). He noted that the unique features of the hubris idea are fourfold. First, a very strong identification with a group (“my people”), be they an institution, nation, or organisation. Second, a related conspicuous tendency to speak in the (royal) third person. Third, an unrealistic, yet unshakeable, belief that any (dodgy) action will be vindicated in any court. Fourth, a strong assertion that their moral rectitude should and does override mundane, trivial, and often legal considerations. In his writings, he has provided a long list of behaviours considered typical of the hubris syndrome. Think of some high-profile politicians at the moment. The behaviour is seen in a person who:
1 Sees the world as a place for self-glorification through the use of power 2 Has a tendency to take action primarily to enhance personal image 3 Shows disproportionate concern for image and presentation 4 Exhibits messianic zeal and exaltation in speech 5 Conflates self with nation or organisation 6 Uses the royal “we” in conversations 7 Shows excessive self-confidence 8 Manifestly has contempt for others 9 Shows accountability only to a higher court (history or God) 10 Displays the unshakeable belief that he or she will be vindicated in that court 11 Loses contact with reality 12 Resorts to restlessness and impulsive actions 13 Allows moral rectitude to obviate CONCLUSION Many researchers have pointed out that the paradox of narcissism at work is that many traits and processes associated with narcissism can seem positive and beneficial, while others are the precise opposite. This paradox has been “solved” by trying to distinguish between the adaptive and maladaptive narcissist, though it is not clear whether this is merely a linguistic tautology. Could one call a constructive narcissist a “narcissist”? In this sense, it is also an oxymoron. Conceiving narcissism as a self-esteem trait disorder does imply, as many personality psychologists have argued, that there is a clear continuum between healthy and unhealthy. However, the issue remains where to draw the line. REFERENCES • Dotlich, D & Cairo, P. (2003). Why CEOs Fail. New York: Jossey Bass. • Furnham, A. (2016). Backstabbers and Bullies: How to Cope with the Dark-Side of people at Work. London: Bloomsbury • Hogan, R., Hogan &, J. & Kaiser, R. (2009). “Management derailment”. In S. Zedeck (ed.), American Psychological Association Handbook of Industrial and Organizational Psychology. New York: APA. • Kets de Vries (2012). “Star Performers: Paradoxes wrapped up in Enigmas”. Organisational Dynamics, 41, 143-82. • Miller, J.D., Gentile, B., Wilson, L., & Campbell, W.K. (2012). “Grandiose and vulnerable narcissism and the DSM-5 pathological personality trait model”. Journal of Personality Assessment, 95(3), 284-90 • Oldham, J. M., & Morris, L. B. (2000). New Personality Self Portrait. New York: Bantam Book. • Owen, D. (2009). In Sickness and in Power. London: Methuen • Wright, K., & Furnham, A. (2014). “What is Narcissistic Personality Disorder? Lay theories of narcissism”. Psychology, 5(9), 1120-30 consideration of practicality, cost, or outcome 14 Displays incompetence, with disregard for the nuts and bolts of policy-making. Perhaps certain organisations attract narcissists more than others. It is therefore highly recommended that these organisations become aware of the psychological processes associated with narcissism and be willing and able to do something about them. ABOUT THE AUTHOR Adrian Furnham is in the Department of Leadership and Organisational Behaviour at the Norwegian Business School. www.europeanbusinessreview.com 41
AI GOVERNANCE AI has still to earn its spurs as a reliable tool in the locker of business. So what guidelines are available to executives to aid in determining the appropriate level of trust to apply towards AI systems? To date, different jurisdictions' regulatory frameworks vary in their approach. CULTIVATING EXECUTIVE TRUST IN THE AGE OF AI GOVERNANCE by Luca Collina & Ben Warnes A s artificial intelligence becomes more embedded across sectors, governments respond with new regulations to manage risks while enabling innovation. However, complex and fragmented regulatory approaches could undermine trust in AI among key decision-makers. This analysis compares emerging AI governance laws and regulations in the EU, US, and UK, specifically examining their potential impact on trust for executives, managers, and workers adopting AI systems. The EU’s AI Act categorises risks and sets rules to protect rights while enabling innovation. The US has an AI Bill of Rights and order for safe AI, but no comprehensive laws yet. The UK takes a pro-innovation approach with guidelines for responsible AI use overseen by existing regulators. 42 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024 BUILDING TRUST IN AI EU: The EU Act promotes accountability and transparency in AI. This can help executives trust AI more through audits to check processes. Managers have duties around monitoring systems to ensure progress and compliance. Restrictions on problematic AI protect workers while allowing innovation, although some uses could still undermine rights. US: Over 90 per cent of AI executives say that AI improves their decision-making confidence, but others lag. Academic research shows that ethics shape trust in AI. Companies would use AI more with guidelines for fairness, explainability, and privacy. However, common values across industries do not yet exist.
UK: In the UK, the rules want companies to Regulations can build leaders’ trust in AI, but balancing risks and progress has trade-offs. feel good about using AI if it’s open on how it works and is fair. However, there are lots of complicated regulations between industries, which is confusing. This may stop executives from adopting AI. There are worries about the economic impact, too. Pros and cons mean boosting or preventing AI trust for executives. A deeper analysis and interpretation of the different laws and regulations among the countries and continents needs to focus on the pros and cons of executives’ trust in AI for adopting it. The EU prioritises responsibility through limited innovation. The US enables unfettered development yet breeds uncertainty. The UK is confused, with complex, sparse oversight. Striking the optimal equilibrium to sustain trust requires measured governance for principled AI expansion, not drastic swings between overbearing restrictions versus little accountability, which deter adoption. As priorities diverge locally, FIGURE 1 EU + Rules to check AI responsibly used make AI's governance more trustable Limits on new ideas bring anger over missed chances Rules on risky AI ease leader worries Compliance workload is seen as excessive - Rules match leader Stopping some AI values for trustworthy blocks hopes for AI moving ahead US + - UK + Flexibility allows more innovation opportunities Rights protections address public scepticism about freeng adoption Safety guidelines answer calls to ease concerns Uncertainty around future laws increase reluctance Working together takes too much leader time and focus Internal trust gaps undermine executives' confidence Rules for careful AI make a way for leaders to adopt and use it Pro-innovation approach aligns with companies' enthusiasm for AI Confidence building supports executive moves to AI Regulatory complexity is confusing on compliance With little oversight, leaders bear the trust issues alone Economic impact pressures make workforce planning challenging www.europeanbusinessreview.com 43
AI GOVERNANCE executives must weigh their context amidst competing aims. Steps upholding ethical standards, welfare, and technological advancement stand the best chance of motivating cross-regional public investment and leadership buy-in. (National Artificial Intelligence Research Resource) to make AI tools and resources more available, secure, compatible, and accessible for everyone to learn.1 This can be seen as an additional support for management. Regulations through elements related to trust and further actions expected by executives. Why are further actions expected from US managers? Top executives already trust AI to improve decisions. The problem is with the employees’ trust. Most staff lack confidence in the technology’s fairness and transparency. Without shared ethical guardrails in place across sectors, uncertainty persists. Managers must translate high-level AI principles into understandable workplace policies and training. Openly addressing concerns about bias and job loss rather than ignoring them expands trust in AI. Cross-industry collaboration to align core values, cementing transparency and accountability, can give employees confidence that AI will be applied ethically. FIGURE 2 EU Regulations – • Accountability and transparency provisions elements related to trust • Restrictions on problematic AI to protect rights Additional executive actions • Set clear guidelines for ethical AI practices aligned with EU values • Foster a culture embracing responsible innovation through training • Proactively assess risks of systems to workers and mitigate concerns Why are further actions expected from the EU’s managers? EU executives must take additional actions to build trust in AI beyond regulations due to two considerations: The EU AI Act establishes accountability and restrictions to manage risks. However, achieving genuine adoption and confidence from executives requires further cultural leadership and commitment to ethical AI. While regulations provide an oversight framework, progress depends on executives driving change through active capability building, risk management, and internal governance. Going beyond rules to instil ethical AI across operations builds authentic trust and acceleration. FIGURE 3 UK Regulations – • Guidelines promote responsible AI development elements related to trust • Rules aim to build public trust and confidence Additional executive actions FIGURE 4 US Regulations – • The AI Bill of Rights outlines critical protections elements related to trust • An executive order establishes standards for safe, trustworthy AI Additional executive actions • Champion building trust in AI through strong ethics policies • Increase openness and staff education on AI to bridge internal trust gaps • Collaborate with others to develop fundamental trust principles A piece of recent positive news about Biden’s AI Bill of Rights is related to the initial pilot applications from the research done by NAIRR 44 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024 • Advocate for straightforward AI regulations in your industry • Assess and be transparent about potential workforce impacts • Lead in developing solutions to distribute the gains from AI broadly The UK’s rules aim to make companies confident in using AI by promoting transparency, accountability, and other trust-building principles. However, regulatory complexity across sectors could reduce this confidence. There are also concerns about economic impacts. On the other hand, the generative AI framework for HM Government,2 even if directed to the public sector, supplies an additional point of reference for supporting businesses in topics related to the adoption and implementation from make or buy, to ethics, data and privacy. Why are further actions expected from UK managers? The UK wants people to feel good about using artificial intelligence by being open about
how it works and ensuring that it’s fair. But lots Key steps include policies for ethics, training of complicated rules between industries are on AI, evaluating job impacts, and talking to confusing. This could make executives afraid to officials about rules. If leaders visibly care adopt AI. While the goals are good, too much red about people through these concrete moves, it tape and most rewards going to companies that shows inside and outside the company that AI use AI early on may slow things down. helps more than it harms. Thus, managers need to ask for simpler regulations in their field. Checking how the technology Set organisational policies and culture will impact workers and being honest about it focused on ethical AI - Leaders spelling out counters fears. And taking the lead to spread AI’s guidelines for fair AI in a company rulebook money-saving powers more proves to all that they want selfevenly brings everyone along. checking rules, not just fast money. Removing obstacles this way Regulations are not to be Provide extensive training helps get wholehearted buy-in condemned or used to and internal guidance across British businesses. justify further delays in resources on AI - Leaders paying We discussed some of the for their whole company to take new rules that different govern- adopting AI because they classes on AI risks shows that they ments make for using artificial can undermine executive worry that AI could harm people by intelligence responsibly. These trust; many regulations are accident without learning. rules help make company leaders feel OK about putting part of a strategic approach Proactively evaluate workthe technology to use. However, to AI adoption anyway. force impacts and address while regulations set intenemployee concerns - Leaders tions, putting principles into studying how AI changes jobs, with care for practice presents challenges. Having explored staff livelihoods, makes employees feel that high-level policy impacts, we now transition higher-ups don’t just coldly ignore their welfare to additional considerations for responsible AI for profits. adoption. 1 3 Beyond regional differences, what are the common executive actions to include in an AI systems strategy? Company leaders can directly act beyond laws to make staff and stakeholders trust AI more. 4 Collaborate with regulators and other stakeholders on sensible ground Leaders respectfully meeting with them about practical new AI laws builds public trust more than ignoring worries. www.europeanbusinessreview.com 45
AI GOVERNANCE Leaders put visible effort into the steps above specific regulations emerge, view compliance to show that they walk the walk. Rules that are as a floor rather than a ceiling for responsible shown to be genuine build trust. Staff knowing innovation. that leaders invest to avoid AI harm means a lot, When leaders show care for impacts on too. Evaluating work changes with heart gains people rather than uncaring profits, staff and loyalty when profits still matter, too. And fair rules society reward the care by trusting leaders’ forged together end suspicion. These concrete judgement on using AI moving forward. So moves towards responsiresponsible foundations laid bility make the public and Regulations alone do not ensure with care then open doors to employees cheer executives confident progress. Leaders forward on using AI to aid lives. executive trust; organisational get trust once trust is earned, EU policymakers could culture and policies matter. boosting their confidence in further compel internal audits AI systems. on existing models while requiring accountability for automated decisions. US leaders might “Earn trust, earn trust, earn trust. Then you demand rapid course-correction abilities if can worry about the rest.” 3 Responsible AI relies on earning trust through systems display unfair performance deviations ethical practices and inclusive governance. post-deployment. UK governance could authorise Organisational adoption hinges on leadership external ethical inspectors to halt dubious approaches within companies as well. projects based on mounting evidence. How executives steer emerging technologies Collaborate across sectors to align on AI proves critical for stakeholder confidence. The best practices guided by shared values. Where 46 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
specific leadership styles implemented around AI strategy internally shape acceptance across levels. Examining common models aids constructive analysis regarding systemic trust factors. LEADERSHIP ESSENTIALS FOR SUCCESSFUL AI ADOPTION Every workplace’s AI journey will differ. What are the key areas for leaders? • Share the compelling vision. • Enable ongoing learning. • Role-modelling values-based behaviour. • Empower accountable decisions. ALIGNING AI TO VISION “Greatness is not a function of circumstance. Greatness is largely a matter of conscious choice.” 4 Keep aims bold but diligently embed ethics. Prioritise infrastructure and controls over aggressive AI deployment. Track quantifiable indicators – business returns, algorithmic bias, data quality, and stakeholder sentiment. Rapid innovations should align with unchanging ethics like fairness and transparency. Major achievements often come through small, steady efforts, such as adding community reps to boards and iterative data tweaks. FOSTER LEARNING CULTURE AND PSYCHOLOGICAL SAFETY “Team learning happens when team members suspend assumptions and enter into genuine thinking together.” 5 Frame AI as an ongoing learning journey with all staff playing roles that uphold ethics and minimise harm. Welcome diverse voices in decisions, supportively respond to challenges, and enable collaborative troubleshooting without blame. Model openness about incomplete AI knowledge. Task cross-functional groups to identify risk controls; support experimenting with audits and oversight. Provide resources for employees to share literacy skills and stay updated. LEADING ETHICALLY “A leader knows the way, goes the way, and shows the way.” 6 Admit limitations in AI literacy and seek multi-disciplinary input to enable debate. Proactively surface potential biases, risks, or inequities in AI systems. Assess sociotechnical challenges; conduct impact redress when necessary, slowing rapid deployment. Prioritise ethics and people over trends or quick wins. Build connections to gather community perspectives on appropriate AI uses – accountability spans boundaries. ENABLE STAFF FOR GOVERNANCE “The best executive is the one who has sense enough to pick good men to do what he wants done, and self-restraint to keep from meddling with them while they do it.” 7 Emphasise staff governance roles. Share challenges openly, not only policies. Allow individuals to be AI-fluent and involve stakeholders in co-creating policies to distribute, www.europeanbusinessreview.com 47
AI GOVERNANCE FIGURE 5 From Regulations to AI Trust Leadership “essentials” Leaders’ actions Regulations then responsibility. Provide team authority to halt questionable deployments via accessible feedback systems enabling agile responses. Sustained, transparent communication and inclusive decisions distribute capabilities across an empowered workforce to uphold ethics. Policies Share and compelling culture ethic vision based Learning culture Training and guidance AI TRUST Workforce impacts & address concerns CONCLUSIONS Leading Ethically As new rules come out to oversee AI, leaders must take steps to allow people to trust the technology. Laws alone don’t build trust; company cultures matter, too. If leaders show they Leadership commitment to care about being responsible with transparency, ethics, and AI, it helps staff and stakeholders staff empowerment builds gain confidence. Rules for AI differ by country, trust for AI adoption. but some worries and hopes are the same everywhere – like wanting AI to be fair, looking out for workers, and still seeing progress. Leaders across borders can work together to make balanced guidelines. REFERENCES Enable Staff for Governance Work with regulators & stakeholders There is still a lot to figure out on the best ways to balance new AI and accountability. Moving forward calls for balanced new rules, not drastic swings back and forth. As laws take shape, leaders must weigh trade-offs but stick to ethics. With care and wisdom, AI can be trusted. 1 Inside companies, leaders need to: • Share an inspiring vision for using AI. • Encourage ongoing learning about AI. • Set a good example of values with AI. • Give staff the power to question AI systems. Joe Biden’s big AI science project gets pledges from Microsoft, Nvidia, and others; https://www.theverge.com/2024/1/24/24049467/ national-science-foundation-ai-research-biden-eo 2 https://assets.publishing.service.gov.uk/media/65a806bf94c997000daeb98e/6.8558_ CO_Generative_AI_Framework_Report_v7_WEB.pdf 3 Seth Godin - https://seths.blog/2014/02/the-most-important-question/ 4 Jim Collins - Good to Great 5 Peter Senge - The Fifth Discipline: The Art and Practice of the Learning Organization 6 John C. Maxwell 7 Theodore Roosevelt ABOUT THE AUTHORS Luca Collina’s background is as a management consultant in Italy in supply chain and manufacturing. In the UK, since 2012, he has managed transformational projects also at international level (Tunisia, China, Malaysia, Russia). He now helps companies understand how GEN-AI technology impacts business, use technology wisely, and avoid problems. He has an MBA in Consulting, has received academic awards for his research, and is a published author. Thinkers360 named him one of the Top Voices, Globally and EMEA in 2023. Luca continuously upgrades his knowledge with experience and research to transfer it. He recently developed interactive courses on “AI & Business” and “Human Centric with AI”. 48 THE EUROPEAN BUSINESS REVIEW After earning a postgraduate degree in marketing in 1995, Ben Warnes worked in corporate communications before co-founding an NYC design and build firm in 1999. Returning to the UK, he worked as a consultant in communications for various blue-chip companies. Moving into construction, he created his design and built a high-end construction company. He attained MCIOB status in the construction industry, managing over £150 million in construction projects. Ben now runs a property investment fund. In 2020, Ben founded LMA Coaching 2020 to pursue his passion, drawing on 25+ years of experience and insights. He specialises in helping leaders foster purpose-driven cultures centred on psychological safety and intrinsic motivation. Ben holds an MBA in Leadership Management. His research on remote work guides organisations in flexible models. MARCH - APRIL 2024
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LEADERSHIP AND MANAGEMENT In the first of a two-part series, we explore how firms are reaping the benefits of leveraging a network of external resources for enhanced performance and innovation, but only when their organisational ecosystems are strategically aligned and fit for purpose. ALIGNING ORGANISATIONAL ECOSYSTEMS TO BE FIT FOR PURPOSE by Jonathan Trevor and Kazuhiro Asakawa M anaging organisations to be highly aligned and capable of implementing their chosen strategy is an age-old challenge. It has only become harder now that many firms and public sector organisations embrace ecosystem principles in their organisational design. Because they are more open, flexible, and integrated than the industrial-age hierarchy, ecosystem-based organisations can leverage external resources (think partners) to offer customers enhanced value upstream (think novel product and service development) and downstream (think flexible delivery) than they ever could be if relying upon internal resources alone.1 However, published research indicates that up to 75% of ecosystems are considered failures.2 The leaders we spoke to acknowledge the considerable potential of ecosystem thinking for their businesses but also expressed concern over the complexity of organising along such lines. We studied a sample of leading international and Japanese firms with a stated ecosystem strategy to understand how they strategically align their 50 THE EUROPEAN BUSINESS REVIEW JULY - AUGUST 2023 organisational ecosystems to be fit for purpose and high performing. Strategic alignment, in this context, refers to the careful arrangement of the different components of an organisational ecosystem — from its purpose (its raison d’etre) to its strategy and structure — required to leverage external resources for strategic value successfully.3 Each component represents a strategic choice. Ecosystem leaders must select from various options the one that suits their circumstances best. All components should be highly aligned, ideally. Whether to create or participate in ecosystems, our study helps managers work through these critical strategic choices and improve their chances of success. First, we organise ecosystem purpose, strategy, and structure into first, second, and third-order strategic choices. Second, we present a practical framework to help ecosystem leaders choose between their various options at each stage. The first and second-order choices are the focus of this article, Part A. Third-order choices and the unique implementation challenges presented by organisational ecosystems are the focus of a second linked article, Part B.
realignment, IBM renewed its emphasis on its partner ecosystem and Kate Woolley to provide a single point of leadership. IBM also doubled down on technology and consulting services, spinning out its managed service business to form Kyndryl, arguably to allow it to focus on its ecosystem and to remove managed services as a business and avoid causing tension with prospective partners. The IBM ecosystem serves three key purposes centred around exploiting external resources to achieve strategic outcomes that would not be possible by relying upon internal resources alone. These include partners selling IBM technology (via a channel business), partners building on or with IBM technology (project-based partnerships), and strategic service partners who use IBM technology to build a bespoke managed service solution for their clients or to enhance their existing service offerings. In other words, IBM has one ecosystem operating under one leader but actively pursues three different ecosystem strategies simultaneously. Good choices establish an organisational ecosystem (ecosystem) as a functioning equilibrium capable of high performance, regardless of field. Poor choices create misalignment and dysfunction, perhaps explaining the reported high failure rate. FIRST ORDER CHOICE — FOR WHAT PURPOSE? Firms within our study sought to leverage external resources for one or more of the following three strategic reasons: A. Enhanced technical innovation, B. Enhanced customer offerings in the form of product and service design and delivery, and C. Enhanced channels to market. Broadly, these correspond to upstream and downstream innovation. Consider the example of blue-chip multinational IBM. IBM has had a long journey with its ecosystem, now considered a single business division and its fastest growing. As part of a wider corporate As part of a broader corporate realignment, IBM has doubled down on creating strategic partnerships with other industry-leading firms to pool resources and offer new and enhanced services to the market. For a long time, IBM has operated an external network in the form of its channel business (think reseller network). Comprising thousands of vendors, the channel business aims to provide an efficient channel to market for IBM technology products. As part of a broader corporate realignment, IBM has doubled down on creating strategic partnerships with other industry-leading firms to pool resources and offer new and enhanced services to the market. Woolley says, “I think of partner ecosystems as one of the most powerful forces in technology. That’s where companies come together to solve the toughest business problems”.4 Or consider the example of the Development Bank of Japan (DBJ), a wholly-owned subsidiary www.europeanbusinessreview.com 51
LEADERSHIP AND MANAGEMENT of the Japanese Ministry of Finance. Created immediately post-World War II to facilitate Japan’s economic and social reconstruction, DBJ occupies a unique role in Japanese society, and its remit extends internationally, with offices in London, Singapore, Beijing, and New York. Through loans, investment, asset management, and advisory services, DBJ supports the development of nationally important industries, infrastructure, technologies, and social concerns. For instance, ecosystem back in the 1990s to In our experience, ecosystems tap into state-of-the-art French during COVID-19 and the dramatic decrease in travel fragrance knowledge through are often referred to and the potential collapse of informal collaboration with generically under a single the inbound tourism sector, fragrance experts in France.5 Whatever the reason for DBJ provided emergency loans concept. A better way is adopting ecosystem principles, to small and large businesses to recognise that there are it should be clear and compelto help them weather the different types of ecosystems, ling to all concerned, including storm, even in cases where it was unprofitable. each representing a distinctive (perhaps especially) external stakeholders, partners and In the long term, a key role strategy with unique clients. Every year, IBM invests of DBJ’s financial experts is implementation challenges. considerably in enhancing the to create and support ecosysvalue of its relationships and tems between different networks across its entire ecosystem to create alignment with its industry actors to encourage economic purpose. Its primary vehicle is an event, ‘‘IBM Think’’. Before COVIDdevelopment. For example, DBJ convenes 19, the IBM Think conference hosted audiences of 40,000 people in various aviation industry players, from one location annually. Today, it is a hybrid event, including a smaller airlines, unions, manufacturers, airports, global in-person event for 5,000 invited employees, partners, clients, and regulators, to transform the sector and even competitors; and a ‘‘Think on Tour’’ series of events in key to be more sustainable in line with stated geographies designed to bring “IBM, partners and clients together locally national targets for compliance with UN in the market where they do business.” Sustainability Development Goals. DBJ IBM Think creates a ‘‘melting pot’’ environment for its stakerepresents a focal organisation, sitting holders to engage with the technology company and its upstream and atop an ecosystem of potentially disparate downstream ecosystems, including innovation partners, strategic industry actors and encouraging collective partners, and an extensive reseller network. According to Simon action to transform an entire sector to be Meredith, Principal in Strategic Partnerships at IBM, the “Assumption more environmentally sustainable through of protectiveness is misplaced”, even with competitors, because the aligned incentives, reduced information explicit purpose is to engage, learn, and co-create. Therefore, trust asymmetry, technological collaboration, is essential in an ecosystem working to develop strategically valuand collective action. able social capital, reduce the transaction costs of collaborating with However, Japan has a tradition of external parties at scale, and mitigate the risk of conflicting interests. embracing ecosystem principles in all Consider four things about your own organization: Does relying sectors. Shiseido, a leading Japanese upon internal resources, while simpler, represent a capability trap? Do cosmetic company, was a pioneer you need to leverage external resources to be competitive? If so, for among the Japanese firms in creating its 52 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
what purpose? Is it to develop a network as an additional marketing channel(s) (i.e., primarily a sales network)? Or is it to capture knowledge for upstream product and service innovation, as in the case of Shiseido? Or is it to develop downstream capability to deliver enhanced products and services to your customers and clients, such as IBM strategic partnerships? Of course, it can be all three. SECOND ORDER CHOICE — WHICH ECOSYSTEM STRATEGY? Once an organisation has committed to embracing ecosystem principles, the second-order management challenge is to choose which ecosystem strategy represents the best option for going about doing so. In our experience, ecosystems are often referred to generically under a single concept. A better way is to recognise that there are different types of ecosystems, each representing a distinctive strategy with unique implementation challenges. Within our sample of companies and wider research, we identified four principal ecosystem strategies according to their openness to external actors and whether they were vertically or horizontally integrated. A critical risk is that failing to recognise these different types may lead managers to sleepwalk into creating, maintaining, or participating in ecosystems that are suitable for their purposes. suppliers supporting McDonald’s operations around the world, the firm relies upon a closed network of several longstanding partnerships with key suppliers. For example, the Martin-Brower Company has formed a key part of the US supply chain, delivering supplies to all of McDonald’s 15,000 restaurant locations in North America for decades.6 Sharp’s “black box” strategy in the 1990s also falls into this category. The Japanese consumer electronics firm enjoyed a significant competitive advantage in LCD-TFT technology in the 1990s by internalising the production of its LCD-TFT TV and the LCD-TFT panels, including partner operations, inside the firm on its huge production site in Kameyama, Mie-Prefecture. Sharp created its own closed and vertically integrated ecosystem of technical innovation Closed And Vertically Integrated Ecosystems are as the name would suggest, a designated group of specialised partnering organisations operating within a closed network under the supervision of a dominant focal organisation. The focal organisation appoints constituent members and coordinates efforts against explicitly mandated targets and standards. The purpose is to ensure efficient performance delivery against required standards in efficient and predictable ways. The McDonald’s supply chain is a good example of this type of ecosystem in action. Serving over 70 million customers worldwide daily, it is vertically integrated into every link of its supply chain to ensure it efficiently matches supply with demand. Whilst there are thousands of third-party www.europeanbusinessreview.com 53
LEADERSHIP AND MANAGEMENT and manufacturing, which was designed to isolate itself from other rival firms to avoid technology leakage.7 Regardless of physical footprint, this type of “closed” ecosystem is well established, and partnerships are often long-lived and highly stable. which coordinates, exchanges, and encodes locally acquired new knowledge in its product innovation and then pushes new products out to sales and marketing functions in those same geographically dispersed end markets.8 One of the interesting challenges with closed horizontal ecosystems is that they may involve Closed And Horizontally Integrated Ecosystems partnering between companies that might previfocus closely on membership of their ecosystem ously have been — and still can be — competitors. but encourage many more horizontal connections Such ‘‘Frenemy’’ (i.e., friends who between the focal organisation and are also enemies) arrangements network members and between One of the interesting common in ARM (described network members directly. The role challenges with closed are later) and its close and long-term of the focal organisation is less superhorizontal ecosystems manufacturing relationship with its visory, and the nature of partnering biggest competitor, Intel. is less transactional. It is more about is that they may IBM’s key strategic partners nourishing connections between involve partnering include deep commercial collaboraecosystem partners for upstream and between companies tions with hyperscalers (think Amazon downstream innovation purposes. Web Services), infrastructure partners, An early example of this type that might previously and global consultancies such as Ernst of ecosystem strategy is the fasthave been — and still & Young. All strategic partnerships moving consumer goods company, can be — competitors. operate under a single internal organiNestle. Nestle has pursued a strategy sational structure, the IBM Ecosystem, of acquiring complementary firms and one leader, Woolley. To reduce competias well as setting up research and development tive conflicts and greater freedom for ecosystem centres worldwide to act as dispersed “antennas” engagement, IBM divested itself of its managed to sense and source local market knowledge and infrastructure business, Kindryl, as mentioned creativity. Acting as a focal point for this distribpreviously. A second challenge is to find the right uted network is Nestle’s R&D coordination unit, 54 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
partners and invest in the resources necessary to form and capitalise upon productive relationships. Open And Vertically Integrated Ecosystems are much more open than their closed-vertical counterparts, resembling marketplaces more than supply chains. The focal organisation acting as a platform maintains a dominant supervisory role within the ecosystem, but membership is much more open and scalable, with potentially many thousands of external actors interacting with the focal organisation and its customer, if not with each other. The Apple App Store is an obvious example. The purpose is to draw upon the creative resources of many thousands of developers to offer Apple product users enhanced choice over applications available through the App Store and through which they can personalise the functionality of what would otherwise be a standardised (albeit smart) device. Apple, and Google, its main rival, control over 95% of the app store market outside of China, worth an estimated $6.3 trillion.9 Other platform firms, from Uber to the Amazon marketplace, also use digital platform technology to efficiently match supply (from many thousands of drivers or sellers, respectively) and demand from customers. In the internal context, such arrangements are prevalent in the form of global value chains (GVCs), in which the different stages of production activities are performed across different countries, each of which may be its own supporting ecosystem made up of local partners, suppliers, and innovators, to match local market customer requirements. Firms often disperse value chain activities ranging from R&D, design, production, and marketing for this purpose.10 Extending the logic of openness even further, some ecosystems are highly decentralised and geared around tapping into the wisdom of the crowd. Consider the example of the Linux community, with its many thousands of contributors. Being a crowd-sourced development, the Linux computer operation system relies upon individual developers to contribute their time and expertise to a common endeavour for free. The incentive is to create something new, and participation is voluntary and collaborative. In that sense, Linux is open to a virtually unlimited external talent pool. Compared with the first two “closed” types, this more open type of ecosystem is a recent strategy, and the subject of considerable focus, especially in terms of the digital transformation agenda. Open And Horizontally Integrated Ecosystems are characterised by their openness to many diverse network actors and the horizontal nature of their connection. Horizontal Open ecosystems resemble communities, where the focal organisation provides the environment for the discretionary effort of the many associated partnering individuals and organisations to lead upstream and downstream innovation within a field of technology or industry. Consider the example of the technology company ARM Holdings. ARM chips power 80% of the world’s smart devices, everything from phones to tablets to the emerging Internet of Things. Its strength is its ability to harness the power of its network resources, in the form of knowledge, human capital, technological expertise, and innovation capability, to design the most powerful and efficient (think low power consumption) chips available to the market. And yet, ARM employs only 7,500 people, mostly located at its headquarters in Cambridge, UK, where it originally started life in a converted farm building in the ‘‘Silicon Fen’’ cluster of high-tech start-ups around Cambridge University. But despite its modest headcount, ARM has over 20,000 external partners within its global innovation ecosystem.11 The same principles can apply but in a physical location. Woven City is the Toyota Motor Company’s www.europeanbusinessreview.com 55
LEADERSHIP AND MANAGEMENT (Toyota) purpose-built innovation Each form of ecosystem must and vertically integrated is community located in the city the best option. Or, if it is to be structured appropriately of Susono near Mt Fuji, Japan. create an innovation commuif it is to perform its strategic nity highly aligned with your Analogous to Silicon Valley in the US or Silicon ‘‘Fen’’ in the UK, of function capably as intended. product development cycle, which ARM is a product, Woven a select group of highly inteCity is, by design, an open ecosystem integrating the grated strategic partnerships might be best. delegated efforts of many thousands of partnering Whichever ecosystem strategy is chosen, each also companies. They operate side by side, physically presents managers with unique implementation chaland virtually, to further Toyota’s goal of realising lenges. Each form of ecosystem must be structured radical new mobility technologies. appropriately if it is to perform its strategic function Sosei Group Corporation is a holding company capably as intended. Designing an ecosystem strucof biopharmaceutical companies specialising in ture to be fit for purpose is an additional — and critical drug development. Sosei Group enters into license — alignment consideration and the focus of Part B agreements primarily with US, EU, and Japanese of this series: Designing Organisational Ecosystems & companies to market the licensed drugs in Japan Overcoming Barriers to Implementation. and find alternative usage for such drugs. Sosei, in its foundation era, chose to locate itself in the UK REFERENCES 1. Williamson, P. J., & De Meyer, A. (2012). Ecosystem Advantage: How to to engage in R&D collaboration with local univerSuccessfully Harness the Power of Partners. California Management Review, 55(1), sities and venture firms to tap into the innovation 24-46. ecosystem in the UK.12 Similarly, Takeda, a leading 2. Reeves, M., Lotan, H., Legrand, J., & Jacobides, M. G. (2019). How Business Ecosystems Rise (and often fall). MIT Sloan Management Review, 60(4), 1-6., Japanese pharma, adopted this type of ecosystem 3. Trevor, J. & Varcoe, B., (2017). How Aligned is Your Organization? Harvard Business by deciding to engage in drug discovery through Review. 7 February. Harvard Business School Publishing. open partnerships worldwide.13 4. https://www.ibm.com/blog/qa_kate_woolley/ 5. Asakawa, K, & Doz, Y. (2002) Shiseido France 1998. INSEAD Case #4934. IBM’s “Collaboratory” strategy also falls into 6. https://www.allthingssupplychain.com/the-amazing-supply-chain-of-mcdonalds/ this type of ecosystem strategy, for the company 7. Murtha, T., Lenway, S. & Hart, J. (2001) Managing New Industry Creation: Global engaged in open innovation even without setting Knowledge Formation and Entrepreneurship in High Technology. Stanford Business Books. up its own R&D labs through active collaboration 8. DeMeyer, A. (1003) Nestle S.A., INSEAD Case, #2692. with universities, government, and commercial 9. https://www.businessofapps.com/data/app-stores/ partners within host country ecosystems. Open 10. https://www.oecd.org/industry/global-value-chains/ and horizontal ecosystems represent the most 11. Trevor, J. (2022). Re: Align: A Leadership Blueprint for Overcoming Disruption recent and the most complex type to emerge in and Improving Performance. Bloomsbury Publishing. 12. Asakawa, K. & Osada, E. (2003) Sosei (A) & (B), Keio Business School Case, theory and practice. #20030712J. 13. Korine, H. & Asakawa, K. (2019) Takeda: The Governance of Strategic Transformation (A) & (B), London Business School Case. #LBD Ref: CS-18-24/25; HBP: LBS222/223. SUMMARY Each of the four ecosystem strategies presented here is distinctive in its own right. Each presents managers with unique strategic advantages. So, which is best? It depends upon requirements, of course. Consider, in your case, how open and integrated you need your ecosystem(s) to be. If your purpose is to develop an efficient supply chain, a closed and vertical strategy may be most appropriate. Or, if it is to create a platform to fuel a market around your product or service, open 56 THE EUROPEAN BUSINESS REVIEW ABOUT THE AUTHORS MARCH - APRIL 2024 Jonathan Trevor is a Professor of Management Practice at Oxford Said Business School, University of Oxford, UK. Kazuhiro Asakawa is a Professor of Global Innovation Management at Keio University Graduate School of Business Administration, Keio University, Japan.
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NEGOTIATIONS Transform how you approach international business negotiations with new findings that provide a novel contribution to the field. Discover how embracing diversity and inclusion through the biculturals on your team can drive your strategic growth and sustainable competitive advantage in the global marketplace, thanks to their unique gap-bridging and boundaryspanning abilities. A WINNING DEAL: How Biculturals Can Supercharge Your International Business Negotiations by Priyan Khakhar and Jasmina Najjar 58 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
I nternational business negotiations can be Lebanon an ideal place to focus exclusively on immensely challenging, but your efforts biculturals, it makes the findings about biculdon’t have to be lost in translation. You can efturals relevant to any country, and applicable fectively unlock the many hidden powers of the to organisations and businesses in any sector. biculturals on your team to navigate the choppy And these takeaways will change how you think cross-cultural waters and better seal the deal. about and approach your international business Biculturals are individuals who have internalnegotiations game with negotiators who have inised two or more cultures and they shouldn’t be ternalised more than one culture. confused with multiculturals, who accept cultural differences in society.1&2 Given the spike in migrants across the globe with people movTHE GENERAL POSITIVE IMPACT ing countries for brighter prospects, biculturOF BICULTURALS als aren’t rare, so the chances of your already having some on your team are rather decent. In Regardless of whether you’re a domestic or interthe article “Biculturals in international business national firm, having bicultural employees can negotiations: moving away from a single culhelp your organisational ture paradigm”, published efficiency. How? These in the Journal of Organizateam members may bring tional Change Management, A prime reason that negotiations new perspectives and ideas, Priyan Khakhar, Hussain fail at times is not understanding in addition to being able to Gulzar Rammal, and Visupport new hires who are jay Pereria3 study for the the national and unique ethnic first time the role that bi- cultural differences between the migrants and expatriates culturals play specifically negotiators sitting at the table. in adapting to your busiin international business ness environment. If your negotiations, sharing new To lessen this risk, firms should firm has an entrepreneurial findings. To uncover these select negotiators who have a solid outlook, hiring biculturals findings, senior managers raises your chances of understanding of cultural issues. in Lebanon across diverse success in cross-cultural public and private sectors settings, enhancing your (from real estate to marketing consulting, food competitiveness and performance. And if you’re export and import, and NGOs) were interviewed. a multinational enterprise (MNE), bicultural Their cultures spanned fusions from Lebanon, employees can assist you in traversing the bumpy the UK, France, Australia, Canada, the USA, Arroads of the contemporary socio-political global menia, and even Brazil. What makes this interbusiness scene. But what about international esting is that, while Lebanon is not necessarily a negotiations? A prime reason that negotiations multicultural society, it has high levels of biculfail at times is not understanding the national turalism because of the people who left during and unique ethnic cultural differences between the 1975-90 civil war but maintained ties with the the negotiators sitting at the table. To lessen 4&5 and the rich mix of religions, languagcountry this risk, firms should select negotiators who es, and cultural influences from the East and have a solid understanding of cultural issues.7 6 Biculturals fit this bill and can act as a bridge for West. Even Hofstede wanted to treat Lebanon differently from neighbouring countries while communication between cultures.8 So, what’s the bottom line? Knowing how to manage the developing his famous cultural dimensions, but knowledge and skills of your bicultural team the data he received had already been merged members is key. with other Arab countries. All this not only made www.europeanbusinessreview.com 59
NEGOTIATIONS BRIDGING THE GAP IN INTERNATIONAL BUSINESS NEGOTIATIONS Biculturals play a crucial role in bridging the gap between parties during negotiations and this is how they do it3: Integrating Cultures for Results: Combining more than one culture and accordingly shifting identities, biculturals naturally adapt to the cultural requirements of the negotiations at hand. This “cultural blending” or “mixing” sparks social integration fuelled by adaptability and the keen ability to identify commonalities. This beneficial superpower helps create understanding and synergy between parties with different cultural backgrounds. Reducing the Blow of Cultural Shock: Culture shock can cause ripples in any international business negotiation. Trying to close a deal across a cultural chasm wider than the Grand Canyon is no easy task. Misunderstandings lurk, tension escalates, and the deal hangs precariously on a thread. Unlike negotiators who are monocultural (individuals who predominantly adhere to a single culture, tradition, or way of life), who might stumble on unfamiliar terrain, biculturals experience reduced cultural shock, thanks to their behavioural adaptability. They can choose appropriate behavioural strategies based on the cultural context, so they can effectively respond to others' actions and intentions. Engaging in Impactful Cultural FrameSwitching: Cultural frame-switching is like having many pairs of coloured glasses for Tapping into the Potential of Multifaceted different situations. When you switch between Adaptability: Imagine being able to effortlanguages or cultures, your perspective changes lessly switch between two or three entirely and you perceive the world from a new angle. different ways of thinking, cultural contexts, Biculturals display a high level of cultural framecultural frames, and perspectives. That's the switching, especially since they can use more cognitive adaptability that biculturals boast. than one language to communicate effectively. Developing general principles to This flexibility makes it easier for them decipher cultural cues, they can to find common ground and connect think strategically and, like a chame- In a tense negotiation, with negotiators from different leon, adjust their approach based biculturals can sense cultural backgrounds. Biculturals with on the situation. Biculturals possess higher cultural frame-switching skills advantageous emotional adaptability, the emotional underare more likely to succeed in intertoo, that’s like amplified cultural currents, diffuse national business negotiations due to intelligence. They understand the tension, and turn the their ability to understand, deliver, hidden language of emotions linked and communicate effectively with to specific behaviours, allowing tide with empathy other parties from different cultures, them to navigate tricky situations and understanding. and distinguish between cultural and build rapport across cultural norms, beliefs, values, and verbal and divides. In a tense negotiation, non-verbal behaviours. This makes biculturals can sense the emotional underthem more prone to understanding, delivcurrents, diffuse tension, and turn the tide ering and communicating with other parties with empathy and understanding. Their from different cultures in pursuit of a desirable cultural intelligence, emotional flexibility, agreement or deal. The result? The creation of and high network range make them better opportunity and better results. at decision-making, bridging cultural gaps, and evaluating cultural fit, hence positioning Avoiding “Groupthink” and Generating them to play a pivotal role in international New Ideas: Poor decision-making. Silencing business negotiations. dissenting voices. Lack of creativity and 60 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
innovation. An unjustified sense of confidence. Ignoring external information. “Groupthink” comes with a tsunami of pitfalls. Luckily, biculturals can help to avoid the dreaded phenomenon and even generate new creative ideas and inject creativity that help overcome stalemates during negotiations. By bringing diverse perspectives and thinking styles to the table, they can facilitate innovative solutions and consensus-building. Possessing Valuable Tacit Cultural Knowledge: Your organisation can strategically use biculturals' tacit cultural knowledge to mitigate cross-cultural communication challenges and develop trust between the negotiating sides. This trust forms the basis for long-term relations and successful negotiations. This is further bolstered by biculturals' tendency to try to connect with members of their in-group in the other party to build a rapport. Playing the Key Role of Boundary-Spanners: In the intricate dance of international business, biculturals emerge as boundary-spanners, effortlessly moving between internal networks and external knowledge sources. They act as conduits, ensuring effective knowledge acquisition and application, propelling teams to unparalleled success. Think of it like this: an organisation operates within its own well-defined network, holding valuable internal knowledge (the “home turf”). Beyond its walls lie vast external information sources, each with their own cultural nuances (the “unfamiliar territory”). Biculturals possess www.europeanbusinessreview.com 61
NEGOTIATIONS the remarkable ability to explore both worlds simultaneously. They understand the internal language and dynamics, translating them seamlessly into the external context, and vice versa. This boundary-spanning prowess unlocks a treasure trove of knowledge, fostering innovation and strategic decision-making that transcends cultural barriers. IT’S NOT ALL ROSY, BUT IT'S STILL WORTH IT It’s worth noting that some authors argue9 that there are limitations to biculturals. These include biculturals experiencing a conflict between their cultural identities; their encountering bias or prejudice from colleagues or clients because of their mixed cultural background, which can impact their they are more adept at dealing with diverse credibility and effectiveness in negotiations; cultures, unlocking valuable knowledge, or their struggling to fully grasp cultural and driving innovation in comparison to nuances, integrate into organisational monoculturals. This is something worth cultures, and communicate. considering in human resource They can also face strain from management and your organiconstantly having to adapt to Biculturals can be your sation's global success plans. different cultural expectations, secret weapon for internaBeyond this, biculturals are potentially leading to stress an invaluable asset waiting to and reduced performance tional business negotiations, be unlocked, thanks to their in negotiations and organ- since they are more adept unique mix of knowledge and abilities which empower isational roles. But overall, at dealing with diverse organisations with a competithe benefits of biculturals far outweigh the drawbacks, espe- cultures, unlocking valutive advantage in international markets.3 Their rich social cially since they bring a wealth able knowledge, and driving of unique strengths and advaninnovation in comparison to interactions and experiences tages to international business ignite an entrepreneurial negotiations and organisa- monoculturals. mindset that fosters creative solutions and innovation at tional performance3. your firm. Natural catalysts for the intrapreneurial edge many firms seek, biculturals’ distinct cultural understanding bridges gaps, promotes collaboration, and BEYOND BORDERS… pushes results. Bringing merger magic to the big picture, biculturals offer their Biculturals can be your secret weapon for cultural intelligence during mergers, easing international business negotiations, since 62 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
REFERENCES 1. Engelsberger, A., Cavanagh, J., Bartram, T. and Halvorsen, B. (2021), "Multicultural skills in open innovation: relational leadership enabling knowledge sourcing and sharing", Personnel Review, Vol. Earlycite. 2. Murdock, E. (2016), Multiculturalism, Identity and Difference: Experiences of Culture Contact, Palgrave Macmillan, London. 3. Khakhar, P., Rammal, H. G., and Pereira, V. (2023). "Biculturals in international business negotiations: Moving away from the Single Culture Paradigm". Journal of Organizational Change Management, 36(1), 180–94. https:// doi.org/10.1108/jocm-04-2022-0110 4. Ghosn, F. and Khoury, A. (2011), "Lebanon after the Civil War: Peace or the Illusion of Peace", The Middle East Journal, Vol. 65 No. 3, pp. 381-97. 5. Lischer, S. K. (2005), Dangerous Sanctuaries: Refugee Camps, Civil War, and the Dilemmas of Humanitarian Aid, Cornell University Press, Ithaca, New York. 6. Hofstede, G. (1991), Cultures and Organizations: Software of the Mind, McGraw-Hill, Berkshire, England. integration and lessening cultural divides. Acting as mentors for expats and repatriates, they can smooth transitions and maximise potential by alleviating the upheaval of culture shock.3 Investing in biculturals may open many doors for your organisation. So think beyond borders: think bicultural. 7. Kim, M.-S. and Hubbard, A. S. E. (2007), "Intercultural Communication in the Global Village: How to Understand 'The Other'", Journal of Intercultural Communication Research, Vol. 36 No. 3, pp. 223-35. 8. Thomas, D. C. and Brannen, M. Y. (2010), "Bicultural individuals and intercultural effectiveness", European Journal of Cross-Cultural Competence and Management, Vol. 1 No. 4, pp. 315-33. 9. Rudmin, F. W. (2003), "Critical history of the acculturation psychology of assimilation, separation, integration, and marginalization", Review of General Psychology, Vol. 7, pp. 3-37. ABOUT THE AUTHORS Dr Priyan Khakhar is faculty lead of the International Business course at Northeastern University London and affiliate faculty with the International Business and Strategy Group at D'Amore-McKim School of Business in Boston, Massachusetts. His vast and eclectic international experience includes working at the Ecole Supérieure de Commerce de Paris, the American University of Beirut, and the American University of Bulgaria. He has also taught within the Strategy and International Business Division at the Alliance Manchester Business School at the University of Manchester. His research includes impact publications such as in the International Business Review, Journal of Transnational Management, Critical Perspectives on International Business, and the Journal of Change Management to name a few. Jasmina Najjar is a Fellow of the Chartered Institute of Marketing (FCIM), Chartered Marketer (CMktr), Fellow of Advanced HE (FHEA), academic, marketing and corporate communications consultant, and author. Before joining the American University of Sharjah, she taught at the American University of Beirut, impacting course-specific and programme-wide development as a course coordinator and programme coordinator, and was a journalist, editor-in-chief, and senior advertising creative with major pan-Arab accounts. www.europeanbusinessreview.com 63
GENDER EQUALITY TAKING A STAND AGAINST THE GENDER GAP IN WORKPLACE FLEXIBILITY by Fiona Wylie Workplace flexibility has become a central pillar in the modern employment landscape, reflecting a growing recognition of its importance for work-life balance, mental health, and overall employee satisfaction. At the heart of this movement lies a persistent and troubling disparity: the gender gap in workplace flexibility. Despite strides toward gender equality, women continue to bear the brunt of caregiving responsibilities, a reality that significantly impacts their professional lives and well-being. Founded on the principles of equality and inclusion, Brand Champions emerged from Fiona Wylie's personal experiences with the challenges of re-entering the workforce after maternity leave. This journey inspired her to advocate for more flexible work arrangements and address the broader issues of gender bias and inequality in the workplace. A company’s mission should be about promoting flexibility and fostering an environment where all employees, regardless of gender, can thrive. 64 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
THE GENDER GAP IN WORKPLACE FLEXIBILITY Research commissioned by LinkedIn, involving over 2,000 workers and 503 hiring managers, reveals a stark reality: 52% of women have left or considered leaving a job due to inflexible working conditions. This statistic is a testament to the widespread impact of rigid work cultures on women's careers. Moreover, a survey conducted by Brand Champions sheds light on another dimension of the issue: the lack of support and understanding surrounding women's health issues in the workplace. With 61% of female respondents perceiving a gap in support and 52% reporting increased stress levels at work due to women's health issues, it's clear that these challenges contribute significantly to the gender disparity in workplace flexibility. BEYOND GENDER: WORKPLACE FLEXIBILITY While women are at the epicentre of the flexibility gap, the conversation extends beyond gender. Mental health issues, generational expectations, and societal norms all play critical roles in shaping the landscape of workplace flexibility. We need to recognise these complexities and champion a holistic approach to addressing them, advocating for policies and practices that accommodate the workforce's diverse needs. perceptions and decisions regarding flexibility and accommodations. The result is a self-reinforcing cycle of inequality, where women are more likely to sacrifice their careers for caregiving duties, thereby perpetuating stereotypes and biases. STRATEGIES FOR BRIDGING THE GAP 1 Recognise and challenge gender biases 2 Implement flexible work policies 3 Support women's health 4 Promote equal caregiving responsibilities Recognising and challenging gender biases involves a systemic overhaul of how gender roles are perceived within the workplace. At the root of the flexibility gap lies a deepseated gender bias that assigns women a disproportionate share of caregiving responsibilities. This bias affects women's, and the primary caregivers', availability and commitment to work and influences employers' perceptions and decisions regarding flexibility and accommodations. THE IMPACT OF GENDER BIAS AND CAREGIVING RESPONSIBILITIES At the root of the flexibility gap lies a deep-seated gender bias that assigns women a disproportionate share of caregiving responsibilities. This bias affects women’s, and the primary caregivers’, availability and commitment to work and influences employers’ This means moving beyond mere awareness to promoting and practising inclusivity actively. For instance, training programmes can be designed to help employees and management understand unconscious biases and their impact on decisionmaking. Organisations can create a more equitable workspace by fostering an environment where employees feel comfortable calling out biases and suggesting improvements. Such efforts could lead to a significant decrease in gender-based discrimination and increase the representation of women in leadership roles, thereby changing the narrative www.europeanbusinessreview.com 65
GENDER EQUALITY the needs of women going through menopause can significantly reduce the stress and health-related issues that affect women's productivity and presence in the workplace. Such support not only aids in retaining skilled employees but also fosters loyalty and improves overall job satisfaction. When women feel supported in all aspects of their health, they are more likely to engage fully with their work, aspire to leadership positions, and around who is deemed “fit” for certain levels of responcontribute to a positive workplace culture that values sibility and flexibility. diversity and inclusion. Another critical step is implementing flexible Lastly, promoting equal caregiving responsibilwork policies as a universal benefit rather than a ities is essential in addressing the root cause of the special accommodation. This approach acknowlflexibility gap. This involves policies and societal edges that work-life balance is a universal concern, change, encouraging all genders to share domestic and impacting all employees regardless of their gender caregiving duties. Employers can play a significant role or parental status. By normalising flexible working by offering longer paid paternity leave, flexible schedarrangements, companies can dismantle the stigma uling for all parents, and resources for caregiving. Such often associated with policies not only alleviate utilising such options, the burden on women Women, who are often reluctant which disproportionately but also challenge the to request flexibility for fear of affects women. Women, traditional gender roles being perceived as less committed that perpetuate the cycle who are often reluctant to request flexibility for of inequality. When men to their careers, would benefit fear of being perceived are equally encouraged immensely from a culture that as less committed to and supported to take on values output over hours logged. their careers, would caregiving roles, it diminbenefit immensely from ishes the implicit biases a culture that values output over hours logged. This that often sideline women's careers. shift enhances employee satisfaction and retention This equal distribution of caregiving responsibiland attracts a wider talent pool, contributing to a more ities can lead to a more balanced representation of diverse and innovative workforce. genders at all professional levels, reducing the gender Supporting women’s health is pivotal in creating gap in leadership and decision-making roles. a workplace that recognises the unique challenges These strategies collectively create a foundation women face, especially concerning reproductive for a more inclusive and productive workplace. By health, maternity, and related medical conditions. addressing the underlying biases, promoting flexiProviding health benefits, including support for mental bility as a universal value, supporting women's health, health and maternity leave, and accommodating and encouraging shared caregiving responsibilities, ABOUT THE AUTHOR Fiona Wylie recognised the need for flexibility in the workplace after her journey returning to work after maternity leave and founded Brand Champions. Renowned for her "SOS" support, Fiona offers flexible marketing assistance with a quick turnaround, precisely tailored to the evolving needs of their clients. She's heavily involved in charity work. 66 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
organisations can significantly close the gender gap. This benefits women and enriches the workplace with diverse perspectives, experiences, and talents, driving innovation and growth. Brand Champions, under Fiona Wylie’s leadership, stands at the forefront of this movement, advocating for a future where gender no longer dictates one's career trajectory or access to flexibility. As we strive toward this goal, we must remember that true progress lies in collective action and commitment to equality for all. References 1. LinkedIn Research on Workplace Flexibility (2023). 2. Brand Champions Survey on Women's Health Issues and Workplace Support (2023). www.europeanbusinessreview.com 67
SUPPLY CHAIN A PRACTICAL GUIDE TO KICK-STARTING YOUR CYBER SUPPLY CHAIN RISK PROGRAMME by Kamil J. Mizgier The digitalisation of global supply chains is unstoppable and there is no doubt about the upside potential it brings in terms of efficiency gains. Yet, the rapid progress in digital technologies, artificial intelligence, and data-driven decision-making exposes organisations to an elevated risk of systemic cyberattacks. And the material impact of cyber events such as the 2020 SolarWinds cyberattack in the US, as well as more recent incidents like XPlain and Concevis in Switzerland, highlights the interconnected nature of cyber threats within global supply chains, demanding increased attention from business leaders and policy makers. Against this backdrop, this article underscores the critical need for resilient cyber supply chain risk management (C-SCRM) practices across industry sectors, including those traditionally less associated with high-profile cyber threats. 68 THE EUROPEAN BUSINESS REVIEW INTRODUCTION TO SUPPLY CHAIN CYBERATTACKS The SolarWinds breach serves as a compelling case study, revealing the widespread consequences of vulnerabilities within supply chains. Drawing parallels with incidents in Switzerland, where the financial sector remains a prime target, this article aims to outline the complexities of safeguarding supply chains against evolving cyber threats. While the Swiss financial sector has responded with comprehensive regulations, the spotlight shifts to broader industrial supply chains where similar regulations either do not exist or are not followed with adequate priority. Examining examples of supply chain cyberattacks on manufacturing companies unveils the vulnerabilities and challenges faced by these critical sectors. In the United States, many industries have experienced targeted supply chain cyberattacks, disrupted operations, and compromised sensitive data. Recent incidents have illuminated the need for robust risk management strategies tailored to the unique characteristics of industrial supply MARCH - APRIL 2024
chains. For example, in 2021, Colonial Pipeline, an oil pipeline system that carries jet fuels and petrol, encountered a ransomware attack that disrupted its operations, leading to a temporary shutdown. The focal point of the attack was the billing infrastructure, rather than the critical oil pumping systems, which remained operational. The decision to halt pipeline operations was attributed to the inability to bill customers. Colonial Pipeline took this precautionary measure to prevent potential further attacks on vulnerable sections of the pipeline, prompted by concerns that hackers might possess information enabling additional attacks. In a bid to restore network functionality, the company ultimately opted to pay a ransom of $4.4 million. As depicted in figure 1, a typical supply chain attack focuses on a third-party software provider. The goal is to obtain unauthorized access to a larger network of suppliers and customers. The hackers achieve this by infiltrating the automated update servers of the targeted software provider. The pernicious aspect of such attacks lies in the fact that the affected companies, those relying on the software provider for updates, are often unaware that they are inadvertently installing malware onto their servers. Consequently, the malware can then spread throughout the network, potentially compromising the security of numerous interconnected organisations within the supply chain. This method allows the attackers to exploit the trust established between the targeted company and its software provider, using the update process as a Trojan horse to gain access to a more extensive supply chain network. Hence, the lack of a proactive approach to C-SCRM can leave organisations and their supply chains susceptible to cyber risks, drawing attention to the importance of industry-wide collaboration, regulatory frameworks, and the adoption of international standards. And despite proven significance, the adoption of ISO certifications, such as ISO 27001, within industrial supply chains remains limited. This raises questions about the readiness of organisations to confront cyber risks head-on, especially in an era where cyber threats continue to evolve in sophistication. Furthermore, there are gaps in academic literature, necessitating action from both researchers and practitioners. This article underscores the imperative for a holistic approach to cybersecurity, in alignment with the evolving concept of cyber resilience. FIGURE 1 A typical supply chain cyberattack. LEVERAGING ISO STANDARDS AND NIST FRAMEWORKS FOR CYBER SUPPLY CHAIN RISK MANAGEMENT In the intricate landscape of C-SCRM, two globally recognised frameworks – the ISO 27001 (International Organisation for Standardisation) standard1 and the NIST (National Institute of Standards and Technology) framework2 – play pivotal roles in guiding organisations toward robust risk management practices. 1. The ISO 27001 standard While the ISO standards do not explicitly define C-SCRM as a standalone topic, the principles embedded in ISO 27001 provide valuable insights for managing risks associated with the buyer-supplier relationships. Key considerations within this standard advocate for comprehensive risk assessments along the entire supply chain. This necessitates a fundamental understanding of potential vulnerabilities and threats arising from supplier interactions. Furthermore, the standards outline various security measures that organisations should implement to ensure information security. These measures offer flexibility, enabling adaptation to control risks associated with supplier interaction, and sensitive information exchange. Like customer relationship management, ISO 27001 www.europeanbusinessreview.com 69
SUPPLY CHAIN recommends establishing clear security requirements and THE ROLE OF INSURANCE IN obligations in contracts or agreements with suppliers. This CYBER SUPPLY CHAIN RISK ensures adherence to security measures and compliance MANAGEMENT standards by both parties. Cyber insurance can help businesses in several Regular monitoring and review of supplier and ways to manage cyber supply chain risk. First customer-related processes and security measures are and foremost, it can provide reimbursement for crucial. This proactive approach enables organisations losses incurred due to supply chain cyberattacks, to swiftly identify potential risks or deviations from such as data breach notification costs, regulatory established security protocols. fines, and business interruption losses. However, Finally, robust incident response plans and business many cyber insurance providers offer risk assesscontinuity measures mitigate risks arising from supplierment services to help businesses identify and related incidents, minimising disruptions in operations. address vulnerabilities in their supply chains. While the term “C-SCRM” may not be explicitly detailed They may also provide access to cybersecurity in ISO 27001, the principles of risk management, security experts who can assist controls, contractual obligations, and monitoring can be effectively applied Like customer relationship in developing and implementing risk mitigation to managing risks associated within management, ISO 27001 strategies. It can be used as a the supply chain. recommends establishing tool to incentivise suppliers clear security requirements to adopt stronger cyberse2. The NIST framework and obligations in contracts curity practices. Businesses NIST focuses on C-SCRM through can require suppliers to or agreements with various publications. However, the carry cyber insurance and suppliers. This ensures NIST Special Publication 800-161 deals meet certain cybersecurity with C-SCRM specifically. Key elements standards as a condition of adherence to security covered in NIST publications include doing business. measures and compliance guidelines for identifying, assessing, When selecting cyber standards by both parties. insurance coverage, busiand managing risks within the supply chain, understanding potential nesses should consider vulnerabilities and threats throughout the supplier lifecycle. several factors, including the size and complexity The standard recommends evaluating and selecting of their supply chain, the type of data and assets suppliers based on their security practices, compliance stored or transmitted within the supply chain, the with standards, and commitment to cybersecurity. It industry they operate in, and their overall cyberencourages information exchange and collaboration security posture. among supply chain stakeholders to effectively address and mitigate emerging threats. This may include sharing best practices, threat data, and security-related information. The NIST approach to C-SCRM focuses on empowering organisations to establish comprehensive cybersecurity practices suited for dynamic and modern supply chains. Through detailed guidelines and recommendations, the NIST framework serves as a crucial tool for organisations to strengthen their capabilities in identifying, assessing, and effectively managing risks within their supply chain environment. The NIST framework outlines a range of factors fundamental for effective C-SCRM, with a particular emphasis on cultural and awareness-related components. 70 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
As cyber threats continue to evolve, businesses must adopt cyber insurance as a strategic shield to safeguard their supply chains and ensure business continuity. Cyber insurance is an essential component of a comprehensive supply chain risk management strategy. By providing financial protection, risk assessment services, and contractual leverage, cyber insurance can help businesses mitigate the impact of supply chain cyberattacks and protect their bottom line. As cyber threats continue to evolve, businesses must adopt cyber insurance as a strategic shield to safeguard their supply chains and ensure business continuity. Major insurance companies offer tailored cyber risk coverage that is accessible to both global organisations and SMEs. BEST PRACTICES FOR IMPLEMENTING A C-SCRM PROGRAMME In the intricate realm of cyber threats within the supply chain, organisations can bolster their defences by adopting a comprehensive C-SCRM programme. These practices, combined with the seven steps outlined in table 1, offer a roadmap for safeguarding the supply chain and effectively managing cyber risks associated with suppliers. TABLE 1 The seven steps to kick-start your C-SCRM programme. Step Description Implementation 1 Select a comprehensive risk management framework Choose a robust framework, such as NIST, to structure your C-SCRM programme. Tailor it to the specific nuances of your supply chain. 2 Conduct in-depth supplier risk assessment Perform a detailed risk analysis to identify and understand cyber risks associated with each supplier in the supply chain. Consider factors such as their cybersecurity posture, data handling practices, and overall risk exposure. 3 Define your supply chain risk appetite Clearly articulate your organisation’s risk appetite levels, ensuring alignment with the diverse risks posed by different suppliers in the supply chain. Embrace economic supply chain risk capital as your compass to guide strategic decisions. 4 Develop strategic mitigation plans with key suppliers Collaborate with suppliers to develop strategic risk mitigation plans, focusing on proactive measures to minimise potential impacts on the supply chain. 5 Institute minimum cybersecurity standards across the supply chain Prioritise basic cybersecurity practices throughout the supply chain. Establish monitoring mechanisms, baseline behaviours, and multi-layered defence systems to mitigate risks collectively. 6 Ensure supplier-driven backup and recovery protocols Collaborate with suppliers to establish robust backup procedures that are regularly tested and encrypted. Ensure that backup media are stored securely, avoiding proximity to operational systems. 7 Strategically integrate cyber insurance for supply chain resilience Leverage cyber insurance in collaboration with suppliers. Align it with risk management frameworks and use it as a supplementary tool for financial protection, risk assessment, and contractual leverage within the supply chain. www.europeanbusinessreview.com 71
SUPPLY CHAIN On a more technical note, initiating the process with a basic cybersecurity questionnaire for suppliers or harnessing the latest technologies, such as incorporating external cyber risk scores from firms like OneTrust or SecurityScorecard, can significantly streamline the risk assessment process. This is particularly beneficial for companies dealing with a multitude of suppliers, providing a more efficient and comprehensive approach to evaluating and managing cyber risks across a broad supplier base. Alternatively, collaborating with supplier risk assessment partners like GRMS, who provide tailored solutions and supply chain risk analysis capabilities, is another effective approach. CONCLUSION – YOUR SUPPLIER’S CYBER RISKS ARE YOUR RISKS The examples of cyberattacks, such as the one on SolarWinds in 2020 and similar incidents in Switzerland in 2023, underscore the necessity of improving cybersecurity in buyer-supplier relationships. The holistic approach outlined in this article, focusing on collaborative risk management, fundamental cyber hygiene, and the strategic integration of cyber insurance, empowers organisations to fortify their supply chain resilience against evolving cyber threats. By actively engaging with suppliers, businesses can create a robust line of defence that protects the entire supply chain ecosystem from potential cyber attacks. The imperative remains unwavering – implement known strategies to safeguard the intricate web of the digital supply chain ecosystem. REFERENCES: 1 Boyens, J., Smith, A., Bartol, N., Winkler, K., Holbrook, A., & Fallon, M. (Oct, 2021). Cybersecurity Supply Chain Risk Management Practices for Systems and Organizations. (N. I. Technology), access https://nvlpubs.nist.gov/nistpubs/ SpecialPublications/NIST.SP.800-161r1-draft2.pdf 2 International Standard ISO/IEC 27001. (Jan. 2022). Information security, cybersecurity and privacy protection – Information security management systems – Requirements (Third edition 2022-10), access https://www.iso.org/ standard/27001 ABOUT THE AUTHOR Dr. Kamil J. Mizgier is the former Global Supplier Relationship and Risk Management Leader at Dow with 15 years of experience in implementing risk management strategies across industry sectors. Before this role, he led enterprise risk modelling projects and teams, among others, at BNY Mellon and UBS. He has published more than twenty academic and practitioner journal articles on risk management and is a frequent public speaker. He obtained his master’s degree in applied physics at the Warsaw University of Technology and a PhD in supply chain management at ETH Zurich. 72 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
Secure password management for business with end-to-end encryption
ARTIFICIAL INTELLIGENCE GENERATIVE AI UPDATE FOR 2024 by Ray Schroeder and Katherine Kerpan While the first full year of operation of ChatGPT, 2023, gave a foretaste of the enormous impact that AI is going to have on us all, 2024 shows every sign of boggling the mind even more. Here are some things to look out for. G enAI has taken a leading role in supporting and enhancing activities, drawing on cognitive functions in many facets of our society. Unlike the robotic revolution that impacted mostly blue-collar workers in the manufacturing and assembly industries of the end of the 20th century, GenAI has most directly impacted white-collar and creative workers over the past year. OpenAI’s ChatGPT was the first major GenAI out of the gate in late 2022. It started an avalanche of entries in the field from start-ups to the leading large tech corporations of Microsoft, Google, Meta, IBM, and more. Now, with more than 100 million weekly users, as well as more than 92 per cent of the Fortune 500 companies,9 OpenAI remains in the lead of this massive movement to integrate artificial intelligence in nearly all aspects of business, industry, and commerce. 74 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024 In one of the earliest academic studies of the implementation of GenAI, Harvard University, the University of Pennsylvania Wharton School, and MIT collaborated to analyse the impact of making the ChatGPT tool available to 758 consultants at the prestigious Boston Consulting Group. Given 18 realistic consulting tasks, the GenAI-equipped consultants, who used GPT-4, completed on average 12.2 per cent more tasks, 25.1 per cent more rapidly. Additionally, 40 per cent of the trial group were judged to have produced higher-quality results.19 Based on more than 4,700 interviews of business executives at the World Economic Forum held in Davos, Switzerland earlier this year, 46 per cent of the leaders believed that GenAI would boost profits in 2024. Also, 25 per cent of the chief executives expected GenAI to lead to headcount reductions of at least 5 per cent this year.7 Clearly, GenAI has the potential to be a gamechanger in the coming year. In this article, we will examine a number of the key changes, challenges, and opportunities that can be expected by the end of the year.
WHERE IS THE TECHNOLOGY TODAY AND WHERE IS IT LEADING? CAPABILITIES TO EXPECT IN 2024 This year, after a dizzying 2023, global business leaders will be able to lay the required groundwork for long-term AI adoption more thoughtfully and intentionally. Organisations will take a step back to evaluate and reskill their workforces, assess data infrastructure needs, and update cybersecurity practices in ways that consider AI needs and risks. As dependency on AI grows, chief information officers will play a pivotal role.13 Their expertise will be critical to proper procurement and implementation decisions impacting legacy systems. The generative AI landscape is shifting from large language models towards smaller, opensource, often multimodal models that combine text, images, video, and more.20 This is important because these new models will be better able to specialise and solve niche use cases. This will lower barriers to experimentation and promote pilot testing, as these more precise and less costly models allow businesses to innovate faster. Market leaders across sectors will With a focus on artificial general intelligence harness this trend to accelerate advance(AGI), GPT-5 is expected to exhibit enhanced ments in personalisation, supply chain optimisation, customer service, and cognitive abilities, enabling it to comprehend many other business operations.2 and respond to a broader range of complex Finally, in 2024, enterprise softqueries and tasks in a more human-like manner. ware providers will begin to integrate generative AI capabilities and features Any update on this technology has to carry the caveat that it is changing day by day and that research and development is, in most cases, months ahead of what is available to the general public. We are now in a period of highly competitive one-upmanship in the features, speed, security, and reliability of GenAI products. As the top dozen or so competitors seek to build consumer and corporate markets, we will see usage expand. Currently, business and industry has effectively applied the technology to marketing, accounting, industry research, product development, trend analysis, report writing, and predictive applications. This rapidly changing environment will continue to make retraining and updating of staff and applications a necessary practice until a level of stability is reached. However, the changes are resulting in consistently improved performance that will make the updating cost-effective through more efficient and expanded performance in many cases. OpenAI is expected to soon release a version 5 of their GPT large language model (LLM) that will include a host of new capabilities. Didier Hope writes in Medium, “The transition from GPT-4 to GPT-5 is anticipated to showcase significant advancements in generative potential, language understanding, and contextual reasoning, further consolidating GPT-5’s position as a leading AI model in the industry. With a focus on artificial general intelligence (AGI), GPT-5 is expected to exhibit enhanced cognitive abilities, enabling it to comprehend and respond to a broader range of complex queries and tasks in a more human-like manner.”15 GPT-5 will likely be seen as an incremental step toward AGI. We are not likely to see a robust version of AGI without a quantum computing platform, a technology that, itself, continues to develop and will likely host fully robust AGI. However significant developments can be expected in the coming months. www.europeanbusinessreview.com 75
ARTIFICIAL INTELLIGENCE directly into at least some of their product offerings, making the technology’s transformative powers readily available to the masses within tools that they are already familiar with and use daily. Companies that leverage prepared workforces, modernised data, secure systems, and up-to-date software tools will gain sustained competitive advantages.17 STRATEGIES TO FOLLOW IN 2024 There are many factors impacting the decision of whether to retain workers in the wake of significant new efficiencies and competencies afforded by GenAI. McKinsey and Company estimates that GenAI could contribute between $2.6 trillion and $4.4 trillion annually to the global economy by 2030. Despite the excitement, they emphasise the importance of companies focusing on cautiously scaling their AI applications and undergoing fundamental organisational changes to fully and wisely leverage the benefits of AI transformations.16 Cprime’s “Generative AI in 2024: A Strategic Guide for Global Enterprises” explains that the economic impact of generative AI on enterprises will be profound, redefining operational efficiencies and cost structures across various industries such as healthcare, marketing, and legal. It will unlock new business value and spark significant advances across organisational functions by processing and extracting value from unstructured data, which has been difficult or impossible up to now.4 Apotheker and colleagues3 discuss the impacts of GenAI on businesses based on a survey of 1,400+ C-suite executives. While GenAI is rapidly changing business operations, 90 per cent of leaders are still waiting for the hype to subside or are pursuing only limited experimentation. The survey reveals that 66 per cent of leaders are ambivalent or dissatisfied with their progress on AI and GenAI, and only 6 per cent have begun upskilling meaningfully. Unfortunately, because of the exponential speed with which these technologies are unfolding, laggards will fall behind quickly as brave adopters jump on board. HOW TO HANDLE YOUR WORKFORCE – UPSKILL OR LAY OFF / TERMINATE? Of course, there are many factors impacting the decision of whether to retain workers in the wake of significant 76 THE EUROPEAN BUSINESS REVIEW new efficiencies and competencies afforded by GenAI. In order to best confront this decision, it may be best to engage GenAI itself, to assist with the priority considerations in decision-making. On 8 February, I asked the newly named Google Gemini to provide a list of considerations. Gemini prefaced its remarks with, “This is a complex issue with ethical and financial ramifications, so consider these factors closely.” It then proceeded to enumerate factors including: 1. Financial Considerations a. Cost of severance packages b. Cost of retraining programmes c. Long-term ROI for both scenarios 2. Skills and Adaptability a. Assessment of impacted employees b. Alignment of new opportunities c. Company culture and values 3. Prioritisation of employee well-being a. Long-term reputation b. Employee morale 4. Ethical Considerations a. Responsibility to employees b. Potential bias in AI systems c. Societal impact: What does the decision mean for the overall community? d. Consider how lay-offs may impact families and the local economy Gemini provided additional details in each of these areas and went on to urge consultation with HR, legal experts, employee representatives, communication transparency, MARCH - APRIL 2024
and more. Gemini is linked to the Web and updates its responses accordingly.10 Some may be surprised at the depth and relevancy of responses. Gemini also provides three different responses to the prompt. Follow-up prompts may provide even more relevant and useful information. As suggested by the GenAI app, there is no single answer for this challenging aspect of successfully achieving efficiencies and competencies through inexpensive or no-cost AI. Google Gemini does not have a monopoly on perspectives; in confronting such situations, you may want to access multiple apps for a further diversity of options. understanding, a willingness to innovate, and a commitment to integrate AI solutions into business processes. Expect cohorts attuned to AI’s risks and rewards, comfortable with constant reskilling, and motivated to direct these technologies toward equitable ends that improve society.6 Rather than displacing roles, their biggest anxiety is not being empowered to steer this wave of change.12 Wise leaders will embrace their input on AI implementation, offering tailored upskilling initiatives and collaboration opportunities. HOW THE ECOSYSTEMS OF HIGHER ED AND BUSINESS HAVE CHANGED WHAT TO EXPECT FROM NEW GRADUATES AS REGARDS AI Beginning in 2024, we should anticipate a new generation of graduates equipped with AI skills, reshaping the workforce.6,12 Immersed in nascent AI applications, these graduates exhibit baseline fluency through daily use. Most considered AI’s trajectory in selecting their majors, with over 75 per cent factoring labour market implications into their decision-making.6 However, doubts persist regarding workforce automation. Many desire integrated curricula that blend technical and humanities disciplines to prepare them for AI collaboration and a hybrid new world.21 Reassuringly, this cohort remains hopeful about AI’s possibilities. Unlike previous technological shifts, these digital natives see AI as a tool to boost critical thinking, creativity, and productivity, not a replacement for human roles.23 As Handshake12 notes, Gen Z seeks to drive AI initiatives within organisations, suggesting robust Business and industry thrive on maintaining an agile, responsive culture that is highly sensitive to the changing needs and wants of their market; higher education is notoriously known as the “ivory tower” that is insular and slow to change. Each of the two has a different ecosystem. Business is dominated by serving the client or customer while generating a profit; higher education is ruled by serving students and, up until now, to a far lesser extent on serving employers of graduates. The worldwide environment has changed across the two fields. With fewer students entering college, enrolments in Europe have declined by nearly 5 per cent over the past decade,14 and enrolments in the US have declined by 10 per cent over the same period.24 Amid rising expenses for college attendance, students have looked to alternative credentials and directly entering careers in lieu of the traditional baccalaureate degree. In order to maintain tuition and fee revenue to cover operating expenses, the colleges and universities on both sides of the Atlantic must cultivate greater enrolments. Meanwhile, the advent of GenAI and associated technologies has shifted the needs of employers. The new technologies can accomplish tasks historically handled by middle managers, accountants, human resources specialists, supervisors, marketers, computer programmers, legal department workers, and many more office positions. Yet, GenAI has opened whole new areas of workers in prompt engineering, AI trainers, sentiment analysers, AI integration specialists, AI ethicists, AI art directors, AI security specialists, and many more.8 It is in the nexus of education and employment that these two ecosystems merge. The interests of both universities www.europeanbusinessreview.com 77
ARTIFICIAL INTELLIGENCE and corporations are best served by successful careers for knowledge exchange fuels innovation and propels the AI the students as they become new employees. The Boston ecosystem forward. Consulting Group has advocated for partnerships between The pace of AI development is relentless. As LinkedIn higher education and busicontributors1 advise, staying informed can be daunting. ness: “Partnerships between The pace of AI development Cultivate a culture of continuous higher education institutions and is relentless. As LinkedIn learning within your organisaemployers can be invaluable for helping businesses respond to contributors advise, staying tion. Voracious learning in diverse formats – from online courses and growing talent needs. They can informed can be daunting. conferences to hands-on experioffer employers a reliable way to Cultivate a culture of mentation – expands competency cultivate an educated and trained and comfort with evolving tools.1 workforce.”18 Serving their mutual continuous learning within interests, such partnerships will your organisation. Invest in employee training advance both ecosystems in the programmes that equip your years ahead. workforce with AI knowledge and skills. Encourage experimentation and support internal or external “hackathons” or innovation labs to explore emerging AI applications. Finally, the AI Readiness Quotient, a diagnostic tool from STRATEGIES TO STAY ON TOP Wharton, is an invaluable resource for businesses. It helps OF THE CHANGES organisations assess their readiness for AI integration, identifying areas of strength and opportunities for improvement. Forget the zero-sum-game mentality. Hamood11 advo- By understanding their current position in the AI landscape, cates “extreme information-sharing”, particularly around companies can develop targeted strategies to enhance their failures and challenges. Nothing is a “mistake”, as long AI capabilities, ensuring that they can effectively leverage as learning is acquired. Fostering a culture of openness AI technologies.22 encourages cross-company collaboration, accelerates learning, and minimises redundant efforts. Share your AI journeys, successes, and setbacks with industry peers and participate in open-source communities. The collective THE WORLD OF BUSINESS – MORE THAN EVER BEFORE – BELONGS TO THE INFORMED, AGILE, AND FEARLESS As we progress through this second full year of GenAI, the ways in which we work, do business, and prepare for the future have changed. Our new tools have redefined many of the middle management positions in accounting, personnel, legal, customer relations, research, marketing, sales, and more. Those businesses that have embraced the new technologies are already reaping the benefits in more efficient operations, more creative approaches to tasks, more informed staff members, and new abilities to gather, analyse, predict, project, and apply data. The upside in operations is enormous at very low cost. It is unprecedented that such advantageous tools enabling such valuable information, insights, and knowledge are available with a trivial investment. Over time, customised applications will become available to 78 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
corporations at an increasing cost. However, now is the time to take advantage of building a base of utilising GenAI upon which the competitive future will depend. This requires a steady source of upskilled and new employees who have the understanding, knowledge, and experience to optimally utilise GenAI. Universities, more than ever in recent times, are now pressured by declining enrolments to offer more relevant and useful foundations to all students. The key to relevance in today’s job market is knowledge and facility with utilising GenAI. Clearly, partnerships between corporations and industry associations with colleges and universities is a promising solution to the challenge of developing an AI-savvy workforce. It is in working together that we will be able to smoothly transition to the GenAI economy of 2024. 9. 10. 11. 12. 13. 14. 15. 16. REFERENCES 1. AI + LinkedIn contributors. (n.d.). "How do you keep up with the latest trends and innovations in AI?" LinkedIn. Retrieved 10 February 2024, from https://www.linkedin.com/advice/3/how-do-you-keep-up-latesttrends-innovations-704 1842070671556608 2. Althoff, J. (2024, January 29). "Embracing AI Transformation: How customers and partners drive pragmatic innovation to achieve business outcomes with the Microsoft Cloud". Official Microsoft Blog. Retrieved 10 February 2024, from https://blogs.microsoft. com/blog/2024/01/29/embracing-ai-transformation-how-custo mers-and-partners-are-driving-pragmatic-innovation-to-achievebusiness-outcomes-wit h-the-microsoft-cloud/ 3. Apotheker, J., et al. (2024, January 12). "From Potential to Profit with GenAI". Bcg.com. Retrieved 10 February 2024, from https://www.bcg. com/publications/2024/from-potential-to-profit-with-genai 4. Cprime (n.d.). "Generative AI in 2024: A Strategic Guide for Global Enterprises". Cprime.com. Retrieved 10 February 2024, from https://www.cprime.com/resources/blog/ generative-ai-in-2024-a-strategic-guide-for-global-enterprises/ 5. Crouse, M. (2023, November 30). "Deloitte’s Tech Predictions for 2024: Generative AI Will Continue to Shape Chips Market". TechRepublic. Retrieved 10 February 2024, from https://www.techrepublic.com/ article/deloitte-generative-ai-predictions/ 6. Flaherty, C. (2024, January 10). "Survey: How AI Is Impacting Students’ Career Choices". Insidehighered.com. Retrieved 10 February 2024, from https://www.insidehighered.com/ news/student-success/life-after-college/2024/01/10/ survey-college-students-thoughts-ai-and-careers 7. Fleming, S. (2024, January 15). "Generative artificial intelligence will lead to job cuts this year, CEOs say". Financial Times. Retrieved 8 February 2024 from https://www.ft.com/ content/908e5465-0bc4-4de5-89cd-8d5349645dda 8. Forbes Councils Member. (2023, July 6). "20 New And Enhanced Roles AI Could Create". Retrieved 10 February 2024 from https://www.forbes. com/sites/forbestechcouncil/2023/07/06/20-new-and-enhancedroles-ai-could-create/?sh=76c351eb6f04 17. 18. 19. 20. 21. 22. 23. 24. Gartenberg, C. (2023, November 6). "ChatGPT already has 'tens of millions' of active users, developer conference reveals". The Verge. Retrieved 3 February 2024 from https://www.theverge.com/2023/11/6/23948386/ chatgpt-active-user-count-openai-dev eloper-conference Gemini (2024, February 10) Considerations for Layoffs vs. Upskilling/ Retraining. Hamood, J. (2023, September 17). "Growing With AI Not Against It: How To Stay One Step Ahead". Informationweek.com. Retrieved 10 February 2024, from https://www.informationweek.com/machine-learning-ai/ growing-with-ai-not-against-it- how-to-stay-one-step-ahead Handshake (n.d.). "Report: The Class of 2024 sets its sights on the future: A new cohort of seniors charts a path to AI fluency, financial stability, and work-life balance". Joinhandshake.com. Retrieved 10 February 2024, from https://joinhandshake.com/network-trends/ gen-z-career-goals-ai-economy/ Hansen, B. (2023, December 22). "Generative AI Trends for 2024". Dataversity. Retrieved 10 February 2024, from https://www.dataversity.net/ generative-ai-trends-for-2024/ Hanson, M. (2024, January 10). "College Enrollment & Student Demographic Statistics". Retrieved 8 February 2024) from https:// educationdata.org/college-enrollment-statistics Hope, D. (2023, November 30) "GPT-5 release date: What to expect from the latest OpenAI model". Medium: Next Top Writers. Retrieved 5 February 2024 from https://medium.com/next-top-writers/gpt-5-release-datewhat-to-expect-from-the-lates t-openai-model-6f9cc4739612 Jackson, A. (2023, December 21). "GenAI will continue to dominate the 2024 business landscape". Aimagazine.com. Retrieved 10 February 2024, from https://aimagazine.com/data-and-analytics/genai-will-continue-todominate-the-2024-b usiness-landscape Janakiram MSV (2024, January 2). "Exploring The Future: 5 Cutting-Edge Generative AI Trends In 2024". Forbes. Retrieved 10 February 2024, from https://www.forbes.com/sites/janakirammsv/2024/01/02/exploring-thefuture-5-cuttin g-edge-generative-ai-trends-in-2024/?sh=2efb0119206e Litman, et al. (2022, October 19). "How Higher Ed and Employers Can Partner to Power Talent Pipelines". Retrieved 10 February 2024 from https://www.bcg.com/publications/2022/bridging-the-talent-gap-bypartnering-with-hig her-ed-institutions Martinez, C & Mezitis, T. (2023, October 13). "Harvard Business School Partners with BCG on AI Productivity Study The Harvard Crimson". Retrieved 30 January 2023) from https://www.thecrimson.com/ article/2023/10/13/jagged-edge-ai-bcg/ Ranger, S. (2024, January 24). "Tech Trends for 2024: Generative AI Models Will Get Smaller, An iPhone’s Average Life Will Be 8 Years". TechRepublic. Retrieved 10 February 2024, from https://www.techrepublic.com/article/ tech-trends-2024/ Sloyan, T. (2023, August 23). "To Keep Up With The AI Revolution, We Need To Change How We Learn". Forbes.com. Retrieved 10 February 2024, from https://www.forbes.com/sites/ forbestechcouncil/2023/08/23/to-keep-up-with-the-ai-re volution-we-need-to-change-how-we-learn/?sh=44486cd4b6d4 Snyder, S. A. (2024, January 12). "What’s Your Company’s AI Readiness Quotient?". Informationweek.com. Retrieved 10 February 2024, from https://knowledge.wharton.upenn.edu/article/whats-your-companys-aireadiness-quoti ent/ Threlkeld, K. (2023, November 15). "Indeed Hiring Lab: 5 Trends That Will Make or Break the 2024 Labor Market". Indeed.com. Retrieved 10 February 2024, from https://www.indeed.com/lead/indeed-hiring-lab-5-trendsthat-will-make-or-break-the-2 024-labor-market Welding, L. (2023, August 16). "U.S. College Enrollment Decline: Facts and Figures". Retrieved 10 February 2024 from https://www.bestcolleges.com/ research/college-enrollment-decline/ ABOUT THE AUTHORS Ray Schroeder is a respected leader in higher education. He is the Professor Emeritus of Communication at the University of Illinois Springfield (UIS) and a Senior Fellow at UPCEA, the Online and Professional Education Association. Ray is a frequent author, speaker, and presenter on technology in education. Katherine Kerpan is an accomplished marketing, communications, and product leader with over 20 years of experience driving complex initiatives at large non-profits. Currently, she works at her alma mater, Loyola University Chicago, as a project manager on the university's enterprise marketing and communications team. www.europeanbusinessreview.com 79
ARTIFICIAL INTELLIGENCE The detection of fraudulent credit card transactions is an ideal candidate for the application of machine learning technology. However, in order to learn how to spot attempted fraud, such a system needs someone to tell it which historic transactions were OK, and which were not. Excerpted from The AI Playbook: Mastering the Rare Art of Machine Learning Deployment,1 by Eric Siegel (6 February 2024), published by The MIT Press. WHERE FICO GETS ITS DATA FOR SCREENING TWO-THIRDS OF ALL CARD TRANSACTIONS by Eric Siegel S cott Zoldi fights crime across the globe. His superpower is data – and an unprecedented, innovative process to amass that data. He’s got his work cut out for him. Every day, hordes of criminals work to exploit systemic vulnerabilities in how you and I shop. Their relentless work chips away at the very integrity of consumer commerce at large. I’m talking about fraud. Crooks obtain your card details so that they can perform a transaction and make off with the spoils. In 2021, payment card fraud losses reached $28.58 billion worldwide.2 The United States suffers more than any other country, accounting for more than a 80 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024 third of that loss. To make matters worse, fraud increased during the pandemic, in part due to the increase in “card not present” virtual transactions. Some called it the “scamdemic”. Scott is FICO’s chief analytics officer. He oversees the world’s largest-scope anti-fraud operation. Day in and day out, his product Falcon screens all of the transactions made with most of the world’s credit and ATM cards – 2.6 billion cards globally. With Falcon, banks and other financial institutions can instantly block suspicious purchases and withdrawals. This capability hinges on machine learning, and it demands an impressive dataset. A
prior transactions that have been designated as such. How do these cases get labelled? The fraudsters who perpetrated these crimes know which are which, but they have not, so far, been cooperative. This means we need humans on our side to manually label many examples. These labels typically make up the rightmost column of the data. Such a data set sounds almost impossible to acquire. It could only be sourced from multiple banks across the globe. And even if you somehow convinced these institutions to cooperate and obtained a representative slew of example transactions, the fraudulent ones aren’t going to label themselves. To obtain this data, Scott’s got to align the stars. Long. You need data about real transactions – a lot of them. This list of many, many example cases from which to learn must be a long one. And by including a broad assortment of cases from around the world, the data can be representative. Each case composes a row of the data. Wide. You need revealing information about each case, including behavioural characteristics of both the cardholder and the merchant. These are the factors on which a model will base its predictions. Since each row enumerates all these factors, the data is also wide. Each factor composes a column of the data. Labelled. ML software needs many known examples of fraud from which to learn, E-commerce $125 Not-present $250/day ... ... Yes Grocery $17 Chip $700/day ... ... No Clothing $275 Swipe $25/day ... ... No Pharmacy $27 Tap $150/day ... ... Yes Utility $59 Not-present $75/day ... ... No Airline $782 Not-present $35/day ... ... Yes Hotel $1,221 Chip $100/day ... ... No Restaurant $76 Tap $40/day ... ... No Pharmacy $32 Swipe $275/day ... ... No Grocery $112 Tap $400/day ... ... No E-commerce $43 Not-present $80/day ... ... No Restaurant $82 Chip $30/day ... ... No Utility $26 Not-present $100/day ... ... No FICO CULTIVATES DATA WITHOUT BORDERS Scott has a PhD in theoretical physics from Duke University. And he’s formed a team of 70 more people with PhDs. Together, they generate the world’s de facto system for detecting fraudulent card transactions. You, I, and most people with payment cards are relying on them. Scott’s anti-fraud operation isn’t what FICO is most widely known for. Along with another one www.europeanbusinessreview.com 81 Long data has many cases fraud-detection model must predict well, striking a tricky balance so that it recognises a lot of fraud and yet does so without incurring too many false positives.3 To this end, the data must fulfil exacting requirements. If you visualise the data as a simple table, just a big spreadsheet, it must be long, wide, and labelled. Here’s what I mean: FIGURE 1 Wide data has more information about each case
ARTIFICIAL INTELLIGENCE of his teams, Scott also oversees this country’s most famous deployed model: the FICO Credit Score. Your FICO Score determines your power to borrow. It’s the most widely used credit score in the United States, employed by the vast majority of banks and credit grantors. It’s a household name, and many understandably feel that their FICO Score is a central part of their identity as a consumer. But FICO’s fraud detection, which is normally invisible to us as consumers, affects us much more often. Named Falcon, this product is the biggest part of FICO’s software business and affects most of us almost every day, every time you use your card. FICO evaluates financial power by day, and fights financial crime by night. To meet this responsibility, it’s important that the Falcon team gets the data it needs – some long, wide, and labelled data. To do so, it collects data from across a global network of banks. This reliance on inter-enterprise data, collected from multiple companies, is atypical. Ordinarily, an ML project serves only the enterprise running the project. For such a project, internal data suffices, since the company has been tracking the very operations that the project aims to improve. In contrast, FICO isn’t a bank. It doesn’t process card transactions. Rather, it holds a rare, globally central, entrusted role across banks. In 1992, Falcon was born of a radical move by a small group of banks. They decided to cooperate, rather than only compete. At the time, a tremendous portion of all credit card transactions – almost 1 per cent – were fraudulent. The fraud rate was only growing and threatened the entire industry. This looming crisis convinced financial institutions to overcome their raw capitalistic instincts and follow a call to arms for the universal good: to collaborate to fight crime, improve transaction integrity, and cut losses. Led by a company called HNC Software, they joined their data together, thereby multiplying their power to train fraud-detection models. Ten years later, FICO acquired HNC Software – and both Falcon and Scott Zoldi along with it. 82 THE EUROPEAN BUSINESS REVIEW Since then, Falcon’s consortium has grown to more than 9,000 banks globally, all continually sending in anonymised card transaction details. FICO receives about 20 billion records, amounting to terabytes of raw data, each month, a petabyte every five years. FIGURE 2 MARCH - APRIL 2024 Banks Consortium data FICO Falcon fraud detection system Machine learning Model
IT’S NOT OVER YET: LABELLING THE DATA In addition to tons of examples, Falcon’s training data needs another ingredient: labels that correspond with the model’s intended output. Each example transaction that makes for a row of data is incomplete until designated as either fraudulent or not fraudulent. Those labels will guide model training to do its job: generate a model that can discern positive cases from negative cases. Only humans can provide the labels. For detection, we don’t get to benefit from “time will tell”, as we do when predicting a future event. Time has told whether a user responded when shown a certain ad or whether a debtor has defaulted. In those cases, we get the label “for free”. But for detecting a qualitative attribute for each case, such as whether it is fraudulent, each training example’s label can only be determined by a person. Manual labelling is labour-intensive and expensive. The expense especially racks up when it requires subject matter experts, such as doctors for establishing whether each example indicates a certain medical diagnosis. On the other hand, problems that don’t require special expertise, such as labelling traffic Banks provide data to develop Falcon’s lights within images for an autonomous-driving fraud-detection model and Falcon deploys project, can be outsourced on “crowd labour” that model for each bank. platforms like Amazon Mechanical Turk for as Banks can’t benefit from little as a penny per case. Falcon without contributing The looming crisis convinced But there’s a dark side: their to it. To be a FICO customer financial institutions to overcome largely unregulated working that uses Falcon, you must conditions “offer a bleak also join the consortium their raw capitalistic instincts glimpse of what could come and share your data. Falcon and follow a call to arms for the for a growing digital underhas become so standard universal good: to collaborate to class”, according to Vocativ. that, despite its cooperative Marketplace 4 calls this “the fight crime, improve transaction new factory floor of the nature, it’s a competitive digital age”. necessity. To hold their posi- integrity, and cut losses. To make matters worse, tion in the payment card fraud detection requires an immense number market, banks need Falcon’s best-inof labelled transactions, because positive ones class fraud detection, which they can are rare. If the fraud rate is 0.1 per cent and you access only by cooperating. In the end, want the data to include at least 10,000 positive this levels the playing field. Even the cases, then you need to label 10 million cases as smallest bank can deploy the very best to whether each is positive or negative. fraud-detection model. www.europeanbusinessreview.com 83
ARTIFICIAL INTELLIGENCE This “organic” labelling process for fraud detection, wherein people are essentially “following the money”, prioritises bigger cases of fraud over smaller cases. FICO treats only adjudicated fraud as positive cases, where the cardholder has formally certified that the transaction was fraudulent (whether it was them or the bank who noticed it in the first place). This means that suspected cases that never get adjudicated aren’t labelled as positive in the training data, even if the bank had to write off the charge. Since folks tend to bother with adjudication more for larger-value cases of fraud, lower-cost fraud is less often Don’t fret! Falcon’s training data manages correctly labelled and is therefore effectively to sidestep this costly bottleneck by relying on deprioritised by Falcon’s model. And that’s tolerable, since the false negative cost is lower for them. what consumers do naturally. With card fraud, On top of this manual labelling, many other if the consumer sees an erroneous charge, they positive cases are passively labelled – those complain. We cardholders and our banks are, in that Falcon has spotted effect, already doing all the automatically. A bank grunt work to label many using Falcon blocks an cases of fraud in the course If Falcon was wrong – if it is a false attempted fraudulent of just living our lives. positive – then the cardholder, transaction and the A key reason that this approach works is that, whose legitimate attempt to transact cardholder might never even hear about it. This with card fraud, banks can was blocked, will often take action is almost a circular afford to learn the hard way. to get it approved and the case will process, since that posiSince the detection system tive example will then is imperfect, it allows some wind up as negative in the training serve to train an updated fraudulent transactions data. In that way, what the model model for Falcon, which to go through. This genergot wrong will serve to improve the ates a positive training identified the positive case if the cardholder later next version of the model. case in the first place. complains about the unauHowever, once again, thorised charge, even though it’s then typically natural cardholder reactions help correct the too late to prevent the fraudster’s crime. The cost data. If Falcon was wrong – if it is a false positive is absorbed by the bank, but the overall cycle is – then the cardholder, whose legitimate attempt economically satisfactory. No humans were substanto transact was blocked, will often take action tially harmed in the process of this data creation. to get it approved and the case will wind up as In other domains, you can’t do it that way. The negative in the training data. In that way, what missed, uncaught cases – false negatives – aren’t the model got wrong will serve to improve the nearly as allowable for an autonomous vehicle that next version of the model. would drive through a red light or a medical system Altogether, this provides plenty of posithat would miss a diagnosis. In those domains, you tive examples for Scott’s team. The number of often can’t avoid the need for additional manual labelled cases of fraud that they end up with work labelling many examples. approaches one million. 84 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
FICO FALCON FIGHTS FRAUD FANTASTICALLY I consider Falcon one of the world’s most successful and widely impactful commercial deployments of ML. It screens all the transactions for 2.6 billion payment cards worldwide. That’s two-thirds of the world’s cards, including about 90 per cent of those in the United States and the United Kingdom. Seventeen of the top 20 international credit card issuers, all of the United States’ 100 largest credit-card issuers and 95 of the United States’ top 100 financial institutions, use Falcon. Since its introduction, Falcon has reduced card fraud losses by more than 70 per cent in the United States. With the United States currently suffering around $10 billion in annual fraud losses, that reduction is saving that country alone something in the vicinity of $20 billion per year. For a detailed example stepping through the arithmetic to show how much money a bank might save by deploying a fraud detection model, see my MIT Sloan Management Review article "What Leaders Should Know About Measuring AI Project Value".5 For more reading on payment card fraud detection in general, and FICO Falcon in particular, see this collection of citations.6 This article is excerpted from the book, The AI Playbook: Mastering the Rare Art of Machine Learning Deployment, with permission from the publisher, MIT Press. It is a product of the author’s work while he held a one-year position as the Bodily Bicentennial Professor in Analytics at the UVA Darden School of Business. For a complete bibliography for this article, see this PDF.7 REFERENCES 1 http://www.bizml.com/ https://nilsonreport.com/newsletters/1209/ 3 https://sloanreview.mit.edu/article/ what-leaders-should-know-about-measuring-ai-project-value/ 4 https://www.marketplace.org/2021/05/04/ the-human-labor-behind-artificial-intelligence/ 5 https://sloanreview.mit.edu/article/ what-leaders-should-know-about-measuring-ai-project-value/ 6 https://predictionimpact.com/documents/notes-for-The-AIPlaybook/The AI Playbook - notes for chapter 4.pdf 7 https://predictionimpact.com/documents/notes-for-The-AIPlaybook/The AI Playbook - notes for chapter 4.pdf 8 https://www.machinelearningweek.com/ 9 https://generativeaiworld.events/ 10 http://machinelearning.courses/ 11 http://machinelearningtimes.com/ 12 http://www.machinelearningspeaker.com/ 13 https://www.machinelearningkeynote.com/predictive-analytics 14 http://www.civilrightsdata.com/ 2 ABOUT THE AUTHOR Eric Siegel, PhD, is a leading consultant and former Columbia University professor who helps companies deploy machine learning. He is the founder of the long-running Machine Learning Week8 conference series and its new sister, Generative AI Applications Summit,9 the instructor of the acclaimed online course “Machine Learning Leadership and Practice – End-to-End Mastery”,10 executive editor of The Machine Learning Times,11 and a frequent keynote speaker.12 He wrote the bestselling Predictive Analytics: The Power to Predict Who Will Click, Buy, Lie, or Die,13 which has been used in courses at hundreds of universities, as well as The AI Playbook: Mastering the Rare Art of Machine Learning Deployment. Eric’s interdisciplinary work bridges the stubborn technology / business gap. At Columbia, he won the Distinguished Faculty award when teaching the graduate computer science courses in ML and AI. Later, he served as a business school professor at UVA Darden. Eric also publishes op-eds on analytics and social justice.14 www.europeanbusinessreview.com 85
ENTREPRENEURSHIP YOU DID NOT FAIL! YOU ARE JUST REBOUNDING! by Olimpia Modorcea and Fernanda Arreola Entrepreneurs make economies turn and prosper. They create a large proportion of new jobs, take economies out of recessions, propose disruptive innovations, and change how we live. Further, those of us who have had the opportunity to develop a product, service, or even a firm know the unique sense of accomplishment and pride that comes with it. T he hidden side of such achievement is also common to all entrepreneurs: failure. According to the Bureau of Labor Statistics1, in the US, at least 20% of businesses will fail in their first two years, and up to almost 50% will do so by age five. Therefore, we question what is there to be said (and known) about failure, and most importantly, what do we know about eventually coming back? FAILURE IS MORE COMMON THAN WE THINK Embarking on an entrepreneurial journey is a rollercoaster ride filled with trials and triumphs. Some entrepreneurs face unexpected roadblocks that force them to pause or close their businesses for an extended period. Despite the setbacks, many individuals force themselves through a process of time and resilience that helps them reactivate themselves and recreate ventures and careers. 86 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024 In our research, we gathered insights from successful entrepreneurs who navigated through business failures and comebacks. The first example that comes to mind is Elon Musk. The visionary behind Tesla and SpaceX faced significant challenges in Tesla's early days. Financial strains, production delays, and scepticism from critics led Musk to stop production temporarily. His pivotal lesson from this experience was the importance of planning strategically and adapting to unpredictable circumstances. Musk emphasises the prerequisite of a resilient mindset, urging entrepreneurs to perceive obstacles as opportunities for growth. Steve Jobs, the co-founder of Apple, endured a turbulent period when he was expelled from his company in the mid-1980s. After his departure, Apple faced stagnation, and its future seemed uncertain. In 1997, Apple acquired NeXT, a company Jobs founded during his time away, leading to Jobs' return. He introduced ground breaking products like the iPod, iPhone, and iPad during his second tenure at Apple. Jobs' takeaway is about the power of reinvention and the ability to turn adversity into innovation.
Howard Schultz, the former CEO of Starbucks, SOMETIMES, IT IS A MATTER OF temporarily stepped down in 2000 after the company SELF-CARE faced a challenging period. During his absence, For some, the need to pause their businesses arises due Schultz realized the critical significance of staying to personal challenges such as health issues, family true to the brand's core values. Upon his return, his matters, or personal crises. Arianna Huffington, the primary focus was rejuvenating the Starbucks expeco-founder of The Huffington Post, faced a health rience and overseeing global expansion. Schultz's crisis in 2007 when exhaustion and burnout led to counsel emphasises the importance of maintaining a her collapsing from sleep deprivation. This incident solid connection to the company's mission and values, prompted her to reevaluate her priorities and step especially during challenging times. back from her role. Following her recovery, Huffington Reed Hastings, co-founder of Netflix, faced a became an advocate for well-being and sleep. Her setback when the company's stock plummeted in 2011. story underscores the significance of self-care and its A price hike and an unsuccessful attempt to separate impact on an entrepreneur's overall success. the company's DVD rental and streaming services led Richard Branson, a British tycoon and co-founder to a substantial loss of subscribers. Hastings, neverof the Virgin Group, experienced a pause in his busitheless, demonstrated resilience by learning from ness due to a severe health fright in 2016. A bicycle mistakes and redirecting the company's focus towards accident left him with severe injuries, the streaming platform. forcing him to reassess his work habits Netflix became a prevalent and priorities. Branson's journey to force in the entertainment Embarking on an industry. Hastings advocates entrepreneurial journey is recovery reinforced the importance of resilience and a positive outlook, pivoting, quickly changing a rollercoaster ride filled particularly in the face of personal chaldirection, and adapting to with trials and triumphs. lenges. His advice for entrepreneurs is new circumstances. www.europeanbusinessreview.com 87
ENTREPRENEURSHIP to listen to their bodies and prioritise their health. embracing personal well-being and addressing life's Oprah Winfrey, media mogul and founder of the challenges head-on can lead to renewed success in the OWN Network faced a challenging period in 2011 professional realm. when she decided to end her iconic talk show, "The The stories of these accomplished entrepreneurs Oprah Winfrey Show". This significant personal and underline the inevitability of hardships and strains professional transition allowed her to focus on other in the entrepreneurial world. Pausing a business for aspects of her life and career. Winfrey's experience an extended period may seem like a setback, but the highlights the power of making tough decisions for pivotal perspective is to see it as a strategic pause for personal well-being and the potential for new opporrecalibration. Learning from industry giants like Elon tunities to emerge from those choices. Musk, Steve Jobs, Howard Schultz, and Reed Hastings, Mark Zuckerberg from Meta took a two-month entrepreneurs can adopt resilience, strategic planpaternity leave in 2015 after the birth of his first ning, reinvention, and adaptability as essential child. During this period, Zuckerberg prioritised his elements in their track to success. Remember, the family, experiencing the profound impact of a workpause is not the end, just like the theatre’s intermislife balance. His journey underscores the significance sion is not the play's culmination. Instead, it's a time of celebrating personal milestones. It emphasises the for recalibration, upgrading, and rearranging the need for entrepreneurs to prioritise their well-being stage to prepare for the next act. and family commitments, even amid the demands of managing a thriving business. This insight accentuates the holistic approach to IS THIS A FAILURE? success that recognises the close connection between personal and professional aspects of life. These examples make us question if these situations Personal hardships can be powerful catalysts for can be classified as failure or if we should reassess positive change. how we refer to unsuccessful business ventures and Pausing a business due to health, family, or personal recalibrations of businesses. For issues requires a unique strength and instance, research2 has found self-introspection. Entrepreneurs Personal hardships can that 65% of novice entrepreneurs like Mark Zuckerberg, Arianna be powerful catalysts for will make a comeback and try Huffington, Richard Branson, positive change. their chances again at launching and Oprah Winfrey showcase that another business. Interestingly, only those who do not acknowledge having failed will have limited chances of ever trying it again. Furthermore, when the decision to close or pause a business arises, what is necessary is taking time to complete what we will define as a rebounding cycle. From our research and observations, for entrepreneurs to fully reinvest themselves, they must allow themselves to undergo the following process. First, they must acknowledge the need to pause or stop. Second, they must seek support to make such a decision. Third, they must take 88 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
a step back and take time to gain perspective and learn (this is when they need to ask why and what). Then, they must integrate what they've learned and prepare for a comeback. Once these steps are completed, they can consider a comeback. What is essential for each step is that entrepreneurs gain awareness about the importance of undergoing each of them consciously. REBOUNDING CYCLE to go through such periods to accept the situation. As presented in our framework, the decision to stop includes a moment of grief. Although denial is a natural reaction that protects us from the unknown, achieving a stage of acceptance3 is the final point necessary to stabilise our emotions and move on. Furthermore, research indicates that entrepreneurs who do not accept the situation are highly unlikely4 ever to undertake a new entrepreneurial challenge. • Build psychological capital. Research shows5 that our psychological capital will help us rebuild ourselves after difficult times. Psychological capital6 is a collection of four psychological states that make us feel good: hope, efficacy, resilience, and optimism. To build this capital, entrepreneurs can rely on specific techniques like humour or defensive pessimism (imagining how a situation can go wrong to prepare oneself). • Anchor in an entourage. If you are about to go through a halt to your entrepreneurial career, do not do it alone! Although not largely talked about, there are several relevant resources that you can use to make you better surrounded while you are going through this difficult time. In France, associations like 60000 rebonds7 or Second Souffle8 allow you to contact free coaches and mentors who are there to support you and guide you. Other events include fuckup nights9, gatherings where other entrepreneurs in the same situation join to share their experiences and gain perspective. OUR HOW-TO GUIDE FOR IMPROVING YOUR REBOUNDING CYCLE As we said before, pausing or stopping a business is a necessary choice to make. Either because the business model is not working as you expected or because of family or health issues, most entrepreneurs will face such a decision soon. Therefore, we have conceived a five-step guide that may help you pause, rest, and make a successful comeback! • Avoid denial. The first important thing to do is to avoid denial. Life experiences include unsettling periods, but it is necessary for our mind and spirit www.europeanbusinessreview.com 89
ENTREPRENEURSHIP • Look after yourself. Maintaining good mental health is fundamental to developing resilience and overcoming change. According to a recent study10 of almost 300 entrepreneurs, 70% acknowledged mental health concerns. The findings of this study are significant because they suggest an underlying relationship between entrepreneurship and many of the affective, cognitive, and mental health conditions that a stressful situation may trigger. Entrepreneurs must note this trend and act accordingly, seeking medical help if necessary when overcoming this moment. • Take time. If you need time, take it! Time will allow you to recover psychologically and physically. It will also give you the space necessary to complete a full cycle of rebounding, for which learning and gaining perspective11 are required. REFERENCES 1 Top 6 Reasons New Businesses Fail. 30 December 2022. Investopedia. https://www. investopedia.com/financial-edge/1010/top-6reasons-new-businesses-fail.aspx 2 Do You Plead Guilty? Exploring Entrepreneurs’ Sensemaking-Behavior Link after Business Failure. 5 June 2016. Science Direct. https://www.sciencedirect.com/science/article/abs/pii/ S2352673415300093?via%3Dihub 3 The Five Stages of Grief. 07 June 2022. Psycom. https://www.psycom.net/ stages-of-grief 4 Do You Plead Guilty? Exploring Entrepreneurs’ Sensemaking-Behavior Link after Business Failure. 5 June 2016. Science Direct. https://www.sciencedirect.com/science/article/abs/pii/ S2352673415300093?via%3Dihub 5 Re-creation after Business Failure: A Conceptual Model of the Mediating Role of Psychological Capital. 02 March 2022. Frontiers. https://www.frontiersin.org/ articles/10.3389/fpsyg.2022.842590/full 6 Psychological Capital: What It Is and Why Employers Need It Now. 21 August 2023. American Psychological Association. https:// www.apa.org/topics/healthy-workplaces/ psychological-capital 7 60,000 rebounds. https://60000rebonds.com/ 8 Second Souffle. https://secondsouffle.org/ qui-sommes-nous/ 9 Fuckup Nights. https://en.fuckupnights.com/ 10 Are Entrepreneurs “Touched with Fire”? 17 April 2015. Michael A. Freeman, M.D. https:// michaelafreemanmd.com/Research_files/ Are%20Entrepreneurs%20Touched%20 with%20Fire-summary.pdf 11 Coping with Entrepreneurial Failure. November 2007. Research Gate. https://www. researchgate.net/publication/305889287_ Coping_with_entrepreneurial_failure ABOUT THE AUTHORS Olimpia Modorcea is a certified coach, therapist, and published author who brings over 25 years of international experience in corporate technology to her passion for personal development. Dedicated to empowering professionals and business owners, she helps them navigate and accelerate their careers with purpose, ease, and emotional stability. Fernanda Arreola is a Professor of Strategy, Innovation, and Entrepreneurship at ESSCA and a researcher focusing on service innovation, governance, and social entrepreneurship. Fernanda has held numerous managerial posts and possesses a range of international academic and professional experience. 90 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
ESG THE FUNGIBILITY OF ENVIRONMENTAL, SOCIAL, AND GOVERNANCE REPORTING by Tim Bovy and Ian Hodges For all organisations, there is the need for ESG reporting to be interoperable because it impacts the ability of organisations to streamline their reporting processes and communicate what is being done to their stakeholders, effectively. I n October 2023, the EU defeated an attempt by some of its Members of the European Parliament (MEPs) to water down the requirements regarding its European Sustainability Reporting Standards (ESRS), thereby ensuring that, through the incorporation of double materiality, it would achieve its ultimate goal of giving non-financial and financial reporting total parity. Following this news, the Global Reporting Initiative (GRI) claimed that “a high level of interoperability between the new ESRS and the GRI Standards – already widely used by thousands of organizations in Europe and around the world – [had] been achieved.”1 Although the GRI acknowledged that ESRS is mandatory and the GRI voluntary, their claim nevertheless called attention to the issue of fungibility, implying that the GRI stood alone in providing organisations with a truly global reporting standard. Our view is that the issue of fungibility is more complex and nuanced than that, while appreciating the value that the GRI brings to the table. Increasingly, standards set by the largest trade and political blocks such as the EU have a degree of extra-territoriality. In the case of the EU, this means some laws apply in specific contexts beyond the jurisdiction of member states. This will be the case with the new ESG reporting standards. ESRS, for example, will apply to all non– EU companies that were previously in the scope of the Non-Financial Reporting Directive (NFRD), which was the predecessor to the CSRD. As the London Stock Exchange has noted, this includes Companies with securities, such as stocks or bonds, listed on a regulated market in the EU; Companies with annual EU revenues exceeding €150 million and an EU branch with net revenue of more than €40 million; and Companies with annual EU revenues exceeding €150 million and an EU subsidiary that is a large company, defined as meeting at least two of the following three criteria: more than 250 EU-based employees, a balance sheet above €20 million or local revenue of more than €40 million.2 Even within member states of the EU, there is cultural and legal diversity. Across the world there could be orders of magnitude more difference and complexity. How large organisations address these differences in their supply chains and international subsidiaries will have significant implications for their own reporting and for the success of ESRS itself. We should not expect comparable reporting www.europeanbusinessreview.com 91
ESG about finding meaningful contexts with which to draw a moral equivalence. A thought experiment should illustrate that point. Let us consider a fashion brand with a European head office and distribution, and outsourced manufacturing across the globe. One such factory is in Bangladesh. The enterprise has publicly stated a commitment that no employee will be paid less than the living wage. The living wage for the most junior staff in the distribution hub in rural Netherlands is €20,700pa3, the living wage for a Bangladeshi textile worker in urban Dhaka is €2,565pa4. The enterprise can audit both sites and establish if the living wage is being paid. However, the living wage in the Netherlands is lower than the legal minimum wage of €23,940pa5. No one should be across the globe to be achieved by asking receiving less in the Netherlands. While We should not the same questions and scoring the the minimum wage in Bangladesh is answers against a common set of exem€1,258.50pa6, almost half that of the expect comparable living wage in Dhaka. Is it enough plars. Instead, we should encourage reporting across the that Dhaka workers are paid reporting organisations to interroughly a tenth of the income of pret the quantitative data through a globe to be achieved by qualitative lens that acknowledges asking the same questions workers in the Netherlands? Are the Netherlands workers simply cultural, political, and geographical and scoring the answers lucky that the statutory wage limit differences. Metrics that in western is set higher than the living wage? Europe, for instance, could be seen against a common set Or is the enterprise obligated to as poor or failing could be evidence of of exemplars. uprate the Bangladeshi incomes by a succeeding and progressing in another similar proportion? part of the world. Other examples can be found throughout The professional judgment of auditors the scope of the standard, such as power generamay well prove sufficient to map the differences tion. While many of the countries most dependent in data and interpretation across the develon coal-fired power have plans to phase down oped world in much the same way that judging coal, if not to phase it out altogether, many materiality in financial reporting allows for qualare still bringing new coal-fired power itative analysis alongside the strictly quantitative stations online. It is estimated that assessment of accounts. However it is done, we somewhere between 170 GW and should not expect specific data points plotted 270 GW of capacity will be built in on a common scale to sufficiently describe upcoming years7, making many compliance to ESRS. We must allow room for a countries´ phase down plans four-dimensional analysis; the landscape that look ambitious and pushing surrounds the data now, in the past, and in the eventual phase out further future. Progress from a low base is still progress, into the future. Enterprises especially if it is achieved in adversity. select international locations Nothing in this approach should be taken and venture partnerships for as excusing the inexcusable: modern slavery compelling business reasons is abhorrent wherever it is found; corruption is outside of power generation pernicious in any circumstances. Instead it is 92 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
but will now have to think of its consequences within the supply chain and what mitigation measures could be meaningful. It is questions like these that enterprises must grapple with in addressing the requirements of ESRS reporting. It is not just data, but what the data means and what it says about the enterprise, its values and its impact on society and the environment. REFERENCES 1. GRI, "Final Adoption of ESRS a ‘Game Changer’ for Mandatory Reporting," 18 October 2023, available at https://www.globalreporting.org/news/news-center/ final-adoption-of-esrs-a-game-changer-for-mandatory-reporting/ 2. Elena Philipova, “How Many Companies Outside the EU are Required to Report under its Sustainability Rules?”, LSEG, June 02, 2023, available at https://www.lseg.com/en/insights/risk-intelligence/how-many-non-eucompanies-are-required-to-report-under-eu-sustainability-rules 3. Netherlands Enterprise Agency https://english.rvo.nl/topics/csr/livingwage#what-is-the-living-wage%3F accessed 18 January 2024. 4. Global Living Wage Coalition https://www.globallivingwage.org/living-wagebenchmarks/urban-bangladesh/ accessed 18 January 2024. 5. Government of the Netherlands https://www.government.nl/topics/minimum-wage/amount-of-the-minimum-wage accessed 18 January 2024. 6. Trading Economics https://tradingeconomics.com/bangladesh/minimum-wages#:~:text=Minimum%20Wages%20in%20Bangladesh%20 remained,12500%20BDT%2FMonth%20in%202023 accessed 18 January 2024 7. Anadón L D, Nemet G and Verdolini E (2023). The Future Costs of Nuclear Power using Multiple Expert Elicitations: Effects of RD&D and Elicitation Design. Environmental Research Letters. 28 April 2023. ABOUT THE AUTHORS Tim Bovy has over 35 years of experience in designing and implementing various types of information and risk management systems for major law firms such as Clifford Chance; and for international accountancy firms such as Deloitte. He has also developed solutions for organisations such as BT, Imperial Tobacco, Rio Tinto, the Kuwaiti government, The Royal Household, and the US House of Representatives. Tim is an elected member of The Royal Institute of International Affairs, Chatham House, an Independent Think Tank based in Central London, and holds a BA degree, magna cum laude, from the University of Notre Dame, and MA and C.Phil degrees from the University of California, Davis. Ian Hodges has worked in a variety of information management roles over a twenty-year career. He has designed and implemented records and information management systems at a national scale, developing parts of the digital archive at The National Archives (UK). At a corporate level he’s undertaken information management projects with The Royal Household and Her Majesty’s Treasury. Ian also has information rights expertise developing policies and procedures for Freedom of Information and Data Protection compliance and working as a Data Protection Officer. In addition to CISM, CIPP/E and CIPM certifications, Ian holds a BA degree from the University of Southern Queensland, a postgraduate diploma from Deakin University, Melbourne and an MA from Birkbeck, University of London. www.europeanbusinessreview.com 93
SUSTAINABILITY PARTNERSHIP AND TECHNOLOGY: Solving Municipal Solid Waste Management in Developing Economies by Sahan J. Fernando and Ambika Zutshi Can waste management be improved in developing economies to establish sustainability and a cleaner environment? This article discusses seven key strategies involving all stakeholders and their respective responsibilities. A common comparison on walking the streets of developed versus developing economies is witnessing garbage in the streets. This is observed in the South Asian and African regions due to weak and inadequate municipal solid waste management (MSWM) practices (Munyai & Nunu, 2020). The global MSW generation is expected to reach 3.4 billion tons per year by 2050 (a 50% increase from the current levels) and 53% of this growth is likely to come from developing economies (Tiseo, 2022). 94 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024 The collectivist national culture of most developing economies holds the key to establishing sustainable MSWM. Looking after one another, being collective, thoughtful, and striving for win-win solutions for all involved should be incorporated as part of the strategies for all stages of MSWM from collection to processing. Examples of these strategies which can be adopted by government and private businesses involved in MSWM include: PARTICIPATORY MANAGEMENT Having a participatory approach in all stages of MSWM is essential as it will encourage key stakeholders like national and local governments, waste service providers, waste or sanitation workers, waste pickers, households,
COLLABORATE WITH THE INFORMAL SECTOR In most developing economies, the informal sector – waste pickers – performs a pivotal role in the collection, separation, transportation, and recycling of MSW. Since collection and transfer of MSW is considered the costliest MSWM practice, collaborating with waste pickers will be a huge financial relief for waste service providers in developing economies which are mostly funded by taxpayers’ money. Further, the collaboration is likely to expand the existing coverage and frequency of MSW collection and recycling. Citizens should be encouraged to purchase and/or consume upcycled products thereby making their respective contributions to sustainable waste management. businesses, and waste-oriented social movements to get together in planning and implementing MSWM policies and practices. Such involvement will synchronise disparate expectations of key stakeholders and eventually deliver sustainable outcomes in MSWM. For example, lawmakers in most developing economies produce ad-hoc regulations that ban the production of sachets below a particular weight to stimulate waste reduction. Most businesses tend to bypass the restriction by manufacturing sachets at a weight that is 1 or 2 grams higher than the stipulated amount which jeopardises the purpose of the regulation. If all stakeholders got together and deliberated about the regulation and a feasible plan to execute it, then such downfalls could have been avoided to deliver sustainable outcomes in MSWM. SOURCE SEPARATION Using audio-visual media, citizens in developing economies should be educated on how to reduce their daily waste, along with the benefits of putting litter in dedicated waste collection bins, and properly segregating their waste prior to disposal. Diversion from traditional MSWM practices such as open burning, open dumping, and landfilling, to separation of MSW from the source remains key for MSW reduction in the first place. Both households and businesses – the two main waste producers – should be encouraged to engage in source separation. However, clear guidelines for the separation of MSW and dedicated storage bins for different waste types may need to be provided for the effective implementation of source separation. Further, the adoption of modern waste charge systems that consider a frequency-based, weight-based, or www.europeanbusinessreview.com 95
SUSTAINABILITY volume-based fee may encourage households and businesses to engage in source separation (Chu et al., 2019; Welivita et al., 2015). RESPONSIBLE WASTE REDUCTION AND RE-CONSUMPTION SUPPLY CHAIN PARTNERSHIP Businesses involved in MSWM processes should be encouraged to modify their supply chain for circularity, for instance by avoiding the use of single-use plastics and polythene in their production. Governments could also provide incentives and/or subsidies for businesses to modernise their equipment to enhance efficiencies during stages of MSWM. Incentives and/or subsidies send a clear message to businesses that the government as the key stakeholder in the supply chain is serious about waste reduction. Regulations remain an indispensable armour for governments, nonetheless, collaboration and working with businesses to strive for solutions to waste stages would lead to long-term maintenance of any implemented strategies as opposed to a mandatory requirement solely to tick a box or find loopholes in the latter. Following principles of circular economy ‘R’s’, citizens should be encouraged to purchase and/ or consume upcycled products thereby making their respective contributions to sustainable waste management. Responsible citizens as such will articulate responsible households and businesses to reduce the generation and management of MSW sustainably. Further, responsible re-consumption for upcycled products and Incentives and/or subsidies send by-products made out of a clear message to businesses MSW will create a market that the government as the key demand which in turn can become a revenue stream stakeholder in the supply chain for waste service providers is serious about waste reduction. and waste-preneurs. RESPONSIBLE PRODUCTION The type of raw materials used to manufacture products remains the key to reducing waste downstream. This will require businesses to switch from the short-term profit-making strategy of ‘‘make-tobreak’’ to ‘‘make-to-keep’’. This change cannot happen overnight for businesses nor without incentivisation and regulations (which are enforced) by the industry sector peak bodies and governments. This change will also require educating the end consumer and switching their mindset for instance, from buying the latest model of a product when the older model is operating as normal. ADOPTION OF SMART TECHNOLOGY In this digital era, with artificial intelligence (and its synonyms technologies) infiltrating all aspects of business decision-making, investing and using modern technologies like Wi-Fi, Li-Fi, cellular network, and drone-based collection bin systems for MSW collection and transfer will enable the waste service providers to overcome the prevailing inefficiencies and ineffectiveness. The adoption of smart technology will facilitate the timely collection of MSW and thus reduce unnecessary fuel and time 96 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
consumption which in turn will harness more sustainable outcomes in MSWM. Public-PrivatePartnerships (PPP) may be required in most developing economies with limited financial capacities to pursue the adoption of smart technology in MSWM so that the financial burden and any according risk of adopting technologies can be shared between partners. Waste-related services in developing economies are mostly funded by taxpayers’ money. The onus accordingly is on all stakeholders: from a country’s citizens, government, to businesses, to work with one another to tackle the problems of waste management and efforts to achieve sustainable development goals (SDGs) – 3 (Good Health and Well-being), 12 (Responsible Consumption and Production), and 17 (Partnerships for the Goals) – in the coming years and beyond. Each country has its unique set of waste types as a priority to be resolved. Hence, the above-mentioned strategies can act as a starting point for conversation and partnership between stakeholders. Developed economies also have the responsibility to share their strategies, lessons learnt, and technologies with their developing economies counterparts to address the global ‘‘waste’’ problem. References • Chu, Z., Wang, W., Zhou, A., & Huang, W. C. (2019). Charging for Municipal Solid Waste Disposal in Beijing. Waste Management, 94, 85–94. https://doi. org/10.1016/j.wasman.2019.05.051 • Munyai, O., & Nunu, W. N. (2020). Health Effects Associated with Proximity to Waste Collection Points in Beitbridge Municipality, Zimbabwe. Waste Management, 105, 501–510. https://doi.org/10.1016/j. wasman.2020.02.041 • Tiseo, I. (2022). Global Waste Generation - Statistics & Facts. Statista. Retrieved October 5, 2022, from https://www.statista.com/topics/4983/ waste-generation-worldwide/ • Welivita, I., Wattage, P., & Gunawardena, P. (2015). Review of Household Solid Waste Charges for Developing Countries – A Focus on Quantity-based Charge Methods. Waste Management, 46, 637–645. https://doi.org/10.1016/j.wasman.2015.08.018 ABOUT THE AUTHORS Sahan J. Fernando is a PhD candidate at Deakin Business School, Australia. He holds a Bachelor of Business Administration and a Master of Business Administration. His research interests include stakeholder collaboration, waste management, institutional complexity, and entrepreneurship. He is also a Senior Lecturer at the University of Colombo, Sri Lanka. Professor Ambika Zutshi holds a Bachelor of Environmental Sciences, Master of Environmental Management and Doctor of Philosophy. Her current research is focused on corporate social responsibility, business ethics, higher education, supply chain management, and stakeholder relationships. She has over 100 publications in journals and book chapters. Ambika is currently an Australasian Associate Editor of The European Business Review, Emerald; an editorial board member of the International Journal of Consumer Studies; and the Editorial Advisory Board of Management of Environmental Quality. www.europeanbusinessreview.com 97
DIGITAL TRANSFORMATION TRANSFORMATION? by Dr. Nina Mohadjer LL.M. It may be said that to implement change in an organisation takes a real leader. But, as Nina Mohadjer contends, to carry out a transformation calls not only for a leader but also the wholehearted commitment of all those involved – and that, while more challenging, can only be positive. A I is everywhere and almost everyone is frightened by ChatGPT. Sure, some are excited, believing that AI will eliminate boring tasks and write their emails, articles, and books. This point of view does not consider that a system, in this case AI, aka ChatGPT, is only as successful as we, the humans, make it. So the question comes up of whether it will lead to change or transformation in our business world. If you 98 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024 look for the difference between change and transformation, you come across the following definitions. Change is the exchange of one thing for another of similar type. Transformation, on the other hand, is a complete change in the appearance or character of something or someone in a way that the thing or person is improved (Cambridge Dictionary, n.d.). In the business environment, a change is automatically a top-down request and an external factor, regardless of the agreement of the people involved. A transformation, however, requires the internal agreement of the involved, making the transition from one stage to the next seem seamless (Behrend, n.d). Just like many words in the business world, these two words are used interchangeably, and unfortunately not always in the right context.
CHANGE MANAGEMENT TRANSFORMATIONAL MANAGEMENT Often, when the word “change” is used in business, Transformation needs the change, but goes one level people connect it with discomfort. While it is supposed deeper into the cultural system of an organisation. It to bring positive aspects to an already-existing situation, completely replaces one thing with another by not only service or product, it creates an unknown, combined changing the external perception, but by reinventing with unease. This does not consider the fact that change all the aspects. in business should have two important components: (a) Additionally the time component is not definite. system change and (b) personal change. One is for the Instead, a transformation aims at a continuous reinintroduction and implementation of the system, and vention to adapt to the present state, as well as the the second is the human individual aspect to ensure the needs of the future. As transformation aims to reinvent acceptance and the use of the application. a complete situation, service, or product, it involves The dynamic Lewin model of change indicates the different business units and, thus, it becomes more following three steps in order to have a successful implechallenging and more unpredictable to involve all mentation of change: (1) unfreezing the present stage; the parties (Golden-Biddle, 2007). The transforma(2) implementing the new behaviour; and (3) re-freezing tion phase requires that employees step outside their the stage (Levasseur, 2001). Within comfort zone, but this is only the entire process, however, the Transformation needs the possible if the leaders are transkey success factor is timely leadand show them where their change, but goes one level parent ership communication. Thus, it journey will lead. The employees becomes the leadership's chal- deeper into the cultural have to understand that different lenge to select which parts to system of an organisation. phases with the associated time keep, and which to eliminate. period are a necessity and will lead It completely replaces However, the second aspect has to a prosperous future. one thing with another to be considered and becomes the It becomes automatically the main success factor for the change by not only changing the leader's job to motivate, engage, management. While employees communicate, and demonstrate external perception, but by the urgency of the transformational used to obey a leader’s request for change and the leader's decision reinventing all the aspects. steps (Kotter, 1996; Kotter, 2007; of what needs to be unfrozen, implemented, and refrozen, today, employees want to be part of it. As 70 per cent of change requests fail due to employee resistance (Ewenstein et al., 2015), management needs to respond to the employees' question: “Why?” (Hiatt, 2006). As Prosci (2012) indicates, change management can only be successful if the individuals who are obliged to use the changed product or system or face the changed situation understand the reason for the change. Simultaneously the organisation has to accept that an application will never be successful if the individuals do not have that comprehension of the changed vision of the desired outcome (Ewenstein et al., 2015). www.europeanbusinessreview.com 99
DIGITAL TRANSFORMATION Golden-Biddle, 2013). At this point, it also The success of a from the top, employees as becomes the leader's task to understand individuals were able to see frustrations and subsequent criticism transformation requires the the future and, thus, started and use the feedback to re-evaluate the collective commitment of relying on their own strength direction. Furthermore, the leader has users, the understanding of in dealing with the crisis. the opportunity to demonstrate the urgency by indicating that the business the why and when, and the will not be able to remain in the present right vision for the future. CONCLUSION state, but that the transformation into the next stage is an absolute necessity. In conclusion, transformation focuses on the future. Thus, Lastly, transformation management is a repetitive when we speak about digital transformation, we indicate procedure and a never-ending circle of feedback, that the individuals using the digital devices, system, and comment, adjustment, and re-evaluation (Goldenproducts are involved. It will be a top and bottom relaBiddle, 2013). tionship. A digital “change” would indicate a top-down Why do we refer to digital transformation and not approach, but a digital device, system, or product without digital change? After analysing the different aspects the involvement of the end users would be redundant in of each, it becomes clear that a digital change would the shortest time period. not have room for survival. A system implementation To quote Tanmay Vora: “Change fixes the past and would not work without the involvement of the people transformation focuses on the future.” (Behrend, n.d.). who are supposed to use it. The success of a transformation requires the collective commitment of users, the understanding of the why and when, and the right REFERENCES vision for the future. 1. Behrend, F. (n.d.). "The difference between change and transformation", While senior executives have the power to request retrieved 11 April 2021, from https://transformation.work/blog-en/insights/ the-difference-between-change-and- transformation/ a change in almost any aspect of an organisation, a 2. Bruch, H., & Sattelberger, T. (2001). "Lufthansa’s Transformation Marathon: successful transformation requires a step-by-step Process of Liberating and Focusing Change Energy", Human Resource Management, 40(3), 249–59. https://doi.org/10.1002/hrm.1015 application with the assistance of the involved parties. 3. Cambridge Dictionary. (n.d.) "Change" and "transformation", in Dictionary The best example is Lufthansa. In 1991 the airline, close Cambridge.com, retrieved 10 April 2021, from https://dictionary.cambridge.org/ to bankruptcy, had to reinvent the business and create dictionary/english/transformation. a global aerospace partner by creating a mental change 4. Ewenstein, B., Smith, W., & Sologar, A. (2015). "Changing change management", McKinsey Digital in the employees. While employees were excluded 5. Golden-Biddle, K. (2013). "How to Change an Organization Without Blowing It from the cost management and cost reduction, the Up", MIT Sloan Management Review, 54(2), 35-41. remainder had to be involved in a trusting relationship 6. Hiatt, J. M. (2006). ADKAR:A model for change in business, government and our community: How to implement successful change in our personal lives and with the airline from strategic and rental arrogance to professional careers. Loveland, CO: Prosci Research devolution and simplification and finally reintegration 7. Kotter, J. P. (1996). Leading change, Cambridge, MA: Harvard Business Press. (Bruch, 2001). The airline was able to engage everyone 8. Kotter, J. P. (2007). "Leading Change: Why Transformation Efforts Fail", Harvard Business Review, 85(1), 96–103. not only by changing the mental state regarding the 9. Levasseur, R. E. (2001). "People Skills: Change Management Tools – Lewin’s transformation, but had a simultaneous top-down, Change Model", Interfaces, 31(4), 71, https://doi.org/10.1287/inte.31.5.71.9674 bottom-up approach within four weeks. By putting 10. Prosci, X. Y. (2012). Best Practices in Change Management, Loveland, Colorado: leadership into action and not just requesting a change Prosci Learning Centre Publications. ABOUT THE AUTHOR Dr. Nina Mohadjer, LL.M. has worked in various jurisdictions where her cross-border experience as well as her multilingual capabilities have helped her with managing reviews. She is a member of the Global Advisory Board of the 2030 UN Agenda as an Honorary Advisor and Thematic Expert for Sustainable Development Goal 5 (Gender Equality), and a co-founder of Women in eDiscovery Germany. 100 THE EUROPEAN BUSINESS REVIEW MARCH - APRIL 2024
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