Thought Leader Interview: Roger Martin

Rotman Management - FALL 2013

The man responsible for introducing the world to ‘a new way to think’ and nearly tripling the size of the Rotman MBA program describes how Integrative Thinking was born and the various ways in which capitalism is broken.

 by Karen Christensen

In 1997, youwere enjoying a very successful career as a senior

executive with Monitor Company. What led you to change your

career course so dramatically?

I have always believed that successful business people who care

about society should, at some point, turn themselves to public service.

I always figured I would do this when I was past the age

of 50 — not 41! But former University of Toronto President

Rob Prichard, who I had met through a consulting assignment,

convinced me that this was the time to do it, and that this was a

place where I could really contribute to my country. He made me

believe that it was possible to take the University’s business

school and make it something that the Canadian business community,

the city of Toronto and the University itself could be extremely

proud of.

Describe how the concept of Integrative Thinking took shape.

Back in the early days of Monitor, we called ourselves ‘Young

Punks Consulting’, because we were all in our 20s and 30s, and

we were going up against big, established firms like McKinsey

&Company and Boston Consulting Group.

I was always curious as to why anyone would actually hire

us. After a couple of years, I came to the conclusion that the only

time we were hired was when the problem at hand did not fit

easily into the context of some definable kind of practice. Clients

appeared to come to us for problems that were very messy,

where there was no existing model to follow. For example, in

the early days of cellular, we were hired by a Korean company

to look into ‘how cellular will develop in Korea’. Well, who could

say? We had to sort of 'make it up' from first principles.

This got me thinking: what was it that led people to believe

We would be able to tackle such problems? I had this vague notion

that it was something about ‘building new models from scratch’

—models that crossed traditional boundaries. The problems we

worked on were not ‘marketing problems’ or ‘manufacturing

problems’ — they lay somewhere in between the silos. I started

to believe that there was a ‘there’ there.

This was around the same time I figured out that business

schools were not producing anybody who was skilled at doing

this ‘thing’ — whatever it was. At the time, I was overseeing

training and development at Monitor. In 1991, I merged the

training programs for our undergraduate consultants from small

liberal arts colleges like Amherst and Swarthmore, and the MBAs

we hired out of Harvard, Stanford and Wharton. I put them all

into the same program, because there was nothing at all — zero

— that the MBAs had learned that was helpful for doing what we

were doing.

THE INTEGRATIVE THINKER’S STANCE             

1. Existing models do not represent reality; they are our constructions.      

2. Opposing models are to be leveraged, not feared.             

3. Existing models are not perfect; better models exist that are not yet seen.          

4. I am capable of finding a better model.      

5. I can wade into and get through the necessary complexity.           

6. I will give myself the time to create a better model.       

That’s when it dawned on me: business education was not

producing people who could tackle messy problems. I said to

my colleagues, “Nobody else is training this thinking skill, and

I really think it’s the ‘secret sauce’ — the missing piece. We have

to start developing this capability!”

I spent most of the 1990s noodling around on what exactly

this skill was. I noticed that some of the CEOs we worked with

seemed to have enough of a capacity for it that they knew they

could hire us to help them out; so I started watching these people

closely, taking note of their thinking processes. That’s what got

me believing that there was an actual form of thinking — which I

came to call Integrative Thinking — that I didn’t understand entirely,

but that existed and was very powerful.

You have said that Integrative Thinking is more than an advantage

in the modern world: it might be a necessity. Why is this?

The fact is, if you’re going to be special in today’s world,

you have to go to the next higher-order level of thought from

the people around you. Business has become so efficient that

all of the basic advantages have been competed away, and the

only way to gain an advantage is by solving some trade-off

that other people accept. The standard operating procedure is

to say, ‘We can’t have both flexibility and speed, so we have to

choose one or the other’; but nowadays, you have to figure out

how to do both.

During your tenure, ‘Design Thinking’ emerged as a key aspect

of ‘a new way to think’ about leadership. Do you consider

it to be a branch of Integrative Thinking, or a separate skill?

I don’t think ‘branch’ is the right term, but it is under the umbrella

of Integrative Thinking. When I finally came to the conclusion

of what Integrative Thinking really is — which is, instead

of accepting the choices before you, create a new model

that contains elements of each, but is superior to both — I then

honed in like a laser on the question of, ‘What exactly is that

creative act that gets you to the new model? How does that creative

act happen?’

That’s what got me so interested in design. I realized that

there are all these people out there creating new models on a

regular basis. They’re trained to create, say, a logo from scratch;

they don’t just pick amongst all the logos that already exist. Their

job is to create something new. At the same time, most designers

would say yes, everything we create is new, but it’s not entirely

new — it contains echoes of other things that came before it. For

example, Apple’s brightly-coloured iMac computers were manufactured

in exactly the same tones as the Imperial cameras from

the 1960s; it was an homage to those cameras.

So my ‘deep dive’ into Design Thinking was really a response

to peeling the ‘Integrative Thinking onion’ one more

layer. I couldn’t very well say to people, ‘Go away and come up

with a creative solution that is superior to what currently exists’

without thinking through, ‘what are the basic operating

principles of creativity?’ By borrowing design methodologies,

I was able to say, ‘Here is a way to think about getting to that

creative answer’.

You have said that the smartest organizations embrace both

reliability and validity. Please explain.

Validity and reliability anchor down opposite ends of a spectrum

that defines how solutions are framed. Individuals rarely have

a balanced perspective, but rather a pre-disposition towards one

or the other.

People with a reliability orientation seek to produce consistent,

predictable outcomes from objective data — for instance,

predicting a customer’s future purchases by using data collected

in a CRM system. To produce the highest reliability possible, a

system must stick to quantitative, objective data and use of the

data that does not involve judgment, because blending subjectivity

and judgment leads to inconsistency. So considering ‘the

mood of the customer’ or ‘their attitude towards new products’

would be seen as an abomination in a reliable system.

Validity-oriented people, on the other hand, seek to produce

outcomes that meet the desired objective, even if the system

employed can’t produce a consistent, predictable outcome.

Pursuit of more validity means adding ‘squishy’ variables and

applying judgment or ‘gut feel’. It makes me think of the movie

Pirates of the Caribbean, where Keira Knightley says to Geoffrey

Rush, ‘You can’t do that! Pirates have rules!’ And he says,

‘I don’t think of them as rules — more like guidelines’. That’s

what a validity-oriented person would say.

I used to be more disparaging of reliability-oriented people,

until I realized that they are the yin to my yang: I need enough

of them around to make sure the train doesn’t go careening off

the rails while I dream up the way things could be better.

You have said that traditional financial planning and reward

systems must be modified to create a balance between reliability

and validity. How can this be achieved?

Financial planning is basically an exercise in reliability. It says,

‘Here’s what we’re going to do: we’re going to sell this much

within our budget and we’re going to have this much in costs’. My

view is, as much as people like to plan for revenues, it’s not really

possible. At the start of the year, you might decide you want to

sell 5,000,000 widgets, but somehow all these people who are

free agents out in the world — customers — can decide, of their

own volition, whether or not to buy them. You can’t force them,

and as a result, it’s an entirely speculative act to say, “Our revenues

will be X.” You don’t control revenue. You know who controls

it? Your customers.

This is where validity triumphs over reliability, because

how can you make certain that you get those desired revenues?

By making truly great widgets! Not just good widgets, but great

widgets that lead customers to say, ‘I really have to have one

of those!’

This is why I have always viewed revenue planning as an

almost useless activity. However, you can have some control on

the cost side, and this is why I would argue that you have to think

about the cost side and the revenue side in very different terms.

With the revenue side, you have to ask validity-oriented questions:

do we have an offering that is highly compelling? And on

the cost side, you can be more reliability-oriented and ask: how

should we plan to produce these amazing widgets?

I would also say that lots of reward systems are oriented

towards reliability: ‘if you achieve this particular number, you

will get a big reward’. What this does is, it encourages people to

mess around with the books and other things they shouldn’t be

messing around with to achieve a reliable outcome — rather than

focusing on achieving an outcome that is great for the firm, for

your customers and for the long term.

Walk into meeting rooms around the world and you will find

people defending their ‘model’ of the way they see things;

what should they be doing instead?

People do this all the time, and it’s not because they’re bad people:

it’s because we all need to have a certain level of stability

in our world. If there aren’t a certain number of things we can

count on and use as anchors, life becomes kind of weird and Kafkaesque.

That’s why people have this desire to hang on to things

and say, “Well, at least this, I know.” There is so much randomness

to life that people long for a degree of certainty.

In the world of business, people want to have a sense that

the model they hold for what their company does — how it wins,

how it treats customers, who its competitors are — is correct.

They want to feel like, ‘I get this’, and as a result, they don’t love

the idea of asking themselves, ‘What if all of this is wrong?’ The

problem is, when you love your current model too much, you are

likely to ignore warning signs that indicate it might not be as valid

as it was a year or two ago — because the world has changed, and

consumers have changed.

Rather than defending their models, I think what people

should do is say, ‘Until such time as I have a better model, I am

committed to this model; but I recognize that it might be deeply

flawed.’ Of course, there’s an element of cognitive dissonance in

that, because people think, ‘If the model is deeply flawed, why

the heck am I using it?’ But if you spend all your time fretting

about doing something else, you’ll never commit to anything. So

you have to take this stance, and constantly take in feedback and

make modifications here and there, so that your model sort of

‘bobs and weaves’ over time.

In recent years you have questioned the very tenets of capitalism.

In Fixing the Game you laid out five steps that business

needs to take (see page 14). Are you seeing any progress

in these areas?

I do see some; but the fact is, it has taken us 25 or 30 years to totally

screw the system up, and it will probably take a bunch more

years to fix it. To use an analogy, it’s like you’ve got this really nice

sweater on, but you see a string sticking out, and you pull on it,

and it just keeps unravelling until there is nothing left — just a

bunch of yarn on the floor. That’s what I’m saying in Fixing the

Game: the more we keep pulling on the ‘thread’, the more we have

to question the very fundamentals of the system; it all unravels.

 

 

FIXING THE GAME: FIVE STEPS    

1. Shift the focus back to the customer and away      

from shareholder value – back to the real market and           

away from the expectations market.  

2. Restore authenticity to the lives of our executives            

by rethinking executive compensation. Stock-based             

compensation creates a powerful incentive to keep  

expectations rising, resulting in executives that manage       

expectations rather than real performance.    

3. Address board governance. If executives are ‘agents’,      

creating agency costs, how can another group of agents –    

the board – discipline the first group and reduce       

agency costs?  

4. Regulate and manage expectations-market players           

more effectively, most notably hedge funds, which create    

no value for society. They have huge incentives to promote             

volatility in the expectations market, which is dangerous     

for investors but lucrative for them.  

5. Take on a more expansive view of the role of for-profit  

companies in society, which entails strengthening the civil              

foundation – going beyond laws and regulations to make     

the world a better place.          

From Fixing the Game: Bubbles, Crashes and What Capitalism      

Can Learn from the NFL, page 37 (Harvard Business Review          

Press, 2011).  

That’s why so many people want to avert their eyes. They

don’t say to me, ‘Roger, you’re wrong; your ideas have no merit’.

What they say is, ‘I really don’t want to think about this. Can’t we

just use longer holding periods instead of stock options and be

done with it? Will you just stop talking if we do that?’

People are sort of tweaking around the edges of the current

system because it’s too painful to contemplate that maybe — just

maybe — I’m right, and we need a whole new model. Maybe

hedge funds are really bad for society, and we’ve allowed them to

become the most powerful and profitable businesses out there.

Of course, in the early days of global exploration, the most profitable

business was piracy: pirates sailed around the world stealing

all the gold. It is conceivable that we have allowed something

that is truly terrible for the world to take shape, and it’s hard for

people to contemplate that.

You also believe leaders need to take on a more expansive

view of the role of for-profit companies in society. Are there

current examples that give you hope?

One that springs to mind immediately is Unilever and Paul

Polman. I worked with him in my Monitor days when he was

running the laundry category at Procter & Gamble. As CEO,

Paul has stopped Unilever from publishing full financial results

every quarter, and he refuses to offer earnings guidance to equity

analysts. He has said things like, “If you don’t like it, please

stop investing in my company, because I only want shareholders

who care about the long term.” This is a pretty aggressive stance,

when you think about it, and I applaud him.

Another one of my favourite business stories of all time is

the letters that Herb Kelleher used to write to Southwest Airlines

customers who complained about not having first class

cabins and swanky lounges. He would say to them, “I hear what

you’re saying, and I really think you should fly with another airline.

Thank you, Herb Kelleher.”

I think the bête noire of all of this is the difference between

maximizing shareholder value and earning shareholders a fair

return. The rigid traditionalists characterize me as not caring

about shareholders, but , I firmly believe shareholders deserve a

fair return. Today we have all these financial methodologies for

determining what exactly that is — like the ‘risk adjusted required

rate of return on equity’. These equations spit out a number and,

if you don’t earn more than that, you are not compensating your

shareholders for risk. However, for some reason, we have gone

from ‘earn above this base number’ to ‘earn as much as humanly

possible’. Says who?

What this does in the decision-making world is, it shifts

the ‘objective function’ of the corporation from ‘make more

than this number’ to: ‘maximize this number’. Of course, when

you do this, you can’t maximize anything else. Everything else

has to be relegated to minima: consumers can’t be any less

happy than this, the government can’t be any less happy with

us than this, we can’t mess up the environment any more than

this — you set all these minima. It all becomes about meeting

one objective function, subject to a bunch of other minimum

constraints.

What a waste of the objective function! Instead, why not

just agree that your shareholders deserve ‘at least an x per

cent return’? If you’re not earning more than that, you aren’t

doing your job; but as long as you achieve that, you can do other

things, too. Then the question becomes, what should you be trying

to maximize? And in my view, the world would be a much

better place (and organizations would be better off in the long

term) if they had as their objective function to ratchet up the

civil foundation — the laws, conventions and customs relating to

behaviour with respect to the environment and society in general.

Leaders should pick something that they have the corporate

capability to do really well. If you’re Paul Polman, that means

creating a sustainable supply chain. If you buy all this chocolate,

or all this palm oil, or whatever, make the world a better place

by having fair trade principles apply.

When you do this, do shareholders lose out? Not at all.

Because — and this is the most important insight from Fixing

the Game — by saying ‘Our goal is to maximize shareholder

value’, you actually guarantee that you don’t. But if you say, ‘I

want to earn a fair return for shareholders and make the world

a better place’, guess what’s going to happen? Shareholders will

do better. This is really an Integrative Thinking moment, because

at first there appears to be a fundamental trade-off involved;

but there isn’t.

In your view, how important is it for today’s leaders to think

about the concept of legacy?

I think of it in terms of some fundamental questions: why are

you on this planet? What is your purpose? If you think your purpose

is ‘to make asmuch money as possible’, it will not be important

to you to leave a legacy. But some people say to themselves,

‘My job is to leave this world a better place in some small way’ in

which case, legacy is important; and I guess I put myself in this

latter category. But it’s a very personal choice.

Looking back on your tenure, what are you most proud of?

Without question, it’s the people that I have helped to become

the best they can be. The people I have worked with closely have

achieved things that I’m pretty sure they never dreamed of, and

that makes me insanely happy. At the core, that’s what I see myself

as: a developer of people. When my head hits the pillow at

night, I can say to myself, ‘I managed to set the context that enabled

these people to do great things’. I didn’t make these people

great—you can’t make anybody great; but you can enable people

and set a context for greatness.

What’s next for you?

I’mreally excited aboutmy project for the next five years, which

is to focus on ‘the future of democratic capitalism’ at theMartin

Prosperity Institute here at the Rotman School. I think of it as

a time-bound project that will have, as its output, concrete ways

to tweak democratic capitalism to make it more sustainable,

so that people can regain their confidence in it. I’m also looking

forward to doing a bit more consulting to senior executives,

because I feel like I can help them figure out how to be beacons

for other companies. And there is great synergy there, because

doing the latter will help me understand how democratic capitalism

works best.

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