Hbr.org september 2014 reprint r1409 cspotlight on managi

HBR.ORG SEPTEMBER 2014
REPRINT R1409C
SPOTLIGHT ON MANAGING ACROSS BORDERS
Contextual
Intelligence
Despite 30 years of experimentation and study,
we are only starting to understand that some
managerial knowledge is universal and some is
specific to a market or a culture. by Tarun Khanna
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TGM 545 Global Leadership/Peterson (MGM F20) taught by
SUZANNE PETERSON, Thunderbird School of Global
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ARTWORK Tomás Saraceno
Poetic Cosmos of the Breath
2013, Hong Kong, China
Spotlight

Tarun Khanna is the Jorge
Paulo Lemann Professor at
Harvard Business School
and the director of Harvard
University’s South Asia
Institute.
Contextual
Intelligence
Despite 30 years of experimentation
and study, we are only starting to
understand that some managerial
knowledge is universal and some is
specific to a market or a culture.
by Tarun Khanna
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September 2014 Harvard Business Review 3
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W
for students and managers to study practices abroad.
At Harvard Business School, where I teach, interna-
tional research is essential to our mission, and we
now send first-year MBA students out into the world
to briefly experience the challenges local businesses
face. Nonetheless, I continually find that people
overestimate what they know about how to succeed
in other countries.
Context matters. This is not news to social scien-
tists, or indeed to my colleagues who study leader-
ship, but we have paid it insufficient attention in the
field of management. There is nothing wrong with
the analytic tools we have at our disposal, but their
application requires careful thought. It requires
contextual intelligence: the ability to understand the
limits of our knowledge and to adapt that knowl-
edge to an environment different from the one in
which it was developed. (The term is not new; my
HBS colleagues Anthony Mayo and Nitin Nohria
have recently used it in the pages of HBR, and
academic references date from the mid-1980s.)
Until we acquire and apply this kind of intelligence,
the failure rate for cross-border businesses will
remain high, our ability to learn from experiments
unfolding across the globe will remain limited, and

the promise of healthy growth worldwide will
remain unfulfilled.
Whether as managers or as academics, we
study business to extract learning, formalize it,
and apply it to puzzles we wish to solve. That’s
why we go to business school, why we write
case studies and develop analytic frameworks,
why we read HBR.
I believe deeply in the importance of that work: I’ve
spent my career studying business as it is practiced
in varied global settings.
But I’ve come to a conclusion that may surprise
you: Trying to apply management practices uni-
formly across geographies is a fool’s errand, much
as we’d like to think otherwise. To be sure, plenty
of aspirations enjoy wide if not universal accep-
tance. Most entrepreneurs and managers agree, for
example, that creating value and motivating talent
are at the heart of what they do. But once you drill
below the homilies, differences quickly emerge over
what constitutes value and how to motivate people.
That’s because conditions differ enormously from
place to place, in ways that aren’t easy to codify—
conditions not just of economic development but
of institutional character, physical geography, edu-
cational norms, language, and culture. Students of
management once thought that best manufacturing
practices (to take one example) were sufficiently
established that processes merely needed tweaking
to fit local conditions. More often, it turns out, they
need radical reworking—not because the technology
is wrong but because everything surrounding the
technology changes how it will work.

It’s not that we’re ignoring the problem—not at
all. Business schools increasingly offer opportunities
4 Harvard Business Review September 2014
Why Knowledge Often
Doesn’t Cross Borders
I started thinking about contextual intelligence
some years ago, when my colleague Jan Rivkin and
I studied how profitable different industries were in
various countries. To say that what we found sur-
prised us would be an understatement.
First some background. Into the 1990s, empiri-
cal economists studying the economies of the OECD
member countries, whose data were readily avail-
able, concluded that similar industries tended to
have similar structures and deliver similar economic
returns. This led to a widespread assumption that a
given industry would be just as profitable or unprofit-
able in any country—and that industry analysis, one
of the most rigorous tools we have, would support
that assumption. But when data from multiple non-
OECD countries became available, we could not rep-
licate those results. Knowing something about the

performance of a particular industry in one country
was no guarantee that we could predict its structure
or returns elsewhere. (See “How Well Correlated Is
Industry Profitability Across Countries?”)
To see why performance might vary so much,
consider the cement industry. The technology for
manufacturing cement is similar everywhere, but
individual cement plants are located within specific
contexts that vary widely. Corrupt materials suppli-
ers may adulterate the mixtures that go into cement.
Unions may support or impede plant operations.
Finished cement may be sold to construction firms
in bulk or to individuals in bags. Such variables often
outweigh the unifying effect of a common technol-
ogy. A cement plant manager moving to an unfamil-
iar setting would indeed have a leg up on someone
who had never managed such a plant before, but not
by nearly as much as she might think.
Rather than assume that technical knowledge
will trump local conditions, we should expect in-
stitutional context to significantly affect industry
structure. Each of Michael Porter’s five forces (which
together describe industry structure) is influenced
by local institutions, such as those that enforce con-
tracts and provide capital. In a country where only
established players have access to these, incumbent
cement producers can prevent the emergence of
new rivals. That consolidation of power means they
can keep prices high. To use the language of busi-
ness strategists, the logic of how value is created and
divided among industry participants is unchanged,
but its application is constrained by contextual vari-
ables. The institutional context affects the cement

maker’s profitability far more than how good she is
at producing cement.
Much of my academic work has focused on insti-
tutional context. With my colleague Krishna Palepu,
I’ve explored the idea that developing countries
typically lack the “specialized intermediaries” that
allow new enterprises to reach a broad market:
courts that adjudicate disputes, venture capitalists
that lend money, accreditation agencies that cor-
roborate claims, and so on. Over time these voids are
filled by entrepreneurs and better-run governments,
and eventually the country “emerges” with a formal
economy that functions reasonably well. Our frame-
work has proved useful to businesses and scholars
trying to understand a particular country’s institu-
tional context and how to build a business within it.
(Our book Winning in Emerging Markets: A Road Map
for Strategy and Execution looks at institutional voids
in more depth.)
Contextual intelligence requires moving far be-
yond an analysis of institutional context into areas
as diverse as intellectual property rights, aesthetic
preferences, attitudes toward power, beliefs about
the free market, and even religious differences. The
most difficult work is often the “soft” work of adjust-
ing mental models, learning to differentiate between
Idea in Brief
THE FINDING
Most universal truths
about management play
out differently in different
contexts: Best practices
don’t necessarily travel.

THE IMPLICATIONS
Global companies won’t
succeed in unfamiliar
markets unless they
adapt—or even rebuild—
their operating models.
THE SOLUTION
The first steps in that
adaptation are the toughest:
jettisoning assumptions
about what will work and
then experimenting to find
out what actually does work.
http://hbr.org
universal principles and their specific embodiments,
and being open to new ideas.
Even Good Companies
Have a Really Hard Time

Businesses that have achieved success in one mar-
ket invariably have tightly woven operating models
and highly disciplined cultures that fit that market’s
context—so they sometimes find it more difficult
to pull those things apart and rebuild than other
companies do. Shifting into a new context may be
straightforward if just one or two parts of the model
need to change. But generally the adaptations re-
quired are far more complicated than that. In ad-
dition, executives rarely understand precisely why
their operating model works, which makes reverse
engineering all the more difficult, even for highly
successful companies.
Metro Cash & Carry, a big-box wholesaler that
provides urban businesses with fresh foods and dry
goods, illustrates this point well. Metro successfully
expanded from Germany to other parts of Western
Europe and then to Eastern Europe and Russia,
learning from each experience. So when the com-
pany entered the Chinese market, Metro executives
knew they’d have to make adjustments but assumed
that their basic recipe for success, tempered by what
they’d learned, was transferable. They did indeed
get a lot right, partly by developing effective partner-
ships and partly by helping provincial governments
experiment with advanced food-safety techniques.
Nonetheless, the company ran into multiple chal-
lenges it had not fully anticipated. In any given loca-
tion in China, learning how to work with the constel-
lation of political and economic players took months.
Lessons learned in one place often didn’t transfer to
other places. Local competition was tougher overall
than it had been in Eastern Europe and Russia (which

Metro entered in an era of generalized scarcity, in the
years after the Berlin Wall came down). Metro man-
agers, who were used to large, formal competitors,
experienced the multiplicity of agile rivals in the in-
formal economy as almost a “fog of war.” Other chal-
lenges resulted from local tastes: Many consumers
preferred to buy live or freshly butchered animals
from wet markets, for example. As a result of these
difficulties, the company didn’t break even in China
until 2008—14 years after entering the market.
India turned out to be even tougher, although
Metro had good reasons for optimism: It saw a way
to cut out middlemen and thereby lower prices. It of-
fered high-quality, standardized products in an en-
vironment with endemic food-quality and hygiene
problems and staggering waste. Its wide assortment
of goods seemed sure to appeal to its target custom-
ers—mom-and-pop retailers, which are so tightly
packed together that India has the highest retailer
density per capita in the world.
Still, Metro confronted obstacles different
from those it had encountered in other markets. It
had trouble getting around an anachronistic law
that required farmers to sell all produce through
government- run auctions. Traders and retailers
that Metro thought would benefit from its presence
put up raucous resistance. And for the first time in
the company’s experience, no one seemed to be in
charge: Metro couldn’t find a single-point political
authority willing to advocate for it. In addition, its
Indian customers were used to informal sources
of credit and found it inconvenient to carry away
wholesale quantities of goods and produce, owing
to India’s dilapidated infrastructure.

Metro’s managers took a long time to understand
that their model had to change, but they never really
contemplated giving up. Just because a company is
“global,” however, doesn’t mean it should do busi-
ness in every country. Sometimes the amount of
adaptation needed is so great that its core operating
model would fall apart. Though Metro ultimately
created more value in India than elsewhere, I believe,
it did so only after very slow experimentation. This
was partly because whatever adaptations the local
team proposed and headquarters approved had to
unfold in the context of an undisciplined political
process and constant shrill criticism from unfamiliar
media, often in the vernacular. Also, organizational
rigidity had inevitably set in, stemming from indi-
vidual managers’ overconfidence in the formula for
Though Metro ultimately
created more value in
India than elsewhere, it
did so only after very slow
experimentation.

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Argentina
Austria
Belgium
Brazil
Canada
Chile
China
Colombia
Denmark
Finland
France
Germany

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Hong Kong
Hungary
India
Indonesia
Ireland
Israel
Italy
Japan
Malaysia
Mexico
Netherlands
New Zealand
Norway
Pakistan
Peru
Philippines
Poland
Portugal
S. Korea
Singapore
South Africa
Spain
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Taiwan
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Until recently, many strategists
believed that patterns of
profitability in developed countries
would show up in less developed
economies as well. They couldn’t
know for sure, because empirical
research on business strategy
had focused on a small handful of
advanced economies. But it was
often assumed that if an industry
was highly profitable in, say,
Germany, it would also be highly
profitable in Thailand or Brazil.
In 2001, as good data on
emerging markets started to
become available, we checked
that assumption by computing the
average profitability of individual

industries in each of 43 countries
and checking correlation between
the countries in every pairing. (For
a copy of our working paper, write
to [email protected])
If it were indeed true that
profitability is predictable from
country to country, most of this
chart would be aqua, reflecting
significant positive correlation
(meaning that industries profitable
in one country are likely to be
so in others, to a degree beyond
the relationship prone to arise by
chance). Such correlation, however,
exists in only about 11% of cases,
and it’s often between similar
nations—the United States and
Canada, for example.
Instead the chart is dominated
by magenta: There’s no significant
correlation of industry profitability
between most of these country
pairs. The fact that an industry is
highly profitable in Sweden tells us
nothing about whether it will be
profitable in Singapore.
The implications are alarming.
Companies enter new markets
all the time relying on what they
think they know about how their
industry works and the technical

competencies that have allowed
them to succeed in their home
markets. But given the results of
our study, it’s not much of a stretch
to say that what you learn in your
home market about a particular
industry may have very little to do
with what you’ll need to succeed in
a new market.
How Well Correlated Is Industry Profitability Across Countries?
by Tarun Khanna and Jan W. Rivkin
Positive correlation
Significant at the 10% level
Insignificant correlation
Negative correlation
Significant at the 10% level
http://hbr.org

past successes. Metro’s managers are first-rate, but
contextual intelligence can’t be rushed or mandated
into existence.
The difficulties I describe aren’t peculiar to
developed- country companies trying to enter
emerging markets. Metro’s tribulations in India, for
example, resemble those that organized commerce
faced with the Poujadism of 1950s France, when
mom-and-pop businesses were up in arms against
the establishment. Germany encountered similar
forces in that period. And developing-economy
enterprises trying to move into first-world mar-
kets have to change their operating models, too.
Whereas at home they may have succeeded by man-
aging around—or taking advantage of—conditions
such as a cash-only society, intrusive or corrupt gov-
ernment officials, and a shortage of talent, they face
different challenges in developed markets.
Narayana Health, founded in Bangalore, is an
example. Its famous cardiac-surgery group per-
forms 12% of the heart operations done in India
each year. CABG (coronary artery bypass graft)
surgery costs the patient as little as $2,000, com-
pared with $60,000 to $100,000 in the United
States, yet Narayana’s mortality and infection rates
are the same as those of its U.S. counterparts. Still,
it’s unclear whether the group’s operating model
will transfer easily to the Cayman Islands, where
Narayana opened a facility in February 2014. Why?
Because it achieved success under specifically
Indian conditions: A huge number of patients need
the surgery, which means that surgeons quickly ac-
quire expertise and thereby reduce costs. Having to
overcome the logistical, financial, and behavioral

barriers that kept poor patients away taught valu-
able lessons. Nurses double as respiratory and oc-
cupational therapists, and family members are now
enlisted to help provide postoperative care. In addi -
tion, construction materials are inexpensive and the
loose regulatory culture allows for experimentation.
In the Caymans, Narayana will inevitably have to
pull apart this operating model, and a coherent re-
placement will emerge only gradually.
Some early signs are encouraging. The Caymans’
material and labor costs are higher than India’s, but
construction practices honed at home have already
allowed Narayana to build a state-of-the-art hospital
in the islands for much less than it would have cost
in most Western locations. The health group has
another big thing going for it: Its culture has been
one of experimentation from the beginning. The
Caymans’ very different regulatory systems will limit
innovation in health care delivery methods, but an
ingrained habit of questioning assumptions, trying
out new approaches, and adjusting them in real time
should serve Narayana well as it adapts.
How Can We Get Better at This?
Some of the ways to acquire contextual intelligence
are obvious, though they’re neither easy nor cheap:
hiring people who are “fluent” in more than one cul-
ture; partnering with local companies; developing
local talent; doing more fieldwork and more cross-
disciplinary work in business schools and requir-
ing students to do the same; and taking the time to
understand the nature and range of local variations.
(See the sidebar “Tuning In to Cultural Differences.”)
Exploring all those approaches in detail is beyond
the scope of this article, but I’d like to highlight a few

perhaps less obvious points.
The “hard” stuff is easy (believe it or not).
Once you accept up front that you know less than
you think you do, and that your operating model
will have to change significantly in new markets,
researching a country’s institutional context isn’t
difficult—in fact, general information is usually
available. It can be helpful to work from a road map
or a checklist, which will help you recognize and
then categorize unfamiliar phenomena. (Winning in
Emerging Markets provides a tool for spotting institu-
tional voids along with checklists on product, labor,
and capital markets in emerging economies.) The
institutional context should influence not just your
industry analysis but any other strategic tools you
typically use: break-even analysis, identification of
key corporate resources, and so on.
One big caveat: Developing economies often
lack the data sources that managers in OECD
countries take for granted.
One big caveat: Developing economies often

lack the data sources—credit registries, market re-
search firms, financial analysts—that managers in
OECD countries take for granted. This absence cre-
ates an institutional void in developing economies
that companies must fill through investments of
their own. HSBC partnered with a local retailer to
create Poland’s first credit registry, for example, and
Citibank did something similar in India as part of its
effort to introduce credit cards there.
The soft stuff is hard. We tend to have very
persistent mental models, particularly about emerg-
ing markets, that are not rooted in the facts and that
get in the way of progress. One of these is the view
that all countries will eventually converge on a free-
market economy. But considerable evidence sug-
gests that state-managed markets like China’s will
be with us for the foreseeable future. I’ve written
elsewhere that the Chinese government is the entre-
preneur in that economy; to automatically equate
governmental ubiquity with inefficiency, as we often
do in the West, is wrong.
A second persistent mind-set is the impulse to
rely on simple explanations for complex phenom-
ena. Metro’s managers were slow to reconceptualize
their operating model in part because they found
it easier to address one factor at a time and hope to
be done with it. (I see this problem in my classes all
the time—sophisticated executives read a case and
home in on one particular difficulty, whereas in real-
ity a constellation of intersecting issues must be ad-
dressed.) Often the cognitive biases that Kahneman
and Tversky first wrote about—such as anchoring
and overconfidence—reinforce this tendency.

Tuning In to Cultural Differences
To succeed in India, Metro
Cash & Carry increased the
visual density of its stores’
previously uncluttered aisles
so that they would more
closely resemble crowded
Indian street markets. In
contrast, eBay stuck with its
U.S. playbook in China, allowing
Taobao to win the Chinese
market in less than three
years; the upstart succeeded
in part by capitalizing on local
responsiveness to colorful,
active websites.
Computer scientists and
cognitive psychologists have
demonstrated that different
cultural groups have differing
tastes in how information and
products are represented. (An
interactive at labinthewild.org
allows you to compare your
engagement style with that of
diverse other respondents.)
Tastes also differ in luxury
services; for instance, hotel
room décor that appeals to one
set of customers may alienate
another. Artwork evoking

England in its imperial age may
be pleasing in York but irritating
in Mumbai. Chinese executives
accustomed to celebratory
red-and-gold furnishings may
perceive modernist minimalism
in their Berlin or New York
hotel rooms as cold and
hostile. Religious imagery is
similarly controversial: The
Hindu goddess of wealth is
often used to connect products
to prosperity in India, whereas
companies in the West rarely
use religious iconography to
market their wares.
Advertising agencies
must work with different
manifestations of universal
values all the time. Bartle
Bogle Hegarty’s campaign
for Johnnie Walker scotch
whisky, for example, sought
to link the product to the
notion of a continual quest
for self-improvement, which
research had shown was the
most powerful indicator of
eventual male success. The
iconic brand emblem—a
striding man—embodied the
idea that one should “keep
walking.” But what worked in
the West—ads that focused

on individual progress—failed
in China and Thailand, where
customers responded instead
to evocations of camaraderie,
shared commitment, and
collective advancement. (One
of the creative leads of the
campaign speculated with me
recently that the …
Find one person who agrees with your choice of theory and one
person who disagrees. (that is, chose the opposite theory from
you). Respond in a way that furthers the conversation with each
person. What new idea or thought or question or challenge can
you add to deepen their thinking?
1) James Brennan,
I feel Vygotsky's cognitive theory of development is more
accurate than Piaget because of how people can develop.
Vygotsky's theory states that cognitive abilities are socially
guided and constructed. Culture plays a big part in helping
children develop specific abilities such as learning, attention
and problem solving. I feel that these abilities cannot be
normally developed by children themselves, but environmental
and societal factors help the children through their
development. Piaget's stages kind of make sense to me, but it
seems what it was missing was Vygotsky's theory of how
cognitive abilities are socially guided and constructed. A real
world implication of this I would say is that the way you see
mothers talking to their baby's even though they cannot respond
back in coherent sentences to understand. I think that when
mothers do this, it helps the child develop an understanding
early on of when people are talking to them, even though they
communicate properly.
2)Claudia,

Out of these two cognitive theories I think that Piaget’s is more
accurate for cognitive development. I believe this because the
four stages that are involved in his theory are pretty much right
on track with the age and skill. Object permanence is a good
example for the sensorimotor stage. This theory is different
from Vygotsky’s theory because Piaget’s stages are universal
and say that each kid will hit these stages exactly the same.
Vygotsky’s is based more on the experiences that kids go
through that affect their development. I agree a lot with the
stage progression of Piaget because it follows along with
physical and cognitive development. Schemas are involved with
Piaget’s theory which is a kid learning something new like a
pencil and then calling everything that looks like one like a pen
or marker a pencil because it has similar qualities.
TB0147
Copyright © 2003 Thunderbird, The American Graduate School
of International Management. All rights reserved.
This case was prepared by Professor John P. Millikin and Dean
Fu, Research Assistant, with assistance from Koichi
Tamura for the purpose of classroom discussion only, and not to
indicate either effective or ineffective management.
The Global Leadership of
Carlos Ghosn at Nissan
“I did not try to learn too much about Japan before coming,
because I didn’t want to have too
many preconceived ideas. I wanted to discover Japan by being
in Japan with Japanese people.”1
“Well, I think I am a practical person. I know I may fail at any
moment. In my opinion, it was

extremely helpful to be practical [at Nissan], not to be arrogant,
and to realize that I could fail
at any moment.”
Carlos Ghosn, 20022
Introduction
Nissan had been incurring losses for seven of the prior eight
years when, in March 1999, Carlos Ghosn
(pronounced GOHN) took over as the first non-Japanese Chief
Operating Officer of Nissan. Many
industry analysts anticipated a culture clash between the French
leadership style and his new Japanese
employees. For these analysts, the decision to bring Ghosn in
came at the worst possible time because
the financial situation at Nissan had become critical. The
continuing losses were resulting in debts
(approximately $22 billion) that were shaking the confidence of
suppliers and financiers alike. Further-
more, the Nissan brand was weakening in the minds of
consumers due to a product portfolio that
consisted of models far older than competitors. In fact, only
four of the company’s 43 models turned a
profit. With little liquid capital available for new product
development, there was no indication that
Nissan would see increases in either margin or volume of sales
to overcome the losses. The next leader of
Nissan was either going to turn Nissan around within two to
three years, or the company faced the
prospect of going out of business.
Realizing the immediacy of the task at hand, Ghosn boldly
pledged to step down if Nissan did not
show a profit by March 2001, just two years after he assumed
duties. But it only took eighteen months

(October 2000) for him to shock critics and supporters alike
when Nissan began to operate profitably
under his leadership.
Background of Carlos Ghosn
Born in Brazil in 1954 to French and Brazilian parents, both of
Lebanese heritage, Carlos Ghosn re-
ceived his university education in Paris. Following graduation
at age 24, Ghosn joined the French firm,
Compagnie Générale des Etablissements Michelin. After a few
years of rapid advancement to become
1 “Decision-Making and Coordination Structures of the
Alliance,” 20 October 1999, http://www.nissan-
global.com.
2 “Nissan President Carlos Ghosn Talks about His Company’s
Recovery,” Nikkei Business, 20 May 2002,
http://nb.nikkeibp.co.jp/Article/1142.
July 23, 2003
2 TB0147
COO of Michelin’s Brazilian subsidiary, he learned to manage
large operations under adverse condi-
tions such as the runaway inflation rates in Brazil at that time.

Similarly, as the head of Michelin North
America, Ghosn faced the pressures of a recession while putting
together a merger with Uniroyal Goodrich.
Despite his successes in his 18 years with Michelin, Ghosn
realized that he would never be promoted to
company president because Michelin was a family-run company.
Therefore, in 1996 he decided to
resign and join Renault S.A., accepting a position as the
Executive Vice President of Advanced Research
& Development, Manufacturing, and Purchasing.
Ghosn led the turnaround initiative at Renault in the aftermath
of its failed merger with Volvo.
Because he was so focused on increasing margins by improving
cost efficiencies, he earned the nickname
“Le Cost-Killer” among Renault ‘s top brass and middle
management personnel. Three years later, when
Renault formed a strategic alliance with Nissan, Ghosn was
asked to take over the role of Nissan COO
in order to turn the company around in a hurry, just as he had
done earlier in his career with Michelin
South America. For Ghosn this would be the fourth continent he
would work on, which combined
with the five languages he spoke, illustrates his capacity for
global leadership.
Background of Nissan
In 1933, a company called Jidosha-Seizo Kabushiki-Kaisha
(which means “Automobile Manufacturing
Co., Ltd.” in English) was established in Japan. It was a
combination of several earlier automotive
ventures and the Datsun brand which it acquired from Tobata
Casting Co., Ltd. Shortly thereafter in
1934, the company name was changed to Nissan Motor Co., Ltd.
After the Second World War, Nissan

grew steadily, expanding its operations globally. It became
especially successful in North America with
a lineup of smaller gasoline efficient cars and small pickup
trucks as well as a sports coupe, the Datsun
280Z. Along with other Japanese manufacturers, Nissan was
successfully competing on quality, reliabil-
ity and fuel efficiency. By 1991, Nissan was operating very
profitably, producing four of the top ten cars
in the world.
Nissan management throughout the 1990s, however, had
displayed a tendency to emphasize short-
term market share growth, rather than profitability or long-term
strategic success. Nissan was very well
known for its advanced engineering and technology, plant
productivity, and quality management. Dur-
ing the previous decade, Nissan’s designs had not reflected
customer opinion because they assumed that
most customers preferred to buy good quality cars rather than
stylish, innovative cars. Instead of rein-
vesting in new product designs as other competitors did, Nissan
managers seemed content to continue
to harvest the success of proven designs. They tended to put
retained earnings into equity of other
companies, often suppliers, and into real-estate investments, as
part of the Japanese business custom of
keiretsu investing. Through these equity stakes in other
companies, Ghosn’s predecessors (and Japanese
business leaders in general) believed that loyalty and
cooperation were fostered between members of the
value chain within their keiretsu. By 1999, Nissan had tied up
over $4 billion in the stock shares of
hundreds of different companies as part of this keiretsu
philosophy. These investments, however, were
not reflected in Nissan’s purchasing costs, which remained
between 20-25% higher than Renault’s.

These keiretsu investments would not have been so catastrophic
if the Asian financial crisis had not
resulted in a devaluation of the yen from 100 to 90 yen = 1 US
dollar. As a result, both Moody’s and
Standard & Poor’s announced in February 1999, that if Nissan
could not get any financial support from
another automobile company, then each of them would lower
Nissan’s credit rating to “junk” status
from “investment grade”.
Clearly, Nissan was in need of a strategic partner that could
lend both financing and new manage-
ment ideas to foster a turnaround. In addition, Nissan sought to
expand into other regions where it had
less presence. In March 1999, Nissan President and Chief
Executive Officer Yoshikazu Hanawa found
such an alliance opportunity with Renault, which assumed a
36.8% stake in Nissan, allowing Nissan to
invest $5.4 billion and retain its investment grade status.
Hanawa was also able to get Renault’s top
management to agree to three important principles during
negotiations:
TB0147 3
1. Nissan would maintain its company name
2. The Nissan CEO would continue to be selected by the Nissan

Board of Directors
3. Nissan would take the principal responsibility of
implementing a revival plan.
It was actually Hanawa who first made the request to Louis
Schweitzer, CEO of Renault, to send
Carlos Ghosn to Nissan to be in charge of all internal
administration and operations activities.
Why would Renault agree to all of these conditions in this
bailout of Nissan? Renault was also
looking for a partner, one that would reduce its dependence on
the European market and enhance its
global position. In 1997 85% of Renault’s revenue was earned
in Europe, 32.8% of which came from its
domestic (French) market. Renault also had high market share
in Latin America, especially Brazil. On
the other hand, Nissan has the second largest market share in
Japan and a strong market share in North
America (see Appendix 2, Nissan’ market share). Nissan lacked,
however, market share and distributio n
facilities in Latin America. By creating the new alliance, Nissan
and Renault expected to balance their
market portfolios and become more competitive. Renault wanted
a partner that was savvy and estab-
lished in the North American and Asian markets. Furthermore,
the merger of Daimler and Chrysler in
May 1998 gave Renault a sense of urgency about finding a
partner to compete more effectively on a
global scale. As a result, Renault and Nissan agreed to a Global
Alliance Agreement on March 27, 1999,
with Carlos Ghosn designated to join Nissan as COO.
Addressing National Culture Issues
When Ghosn went to Japan, he knew that industry analysts were

reasonable in doubting whether a non-
Japanese COO could overcome Japanese cultural obstacles, as
well as effectively transform a bureau-
cratic corporate culture. Ghosn was going to have to address
several Japanese cultural norms in order to
transform the company back into a successful one.
The following are some of the issues he faced.
Consensus Decision-Making and its Relationship to Career
Advancement
Since the war, the Japanese business culture for decades had
been producing leaders who were very good
at reaching consensus and working cooperatively within a
department (a derivative of the mura-shakai
consensus based society system). Thus, the conventional
wisdom in Japan was that conscientiousness
and cooperation were the key elements to maintaining
operational efficiency and group harmony. This
paradigm often resulted in delays to the decision making
process in an effort to achieve consensus.
As an unintended consequence of the emphasis on
conscientiousness, Japanese professionals tended
to avoid making mistakes at all costs in order to protect their
career growth. This can result in frequent
informal informational meetings and coalitions (called
nemawashi) that occur between professional
departments prior to a decision-making meeting. Through these
informal contacts, participants try to
poll the opinions of other participants beforehand in order to
test which positions have the strongest
support so that their position is aligned with the position most
likely to be influential. Then, at the time
for a meeting with their superiors, participants tender their

aligned positions one by one to the ultimate
decision maker with the feeling that if the decision maker
agrees to the consensus, then no one indi-
vidual can be identified later for originating a faulty position if
that decision results in failure. Rules and
conformity replace process.
In Japan, age, education level, and number of years of service to
an organization are key factors
determining how an employee moves up the career ladder. Due
to a cultural tenet called Nennkou-
Jyoretu, placing power in the hands of the most knowledgeable
and experienced, promotions are nor-
mally based on seniority and education. In practice, the only
things that usually thwart these time- and
education-based promotions are performance errors that reflect
poorly on the team and any behavior
4 TB0147
that causes disharmony among team members. When something
goes wrong, the most senior person
accepts responsibility while accountability at lower levels is
diffused.
This part of Japanese culture had been useful to reinforce
control over operations and enhance

quality and productivity. During the postwar period of the
company’s growth, it contributed to great
working relationships among everyday team members at Nissan,
but these norms, by the mid 1990s,
were actually impeding the company’s decision making.
Specifically, these cultural norms severely ham-
pered risk-taking and slowed decision making at all levels.
Existing teams of employees routinely spent
much time on concepts and details, without much sense of
urgency for taking new action, due in part
to the risks involved with actions that could result in failure.
This mindset contributed to a certain
degree of complacency with market position and internal
systems at Nissan, undermining the company’s
competitiveness.
In a related cultural issue, as employees became increasingly
aware that Nissan was not performing
well, the Japanese culture of protecting career advancement led
to finger pointing rather than accep-
tance of responsibility. Sales managers blamed product
planning. Product planning blamed engineer-
ing. Engineering blamed manufacturing and so on.
When Ghosn first arrived in Japan, he was surprised to learn
that, while most of the employees
sensed that there was indeed a problem within the company,
they nearly always believed that their
respective departments were operating optimally. The consensus
was that other departments and other
employees were creating the company’s problems. Ghosn also
learned that many of the employees of the
company did not have a sense of crisis about the possibility of
bankruptcy at Nissan because of the
Japanese business tradition, which implied that large troubled
employers would always be bailed out by

the government of Japan. This view was based on the long
standing partnership between the govern-
ment and the major businesses to ensure employme nt and
expand exports to world markets. The busi-
nesses for their part were committed to providing lifetime
employment to their workers.
Addressing Corporate Culture Issues
Not only were there Japanese cultural norms for Ghosn to
contend with, but there were procedural
norms at Nissan, both formal and informal, which were holding
the company back. First, once deci-
sions were made at Nissan, the follow-up during implementation
was often not effective. This was not
usually the case in other Japanese companies. Second, top
management had developed tunnel vision
regarding its strategic focus on regaining market share, as
opposed to restoring margin per unit sold.
This was in part due to a focus on what was best for maintaining
the company’s size and its employees,
i.e. more units to produce, rather than what was best for
customers (newer, better products to meet
market demands) or for investors (higher earnings and higher
stock value). Additionally, in an unusual
break from Japanese business culture, there were
communication problems between the layers of the
organization. Staffs seemed relatively uninformed of key
corporate business decisions, while top man-
agement seemed out of touch with what policy execution issues
were present at the middle and lower
management levels.
Ghosn realized that Nissan’s fundamental problem was the lack
of vision from management and
the persistent problem of ignoring the voice of Nissan’s

customers.3 Furthermore, he identified the
following problems at Nissan:
1. Lack of a clear profit orientation
2. Insufficient focus on customers and too much focus on
competitors
3. Lack of a sense of urgency
3 , p. 155, Carlos Ghosn
(2001) (August 10, 2002).
4 , p. 26,
(2000) (August 8, 2002).
TB0147 5
4. No shared vision or common long term plan
5. Lack of cross-functional, cross-border, cross-cultural lines of
work.4
Carlos Ghosn’s Philosophies of Management
Despite all of his doubters, Ghosn embraced the cultural
differences between the Japanese and himself,
believing fervently that cultural conflict, if paced and channeled
correctly, could provide opportunity
for rapid innovation. He felt that by accepting and buildi ng on
strengths of the different cultures, all

employees, including Ghosn himself, would be given a chance
to grow personally through the consid-
eration of different perspectives. The key, he reiterated many
times, was that no one leader should try to
impose his/her culture on another person who was not ready to
try the culture with an open mind and
heart. In this vein, Carlos Ghosn came to Japan knowing that if
he were to start imposing reforms by
using the authority of his company position, rather than w ork
through the Japanese culture, then the
turnaround he sought would likely backfire.
What he did bring with him was three overriding principles of
management that transcended all
cultures. And he used these as a backdrop to give employees
structure as to their efforts of determining
the proper reforms. These three principles are as follows:
1. Transparency—an organization can only be effective if
followers believe that what the leaders
think, say, and do are all the same thing
2. Execution is 95% of the job. Strategy is only 5%—
organizational prosperity is tied directly
to measurably improving quality, costs, and customer
satisfaction.
3. Communication of company direction and priorities—this is
the only way to get truly uni-
fied effort and buy-in. It works even when the company is
facing layoffs.
The First Months in Japan and the Cross-Functional Teams
When you get a clear strategy and communicate your priorities,
it’s a pleasure working in Japan.

The Japanese are so organized and know how to make the best
of things. They respect leader-
ship.
Ghosn5
Even though Ghosn expected that his attitude toward cultural
respect and opportunism would
lead to success, Ghosn was pleasantly surprised by how quickly
Nissan employees accepted and partici-
pated in the change of their management processes. In fact, he
has credited all of the success in his
programs and policies (described below) to the willingness of
the Nissan employees at all levels to
change their mindsets and embrace new ideas.
Perhaps it was the way he started that set the foundation among
the employees. He was the first
manager to actually walk around the entire company and meet
every employee in person, shaking hands
and introducing himself. In addition, Ghosn initiated long
discussions with several hundred managers
in order to discuss their ideas for turning Nissan around. This
began to address the problems within the
vertical layers of management by bringing the highest leader of
the company in touch with some of the
execution issues facing middle and lower management. It also
sent a signal to other executives that they
needed to be doing the same thing.
But he did not stop there. After these interviews, he decided
that the employees were quite ener-
getic, as shown by their recommendations and opinions. With
this in mind, Ghosn opted to develop a
program for transformation which relied on the Nissan people to
make recommendations, instead of

hiring outside consultants. He began to organize Cross-
Functional Teams to make decisions for radical
5 Middleton, John. ExpressExec.com,
http://www.expressexec.wiley.com/ee/ee07.01.07/sect0.html,
Acquired
on Internet, 7 August 2002.
6 TB0147
change. Part of his interest in doing this in-house was to address
the motivation and horizontal commu-
nication issues that he encountered throughout the organization.
He felt that if the employees could
accomplish the revival by their own hands, then confidence in
the company as a whole and motivation
would again flourish. In a sense he was making it clear that he
was also putting his own future in their
hands because he had publicly stated several times that the
Nissan company had the right employees to
achieve profitability again in less than two years.
Before the strategic alliance occurred between Renault and
Nissan, Renault had made an agree-
ment with Hanawa to remain sensitive to Nissan’s culture at all
times, and Ghosn was intent on follow-
ing through on that commitment. First and foremost, when he

chose expatriates to accompany him
from Renault to Nissan, he screened carefully to ensure that
those expatriates would have his same
cultural attitudes toward respecting Nissan and the Japanese
culture. And, after completing his rounds
of talking with plant employees, he chose not to use his
newfound understanding of the problems to
impose a revival plan. Instead, Ghosn mobilized existing Nissan
managers by setting up nine Cross-
Functional Teams (CFTs) of approximately 10 members each in
the first month. Through these CFTs,
he was allowing the company to develop a new corporate
culture from the best elements of Japan’s
national culture.
He knew that the CFTs would be a powerful tool for getting line
managers to see beyond the
functional or regional boundaries that defined their direct
responsibilities. In Japan, the trouble was
that employees working in functional or regional departments
tend not to ask themselves as many hard
questions as they should. Working together in CFTs helped
managers to think in new ways and chal-
lenge existing practices.
Thus, Ghosn established the nine CFTs within one month of his
arrival at Nissan. The CFT
teams had responsibility for the following areas: Business
Development, Purchasing, Manufacturing
and Logistics, Research and Development, Sales and Marketing,
General and Administrati ve, Finance
and Cost, Phase-out of Products and Parts, Complexity
Management, and Organizational Structure.
Ghosn had the teams review the company’s operations for three
months and come up with recom-

mendations for returning Nissan to profitability and for
uncovering opportunities for future growth.
Even though the teams had no decision making power, they
reported to Nissan’s nine-member execu-
tive committee and had access to all company information. The
teams consisted of around ten members
who were drawn from the company’s middle management.
Ten people could not cover broad issues in depth. To overcome
this each CFT formed a set of sub-
teams. These sub-teams also consisted of ten members and
focused on particular issues faced by the
broad teams. CFTs used a system reporting to two supervisors.
These leaders were drawn from the
executive committee and ensured that the teams were given
access to all the information that they
needed. To prevent a single function’s perspective from
dominating, team had two senior voices that
would balance each other.
One of the regular members acted as a pilot who took
responsibility for driving the agenda and
discussion. The pilot and leaders selected the other members.
The pilots usually had frontline experi-
ence as managers.
The CFTs also prescribed some harsh medicine in the form of
plant closures and employee reduc-
tions. The CFTs would remain an integral part of Nissan’s
management structure. They continue to
brief the CEO; however the team’s missions have changed
somewhat. They are to carefully watch the
on-going revival plan and try to find further areas for
improvement.
Since the members of the teams were often mid-level managers

who rarely saw beyond their own
functional responsibilities, this new coordination had high
impact on participants. Specifically, it al-
lowed them to understand how the standard measures of success
for their own departments were mean-
This document is authorized for use only by fouad zaghaba h in
TB0147 7
ingless to Nissan unless they were framed in a way that
connected to other departments to result in
customer attraction and retention. In many cases, these mid-
level managers enjoyed learning about the
business from a bird’s eye perspective and felt fully engaged in
the change process, giving them a sense
of responsibility and ownership about turning Nissan around.
As Ghosn explained in a speech in May 2002, “The trouble is
that people working in functional
or regional teams tend not to ask themselves as many hard
questions as they should. By contrast, work-
ing together in cross-functional teams helps managers to think
in new ways and challenge existing
practices. The teams also provide a mechanism for explaining
the necessity for change and for project-
ing difficult messages across the entire company.”6
Ghosn did have one great stroke of luck that helped him

reinforce the need for change. At ap-
proximately the same time as he was arriving in Japan,
Yamaichi, the major financial house in Japan,
went bankrupt and was not bailed out by the Japanese
government. Before that, Japanese employees,
including Nissan’s, did not worry about corporate problems
because the government was always saving
the day. This recent turn of events helped to develop a sense of
urgency among Nissan employees.
Ghosn, to his credit, used the Yamaichi example whenever he
could to continue to motivate his employ-
ees, repeating that their fate would be no different if they did
not put all of their effort into figuring out,
and then executing, the best way to turn Nissan around.
Reforms in Full Swing
Within the first six months, the fruit of the CFTs and the
increased sense of urgency were apparent.
Management (especially Ghosn) was increasingly perceived as
transparent among all levels of employ-
ees, which Ghosn attributed to his respect for protecting
Nissan’s identity. In addition, decisions were
being made faster; and there was increased communication and
understanding about what was impor-
tant to management. There was, however, very little
implementation yet, only planning. Having re-
ceived from the CFTs the recommendations, which included
plant closures and reduced headcount,
Ghosn created and communicated what he called the Nissan
Revival Plan (or NRP) in October of
1999. From that point forward he stressed implementation and
follow-up, rather than planning and re-
examining decisions. Other CFTs were formed, but the bulk of
his efforts lay in ensuring high-quality
execution of the decisions that were laid out in the plan.

Ghosn’s main focus areas included: (1) development of new
automobiles and markets, (2) im-
provement of Nissan’s brand image, (3) reinvestment in
research and development, and (4) cost reduc-
tion.
Reducing Redundancies
To achieve these results, the closing of five factories and the
reduction of 21,000 jobs (14% of Nissan’s
workforce) were planned. Job cuts would occur in
manufacturing, management, and the dealer net-
work.7 Since Japanese business culture had tended to have
lifelong employment as a principle, Ghosn
endured strong criticism from the media, including being
labeled as a gaijin, a foreigner. In addition,
Ghosn fired several managers who did not meet targets,
regardless of the circumstances. Many industry
analysts cited his demotion of Vice President of Sales and
Marketing in Japan, Mr. Hiroshi Moriyama,
as unacceptable and reckless. They contended that falling
revenues and dissipated market share were
6 Ghosn, Carlos, “Saving the Business without Losing the
Company,” Harvard Business Review, Vol. 80,
No. 1, January 2002.
7 “Nissan’s Napoleon,” Worldlink, 11 July 2002,
http://www.worldlink.co.uk.
8 Barr, C.W. “Get Used to It: Japanese Steel Themselves for
Downsizing. Mitsibushi and Nippon Telephone
Have Added 30,000 Layoffs to Nissan’s 21,000 Announced Oct.
19,” Christian Science Monitor, Nov. 12,
1999.

8 TB0147
due to Nissan’s aging product line rather than to Moriyama’s
performance. In addition to the media and
industry analysts, the government, also expressed concern about
the layoffs, but Prime Minister Keizo
Obuchi responded by offering subsidies and programs to help
the affected workers.8
Keiretsu Partnerships
As one of the biggest changes of the NRP, Nissan broke away
from the Japanese cultural norm of keiretsu
investments. However Nissan maintained customer-supplier
relationships with those former keiretsu
partners. As it turned out, Nissan regained billions in tied up
capital to use for debt servicing …
S P R I N G 2 0 1 7
I S S U E
Christine M. Pearson
The Smart Way to
Respond to
Negative

Emotions at Work
Many executives try to ignore negative emotions in their
workplaces — a tactic that can be counterproductive and
costly. If employees’ negative feelings are responded to wisely,
they may provide important feedback.
Vol. 58, No. 3 Reprint #58305 http://mitsmr.com/2lU6Pag
http://mitsmr.com/2lU6Pag
IT IS IMPOSSIBLE to block negative emo-
tions from the workplace. Whether provoked
by bad decisions, misfortune, or employees’
personal problems, no organization is immune
from trouble. And trouble agitates bad feelings.
However, in many workplaces, negative emo-
tions are brushed aside; in some, they are taboo.
Unfortunately, neither of these strategies is ef-
fective. When negative emotions churn, it takes
courage not to flinch. Insight and readiness are
key to developing effective responses.
Savvy managers and executives quickly learn
to cultivate sunny emotions at work. Practical

recommendations and abundant research ac-
centuate the benefits of encouraging positivity
in the workplace.1 Reinforcement is often im-
mediate. The swell of good feelings is palpable
when executives successfully cheerlead for
The Smart Way to
Respond to Negative
Emotions at Work
H O W T O M A K E Y O U R C O M P A N Y S M A R T E
R : M A N A G I N G P E O P L E
Many executives try to ignore negative emotions in their
workplaces — a tactic that can be counterproductive and
costly. If employees’ negative feelings are responded to wisely,
they may provide important feedback.
BY CHRISTINE M. PEARSON
PLEASE NOTE THAT GRAY AREAS REFLECT ARTWORK
THAT HAS BEEN INTENTIONALLY REMOVED.
THE SUBSTANTIVE CONTENT OF THE ARTICLE APPEARS
AS ORIGINALLY PUBLISHED.
SPRING 2017 MIT SLOAN MANAGEMENT REVIEW 49
“ Our company was acquired and our workforce was cut by
70%. We’re each carrying about twice the
workload now, with a fraction of the resources. Employees at
all levels are frustrated, angry, and anxious

about their futures, and not one of our new executives seems to
care. Pride in the organization has dried
up. People are too stressed to do anything but keep their heads
down and pound out their work. Morale
is at an all-time low. You can feel it when you come in the
door. Yet our new leaders are stunned when
they learn someone else is quitting.”
— Manager, global services organization
THE LEADING
QUESTION
How should
executives
handle
negative
emotions
in the
workplace?
FINDINGS
�Many managers
don’t know how
to respond to
employees’
negative feelings.
�Promptly stepping
up to face emotions
like anger, sadness,
and fear can stem
interpersonal
turbulence and

keep satisfaction,
engagement, and
productivity intact.
50 MIT SLOAN MANAGEMENT REVIEW SPRING 2017
SLOANREVIEW.MIT.EDU
stretch goals, muster enthusiasm about new prod-
ucts, or celebrate team successes. Sometimes, these
efforts are irrefutably tied to greater improvements,
providing additional opportunities for positive
emotional crescendos from leaders.
Steering toward positive emotions is the norm.
But there are reasons for negative emotions in the
workplace — from erosion of the implicit work con-
tract between bosses and employees, to ever-growing
demands to do more with less, to relentless rapid
change. Today, it takes both positive and negative
emotional insight for organizations and individuals

to function effectively over the long term. Negative
emotions, it turns out, not only punctuate obstacles
but also unleash opportunities.2 Negative emotions
can provide feedback that broadens thinking and
perspectives, and enables people to see things as
they are. When executives step up to deal with ris-
ing anger among employees, they may discover
exploitations of management power. Similarly,
managers who address signals of employee sadness
may learn that the rumor mill is spreading false
news about closures and terminations.
For more than two decades, I have studied work-
place circumstances that evoke negative emotions.
(See “About the Research.”) My research, often con-
ducted with colleagues, explores the darker side of
work — from exceptional, highly dramatic organi-
zational crises (such as workplace homicide or
product tampering) to the everyday problem of disre-

s p e c t f u l i n t e r a c t i o n s a m o n g cowo r ke r s ( a
phenomenon for which my coauthor Lynne Anders-
son and I coined the term “workplace incivility”3). Via
surveys, focus groups, and interviews, thousands of
respondents have described their experiences with
causes, circumstances, and outcomes that involved
negative emotions.4 A crucial finding across our stud-
ies is that few leaders handle negative emotions well.
When it comes to managing negative emotions,
most executives respond by pressuring employees to
conceal the emotions. Or they hand off distressed
employees to the human resources department. A
small proportion consider emotions detrimental to
operations and assert that feelings should be kept
out of the workplace. Some blame their own bosses’
compulsions for unbroken cheeriness, which obliges
them to tamp down negative sentiments of their
own and those of their subordinates. A general

manager I interviewed voiced a typical rationale:
“Our CEO doesn’t want to hear anything negative.
Not a word about dissatisfaction.”
Many executives complain that dealing with
employees’ negative sentiments drains too much
time and energy. Some express concern that their
interventions might exacerbate rather than im-
prove circumstances, or that addressing concerns
might unleash stronger reactions than they could
handle. Additionally, executives worry that uncork-
ing employees’ negative emotions might trigger an
unwelcome flood of their own bad feelings.
Many executives report they’ve had no training
about handling negative emotions effectively and a
dearth of role models for doing so. One of my recent
studies validates this claim. I asked 124 managers
and executives about their personal experiences of
negative emotions at work. About 20% reported

that they have never, in their entire careers, had
a single boss who managed negative emotions
effectively.5 Every respondent was readily able to
name bosses who had mismanaged relevant issues
and to describe specific opportunities that had been
missed, as well as associated organizational costs.
Most managers admit that they simply do not
know how to deal with negative emotions. I would
like to change that. The advice here is based on re-
search by my coauthors and me about workplace
crises and incivility, as well as our observations of the
impacts and responses engendered by both. Within
these contexts, my fellow researchers and I have stud-
ied how organizations handle negative emotions. We
asked about what works and what doesn’t. Some rec-
ommendations here flow directly from data collected
for our studies. Others are based on lessons I have
learned while shadowing and consulting to employ-

ees at all levels as they prepared for, managed, and
learned from crises and instances of incivility. Addi -
tionally, in light of sensitivities toward negative
emotions, I turned to clinical psychologists who work
with managers and executives to validate the follow -
ing recommendations.
Facing Negative Emotions
In the short term, ignoring or stifling negative emo-
tions is easier than dealing with them. However, my
research with colleagues has shown that discounting
or brushing aside negative emotions can cost
SLOANREVIEW.MIT.EDU SPRING 2017 MIT SLOAN
MANAGEMENT REVIEW 51
organizations millions of dollars in lost productivity,
disengagement, and dissipated effectiveness.
In a study of 137 managers enrolled in an execu-
tive MBA program, Christine Porath of Georgetown
University and I found that negative emotions led

them to displace bad feelings onto their organiza-
tions, either by decreasing their effort or time at work,
lowering their performance or quality standards, or
eroding their commitment to their organizations.6
Employees who harbor negative sentiments lose
gusto and displace their own negative emotional re-
actions on subordinates, colleagues, bosses, and
outsiders. They also find ways to stay clear of cowork-
ers and circumstances that they associate with their
negative feelings, which can short-circuit communi-
cation lines and clog resource access.7 Consider these
pricey consequences as incentives to face, rather than
avoid, darker workplace emotions.
Look yourself in the mirror. If you lack emo-
tional self-awareness, your own concerns will
inhibit your abilities and color the emotions that
you tune into.8 Next time your own negative emo-
tions are rising, reflect. Recognize and harness your

own emotional triggers. Which conditions or indi-
viduals provoke emotional reactions from you?
Note circumstances and your typical responses.
Ask trusted colleagues and friends for their obser-
vations of your behavior.
Stay calm, breathe deep, and model behavior.
When your negative feelings stir in the workplace,
take a slow and deliberate account of what is going
on. Our earliest studies of incivility uncovered a
typical escalating cycle of tit-for-tat behavior when
emotions were high.9 Rather than fueling that cycle,
let agitation serve as a signal to step back.
Instead of engaging in reciprocal behavior, prac-
tice overcoming physiological signals that could draw
you into the drama. For example, when you feel your
emotions rising, pause and take a focused deep breath
rather than bursting forth with a knee-jerk reaction.
That momentary delay can help reason rather than

instinct drive your response. Think broadly, and aim
to spread composure by modeling it. Build a habit of
passing on fewer negative emotions than you receive,
regardless of the circumstances.
Fine-tune your radar. Watch facial expressions
and body language, especially when nonverbal be-
haviors don’t seem to match what you are hearing. To
build this skill, practice observing and interpreting
emotional actions and reactions at meetings and in
public settings. As the chief legal officer of an interna-
tional chemical company said, “The greatest benefit
of preparing for crises as a team is learning the ‘tells’
that the other leaders exhibit when their negative
emotions rise. Over the years, those subtle signals
have helped me determine when to step in and how
to frame my suggestions, especially when crises are
brewing.” Take account of the context and the stakes
for individuals. Afterward, check your accuracy by

seeking others’ perspectives about what occurred.
When you’re listening, listen fully. This requires
much more than simply focusing on the speaker. If
you are checking email on your phone or laptop,
you’re not listening fully. If your internal dialogue is
ABOUT THE RESEARCH
This article draws on a stream of research
that the author, in collaboration with coau-
thors, has carried out for more than two
decades to understand how managers and
employees handle the dark side of work-
place behavior — from exceptional incidents
involving organizational crises to common-
place uncivil interactions among employees.i
All of the studies examined some aspect of
the role of negative emotions.
In our crisis management research, my
coauthors and I have worked directly with se-
nior executives and observed, interviewed,
and surveyed managers as they prepared for,
dealt with, and learned from crises and near
misses in their organizations. In our founda-
tional research into workplace incivility, we
collected survey data from thousands of
employees at all organizational levels. We
deepened and broadened our understanding
through further studies, in hundreds of inter-
views and additional surveys, and in scores of
focus groups with employees, managers, and

executives. Insights across studies also re-
flect consulting and collaboration with
organizational leaders as they attempted to
assess and improve their capabilities for deal-
ing with crises and incivility.
At the heart of this article is an ongoing,
multifaceted study to understand the manage-
ment of negative emotions in the workplace.
To date, the research reported here has been
developed with the active engagement of
more than 350 managers and executives from
more than 200 organizations and three dozen
countries. We have gathered data from focus
groups, in-depth interviews, surveys, observa-
tion, and other field research. In many cases,
we began our inquiries by asking participants
to describe a critical incident that evoked
their negative emotions at work and to base
their responses and recommendations on
that situation. Information such as the
causes, contexts, and consequences of the
negative emotional experiences, as well as
the nature and effectiveness with which the
negative emotions were managed, were as-
sessed through simple content analysis of
the open-ended data. Our respondents rep-
resent a cross section of industries (public
and private companies, government, and
nongovernmental organizations), job types,
and management positions.

SLOANREVIEW.MIT.EDU
blaming or criticizing, you’re not listening fully. If
you’re jumping to solutions or thinking about the
story that you will share when it’s your turn to talk,
you’re not listening fully. Cease these behaviors to
demonstrate that you care. You will catch signals ear-
lier and interpret their meanings more astutely.
Stepping Up to Negative Emotions
When managers fail to notice or respond to negative
emotions, they subsequently encounter increases in
rifts, resentment, and dissatisfaction among employ-
ees.10 When negative emotions are allowed to brew,
physiological predisposition can cause coworkers
to mimic the movements, postures, and facial
expressions of those feeling bad.11 Notably, this syn-
chronization happens automatically, so others may
mirror negative expressions without awareness that

they are doing so. Unconsciously passing on negative
emotions can erode productivity and cooperation.
In the worst cases, managers have described a cloud of
negative emotions that can spread throughout the
workplace, making it more difficult to recruit and
retain the best employees.
Leaders can be strategically shortsighted when they
ignore or miss negative emotions in the workplace. In
a recent study exploring negative incidents at work,
99 managers at an international Fortune 100 manu-
facturer shared examples of early warning signals
that were missed prior to negative incidents, despite
employee concerns.12 In some of the cases, larger prob-
lems grew in the interim, and delays complicated
rectifying or learning from difficult circumstances.
The benefits of addressing negative emotions can be
significant. Promptly stepping up can stem interper-
sonal turbulence and keep satisfaction, engagement,

and productivity intact. Moreover, those who take
the initiative to step up often experience personal
gratification from helping others in meaningful ways.
How to Step Up
Tend to signals of negative emotions early. Watch for
warning signs across your team. Are individuals putting
in fewer hours or less effort? Has engagement dwin-
dled? Are fewer employees showing up for discretionary
activities such as celebrations or noncompulsory
meetings? In our research and practice, these behaviors
have signaled underlyi ng negative emotions. Take a
close look at hard data and trends that can be signs of
dissatisfaction and withdrawal, such as late arrivals,
absenteeism, and voluntary turnover.
Even small supportive gestures from managers
can improve employees’ ability to cope. Anticipate
that employees facing tough times will have negative
feelings. Discuss and determine what employees
need and what you are able to offer. Convey frank

optimism and confidence that they can manage the
challenges. Find ways to offer additional support
and resources to help them.
Seek out troubled employees. When behaviors
seem emotionally charged, it can be challenging to
understand what is happening. Start by gathering
data. Ask simple, neutral questions to get a conversa-
tion going, such as “How are you doing today?”
or “Everything OK?” Then, tune in sharply to the re-
sponse, taking stock of subtle indicators like volume,
pitch, and speed of speech. Consider whether an em-
ployee’s behaviors and expressions are unusual or out
of sync with the rhythm of your conversation. Listen
for veiled references to negative emotions. Employees
may not be comfortable saying they are sad, but they
might tell you they feel discouraged or disappointed.
Resist the urge to fix others’ problems for them.
Be quick to listen and offer support but slow to advise.

As a senior production manager in a manufacturing
company explained, “What works for me is to voice
my concerns, lightly, and then wait for the response.
I’m also really careful not to jump into the role of
being the parent.” Ask questions to help employees
determine what the best approaches would be. Help
employees map out specific individuals in their net-
work who could provide the support they need.
When negative emotions are rooted in conflicts
among employees, strive to get adversaries to work to-
gether to resolve their differences. Urge them to
prepare for a discussion together and, in that discus-
sion, to stick to the issue at hand. To drive reconciliation,
help them understand the personal costs and larger
stakes if they cannot move past their differences.
Sometimes, individuals cannot get unstuck from
their negative emotions. If troubled employees are
unwilling to consider alternative perspectives or ap-

proaches, accept that for the time being. Rather than
push harder, take a step back, observe, and remain
available, as appropriate.
Do not assume that negative emotions have dis-
solved when hard times seem to have passed. The full
significance of negative circumstances may not
become evident to those affected until later. For ex-
ample, although you may be relieved by employees’
initial acceptance of organizational shakeouts, don’t
miss or ignore what often follows. Sadness can
emerge as reality sets in about losing colleagues or
routines. During this time, don’t dispassionately
direct employees to put the past behind them.
The impact can be depleting. As an information
technology (IT) manager who survived layoffs

explained, “The new leaders keep warning us,
‘It’s time to move on.’ I resent it. They make it seem
like having legitimate concerns is a personal
shortcoming.”
Dealing With Anger,
Fear, and Sadness
Anger, fear, and sadness are three primary negative
emotions commonly encountered in the workplace.
Knowing more about these specific emotions can in-
crease your skill at handling them and build the
confidence you need to take effective action.
Anger This may be the most prevalent negative
emotion at work. It is certainly the most acceptable.
As I have observed in field research and found across
surveys and interviews, displays of anger can be so
common and powerful in some organizations that
employees sometimes learn to habitually use anger
to get their way.
Working with and around angry people is ex-
hausting: It wears others out, undermines their drive,

and suppresses their cognitive abilities. When indi-
viduals dare to respond to anger, brain chemistry can
cause them to have difficulty communicating well or
thinking clearly.13 Unfortunately, inferior responses
can strengthen angry employees’ self-serving biases
about being right, stoke their confidence, and rein-
force their use of anger.
Angry encounters can spin into long-lasting re-
sentment and unhappiness. Based on thousands of
survey responses regarding incivility, research col -
leagues and I found that (1) employees who are treated
angrily typically seek retribution, harbor animosity, or
both; (2) some employees who simply witness or hear
about others’ angry outbursts may seek recourse;
and (3) employees in anger-tainted workplaces find
ways to get even with offenders and with their
organizations.14 The following guidelines are im-
perative for effective managerial response to anger.

Don’t let yourself get sucked in. When anger is
stirring, expect your own anger or fear to rise.
Whether you are the target of anger or a referee
among angry employees, aim to slow down the situ-
ation. Do what you can to quiet yourself and the
environment. Remain still. Listen carefully. Aim to
project a composed, neutral demeanor by speaking
calmly, clearly, and deliberately, but do not be conde-
scending. When you are the target of anger, do not
attempt to justify yourself or argue the point. Rather,
strive to contain your own negative emotions.
When dealing with anger in the workplace,
calmly try to unknot and understand the full situa-
tion without being absorbed by it. Speak with
individuals one-on-one to ascertain their perspec-
tives. Help angry employees consider appropriate
ways of handling heated issues, by discussing prob-
lems and developing plans to deal with similar

challenges more effectively in the future. When
anger is directed at you, fully evaluate whether
complaints are justified. If so, apologize and take
action promptly to correct the problem. If not, aim
to remain respectful and carry on.
Don’t side with an employee you think has
been wronged. Doing so can harden negative atti-
tudes, making the situation more brittle and more
resistant to improvement. Instead, aim to speak
from a position of neutrality. Resist the temptation
to empathize with negative comments about any
individual or the circumstances. Do not attribute
harmful intentions, even if they seem obvious. As
an executive at a public-sector organization recom-
mended, “Create an environment where employees
understand the personal costs if they’re not pulling
for the team. Help angry employees consider and
initiate forward-focused thinking and action in a

solutions-based environment, rather than dwelling
on the negative.”
Fear Full-scale organizational crises, dismal
quarterly results, and even off-the-cuff negative
comments by those in charge can kick-start fear in a
workplace. When fear strikes, the physiology of sur-
vival readies individuals to fight, flee, or freeze.
However, organizations expect employees to carry
on, even when employees’ perceptions of personal or
SLOANREVIEW.MIT.EDU
professional risks are acute and realistic. Even in the
midst of unthinkable crises, workers are expected to
continue to meet their typical performance targets.
The prevalence and strength of this workplace norm
cause employees to be very reluctant to admit that

they are afraid.
Nonetheless, it is essential to address fear at
work because this negative emotion packs a
wallop. Fear seizes individuals’ attention while si-
multaneously diminishing their objectivity. Being
afraid can erode employees’ decision-making abil-
ities and confidence. Fear stimulates catastrophic
thinking, leading employees to replay the past, fret
about the future, and disengage from the present.
Being scared undermines employees’ tolerance for
ambiguity and complexity, a crucial success factor
for today’s competitive environment. Further, the
negative impact of fear can linger long after dan-
gers prove unfounded. In the meantime, studies
I’ve worked on show that worried employees may
attempt to unload their concerns on colleagues,
setting off additional negative emotions across the
workplace.15

When fear is engendered by coworkers or bosses,
employees trim their time at work, accept fewer re-
sponsibilities, and accomplish less. When their
fears are ignored, employees take action to protect
themselves from the dangers that they recognize or
imagine. Rather than striking out at the individuals
who scare them, employees often displace their
negative reactions onto the organization that has
failed to protect them.
If fear lingers, employees start looking for new
jobs. In fact, of the negative emotions that Porath
and I have tracked for more than two decades, fear
is the emotion most likely to cause employees to
quit, although they are unlikely to cite fear as the
catalyst for their departure.16
As individuals are unlikely to report their fears in
the workplace, the burden is on executives to ad-
dress this commonplace challenge. Nonetheless,

some executives choose to ignore the problem of
frightened employees or even deny or minimize the
situation engendering fear in the first place. Others
may recognize the cause of fear but leave the burden
of dealing with it to those who are afraid, despite
costly outcomes. The following two actions are
essential when fear churns.
Deal with employee fear head-on. Action is a
powerful antidote to fear. Our research suggests
that being frank and providing reasonable, realistic
reassurance can signal that someone is in control.
This awareness can help employees who are afraid.
One executive described how he successfully ap-
proaches fear in the workplace: “I allow fearful
employees to vent, and I try not to let their fear spi -
ral out of control. I assure them as much as I can.
I listen carefully to their concerns and honestly
provide whatever facts I can.”

Help employees avoid exaggerating perceived
dangers. To keep fear from spinning out of control,
be honest and up front about challenges while
infusing authentic enthusiasm about realistic op-
portunities and benefits that may lie ahead. Share
your own concerns reasonably to ease others into
discussing theirs. Encourage employees to gather
facts and help them face their individual fears rather
than slipping into the victim’s role, a perspective that
engenders hopelessness and unhappiness.
A common source and stimulant of workplace
anxiety is the rumor mill. My fellow researchers and
I have observed managers and executives attempt to
mitigate fear by withholding details of changes on
the horizon. Rather than assuaging concerns, how-
ever, lack of information leads to speculation, often
with worse outcomes than reality would hold. To
ward off fear and avert this problem, overcommuni-

cate and find ways to recognize or reward those who
persist despite their fears.
Sadness Sadness may be the most unwelcome
emotion at work. Working with sad people crushes
enthusiasm, drains productivity, and dulls esprit de
corps. Sad employees display low energy and lose
interest in what once engaged them.
According to our survey and interview data, sad
employees tend to show up later, leave earlier,
avoid potentially unpleasant meetings, seek offsite
assignments, and seize opportunities to work
remotely.17 Those deeply saddened become apa-
thetic. Some sad employees give up and quit.
Despite such costly consequences, however, execu-
tives will find scant research or recommendations
about dealing with sadness. To improve this, I offer
the following suggestions based on my research
and consulting.

Be present. Sadness is often accompanied by feel-
ings of isolation. As I have observed in crises and less
extreme negative circumstances, executives who re-
main accessible impart strength, as well as a sense of
communal concern and connection, to their follow-
ers. However, while engaging with sad employees,
resist the temptation to push for higher spirits or to
provide advice about how an individual should cope
with sadness. Specifically, do not tell sad employees
that you know how they feel — you couldn’t. Do not
compare their sad situations with your own: Your
examples may seem insensitive and irrelevant.
With dramatic loss, employees may seem de-
tached or disoriented, behaviors that can increase
a manager’s reluctance to intervene. Nonetheless,
practical approaches from managers and execu-

tives can help lighten the burden. If employees
have experienced a serious personal loss, help
them temporarily make work a lower priority so
that they can focus on dealing with their grief.
Allow employees to overcome their sadness at their
own pace. Help them connect with their natural
support systems. Some options to temporarily …
www.hbrreprints.org
B
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O F
H B R
Leading Change

Why Transformation Efforts Fail
by John P. Kotter
•
Included with this full-text
Harvard Business Review
article:
The Idea in Brief—the core idea
The Idea in Practice—putting the idea to work
1
Article Summary
2
Leading Change: Why Transformation Efforts Fail
A list of related materials, with annotations to guide further
exploration of the article’s ideas and applications

10
Further Reading
Leaders who successfully
transform businesses do eight
things right (and they do them
in the right order).
Reprint R0701J
http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name
=itemdetail&referral=4320&id=R0701J
http://www.hbrreprints.org
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Most major change initiatives—whether in-
tended to boost quality, improve culture, or
reverse a corporate death spiral—generate
only lukewarm results. Many fail miserably.
Why? Kotter maintains that too many
managers don’t realize transformation is a
process,
not an event. It advances through
stages that build on each other. And it
takes years. Pressured to accelerate the
process, managers skip stages. But short-
cuts never work.
Equally troubling, even highly capable
managers make critical mistakes—such as

declaring victory too soon. Result? Loss of
momentum, reversal of hard-won gains,
and devastation of the entire transforma-
tion effort.
By understanding the stages of change—
and the pitfalls unique to each stage—you
boost your chances of a successful transfor-
mation. The payoff? Your organization flexes
with tectonic shifts in competitors, markets,
and technologies—leaving rivals far behind.
To give your transformation effort the best chance of
succeeding, take the right actions at each
stage—and avoid common pitfalls.
Stage Actions Needed Pitfalls
Establish a
sense of
urgency
• Examine market and competitive reali-
ties for potential crises and untapped
opportunities.
• Convince at least 75% of your man-
agers that the status quo is more dan-
gerous than the unknown.
• Underestimating the difficulty of driving
people from their comfort zones
• Becoming paralyzed by risks
Form a pow-

erful guiding
coalition
• Assemble a group with shared commit-
ment and enough power to lead the
change effort.
• Encourage them to work as a team
outside the normal hierarchy.
• No prior experience in teamwork at the
top
• Relegating team leadership to an HR,
quality, or strategic-planning executive
rather than a senior line manager
Create a
vision
• Create a vision to direct the change effort.
• Develop strategies for realizing that vision.
• Presenting a vision that’s too complicat-
ed or vague to be communicated in five
minutes
Communicate
the vision
• Use every vehicle possible to commu-
nicate the new vision and strategies for
achieving it.
• Teach new behaviors by the example of

the guiding coalition.
• Undercommunicating the vision
• Behaving in ways antithetical to the
vision
Empower
others to act
on the vision
• Remove or alter systems or structures
undermining the vision.
• Encourage risk taking and nontradition-
al ideas, activities, and actions.
• Failing to remove powerful individuals
who resist the change effort
Plan for and
create short-
term wins
• Define and engineer visible perform-
ance improvements.
• Recognize and reward employees con-
tributing to those improvements.
• Leaving short-term successes up to
chance
• Failing to score successes early enough
(12-24 months into the change effort)

Consolidate
improve-
ments and
produce
more change
• Use increased credibility from early
wins to change systems, structures, and
policies undermining the vision.
• Hire, promote, and develop employees
who can implement the vision.
• Reinvigorate the change process with
new projects and change agents.
• Declaring victory too soon—with the
first performance improvement
• Allowing resistors to convince “troops”
that the war has been won
Institutionalize
new
approaches
• Articulate connections between new
behaviors and corporate success.
• Create leadership development and
succession plans consistent with the
new approach.
• Not creating new social norms and
shared values consistent with changes

• Promoting people into leadership posi-
tions who don’t personify the new
approach
B
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H B R
Leading Change
by John P. Kotter

S
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Leaders who successfully transform businesses do eight things
right

(and they do them in the right order).
Editor’s Note:
Guiding change may be the ulti-
mate test of a leader—no business survives over
the long term if it can’t reinvent itself. But,
human nature being what it is, fundamental
change is often resisted mightily by the people it
most affects: those in the trenches of the busi-
ness. Thus, leading change is both absolutely es-
sential and incredibly difficult.
Perhaps nobody understands the anatomy
of organizational change better than retired
Harvard Business School professor John P.
Kotter. This article, originally published in the
spring of 1995, previewed Kotter’s 1996 book
Leading Change
. It outlines eight critical suc-
cess factors—from establishing a sense of ex-
traordinary urgency, to creating short-term
wins, to changing the culture (“the way we do
things around here”). It will feel familiar when
you read it, in part because Kotter’s vocabulary
has entered the lexicon and in part because it
contains the kind of home truths that we recog-
nize, immediately, as if we’d always known
them. A decade later, his work on leading

change remains definitive.
Over the past decade, I have watched more
than 100 companies try to remake themselves
into significantly better competitors. They
have included large organizations (Ford) and
small ones (Landmark Communications),
companies based in the United States (Gen-
eral Motors) and elsewhere (British Airways),
corporations that were on their knees (Eastern
Airlines), and companies that were earning
good money (Bristol-Myers Squibb). These ef-
forts have gone under many banners: total
quality management, reengineering, rightsiz-
ing, restructuring, cultural change, and turn-
around. But, in almost every case, the basic
goal has been the same: to make fundamental
changes in how business is conducted in order
to help cope with a new, more challenging
market environment.
A few of these corporate change efforts have
been very successful. A few have been utter
failures. Most fall somewhere in between, with
a distinct tilt toward the lower end of the scale.
The lessons that can be drawn are interesting
and will probably be relevant to even more or-

Leading Change
•
•
•
B
EST
OF
HBR
harvard business review • january 2007 page 3
ganizations in the increasingly competitive
business environment of the coming decade.
The most general lesson to be learned from
the more successful cases is that the change

process goes through a series of phases that, in
total, usually require a considerable length of
time. Skipping steps creates only the illusion of
speed and never produces a satisfying result. A
second very general lesson is that critical mis-
takes in any of the phases can have a devastat-
ing impact, slowing momentum and negating
hard-won gains. Perhaps because we have rela-
tively little experience in renewing organiza-
tions, even very capable people often make at
least one big error.
Error 1: Not Establishing a Great
Enough Sense of Urgency
Most successful change efforts begin when
some individuals or some groups start to look
hard at a company’s competitive situation,
market position, technological trends, and fi-
nancial performance. They focus on the po-
tential revenue drop when an important
patent expires, the five-year trend in declining
margins in a core business, or an emerging
market that everyone seems to be ignoring.
They then find ways to communicate this in-
formation broadly and dramatically, especially
with respect to crises, potential crises, or great
opportunities that are very timely. This first
step is essential because just getting a transfor-
mation program started requires the aggres-
sive cooperation of many individuals. Without
motivation, people won’t help, and the effort
goes nowhere.

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