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Health Care Reform Is Good for Business

The United States must achieve universal health coverage — not just for reasons of fairness and compassion, but to ensure efficient, high-value care. As long as insurance coverage is unavailable for pre-existing conditions, is re-priced when someone gets sick, and is unaffordable for low-income working people, the dysfunctions of the system will continue to compound, and spending will rise without improving value.

Skyrocketing health care costs will be reallocated to providers, employers, and consumers who have the means to pay. Everyone — businesses and individuals — will end up paying more in health care costs for poorer overall health outcomes.

The Affordable Care Act, upheld by the Supreme Court, does not get all the way to universal coverage, but it takes important steps toward enabling health insurance for many people who are now uninsured. Despite the attention heaped on this decision, it remains a first step on which leaders need to build.

Business has so far been skittish about embracing the need for reform. But universal coverage doesn’t equal socialized medicine. Throughout Europe, for example, different countries achieve universal coverage with a variety of approaches: single payer, multi-payer, and individual payers with subsidies; with and without direct involvement of employers; with varying percentages of physicians paid by the government, by hospitals, or in private practice; with government and private hospitals — sometimes competing; with varying degrees of local and national involvement in funding; and with different budgeting approaches, different ranges of available services, and different lengths of wait for care.

It’s important for skeptics to remember that the United States already has a form of de facto universal access: emergency services must be provided to anyone who shows up for care. However, this is the most expensive and dysfunctional kind of universal access. People without health plans tend to receive care at later stages, making care less effective and more expensive. Plus, emergency rooms are unnecessarily expensive settings for much of the care delivered there. The absence of primary and preventive care leads to compounding problems, worse outcomes, and much higher expense. The Affordable Care Act recognizes that earlier universal access to care is imperative for improving health and productivity as well as the effectiveness and efficiency of health care.

The lack of universal coverage in the U.S. has led to cost-shifting and huge administrative costs, as system participants try to shift the burden of uninsured and high risk patients to others. None of the efforts that go into cost-shifting and risk-avoidance create any value for patients. None of those efforts improve health, health care outcomes, or efficiency.

Yet public reforms alone won’t solve the crisis. Only by shifting the focus from “more health care” or “cheaper health care” to “better health and better care” can employers bend the spending curve and achieve greater value for each dollar spent.

Beyond compliance with the law, forward-thinking employers are already taking bold, strategic action to improve future health as a way to reduce future health care spending. Many already understand that the productivity losses from poor employee health (absenteeism, disability, and early retirement) cost more than health benefits. Leaders in the private sector can make significant differences by supporting innovations that dramatically reduce the burden of chronic disease and increase value in health care delivery. Rather than fight payment reform or step out of health benefits hoping someone else will fix the problems, business and health care executives should focus on initiatives that improve health in the communities they influence. Innovation can range from employee health initiatives, to new approaches and facilities for secondary prevention in chronic conditions such as diabetes and heart disease, to new types of delivery teams, new roles, new mindsets and new measures of success.

Ultimately, universal coverage is critical. But it is not sufficient to solve the health care crisis. We need dramatic improvements in the value of health care to obtain better health outcomes for more people at affordable costs. These improvements will come from innovation in the structure and organization of care delivery, including medical and non-medical approaches. Innovations will change how, where, and by whom care is delivered so that the attention is on solutions that help patients, families, employers, and communities achieve better health. Without significant increases in health care value, we will inevitably experience rationing and strong administrative control of health care. That, not “socialism,” is what we should be worried about.

The Affordable Care Act: A Doctor’s View

Just a few minutes after the Supreme Court announced its decision on the Affordable Care Act, I saw a longtime patient of mine, a 71 year-old retired businessman with hypertension. His numbers were not good, but he had an unusual explanation.

“I think my blood pressure is up because I have been so worried about what the Court was going to do,” he said. “It would have been terrible if they had rolled the law back.” He was serious. He also needed an increase in his medications, but I was delighted to see so many people around me during my primary care session this morning who understood the importance of the day. The nurse’s aide who works with me looked over my shoulder as I read the news on my computer while that patient changed into his examination gown. She was overjoyed. “We have to take care of these people,” she said, meaning the millions of uninsured. “How could we do that without this law?” I can’t tell you off the top of my head what kind of insurance my 71 year-old with high blood pressure has. I just know he has insurance, as do all the patients in my practice. We don’t turn anyone away at my hospital, but, since health care reform passed in Massachusetts in 2006, the number of uninsured patients has dwindled.

That’s the good news. The tougher news is that it takes hard work to make coverage for everyone viable. And now that the ACA has survived, that hard work can get underway. A taste of what is coming can be gleaned from my experiences as I took care of patients today. I received emails about three patients who have been identified as “high risk” because of multiple medical conditions. My organization wanted me to verify that they are my patients, and that they are at sufficiently high risk that they should also be followed by a nurse case manager. Working with those case managers is going to mean more emails and more phone calls, and there will be moments when those interactions seem like a burden. I also received a computer reminder that a test I wanted to order on one of my patients might be a duplicate of one performed two months ago. Yes, it was the same test, but I needed to run it again. The reminder slowed me down but it could have prevented a mistake. These interruptions complicate my work — but they also improve the quality of care.

Why is my organization doing all these things that make my already difficult day harder? The reason is that, ahead of the Affordable Care Act, we had changed our main model from fee-for-service to population-based contracts, where we have an incentive to manage overall costs and outcomes of groups of people, rather than getting paid procedure by procedure, patient by patient. That is the logical consequence from the imperative to take care of everyone with limited resources — and we can expect similar consequences to flow throughout the country from the Court’s decision.

The Affordable Care Act will add complexity to some aspects of health care as organizations re-tool, and it may increase some costs in the short term. But ultimately it will improve the quality of patient care and reduce costs as providers and their organizations focus as much on keeping people healthy as they do on healing them when they’re sick. That’s something patients, providers, and employers who subsidize care — and want healthy employees — should be happy about.

The other end of shyness

Do you privately shake with nerves or shyly blush when the attention is on you? Most people experience some form of shyness but others are so immobilised by the fear of being judged negatively that they can barely function. Social phobia is the third most common mental illness after depression and substance abuse. We hear about one woman’s 20 year struggle with social anxiety and some recent scientific findings about the brain activity associated with this disorder.

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You Don’t Need a PhD to Innovate

So you’re not a nano-technologist. You don’t know how to sequence the human genome. You confuse artificial intelligence with posing. Does this mean that you’re useless — that you have no place in the 21st-century economy?

Cheer up. You don’t have to be Einstein to disrupt paradigms. Well, actually, you do — Einstein himself said that his greatest asset was his imagination, not his knowledge. The point is, if you can think, you can innovate. If you can ask “why?” you can change the world. Let other people do the hard work of figuring out how to make an airplane fly and a TV screen thinner. You can be the one who figures out that putting the TV in everyone’s airplane seatback could make for a great new airline. Here are a few examples where a simple twist on an existing paradigm changed everything — often in complicated technological businesses.

Better Planet
The trouble with electric cars is that their range is limited, right? You can’t drive cross-country without stopping every 200 miles to recharge the battery — which takes a lot longer than filling a car with gas. Shai Agassi, the Israeli entrepreneur who founded Better Place (profiled by Dan Senor and Saul Singer in their great book, Start-Up Nation), asked, “Why recharge the battery? Why not replace it at a swapping station?” The facility looks like a gas station. But instead of pulling in and filling up, you pull in and a robot swaps out your drained battery for a fully charged one. You don’t own a battery, you just rent one every 200 miles. Brilliant. And I predict that the innovation will make the electric car the car of the future. But it would never stand a chance without Shai Agassi’s idea.

Menchie’s Yogurt
Cold Stone Creamery understood that people like custom-made treats. So their business model is give you exactly what you want. An employee asks you what ice cream flavor and toppings you want, painstakingly measures and scoops everything out, mixes it all together, and then tallies up the cost of everything you selected. It takes five minutes. That means long, discouraging lines. And at $10 an hour for labor, the process adds $1.25 to the cost of the treat. Menchie’s Yogurt, now the world’s largest self-serve frozen yogurt retailer, asked, “Why not let the customer do all the work?” So when you walk in, you see eight yogurt machines, each with two different flavors. You fill your own cup with as much or as little as you want of as few or as many as 16 flavors of yogurt. You then add your own toppings. The cashier simply puts your cup on a scale, and you’re charged by the weight. It’s fast. Swipe your credit card, and you’re out of there, enjoying your own custom-made dessert. Bye-bye, traditional yogurt retail.

Rent-a-Bike
You know Zipcar, right? They asked, Why should people who need a car have to travel to huge lots miles away to rent one? Why not let people become members and pop cars all over town? Members simply locate a Zipcar nearby, activate the door opening with a smartphone app, and go. No agent involved. Now several enterprising start-ups, like Hubway in Boston, have done the same thing with bicycles. And it’s not exactly like bicycles were a new technology. With a $70 annual membership, you get a key. Just swipe it at one of the bike stations around town, grab a bike, and you’re off. You can even rent a helmet. You return the bike to any station you choose. No on-site employees involved.

iPhone
When Steve Jobs saw multi-touch technology, his first reaction was, “My God, this could be a phone.” He didn’t design the technology. He just recognized that a multi-touch screen could create an infinite number of user interfaces for an infinite number of applications, instead of the one user interface to which traditional phones were limited. So long, plastic buttons.

The Feature-Length Cartoon
Walt Disney didn’t invent the cartoon. But he did ask, “Why are cartoons always only three minutes long?” He realized that with the right story, you could engage an audience with animation for just as long as you could with live actors. The feature animation business was born.

The Upside-Down Ketchup Bottle.
Heinz didn’t invent upside down. Upside-down had been around for a while. But someone there finally asked, “Why do we let the ketchup rest in the bottle at the farthest point from the opening? Why not flip the design, so people don’t have to break a blood vessel getting the damned stuff out.” Voilà. Upside-down packaging everywhere.

So, welcome back to the 21st-century economy. If you can ask “Why?” in an industry where everyone else is too busy or distracted to bother, you can build a great business, no matter how complex the underlying technology — and maybe change the world in the process.

You can be the one who asks “Why?” You can hire people to figure out the how.

What are some of the unasked “Why?” questions that you’ve noticed in the world today?

Make Everyone a Risk Manager

By the nature of their work, people at The University of California, where I serve as Chief Risk Officer, are risk takers. Their risk appetite is amplified by an urgency or impatience to “get the job done,” a belief that they have all the information they need and therefore don’t need the assistance or interference of others, and a feeling that if all of the potential risks were uncovered, they would not be allowed to proceed.

UC employs more than 170,000 faculty and staff. Its five medical centers handle more than three million patient visits each year. UC manages three U.S. Department of Energy national laboratories and operates the largest fleet of research vessels in the world. UC is also actively involved in locations beyond its campuses, national labs, and medical centers — in places throughout California, around the world and online. So, how do we align faculty and staff risk appetites with what the system can tolerate?

Our solution is to put people in charge of their own risks and my role is to provide tools to help them identify, manage, and monitor their risks — not to manage the risks for them.

Our Office of Risk Services (ORS) takes an organization-wide approach to attack the University’s portfolio of risk by utilizing a host of different tools, workgroups, and initiatives. Key to the program is our Enterprise Risk Management Information System (ERMIS), which provides a variety of qualitative and quantitative tools to help UC unit managers identify their risks and determine where to strategically deploy resources.

ERMIS can define, highlight, and predict risks and trends to allow managers to intervene before problems arise, and it can be adapted to many different sectors. It creates efficiencies by automating manual processes and the application flexibility reduces IT redundancy across different units and locations.

In one recent application, a UC researcher wanted to take a team of graduate students to a country that was a security and safety concern. In many universities, he would have struggled to obtain funding for such a project. Working with the Risk Services group, the researcher was able to identify specific likely risks and could modify the project plans so as to reduce the risk and unlock the funds he needed.

We are also involved in helping managers assess the risks of new projects. One of UC’s major current initiatives is to move to a centralized payroll system. The project known as UCPATH offers tremendous opportunities for savings and efficiency, but it carries complex risks: operational, compliance, strategic, and reporting risks. We are leveraging our ERMIS system and tools to monitor and report on risks and risk treatments. This same methodology has been used on a variety of important initiatives including but not limited to: foreign operations; expanding research and clinical operations; student-led community initiatives; and consolidation of business units.

We track the value and savings of our risk management program along multiple dimensions: efficiencies created, reduced impact of risks, and reductions achieved in borrowing costs. Over the last six years, the program has saved more than $500 million, while UC’s investment in resources has risen.

We are getting ready for our annual Risk Summit, where more than 600 people — from students to scientists, representing every spectrum of UC — will be in attendance. The common thread will be that they are all their own risk managers.

Getting Back to Growth

That phew! you’re hearing is the sound of investors exhaling. Recent quarterly reports suggest that corporate profits rose for a 10th consecutive quarter, defying predictions that U.S. companies would show no earnings growth in the early part of this year. This preserved one of the indicators that have consistently pointed north since the economy emerged from recession in 2009.

But CEOs can’t rely on cost-cutting to keep their profit momentum going — it’s gone about as far as it can at most companies. Nor can they rely on macroeconomic growth. In fact, we are now experiencing the lowest-growth recovery on record, including the Great Depression. Today’s business leaders must be able to boost their organic growth another way. Here are four ideas:

1: Have a method. I am often amazed at the helter-skelter way that companies pursue organic growth. Many chase market share they’ll never get. Others focus too much on their most loyal customers or, worse, on their competitors’ most loyal customers. A lot of companies throw money at the problem — more R&D, more marketing, more sales people. Some senior leaders simply lean harder on their operating units, increasing their targets and demanding more growth.

All of these approaches lead to initiatives that will never pay off — sometimes a multitude of them. A few years ago, one of the world’s largest retailers had literally hundreds of initiatives going after same-store sales growth. Its focus was to get more people into the store (“foot traffic”) and, once in the store, to get them to shop more categories (“cross the aisle”). But when the retailer took a more careful look, it found that its best opportunity was to get people to buy more in the categories they were already shopping (such as apparel or electronics or groceries). This realization — which came from a headroom analysis, just one method companies can use — made the retailer more focused and dramatically reduced the number of initiatives its managers had to support. Its “return on effort” skyrocketed.

2: Make growth “net free.” The problem with investing in organic growth is that the costs hit the books before the revenues do, creating a tension between short-term profitability and long-term growth. Encouraging companies to be more “long term” is not the answer. Better to recognize that no company is 100% efficient and that there is always a chance to fund organic growth through savings generated by efficiency gains.

This was essential to Jim Kilts’ turnaround of Gillette a few years ago. He instituted a policy of continuous productivity improvement, but also allowed — even encouraged — his operating units to use the savings to fuel future growth. By the time Gillette sold itself to Procter & Gamble, Kilts had turned Gillette into an organic growth machine with far higher margins than before he took over.

3: Make your company growth-friendly. Companies sometimes have practices that subtly – but powerfully – discourage organic growth. One is surrendering to the business cycle — under-investing in the down part and over-investing in the up part. Another is senior leaders typecasting their portfolio, referring to this unit as a “cash cow” and that one as a “growth engine” — unhelpful labels that result in missed opportunities (in the first case) or overly aggressive behaviors (in the second). I’ve even seen situations where a company’s language gets in the way, such as defining an “organic growth opportunity” not in terms of ends but of means (more sales people, a new CRM system, or a new product introduction, for example).

If you want your operating units to be good at growing organically, you need to create an environment that encourages it. The right language can help. So can having a corporate reserve fund to help the operating units pay for organic growth. The best way is to design the right dialogs and data into the management process that governs your company’s strategy and execution.

4: Make growth fun. The daily business of growing organically can be a grind. The good news is that it’s a lot more fun than cost-cutting and — unlike M&A — it is everyone’s business.

There are many ways to get the broader organization involved. Some people like to teach, so have them (for instance) teach your company’s method for organic growth. Other workers like a friendly competition, so set up ways to enable that — and to recognize even small achievements. I know of one media company that put a giant gong in its sales department. When revenue targets were hit, a manager would emerge and give that gong a wallop. It was a signal — audible to everyone — that the company was winning.

Organic growth is infectious. Celebrate it. Get everyone on board.

My experience suggests that growing organically is a skill companies can develop, not an advantage they temporarily gain as a result of a hot product or successful business model. When companies put their minds to it, organic growth is the daily, weekly, monthly, and yearly outcome of finding, funding, and acting on opportunities that are often hiding in plain sight.

Ken Favaro is co-author, with David Meer and Samrat Sharma, of “Creating an Organic Growth Machine” (HBR, May 2012), as well as “Organic Growth is the Underestimated Opportunity,” on the HBR Blog Network.

A Health Mandate That Business Can Live With

Whether President Obama’s health reform law lives or dies after next week’s Supreme Court decision, it won’t alter the dire fact that employee health costs have exploded to become the third-largest expense in business today, undermining the financial health of thousands of companies.

Until now, most businesses have tried to deal with their surging health costs in one of two ways. About 22 percent of firms in the U.S. have reduced employee benefits. Another 20 percent have increased the employee’s share of the premium costs. But neither denial of benefits nor cost-shifting has slowed the upward spiral of employee health costs.

There is a way, however, to get health costs under control without denying benefits or making employees pay more. But it requires that employers stop the practice of handing out unlimited health benefits with no strings attached.

Instead, they must embrace a health mandate of a different sort — one that holds everyone accountable for their health-related behaviors, from the CEO on down. Once they do that, the evidence shows that they will get healthier employees and a healthier bottom line.

That’s because the declining health of the American worker is at the core of the health care expense burden. As one recent study found, an astonishing 86 percent of all full-time employees in the U.S. — that’s six of every seven workers — are now either overweight or have a chronic (but usually preventable) health condition. And as the health of employees keep declining, their employer-paid health premiums keep rising — 113 percent just since 2001, in fact — and productivity plummets. According to a report from the Milken Institute, direct medical costs combined with ill health-induced absenteeism and “presenteeism” — which is when employees manage to show up for work but are less productive — costs American businesses more than $1.3 trillion per year. That’s right, trillion!

And 70 percent of that cost, notes the Milken study, is totally preventable. It has been proven that wellness programs can reduce employee health risks considerably. A 2010 study by Harvard health economist Katherine Baicker — hers is considered the gold standard in measuring wellness return on investment — found that for every dollar spent on wellness, “medical costs fall by about $3.27 … and absenteeism costs fall by about $2.73.”

Some accountability-based wellness programs deliver even bigger savings to businesses. In these, employees willing to take responsibility for their health-related lifestyles pay a much-reduced contribution toward their premium, often half that paid by non-participants. Those found to have biometric readings indicating significant health risks must then work with a health coach to at least try to reduce those risks in order to keep receiving the lower premium. These programs are completely voluntary, and no one is penalized for being unhealthy. They are simply rewarded for trying to reduce those risks, unless their doctors advise against it.

It turns out that even small improvements in an employee’s biometric readings make for huge reductions in health claims costs. A recent study we conducted of four mid-size employers with accountability-based wellness programs found that the total annual paid claims of wellness participants dropped to $2,269 compared with $6,187 for non-participants.

This despite the fact that 68 percent of workers in these programs started out with significant health risks, which is fairly representative of the percentage with health risks among the general population. Yet emergency room claims, pharmacy claims, hospital claims — all showed a sharp drop among wellness participants versus a steady rise among non-participants.

Now that’s a health mandate business can live with!

As we await next week’s Supreme Court ruling, we would do well to remember that despite all the political debate in Washington over “Obamacare,” the real battle over the future of health care is being waged out in the marketplace, in the world of business.

As, in fact, most such policy battles usually are.

The Key Ingredients of a Successful Team

I was recently having a long conversation with a colleague, who was passionately outlining a new solution to an old problem, when my cellphone died. I was traveling, and to continue our discussion, I had to walk across the airport to a public pay phone. I kept adding coins to keep the call going. The conversation ended once my colleague convinced me that even though existing solutions would work, a novel approach would result in an exponential performance improvement.

The episode triggered an interesting thought. The pay phone represents the archetypal machine; it responds predictably. You insert coins and the line comes alive; you add coins and it continues to work. But that doesn’t quite work with people, does it? My colleague, for instance, was driven by the excitement of trying a new solution, not by persisting with an existing one.

For over two decades, I’ve tried to understand what drives teams. Conventional theories never work; I find that the secret sauce for a successful team has three ingredients:

1. A big challenge: The fun is in the chase. That mightn’t be true in the context of courtship, but it’s certainly true of work. When people face big, hairy and audacious goals, searching for solutions becomes exciting, even obsessive. Google’s mission statement is bold but simple: “Organize the world’s information and make it universally accessible, and useful.” It has done well by chasing that incredibly bold goal.

2. People with a passion to perform: It’s fun to watch a group that is brainstorming. The excitement and restlessness in people who are trying to find solutions to vexing problems is priceless; that can’t be replaced by expertise or experience. People fuel incredible energy, as teams go all out to find solutions. They spare little thought for the rewards; they’re absorbed in overcoming the challenges they face.

3. Space to excel:The third crucial element is the space to innovate, to be able to make mistakes and start over. As children, we may have heard the fable about the spider that successfully climbed a wall by morning after falling to the ground all night long. We are all spider-people in that sense — ordinary people with extraordinary powers to succeed. A team leader who can provide the right amount of room for experimentation can ignite the power of passion and generate miraculous results.

If people see a challenge in what they are doing, have the passion to perform, and have the space to create magic, they will. Research challenges the assumption that people will perform only if they’re provided financial incentives. In this fascinating video, Daniel Pink, who wrote Drive: The Surprising Truth About What Motivates Us, lists more than one study that dispels traditional carrot-and-stick wisdom. Pink believes that executives would do well to understand the importance of autonomy, mastery, and a sense of purpose in driving success.

The drummer boys creating music today aren’t waiting for anyone to wind them up with the key of monetary rewards; they’re passionate, self-driven, and often, self-organized. Isn’t it time we plugged into them?

The Discipline of Listening

As the up-and-coming vice president and CEO candidate for a Fortune 500 technology corporation sat before the CEO for his annual review, he was baffled to discover that the feedback from his peers, customers, direct reports, and particularly from board members placed unusual emphasis on one potentially devastating problem: his listening deficit. This executive was widely considered among the best and brightest in his company, but it was evident that this issue needed immediate attention if he ever hoped to advance to the top spot.

He wasn’t alone in that regard. My knowledge of corporate leaders’ 360-degree feedback indicates that one out of four of them has a listening deficit—the effects of which can paralyze cross-unit collaboration, sink careers, and if it’s the CEO with the deficit, derail the company. But this doesn’t have to be the case. Despite today’s fast-paced business environment, time-starved leaders can master the art of disciplined listening. Conventional advice for better listening is to be emotionally intelligent and available. However, truly good listening requires far more than that. As you move toward truly empathetic listening, consider these tips:

Pan for the nuggets. I saw how Larry Bossidy, former CEO of Honeywell, did this. Sitting down with a business unit leader presenting him with information about a $300 million dollar technical investment opportunity, Bossidy divided a sheet of paper about three-quarters across. On the larger left side of the paper, he scribbled detailed notes; on the smaller right side, he occasionally jotted down two or three words, capturing what he perceived to be the key insights and issues being brought to his attention. It was a simple technique that disciplined him to listen intently for the important content and focus follow-up questions on points that really mattered. Whether or not this is your method, you should train yourself to sift for the nuggets in a conversation. Then let the other person know that they were understood by probing, clarifying, or further shaping those thoughts. The benefits of this go beyond ensuring that you heard it right: first, the person on the other end of the conversation will be gratified that you are truly grasping the essence of their thoughts and ideas; second, this gratification will motivate and energize them to create more thoughts and solutions. Listening opens the door to truly connecting and is the gateway to building relationships and capability.

Consider the Source. When working with peers, in and across teams, work to understand each person’s frame of reference—where they are coming from. This is extremely important when disagreements arise. When you truly understand the perspective of others, you are most likely to reach productive solutions; further, all the participants will feel heard, whether their solution is adopted or not. Even better, it’s likely that the solution will not turn out to be one that was brought to the table by any one party; it will be a new approach crafted in the conversational environment you created. Active listening and probing (with humility, not aggression) energizes groups, encourages them to reach consensus, and helps them arrive at new and better solutions.

Consider Ivan Seidenberg, who rose to become Chairman and CEO of Verizon. Earlier in his career, as a business unit manager, he recognized that he must cut costs. But his division’s operations department was adamant it could not be done given the tremendous complexity of its processes. Seidenberg understood their frame of reference, which was that they were in favor of simplification, but couldn’t achieve it without the collaboration of the product departments. Seidenberg got the two sides to collaborate and much better solutions were found. Not only were costs cut, but operations became more focused and simplified.

Prime the Pump. After GE achieved its goal of being first or second in several of its businesses with exceptional margins, then-CEO Jack Welch faced the challenge of how to spur continued growth. He actively listened to a Business Management Course team at GE’s Crotonville learning center. They suggested that, if a GE business had become the biggest fish in its pond, it was thinking about the pond too narrowly. The definition of the market needed to be changed based on an expanded understanding of its customers’ needs. As business unit managers prepared their next round of strategy presentations for the Chairman, Welch told them all to redefine their market in such a way that their share was less than 10 percent. This released GE managers’ energy to grow their businesses with new ideas. One of those ideas was to grow the services businesses across GE. Today, GE has a $200 billion backlog in its services business.

Slow Down. There is a reason that, over the years, you have lost your ability to listen. It feels too passive, like the opposite of action. It’s much faster to move to a decision based on the information you already have. But in doing so, you miss important considerations and sacrifice the opportunity to connect. Understand that as you begin to change your listening style to a more empathetic one, you may often feel inefficient. It takes time to truly hear someone and to replay the essence of their thoughts back them so that both parties are clear on what was said. The payback is dramatic, but it comes over the long run.

Keep Yourself Honest. No habit is broken without discipline, feedback, and practice. As well as installing a personal mirror to reflect on your own behavior, find a colleague to give you honest feedback on how well you are tuning into the thoughts and ideas of your colleagues, managers, board of directors, and others. Explicitly lay out an exercise regime by which you will practice empathetic listening every day and strengthen your skills. Make a habit of asking yourself after interactions whether you understood the essence of what was said to you, the person’s point of view, their context, and their emotion. Also ask yourself whether that person knows that they were heard and understood.

For leaders, listening is a central competence for success. At its core, listening is connecting. Your ability to understand the true spirit of a message as it is intended to be communicated, and demonstrate your understanding, is paramount in forming connections and leading effectively. This is why, in 2010, General Electric—long considered the preeminent company for producing leaders—redefined what it seeks in its leaders. Now it places “listening” among the most desirable traits in potential leaders. Indeed, GE Chairman and CEO Jeff Immelt has said that “humble listening” is among the top four characteristics in leaders.

Truly empathetic listening requires courage—the willingness to let go of the old habits and embrace new ones that may, at first, feel time-consuming and inefficient. But once acquired, these listening habits are the very skills that turn would-be leaders into true ones.

The Smart Way to Make Profits While Serving the Poor

Most companies trying to do business with the 4 billion people who make up the world’s poor follow a formula long touted by bottom-of-the-pyramid experts: Offer products at extremely low prices and margins, and hope to generate decent profits by selling enormous quantities of them. This “low price, low margin, high volume” model has held sway for more than a decade, largely on the basis of Hindustan Unilever’s success in selling Wheel brand detergent to low-income consumers in India.

However, as I discussed in my last post, the model has a fatal flaw: It inevitably requires an impractical penetration rate of the target market — often 30% or more of all consumers in an area.

Any business that starts off needing a 30% or higher penetration rate is built on a shaky foundation. At the bottom of the pyramid, it’s a losing proposition. Instead, companies seeking to improve the lives of the world’s poor should focus on a more realistic route to profitability: They need to elevate gross margins far above the company average by pushing down variable costs and boosting the price consumers are willing to pay for a unit of product. They also need to drive up the price point for a single transaction. This combination of higher margins and higher price points boosts the contribution — the amount of money that goes to covering fixed and operating costs — generated from every transaction.

Generating a high contribution from every sales transaction requires a three-pronged margin-boosting approach: localized base products sold as a bundle, an enabling service, and customer peer groups.

Localize and bundle base products. A localized base product is an offering whose final processing prior to sale — such as dilution or combination with other components or ingredients — is done as close to the target market as possible. The company saves on labor costs because local wage rates are low. Solae, a global manufacturer of soy protein, was able to double gross margins by getting repeat customers to use their own refillable containers when they bought bulk protein.

Bundles save consumers time and money in gaining access to needed products and create a richer consumer experience whose total value is greater than the sum of the parts. At the same time, bundles allow companies to sell more per transaction. For instance, a low-income consumer can more easily lay out the money for a “body care kit” that contains several needed products such as shampoo, toothpaste, and other products than pay the same amount for a single product, like a large-size shampoo.

Makers of solar-powered lights — for example, D.Light and Duron — provide both light and other needed functionality, such as a capacity for recharging cell phones, in their products. Cosmos Ignite’s MightyLight integrates a portable radio, and the company is considering adding more functionality, such as the ability to run battery-operated devices and water purifiers.

Offer an enabling service. To sustain high margins, it is also necessary to offer a service that engages customers and gives them the knowledge and skills needed to maximize products’ functionality. A close relationship between consumers and service providers also adds intangible value to the consumer experience, allowing companies to charge a premium.

For example, for about $14 a week, Mexico-based cement manufacturer CEMEX sells low-income families a service that helps them build their own homes more effectively and at lower cost by providing access to inspections, warehousing of materials, and the advice of an architect. The price includes the company’s cement products.

Cultivate customer peer groups. Like a sewing circle or an investment club, a customer peer group is a close-knit association of people who share an identity — but in this case, it’s built around a product. Such groups extend the high-touch benefits of an enabling service, as members help one another adopt new behaviors and mind-sets that make the product more beneficial.

Peer groups also drive up the size of sales transactions: A single sale aggregates the demand of many customers. Grameen Bank, the microfinance bank in Bangladesh, is well known for its use of peer groups: Self-formed clubs of five to 10 people, usually women, share responsibility for microloans. A group will typically give itself a name and meet regularly to check on members’ businesses. Grameen boosts the loan amounts given out per transaction by interacting with the lending circle, not individual borrowers. It attributes its 99% repayment rate in large part to the self-imposed discipline and mutual learning induced by the peer-group approach.

If companies wish to launch flourishing ventures capable of transforming the lives of millions of low-income people across the developing world, they must get back to basic business tenets. However laudable its mission, a business built on unrealistic expectations will fail just as surely at the bottom of the pyramid as in a developed market.

Because the high costs of doing business among the very poor demand a high contribution per transaction, companies must embrace the reality that high margins and price points aren’t just a top-of-the-pyramid phenomenon; they’re also a necessity for ensuring sustainable businesses at the bottom of the pyramid.

This blog post was excerpted from Erik Simanis’ article “Reality Check at the Bottom of the Pyramid” in the June issue of the magazine.

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