hbs apple case study

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Apple Inc. in 2020

By: David B. Yoffie, Daniel Fisher

After a decade as CEO, Tim Cook is facing one of his biggest strategic transitions of his tenure. While Apple had performed spectacularly well under Cook, Apple's core business was maturing. Sales of…

• Length: 31 page(s)
• Publication Date: Apr 6, 2020
• Discipline: Strategy
• Product #: 720454-PDF-ENG

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After a decade as CEO, Tim Cook is facing one of his biggest strategic transitions of his tenure. While Apple had performed spectacularly well under Cook, Apple's core business was maturing. Sales of iPhones, iPads, and Macs were flat or down. However, Apple's new hardware-Apple Watch and Airpods-as well as services were growing rapidly. This case explores Apple's history and Cook's strategic options for driving new hardware and services into Apple's mainstream in the next decade.

Learning Objectives

This case can be used for several purposes, including industry analysis, introduction of complementary assets, sustaining competitive advantage and expanding corporate scope.

Apr 6, 2020

Discipline:

Harvard Business School

720454-PDF-ENG

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Harvard Business Case Study: Apple Inc.

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Harvard business school publishes kaspi.kz case study.

ALMATY, Kazakhstan, May 14, 2024 (GLOBE NEWSWIRE) -- Joint Stock Company Kaspi.kz (“Kaspi.kz”) (Nasdaq: KSPI) announces that the company is the subject of a Harvard Business School (HBS) case study ‘Kaspi.kz: Building Trust through Innovation’. This is the second Kaspi.kz case study, following on from HBS’s 2019 case study ‘Kaspi.kz IPO’.

HBS’s latest Kaspi.kz case study examines how the company’s unique corporate culture, including its obsession with the quality of its services has helped Kaspi.kz to build the trust of its customers and stakeholders. This has proven fundamental to the company’s ability to continually develop innovative, highly popular digital products which achieve world-class adoption and customer engagement. The central question of the case study is whether this approach combined with Kaspi.kz’s homegrown brand and technology expertise will be an important asset for the company as it seeks to expand beyond Kazakhstan.

Mikhail Lomtadze, CEO and co-founder of Kaspi.kz, commented:

“This is Harvard’s second case about Kaspi.kz. The first case, written in 2019, has now been taught for 4 years. The new case is dedicated to our unique corporate culture and obsession with high quality services, which are key to gaining the trust of our customers. It is especially pleasing to know that even more students and professors around the world will learn about and explore Kazakhstan and the rapid pace of digital innovation in our country.”

The case study can be accessed via:

https://hbsp.harvard.edu/product/324022-PDF-ENG?Ntt=

HBS is known for teaching not from books, but real cases about companies and actual management decisions. The typical HBS case is a 20 to 25-page story developed for educational purposes about a managerial challenge facing a company. HBS cases are taught not only at Harvard, but at other leading universities around the world.

About Kaspi.kz

Kaspi.kz’s mission is to improve people’s lives by developing innovative mobile products and services. To deliver upon this, we operate a unique, two-sided Super App model – Kaspi.kz Super App for consumers and Kaspi Pay Super App for merchants. Through these Super Apps, consumers and merchants can access our leading Payments, Marketplace and Fintech Platforms. All our services are designed to be highly relevant to users’ everyday needs and enable consumers and merchants to connect and transact using our proprietary payments network. The combination of a large, highly engaged consumer and merchant base, best-in-class, highly relevant digital products and a capex lite approach has resulted in strong top-line growth and a profitable business model, and has enabled us to continue innovating, delighting our users and fulfilling our mission.

Contacts David Ferguson, [email protected] +44 7427 751 275

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Ask These Questions Before Choosing a Manufacturing Location

How to grapple with the complexities of moving operations in a tightly woven global economy.

• Apple Podcasts

In today’s global economy, what are the factors that go into choosing a production location?

In this episode, Harvard Business School professor Willy Shih draws on his case study about China-based automotive glass maker Fuyao to discuss this core strategic question. The company must decide between two options to fulfill its upcoming contracts: its new Ohio factory or its factory based out of Tianjin, China. Unlike the Ohio factory, the Chinese factory produces below the cost target, but it also incurs extensive shipping costs and requires a far greater amount of inventory holding.

Shih explains how to account for product life cycles and the length of your inventory pipelines when selecting a manufacturing location. He also discusses how to assess other possible risks that could cause delays or increase production costs—like customs delays and labor strikes.

Key episode topics include: strategy, cross-cultural management, global strategy, operations and supply chain management, China, shipping, production planning, inventory pipeline.

HBR On Strategy curates the best case studies and conversations with the world’s top business and management experts, to help you unlock new ways of doing business. New episodes every week.

• Listen to the original HBR Cold Call episode: China-based Fuyao Glass Considers Manufacturing in the U.S. (2020)
• Find more episodes of Cold Call
• Discover 100 years of Harvard Business Review articles, case studies, podcasts, and more at HBR.org

HANNAH BATES: Welcome to HBR On Strategy , case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business.

In today’s global economy, what are the factors that go into choosing a production location? That’s the strategic decision facing Wen Li. She’s the global sales manager for Fuyao Glass, the world’s largest automotive glass producer.

She must decide where to fulfill upcoming contracts: In Fuyao’s new Ohio factory, where production rates are lower due to a newer employee base? Or their factory in Tianjin, China, which produces faster and cheaper but would incur shipping costs and require enormous inventory management?

Today, we bring you a conversation about a core strategic question facing managers who oversee supply chains, with Harvard Business School professor Willy Shih.

In this episode, you’ll learn how to account for product life cycles and the length of your inventory pipelines when you select a manufacturing location. You’ll also learn how to assess other possible risks that could cause delays or increase production costs – like customs delays, labor strikes, and political conditions that could lead to tariffs.

Since this episode originally aired on Cold Call in January 2020, global trade and U.S. and Chinese production have continued to shift. But the case study and its larger lessons in supply chain strategy are as relevant as ever. Here it is.

BRIAN KENNY: During the run up to the 2016 presidential election, candidate Donald Trump promised to reinvigorate the economy by bringing American manufacturing jobs back to the U.S. It was the cornerstone of his Make America Great campaign. Three years later, the results are mixed. The New York Times reports that companies have relocated just under 145,000 factory jobs to the U.S. On the other hand, the administration’s trade war with China may have undercut those gains by compelling some U.S. companies to move their manufacturing operations from China to other Asian countries with low-cost labor and easier access to Asian markets. In a highly polarized political environment, there is considerable debate over how to measure the effect of any reshoring trends by U.S. companies. But this isn’t just a concern for U.S. business leaders, the repatriation of American firms and the U.S. China trade war, have business leaders around the world grappling with the complexities of moving operations in a tightly woven global economy. Bottom line, it’s really complicated. Today we’ll hear from professor Willy Shih, about his case entitled, Fuyao Glass America: Sourcing Decision. I’m your host, Brian Kenny, and you’re listening to Cold Call , recorded live in Klarman Hall Studio at Harvard Business School.

BRIAN KENNY: Professor Shih is an expert in manufacturing and product development who also spent 28 years in industry at some of the largest technology firms in the world. And you know your way around a manufacturing floor. Is that right, Willy?

WILLY SHIH: Well, I’ve seen quite a few, so some people think I’m an expert.

BRIAN KENNY: And we’re going to talk about that more today. Thanks for joining me.

WILLY SHIH: Oh my pleasure. Thank you for having me.

BRIAN KENNY: We’ve had you on the show before, so I’m glad that you came back. I thought this case was really interesting because it kind of flips the script a little bit on the repatriation of companies to the U.S. Because here we have a Chinese company making the very same complicated decision, but from the other side of the Pacific. So I thought that was kind of an interesting flip on this. But let me ask you this, to start the way we always do, can you tell us what’s happening as the case opens? Who’s the protagonist and what’s on her mind?

WILLY SHIH: The case is actually Wen Li, who is the protagonist, who is the global sales manager for Fuyao Glass and she is preparing for a meeting with the chairman. And the question is really, they have opened this new factory in Moraine, Ohio and they are a Chinese company. Most of their other factories are in China and they’ve made some ventures abroad. But this factory in Moraine was really their stake in the American market. And so the question in front of her is, they have just won a new bid, which they priced very aggressively, should they supply it out of Ohio, which is more expensive at the moment or should they supply it out of China, where they actually have very established, mature facilities and they can deliver it at a much lower cost.

BRIAN KENNY: And that raises a whole host of issues that we’re going to get into that I thought were really interesting and sort of unintended consequences of some of the decisions that business leaders are being forced to make these days in the current environment. But I’m wondering, how did you hear about Fuyao? What prompted you to write the case and how does it relate to the work that you do here at Harvard Business School?

WILLY SHIH: What I was looking for as I was looking for a case that would teach about sort of the fundamental tenets of trade and globalization. Right, so we were looking for something that would illustrate those core issues, tradability of goods, to what extent do I need to manufacture something locally that I’m going to consume locally or can I make it in some other part of the world? The notion of labor arbitrage. When I have labor costs in one part of the world, which are very different than where I might want to sell, does it make sense to ship product long distances to do that? And then the third question that we really wanted to teach was about the tradeoff between using more labor or using more capital. And this is heavily influenced by your local labor costs and market conditions, to what extent do I invest more in automation? Or would I rather do more with labor because labor is less expensive and more flexible? We wanted to illustrate those three concepts. Okay. And what appealed to me about the Fuyao setting is, it’s the traditional offshoring narrative. It’s about a company that is trying to move jobs and manufacturing from its home base to another country. And it faces all the same challenges. The very popular narrative we heard in America for the last 15 years in particular, except it’s reversed. Here’s a Chinese company offshoring jobs to the U.S. and the chairman in China, by the way, is facing the same type of political issues there. How could you be shipping Chinese jobs to America? But it illustrates all those same key concepts that we wanted to in a narrative that’s just backwards.

BRIAN KENNY: So let’s talk about Fuyao. They make glass, they make glass for cars, at least in the case they may make glass for other things as well.

WILLY SHIH: Fuyao is an automotive glass maker and so they focus only on the automotive glass market. Automotive glasses are a little different than the type of glass that you have for windows. Window glass is normally are just flat sheets of glass, it’s made by a process called Float Glass, The Pilkington Float Glass Process. When you make automotive glass, usually what you have to do is you have to first cut it and shape it to match the style of the vehicle. So every vehicle that’s produced, usually, you have to produce custom cut windows for that vehicle. And then the other thing you have to do is you have to treat it specially. So for example your front windshield is safety glass. So that’s actually two sheets of glass with a layer of a polymer in between so that if you strike it with some object, it won’t shatter, rather it’ll hold all the shards of glass in place. So there’s an assembly process associated with it. And then there’s also the tempering process where you really try to change the physical properties of the glass through a heat cycling so that it won’t shatter on impact, it’ll be stronger. So you start with float glasses, the raw material, and then you bend it and you cut it and you do these various processes. And then also you will add things like features, right? So for example, sometimes you want to embed heating wires in it so you can have defrosting. Or some of the newer windshields now will have moisture sensors embedded in them to trigger your windshield wipers and things like that. So there’s lots of features as well.

BRIAN KENNY: Even displays…

WILLY SHIH: Even displays.

BRIAN KENNY: My side mirrors tell me if there’s a car in the lane before I change.

WILLY SHIH: Right. So then what you can do is you can embed features like that. So Fuyao is a specialist, okay. And at the time of the case, they had almost 65% market share in China of all the automotive glass sold in China. Now that’s particularly significant because at the time of the case, China was already the largest automotive market in the world. At the time of the case, China was around 28 million vehicles produced and sold every year, whereas the U.S. is typically around 16 to 17 million vehicles sold per year. But we only manufacture 11 million and change in the U.S. and the rest are imported. So from a manufacturing scale standpoint, China is actually much larger market.

BRIAN KENNY: And I’m sure a lot of people listening to our conversation are driving in their cars. I would just say, look around you, there’s so much glass in a car. Until I read the case, I hadn’t really thought about that. And then I was still driving home after reading the case and I thought, “Wow, this thing is probably 50% glass it seems like-”

WILLY SHIH: Well, there’s a lot of glass, there’s increasing use of glass in fact, especially for skylights, there are some vehicles who have very large skylights. And so you can imagine the kind of the mechanical strength you need to have for that. But then also if you look at the side windows, there’s a lot of complexity. You have a lot of these corner cuts and a lot of curve shaping and stuff. So there’s actually quite a bit of manufacturing complexity because for each set of auto glass for a vehicle program, right. So for an individual model car, you have to do a set of molds and you have to do custom cutting and you have to make it match that particular vehicle. So each one of these orders and this case concerns the particular order for the glass set for a particular model. Once you win that, then you have to have a production plan and you then have to choose which factory you want to source it from because the auto maker will expect to work with that line in that factory for the life of that model.

BRIAN KENNY: What was it like on the manufacturing room floor?

WILLY SHIH: So, I’ve been in several of the Fuyao factories. For example, the one in Moraine is an enormous facility. If you think about the processes that you need to make all these parts, you have raw glass coming in to Moraine and it’s trucked in from a factory in Mount Zion, Illinois, for the case of Ohio, but then you have cutting and you have washing. You have a lot of automated tools which will handle those sheets because frankly, handling sheets of glass like that is not easy. And for the volumes that people are talking about, you like to have some automation. So you’ll have initial cutting and washing, you’ll have long lines where machines will handle the bending of the glass. And then eventually you’ll cut them to shape and then you’ll have a separate lines where you’ll say, I’ll make the front windshields, where I’m going to take two pieces that are cut to match. And then workers will grab first the first layer, and they’ll put a sheet of that plastic in between, they’ll put a second layer of glass on and then they’ll trim it and set it up to go into an oven where I can heat it to fuse everything together. So it takes quite a bit of space. If you look in the factory in China versus the factory in Ohio, because labor is more expensive in Ohio, they’ve chosen to automate more steps. In China, for example, there’ll be more workers handling windshields or window parts, whereas in Ohio there’s a kind of more machine automation. And Ohio is also a newer plant.

BRIAN KENNY: Which is another sort of dimension to the whole bringing jobs back to the U.S. Automation obviously is having a big impact on how many jobs, how many workers are needed to perform a produce a product or perform a task.

WILLY SHIH: Right. Labor is much more expensive in the U.S. so it’s easier for a manufacturer to justify more investments than automation.

BRIAN KENNY: How much more expensive is it? The case gets into, does it?

WILLY SHIH: Well, the case talks about it and the case talks about the labor rate differential being about 7:1. It’s down considerably from the early 2000s when a typical labor rate ratio would be 10:1 maybe even 20:1. That gap has certainly narrowed.

BRIAN KENNY: What about the raw materials that are needed to make the glass?

WILLY SHIH: Well, raw materials are pretty basic for glass, it’s basically purified sand, limestone and some other materials. Okay. And so the key raw material for auto glass is something called float glass. Okay. And that’s something where you mix sand and other minor elements and you fuse them in a hot oven and then you pour it into a bath of molten tin. The glass then just kind of floats off that onto a line where you try to control the thickness and you use the molten tin as a way of having a very flat surface and not requiring a lot of polishing. And that was a process developed by the Pilkington Company in the UK, it’s called the Pilkington Flood Glass Process. It’s widely used by most glass manufacturers. In the case of Fuyao, they have their own float glass plants because they believe very much in vertical integration. So they’ll make their own float glass. They have their own sand mines in China. Right. Because they want to control all that

BRIAN KENNY: So, this becomes one of the considerations obviously, that they have to think about when they think about where to locate this plant. So why don’t we dive into that, that set of questions specifically. First of all, I’m just curious about Wen Li’s background, I mean this is obviously a big job, big decisions with big consequences. How did she prepare for that?

WILLY SHIH: It is a big job. She actually started out as a consultant, but her father had a family business in Shandong Province in China and he had a health emergency. And I’ve never delved into the details of that, but this family business was a printing and packaging business. And so when he had this health emergency, she had to step in, for a number of years she was running that business, which was actually great training for her. She told me that she had to do a lot of restructuring of that business and really get it into profitability. She then got recruited into Fuyao and as I mentioned, one of her early tasks was when the Beijing government told them they had to move this factory to Tianjin. So she really worked closely with the Tianjin government and then with the team in setting up that whole Tianjin facility.

BRIAN KENNY: So now she’s thrust into a different situation where she has to make a recommendation to the owner of the company about where to locate this plant, what are some of the things that she has to consider?

WILLY SHIH: Well, I think the key questions really revolve around the costs. If you look at the Moraine factory, it’s relatively new, it’s still in its ramp up phase. For this particular order that they want, that they are looking at, the cost to produce it in Moraine is roughly 50% higher than it would be to produce it in Tianjin for example. It’s considerably cheaper to produce it in Tianjin and ship it than it is to produce it in Moraine. But the Tianjin factory is quite mature. They’ve gotten better in their yields, they’ve gotten better in their labor efficiency and all those metrics which contribute to cost, whereas Moraine is still coming up the learning curve. And I think the key question is, do I bet that they’re going to get there? And potentially lose money on this contract if they don’t get there? Or it takes them longer, or do I go with a safe thing and stick with Tianjin and source it from China. Now they’re already doing other business in Moraine, so it’s not like there’s no work for the factory in Moraine. It’s more kind of an incremental order that they bid very aggressively for, and so where should I put it?

BRIAN KENNY: So, they have a lot of stake there though because they did bid aggressively for this and they’ve got to prove that they can do it. How guaranteed is it that those pieces of glass are ever going to get across the ocean and to where they need to be in time to meet the order?

WILLY SHIH: Well, that’s one of the other challenges facing them, right? Because if I source this glass from Tianjin, and by the way, they have been supplying U.S. and European makers for a while, even before they had this factory in Moraine. So they have been shipping auto glass around the world, but it takes some amount of time. So I am going to have inventory in my pipeline and that subjects me to a lot of risks. Maybe there’s a longshoreman strike that holds up my inventory clearing customs and coming into the country. Maybe the U.S. has an administration that decides they’re going to apply tariffs to it. Okay. So that my costs go up.

BRIAN KENNY: That could happen.

WILLY SHIH: If you’re a company that is a supplier to one of the big three U.S. automakers or to a number of other automakers, I know somebody who is intimately familiar with some of these contracts. Tariffs are the responsibility of the supplier. If you’re General Motors, that’s not your problem. Because in your purchasing agreement you say two years supplier, if you have to pay tariffs it’s your problem. That’s not what is in the cost that I will be prepared to absorb. Right. So, that’s a risk. In some sense you have to give the chairman of Fuyao some amount of credit for building this factory in Moraine, actually well ahead of when the trade war really got heated up. In some respects, and I’ve talked to him about that, he was in a hurry to do it. And I would say, they were ahead of the curve in that thought process.

BRIAN KENNY: I want to talk about this from the customer’s perspective. So if I’m GM and I’m entertaining bids from different suppliers, do I have a say on this and how much do I care about where they’re sourcing the materials as long as I’ve got this ironclad guarantee that I’m going to get my stuff when I need it.

WILLY SHIH: A company like a GM or any of the major automakers, what they want is they want a quality product, at the right price, delivered dependably. So you can imagine every car out there needs its windshield and its windows. So if you are not able to deliver on time exactly when they need it, you’re going to stop their production line. So the major automakers often impose very stiff fines, if you’re unable to deliver. It could cost you $1 million a day if you shut down somebody’s production line. But if you step back and say, as a major automaker, what does that really mean? It means I need suppliers who can really be good partners for me. Oftentimes they’ll say, I want you for a particular model or maybe a range of models. I want you to source it locally. Some other automakers like BMW, for example, will say, I want you to source from these plants around the world to supply my plants around the world and they will designate ones that they have inspected that they’re comfortable with. Right. So your customers have actually a fair amount of influence in terms of where they would like you to manufacture a particular order or a particular set of products.

BRIAN KENNY: How crowded is this marketplace? Who competes with Fuyao?

WILLY SHIH: Well, Fuyao is a pretty big player in China. They’re relatively smaller elsewhere. They’re trying to grow to become a global player. Other companies that you would typically find in the U.S. would be companies like Guardian Industries. Okay. Or Saint-Gobain, which is a very large global player. Asahi Glass, Nippon Sheet Glass. So there are other manufacturers out there, many of them tend to be kind of regional rather than global. Saint-Gobain is fairly global, but you see a lot of regional players.

BRIAN KENNY: So, the experience of knowing how to operate in overseas markets, whether it’s in the direction of China to the U.S. or the other way around, it’s pretty valuable.

WILLY SHIH: Yes. I think it’s very valuable in this industry in particular.

BRIAN KENNY: Have you discussed this in class?

WILLY SHIH: We just taught the case yesterday. One of the surprises to me was a reticence amongst students to have long supply chains. Okay. And it wasn’t pervasive by any means, but I saw to me a surprising number of people who were not big fans of global sourcing and long supply chains. Now having said that, I also had students in my classes who have worked at companies like at Apple. Okay. Or garment companies who have long used global sourcing. Garments are one of those lead products that always are one of the first seek low cost countries for manufacturing. So it was a mix. But I was surprised by the number of people who are very conscious of the length of the supply chain in terms of distance and time in how that could impact your responsiveness to customer needs because of that kind of long inventory pipeline. On the other hand, if they were comfortable with the long inventory pipeline, kind of a reticence on paying for premium shipping. And one of the things I was trying to point out is if I have high value cargo, I might choose to assemble it in a low cost country because I can save a lot and then I’ll high value or high time value, I can ship it by air cargo and I can have it here, cleared customs in a store in 48 hours. I mean we have firms like Zara: Fast Fashion, who have built their whole business model on, I’m going to source in places which are attractive for various reasons. And then I will just get it into store very quickly using air cargo or somebody like Apple who predominantly ships iPhones and iPads by air cargo. Because my product life cycles are short and you know, I need to assemble it somewhere where labor is not expensive, but I need to get them to market fast.

BRIAN KENNY: And ultimately the customer probably pays whatever that tariff is.

WILLY SHIH: Well, we had that discussion in one of my classes about, would you pay more to get this in a day instead of 30 days and ultimately most students agreed, well, I probably would pay more. Right? But for a company, if they become a product manager somewhere someday and a lot of students aspire to those types of roles, these are the types of decisions you have to make every day about where do I source my product? What do I want to pay for in terms of supply chain flexibility and responsiveness? So those were the things that we were trying to explore.

BRIAN KENNY: There’s a little footnote to this case too that you let me know about which is that, this is the subject already of a documentary.

WILLY SHIH: It turns out there’s a documentary that has gotten very great reviews so far. It’s called American Factory. And it highlights kind of the challenges of a Chinese company coming into the U.S. where you have very different cultures. You have to span that cultural divide. You have a whole host of issues. There’s a union organizing campaign around the factory. There’s struggles getting the factory to the performance level that they need. So it’ll be a-

BRIAN KENNY: It kind of gets to a lot of the issues in the case.

WILLY SHIH: Gets to a lot of issues in the case, it’s a very nice complement to the case.

BRIAN KENNY: And this film will be on Netflix eventually for-

WILLY SHIH: It is already on Netflix. In fact, when we taught the case a number of students in each of my sections had seen the movie, and so but they were still–

BRIAN KENNY: –Very enterprising of them. Willy, thank you for joining me.

WILLY SHIH: Thank you for having me.

HANNAH BATES: That was Harvard Business School professor Willy Shih – in conversation with Brian Kenny on Cold Call .

We’ll be back next Wednesday with another hand-picked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review.

When you’re ready for more podcasts, articles, case studies, books, and videos with the world’s top business and management experts, you’ll find it all at HBR.org.

This episode was produced by Anne Saini and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Erica Truxler, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.

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The Importance of Trust for Managing through a Crisis

Brian Kenny:

You may have heard of the “Butterfly Effect” in which a butterfly flapping its wings in Texas leads to changes in wind patterns that cause a tornado in Brazil. It's a simple and poetic way to explain Chaos Theory. In February of 2020, the butterfly took the form of a pathogen in Wuhan, China, and the resulting tornado was a global pandemic that created chaos the world over. In the early days of the pandemic, widespread panic led to hoarding of essentials like toilet paper, sanitizers and masks, misinformation fueled anxiety and fear, governments around the world took drastic actions, including lockdowns that brought economies to a standstill. Unemployment soared, stock markets plummeted, and hospitals and healthcare systems were pushed to the brink with the sick and dying. And every day, leaders in organizations, large and small, were facing challenges unlike anything they had ever seen.

Today on Cold Call , we welcome Professor Sandra Sucher to discuss her case, “Twiddy & Company: Trust in a Chaotic Environment.” I'm your host, Brian Kenny, and you're listening to Cold Call on the HBR Podcast Network. Sandra Sucher studies how organizations become trusted and the vital role that leaders play in that process. She is the author of, The Power of Trust: How Companies Build It, Lose It, and Regain It , and you are a repeat customer on Cold Call , welcome back, Sandra.

Sandra Sucher:

Thanks so much.

Great to have you here. It's funny, as I was writing that intro, I was thinking, gosh, this was only four years ago, but it feels like a lifetime, and at the same time, it feels like yesterday. I think we tend to forget in everything that's happened, just how chaotic it was in the early days, actually throughout pretty much the whole pandemic.

The pandemic was a three-year exercise in learning how to trust.

We had to trust governments to set sensible policies, pharma companies to create those vaccines that saved our lives, the companies we worked in to keep us and our customers safe, and all those remarkable first responders whose jobs had to be done at work, who couldn't phone it in, and who we counted on for social stability throughout that period of time. Trust is a willingness to be vulnerable to other people's actions and intentions. And during the pandemic, everyone felt that vulnerability-

... And they understood what it was like to trust.

Yeah. And I think leaders were just trying to figure out how do we operate in this unexpected series of situations that keep unfolding in front of us every single day? I think we all experienced that in one way or another. So I'm sure people are going to be really interested in hearing how Twiddy & Company found their steadiness throughout all of the unsettledness that was going around. Let me ask you to begin by just telling us what the central issue is in the case and what your cold call is to start the discussion in class?

Clark Twiddy, who's the protagonist of this case, and I were doing some beginning conversations, he said, "have you ever heard of Cynefin theory?" I said, "no, what is that?"

That just rolls off the tongue very nicely.

For sure. In fact, I always have to Google how to pronounce it, it's really embarrassing. And he said, "well, that's a theory that says that there are different kinds of contexts in which depending on how much you can know, you actually have to manage differently." So it's a really powerful idea, and so I of course got the article and read all this, and so a chaotic environment is an environment in which there are unknowables, so no amount of time and attention is going to get you to an answer to what to do. It's not like it's not expertise that's needed and all that sort of stuff and the managerial challenge in a chaotic environment is to gain control. And so this was a remarkable opportunity to study a leader trying to do that at a time where no one knew what to do.

How do you kick the class off?

I actually start by asking people to think back to March and April of 2020, where were they? What were they doing? Who in trust terms were they vulnerable to at that moment? What were they counting on? And then we do spend some time upfront in the class thinking about different kinds of business contexts and what it means for a leader to have to manage in a simple environment where if you're at the Ritz-Carlton, it's just like, do what you do really well every single day.

Most businesses operate in a complicated environment where there are multiple paths to greatness and they have to figure out what it is. Lots of stakeholders, many moving parts, some businesses like Boeing operate in an area of expertise where if they don't do and rely on expertise, we're all cooked. And then there's this very peculiar moment when you're in a chaotic environment where no amount of forethought or planning can actually tell you what to do. It's not even a question of getting the right people in the room, this is a question of, every single day I have to figure out what makes sense to do right now, so this was what this case is about.

How did you hear about Twiddy & Company?

My co-author in the book, Shalene Gupta, she had been doing some research on Twiddy for their use of big data. So Twiddy is in the vacation home rental business, and they're a platform and they connect homeowners with people who want to spend a week on the Outer Banks in North Carolina. And she had heard about them because of their use of big data, they’re only (only in HBS would you say this) a hundred million dollars in sales, which for us is a relatively small business to study. And she was just taken with the notion that they were using big data in this business, so she said, "why don't we go and investigate?" And then we found out about what they had done during the pandemic, it was like, well, we've got to write a case about this.

This was post-pandemic that you had started conversations with them?

You started to talk about trust earlier, that's something that you study deeply, that's the subject of your book and of a case that you're leading here at HBS. Can you just for our listeners, put a definition on trust, how do you think about it in this context?

Trust is a relationship between some party who has to trust another party. And we usually think of it in that sense as kind of dyadic, it's you and me, Brian and Sandra. But the important thing is, it's mediated by the action that the other party is supposed to perform. So I don't trust in people, I trust in the actions that they're doing, the things I'm relying on them for. And so once you get that architecture right, what it means is that, on the one hand, if you're the trusted party, a company, a leader, it means that you actually have power over the people who trust you, they're vulnerable to your willingness to actually make good on your promise. And if you're actually trusting that other party, you know you're vulnerable and you have to be willing to do this.

The thing about trust is so interesting to study, is that you can't demand it. And so you need reasons to trust and the reasons are all in the actions and intentions that are behind them.

And how does loyalty relate to trust?

Loyalty is an outcome of trust. So what happens is that if you trust me over time long enough and I deliver for you, you become loyal. And most of these decisions are pretty rational, but that's the connection. And so what you're trying to do from a business standpoint, is to create that loyalty in people so that they feel that they understand what you can do for them and that you're going to keep doing that.

Mm-hmm. But you have to earn it.

Bottom line, you have to earn it. So Twiddy is interesting because they're trying to build trust in multiple different facets of their business, can you describe what their business is like?

Imagine a professional Airbnb, so that's the business that they're in, they connect homeowners, people who own houses that they rent out on the Outer Banks in North Carolina with people who want a vacation there. And what distinguishes Twiddy, and they're very proud of this and they well should be, is that they're a professional, this is, as they say, not a side gig for them. And so from a homeowner's standpoint, what they do for them, they help them make their homes ready to rent, they help them maintain their homes while people are in them. They do projects for them if they need to have some upgrades to the home, they recommend things that would make the home more saleable.

And then on the other side, if you're a guest, because of their deep local roots, they know what it's like to vacation there. You say, I'm coming with my mother, my two kids, and my husband, what is there to do on the Outer Banks? The business is rooted in what they call southern hospitality, and that's not just like a term, it's a real thing.

It's a real thing.

It's a real thing, and their job is, and the way that they perceive it is to actually have both sides of this platform be really happy to be doing business with them.

And the employees obviously play a really important role in that?

Twiddy is part of the second generation, the business was founded by his parents. Can you talk about what the second generation has brought into the business as it's grown more sophisticated?

What they do, is they actually have created an environment of development for employees, it's quite unique. So among the things that they do, it's an environment of empowerment where the employees are trusted to use their instincts for what would satisfy a guest. There's a great example we write about in the case about one of their field engineers who got a call from someone for a backed up toilet. And the person said in passing, "God, it's really hot, I'd love some ice cream." And he said, "well, like what flavor?" And he went out and got the vanilla ice cream that the guest wanted, brought it, and he described to us, he said, "that's what it's like to work at Twiddy." The other thing that they do, which is quite unique, is they take all 145 of their regular employees, not their summer employees, on a major trip to one of the world capitals, so this can be Paris, it can be Rome, it can be London, it can be in New York. And they do this, they say, for two reasons, one is, these are trips these people probably could never afford, and the other is so that they can experience service from the other side of the counter. So they want to know what it's like to be served and to be able to polish their skills and learn things. So that's a very unique kind of a development approach to people who work in a business that usually has remarkably high turnover and very little loyalty.

And all along they're building trust with their employees by doing these kinds of things. How would the employees describe Ross and Clark?

I think they describe them pretty differently, Ross is the internal guy, so he's managing culture, he's managing internal operations, he's deliberate, he's thoughtful, and he's the kind of guy that you just know he's thinking and he's talking. Clark was in the military and he has a leader presence about him, he's the external face of the business, and he's the guy that really thinks a lot about how it is that they can connect to all of their external stakeholders and how to manage all these relationships.

And both of these roles become critically important as we talk about COVID and the impact that had on the hospitality industry. Broadly, travel and leisure suffered immensely, and this is a great microcosm of what that might've looked like and felt like. So can you talk about how COVID impacted Twiddy & Company in the early days?

Their moment of truth came when in late in March, the state of North Carolina decided to close the bridge that connected the mainland of North Carolina to the Outer Banks.

So they're literally cut off at this point?

They're literally cut off. And so at that moment, they would have guests who were in Trader Joe's buying food for the weekend, and the other guests would be already on the island because they got there early. And their job is to try to figure out how to bring these people together, what to do because they're separated. And then you have all these people who have booked vacations who are trying to figure out whether or not they will actually be able to either get their money back or is it a good idea for them to book? Does anybody know whether it makes sense to actually say, well, this is March, what do we think is going to happen in August?

And nobody knew how long this was going to go?

Absolutely not. And so that's what they are managing their way through every single day, their call volumes went from 200 a day to a thousand a day. They basically melted everybody's phone because everyone was trying to get in touch, and what was happening was that people were pulling money out of the business, they couldn't reach them to say, I'm just going to take my deposit back, and so at one point, they had a three and a half million dollars pulled out of their accounts. If you're a hundred million dollars business and most of your business is payroll, that's material.

And this is probably going to sound painfully familiar to a lot of people who have the very same thing, vacation plans and all kinds of things, and airline tickets. How were Ross and Clark able to prioritize amidst things as they were coming at them so quickly? How do you even begin to triage that?

It's interesting, one of the things that I've learned in writing the case from them is how important it is to keep your timeframe tight. And so what they started to do, something they'd never done before, is they started having weekly town halls by phone and through the internet and all that with their homeowners. And Clark developed a four-step process for what he would communicate about, so he would say, "here's what we know, here's what we don't know, here's what we're doing in response, and here's what next week should look like." And he said he deliberately didn't plant his flag any further out than a week because that was as far ahead as he could get. He did the same thing with employees, with employees, they were very candid. They called it information equity about how many weeks they had of payroll before they would have to face either job cuts, pay cuts, or potentially closing the business down.

A lot of the crisis management had to do with actually being extremely clear and transparent about where you were at any given point in time and being smart enough to know to not try to get too far ahead of yourself. And I learned a lot from that as someone who's never had to manage in that particular environment about the importance of timeframe and clarity of communication and a willingness. When Clark was on those calls with the homeowners, he gave them his personal cell phone number and he made it a habit of always taking the toughest questions first, and he stayed as long as people wanted to ask questions.

And so if you're managing through a crisis where everyone is starting to feel vulnerable not knowing what happens, what they really want is someone they can trust to tell them at least what's going on right now. And he got huge credit and, well, he should for doing that with employees he said he started out trying to be conventional kind of military leader like, we're going to get through this, it's going to be great. He said he spent the first day or so doing that and everyone turn to him and said, "you just can't do that, we don't know this, that's not appropriate, that's not going to make us feel any better, why don't you tell us the truth about what's going on, don't speechify." And that was how they moved into this other space.

I think we all experienced leaders taking different approaches to how they communicated during the crisis. And I think one of the challenges was fighting the urge to not say too much, to not speculate, to not talk about things that you're not certain of. Is that consistent with the approach they took?

Yes. And they also relied on experts, so what they would do is, they would bring in to these calls and they'd make videos of, for example, the people they were buying their cleaning equipment from. And they would have an informational video saying, here's what this cleans, here's how it operates on surfaces, here's how we're applying it in the homes. They did the same thing with state and local government officials to come in and talk about, here's what's going on, here's how we're managing this right now. And so they really did a very good job of becoming a source of information. And the employees told us as we were developing the case, that Twiddy became their touch point for good information because they figured out that whatever it was that they found out, they thought was about as reliable as it's going to get. And in fact, a lot of companies became that source of information during the pandemic for the people who work for them.

So communication, one very important thing that they did to regain trust. What are some of the other steps that they took that helped to rebuild that foundation?

The most important thing that they did was to get refunds to customers who wanted to cancel their vacations. And because they couldn't command their homeowners to do that, because this is homeowner money, they got the local real estate government commission to write a letter that said that, this is the policy that they thought that homeowners should follow. So they said, "we knew it was the right thing to do, there was no law that specified that we had to do it." And so what they wanted was some additional heft in dealing with homeowners who might be reluctant to give the money back. With guests, they spent a lot of time doing what they called “reservation preservation” and just saying, well, would you be interested in spending some time and thinking about whether October might work for you? But far enough out for us to know, you can always get your money back. And lots of people were glad of, as you know, international travel ground to an absolute halt, but at that time, for people who actually wanted to go someplace, domestic travel was the only thing they could do.

Yeah, you could get in your car.

Right, exactly, so they did that. And then from an employee standpoint, I think one of the most impressive policies that they set were for the people who clean the houses. So imagine you're going into a house, you're not sure whether anybody in that house is sick, they're not sure whether you're sick, and your job is to make all those surfaces clean because at the time, that was what we thought was actually the way the virus was passed. And what they developed was a policy that said that the people who were in the home could not crowd the people who were doing this work, and that if at any time someone who was doing the cleaning felt unsafe, they could just leave and that the company would back them up.

That's a bit of a trade-off there because you're trying to build trust with all of these, and sometimes there's a tension that exists there and you have to choose a side.

Exactly. And one of the most important features of trust is that it's built from the inside out. So it's pretty impossible to be trusted by people outside your organization if the people inside don't trust you. And Twiddy didn't need me to tell them that, that's something that they know, and that was why they were so people-centric in the way that they went after this.

In my role, I'm often dealing with the communications side of all of this, and one of the things that we always try to do in a crisis situation is come back to your core values and let that dictate how you behave in that situation. And the case talks about this, about how they went back to their core values to let them figure out a path through where it wasn't clear what to do.

Exactly. And that's actually what matters at the end in terms of both being trustworthy and being trusted, is that you have to stand for something. And it's at that moment where people kind of go, that's what they said they were like, and that's how they're behaving right now. And so that integrity, that fidelity between what I believe and what I'm actually doing in my actions, that's the fundamental building block for trust.

Yeah. And for brands, it's also a really important thing to be true to who you are because particularly in situations like this that the potential for brand damage is real.

Right. And for them, because this was a brand built on person to person interaction, all of a sudden they had to shift the brand to being equally personable but not in person. And that's everything from closing down the front desk that used to greet everybody so that people had to go immediately to their homes that they had rented and then had to build all these relationships up by phone, by text, any way that people wanted to communicate and to create a new way of being personable with them.

Yeah, really important. The case does talk about the fact that when things were probably most challenging, private equity came into the picture and offered to maybe buy up the business, how did they think about that?

The thing that we haven't said so far, and it's one of the things that makes the case so interesting is, this is a family business, and you mentioned before it started by their parents, and so they said that they knew that they could probably sell the business to get the money they needed, sell a stake in the business. And then they thought about that and they just didn't feel that that would actually allow them to maintain the standards and the approach to the business that they have as owner-operators. And as appealing as it was, and there were definitely people from North Carolina, private equity firms who said, we can help you guys out here, it wasn't clear if they could get a loan from a bank.

And Clark describes what it's like, he's on the board of the bank to go to the bank and say, well, I think we may need a personal loan from you guys. And then the question is, well, when could you pay it back? And the answer is, we're not sure. And so these were absolutely critical moments for them, but in the end they decided that staying 100 percent family owned was actually going to be the hill they were going to die on. And that was just their decision about how to maintain the business that they loved and cared for.

Mm-hmm. And therefore, the trust part of this becomes even more crucial because you need customers to come back, you need the homeowners to continue to make their properties available, you need the employees to provide the service. What if we pull the lens back a little bit from Twiddy & Company, and I'd love it if you could just talk about how you know whether or not you have the trust of the stakeholders that matter most to you, how do you know if your employees trust you or your customers trust you?

There's some great research actually from PWC on how lousy we are at predicting how much we're trusted. So there's this study that they've repeated it now, this is the third year they've done it, and here's the data. So it basically says that everybody, 90 percent of people agree, both customers and employees, that trust is important, trusting you is important. So executives think that they're trusted to a level of 80 or 90 percent, there's a 60 point gap with customers-

... As to how much customers actually trust them compared to how much the senior leadership think. And there's a material that's much less 20 point gap between how much we think our employees actually trust us and how much they really do.

What leads to that? Is it just that they're insulated, it's like the emperor has no clothes?

In my research, what I found is that the people don't understand that trust is actually a real thing, it's not like a feeling. And so my research says that people trust fairly systematically on four dimensions, the first dimension is just that you're competent, so no one's going to trust you, and why should they if you're not good at what you do? And then there are two dimensions in the moral domain because if you have power over me, I'm relying on you, I care about what your motives are, it actually really matters a lot to me where I show up in your stacked rank list of who's important and how you do things, it also matters to me how fair you are in how you go about accomplishing your goals. So those are three dimensions, competence, motives, means. And then the last is impact, what's the actual result that your actions have had on my life? And each one of those is actually measured differently, so in the lousy days of Uber, they could be great at competence and not so great on motives and means.

But what's useful about understanding that, is that makes trust something that you can manage. This is a parsing mechanism that says, well, is our competence being questioned here? Is it a question of our motives, what people think? Maybe just we're not being fair, or actually, does anyone know the actual effect of what we've had on the people? And so the companies I work with, and this has proved to be a pretty effective framework that allows you to begin to get a handle yourself from an operational standpoint on whether or not you're trusted. And then many companies are actually, certainly the big consulting firms are doing good work at trying to figure out how do you actually measure trust for people who want kind of an all-in-view where you look at social media, you do data scraping off of that, you look at what people look at the inside.

Deloitte has a good process, they've identified 17 different domains in which you could build or lose trust from cryptocurrency to culture to compliance. And each one I think because trust is being built and lost all the time in businesses, and the trick is, how can you actually understand what are the critical risk areas for you where you're relying on people to trust you, and how good are you at those things? So it's a very systematic, quite strategic approach that you need to take if you actually want to improve something or recover it.

Right. And there are a lot of organizations that rely too much maybe on one indicator, you hear about NPS, Net Promoter Score, if you look at that, but you don't look at the dimension of employees and how they're experiencing working for you, then you're missing something.

Yeah, that's definitely true. Although I have done research on a great company in Kazakhstan Kaspi.kz, and they're a combination of a FinTech payments platform and marketplace, it's a remarkable business. And their NPS Score, they only look at two questions, would you recommend us, and why? They actually audio tape these and they do this 30 or 40,000 times a month because people have endless numbers of contacts with them because of all these businesses. Their senior leadership listens to them or what they listen for the people who are not happy. And they have a philosophy that basically says, if you don't trust me with the current products I have, you'll never trust me with the next product.

That makes perfect sense.

People get pretty good at this if they actually develop a trust mindset and care a lot about how it is that the other party is thinking, that's at the heart of trusting.

And you have to pay attention to it, are there early warning signs? Is there a canary in the coal mine that people should be looking for?

That's a great question. I don't know, so I'm going to pause here and just think rather than try to answer off the top of my head. And I would say that the first thing I would look at is actually inside the organization, I think there's usually a desire to externalize this issue, but I would definitely start because of all that I know about how trust is built from the inside out to just seeing what the indicators are inside my business about, are people leaving for reasons I don't understand? Are people not coming to me as often? Have I had layoffs, which is a known trust killer, how people responded to that? This is just the real things that happen that cause people to either build or lose trust, and you can't pretend it's like some other thing that somehow operates outside the dimension of all the management decisions you make. So I would probably start inside and just try to understand how well we understand are people engaged and how they're doing their work.

It makes a lot of sense, particularly since those are the people that are building the products or providing the service that you offer to customers. This has been a great conversation, Sandra, I knew it would be, I love having you on Cold Call . I have one more question for you so you can have the final say here, I'm wondering what lessons listeners can glean from the Twiddy & Company case, if there's something you want to stay with them, what would that be?

I think the biggest thing is just to understand that even in a situation like the pandemic, you can operate in ways that allow you to build trust. And that's a pretty remarkable thing because you look at that as something that, well, it's like a good news philosophy, I'll be trusted during good times, but don't try to trust me on the bad times. And this shows that you can be quite intentional as long as you try to really work very hard at understanding what the other person is experiencing and what you're doing to either help that or hinder that. And that's what you can learn from this, is that even during the pandemic, you could do this, and to me it was very inspiring.

Sort of the old, never let a good crisis go to waste.

You got it.

Sandra Sucher, thank you so much for joining me on Cold Call .

Great, thank you so much.

If you enjoy Cold Call , you might like our other podcasts, After Hours , Climate Rising , Deep Purpose , IdeaCast , Managing the Future of Work , Skydeck , and Women at Work , find them on Apple, Spotify, or wherever you listen. And if you could take a minute to rate and review us, we'd be grateful. If you have any suggestions or just want to say hello, we want to hear from you, email us at [email protected] . Thanks again for joining us, I'm your host Brian Kenny, and you've been listening to Cold Call , an official podcast of Harvard Business School and part of the HBR Podcast Network.

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