Finding a higher gear

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August 15th 2008  Printer version



FROM HARVARD BUSINESS SCHOOL PUBLISHING

The HBR Interview

The CEO of India’s Mahindra & Mahindra is transforming the group from national champion to global corporation in an unconventional way.

An Interview with Anand Mahindra by Thomas A. Stewart and Anand P. Raman

In 1981, Anand Mahindra—a third-generation scion of one of India’s oldest business families—graduated from Harvard Business School in Boston and returned to Mumbai to join the Mahindra & Mahindra Group’s steel company, Mahindra Ugine (MUSCO), as an executive assistant. When the government of India decided to allow a large number of companies to import state-of-the-art technology and set up small but efficient steel plants in the country, MUSCO found itself in the throes of a terrible price war. Six months later, senior executives asked the young Mahindra to attend a crisis committee meeting. Managers around the table claimed they had done everything possible to cope, but the newly minted MBA asked if they had thought about maximizing contribution by lowering prices. From the looks on people’s faces and their responses, it was clear that few fully understood cost curves or what Mahindra meant by “contribution.”

Fast-forward a quarter of a century. In January 2007, Mahindra, now the vice chairman and managing director of the $6.6 billion M&M Group, was at the annual meeting of the World Economic Forum in Davos. He bumped into Robert Lane, the chairman of the world’s largest tractor manufacturer, John Deere, in whose shadow M&M was quietly gaining share. Lane told him: “I’ve been to your tractor dealerships in the U.S. and seen your manuals.” Mahindra smiled and said, “Well, that’s bad news and good news.” The bad news is that the American company has M&M in its crosshairs. The good news is that John Deere is worried about an Indian upstart—and that’s testimony to the transformation that the 53-year-old Mahindra has wrought at M&M.

Mahindra took over as de facto head of M&M in 1991, just as India opened its economy to create one of the world’s most competitive marketplaces. Many family businesses have since fallen by the wayside, but M&M remains the leader in the Indian tractor and utility vehicle businesses, with market shares in 2007 of 40% and 45%, respectively. Although it woke up to the outside world late, spending most of the 1990s restructuring, the company has become a successful global player. M&M manufactures tractors in China, where it has taken over a company, and assembles them in Australia and Africa, and in the United States, where it has carved out a 4% niche. It also sells sport-utility vehicles in South Africa, Uruguay, Serbia, and Italy, and will enter the U.S. market with a hybrid SUV by 2010. That’s no idle boast: M&M’s world-class SUV, the Scorpio, took the market by storm in 2002. The company spent $120 million—a fifth of what one of the Big Five would have had to spend—on the project. The SUV gamble could have cost Mahindra his job; instead, he earned kudos for turning the staid engineering companies he inherited into a globally competitive group.

Or has he? Many people see one striking similarity between M&M present and past: In India’s post-economic-reforms gold rush, the group has invested in a large number of unrelated businesses. Mahindra, a Renaissance man whose interests range from books and old maps to wine and yachts, appears to be a Renaissance manager, too. He believes that in emerging markets, businesses structured as groups of companies have an edge over rivals, and he is moving into everything from selling used cars to exporting grapes.

However, the pressures are mounting as the M&M Group’s companies try to become global and innovative—Mahindra’s buzzwords today. Keeping those priorities front and center, Mahindra must tackle three areas: First, he has to decide which companies’ globalization strategies to back; most of them will have to make big bets to succeed. Second, he must find ways of attracting top talent on several continents and generating synergies between the group’s companies. Third, he may have to rethink the role of the corporate center and, perhaps, his own role. In keeping with his temperament, Mahindra has chosen to give the business heads near-total autonomy, but critics say that has resulted in powerful fiefdoms, a culture of excessive consensus, and a tolerance for mediocrity that is slowing down the group.

HBR’s Thomas A. Stewart and Anand P. Raman spent a week in Mumbai and Nashik talking to M&M’s senior executives, shop-floor workers, trade union leaders, independent directors, and equity analysts. They interviewed Mahindra on two occasions and learned why he believes the value of the group is more than the sum of its parts. What follows is an edited version of those conversations.

Mr. Mahindra, you took over as M&M’s deputy CEO in 1991, just when the Indian government radically changed its economic policies and triggered unprecedented competition. Now, in the face of intense competition from Western multinationals in your home market, you’re trying to transform M&M into a global leader. Is this your biggest challenge yet?

We often say that the M&M Group’s destiny is inextricably linked with India’s. Both were born around the same time: India in 1947, M&M in 1945. The group has experienced the same vicissitudes that the Indian economy has. There have been three phases in our 63-year history. In the beginning, J.C. Mahindra, my grandfather, and K.C. Mahindra, my great-uncle, sold jeeps manufactured locally under license from the American company Willys-Overland Motors. Like many other Indians, J.C. and K.C. believed in globalization, and in the 1950s and 1960s, they tied up with several foreign companies, such as Chrysler, Dr. Beck, International Harvester, and, of course, Willys.

The second phase began in the 1960s, when India became a 揷losed?economy. M&M went to sleep, along with India抯 other business groups. We didn抰 have to develop or import technology because we didn抰 face much competition, and in any case, the Indian government wouldn抰 allow M&M to increase capacity. Instead, the group diversified into several unrelated industries, such as oil-rig leasing, instrumentation, chemicals, fiberglass, and nuclear power.

In 1991, India suddenly opened up, marking the third stage of our evolution. I helped restructure the group in 1994 to cope with the liberalization and globalization of the economy. M&M was transformed from a functional organization to a multibusiness group of companies. At that stage, we created six sectors梐utomotive, automotive components, farm equipment, financial services, infrastructure development, and software梐nd moved out of other industries. We reengineered business processes, brought in new people, invested in information technology, and reduced head count. Despite doing all that, M&M抯 stock price underperformed the stock market index. Investors no longer believed that we were a blue chip company. In fact, in January 2002, the Bombay Stock Exchange dropped us from the list of bellwether stocks that constitute the Sensex [BSE Sensitivity Index].

The Sensex has doubled in the past seven years, but the value of the M&M scrip has risen 20-fold, if you factor in a 1:1 bonus issue in June 2005. In July 2007, the Bombay Stock Exchange brought M&M back into the Sensex. How did you manage that turnaround?

In 2001, I did some research and identified four characteristics that successful companies share. One, they aspire to be leaders in their businesses. Two, they have global potential. Three, they are innovative. Four, they display a ruthless focus on financial returns. We held a conference for senior executives in 2002, which has since become an annual event, and I announced that all the companies in the group would have to conform to those four principles梡articularly the financial goals we had set. If a company didn抰 meet the financial targets we had drawn up for the next 12 months, it would have to fold. In just a year抯 time, there was a near-total turnaround, with almost every company抯 profits and cash flow shooting up. That marked a turning point, and we haven抰 looked back.

At the 2003 Blue Chip conference, as we now call our annual retreat, I asked every company to go from good to great by innovating to insulate itself from volatility and by striving for higher goals. We made record profits that year, and in 2004 we decided that every company in the group should become the most customer-centric in its industry. In 2005, we said we would double revenues and triple profits by 2008, which we have managed to do. We tried to intensify our focus on the customer in 2006, and in 2007, I again made the case that innovation should become M&M抯 top priority.

Your focus on innovation is unusual in India, where companies concentrate on generating cost-related advantages. Why do you believe innovation is important for an emerging giant like M&M?

Innovation has been one of M&M抯 priorities for some years, but I brought it back to center stage last December. The more I learn about industry structures, the more I feel that once a company has paid the fee, in a manner of speaking, to enter a sector, it becomes even harder to stay afloat. In 1996, when American companies were implementing quality-related practices in order to compete with Japanese rivals, [Harvard Business School professor] Michael Porter unveiled the concept of the productivity frontier [揥hat Is Strategy??HBR November朌ecember 1996]. He warned American businesses that they shouldn抰 think they were winning; they were just catching up. Once they did so, Porter argued, companies would face the tougher challenge of using strategy to differentiate themselves. I抦 convinced that Indian companies have almost caught up with the productivity frontier today. What抯 going to distinguish us in the future is our ability to make products and services that capture the customer抯 imagination.

So the renewed focus on innovation follows from customer centricity, which you made one of the group抯 management priorities in 2004.

My aspiration is that M&M become one of the most customer-centric organizations in the world. If we focus on understanding our customers, we will be able to develop customer-centric innovations. By that, I don抰 mean we should only ask customers for product ideas; I抦 aware, of course, that Sony would never have developed the Walkman if it had listened solely to its customers. I want us to do what the design firm IDEO does. IDEO抯 consultants observe a customer for hours, watching the person, say, vacuum floors. They come away with tons of ideas about what a vacuum cleaner should do and what it should look like. Magic happens when companies observe customers in that way and develop new products or services.

As you know, M&M developed an SUV, the Scorpio, in this way, and customers love the vehicle. But we need to make more such products. If M&M is going to compete with the world抯 best companies, it has to become an innovation factory梬hich is why I returned innovation to the top of our current priorities.

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You often refer to the cost per unit of innovation in India. What do you mean by that?

That抯 shorthand I use to describe the India story. Companies can execute the world抯 most frugal engineering梐s Renault抯 CEO, Carlos Ghosn, elegantly phrased it梚n India. But they shouldn抰 look for the lowest cost per unit of output here; they must search for the lowest cost per unit of innovation. The phrase抯 origins date back to 1993, when M&M struck a deal with Ford to manufacture the Escort in India. After we signed the contract, I told my American counterpart, 揑抦 happy to help you get into the local market, but India isn抰 a sweatshop for hands; it抯 a sweatshop for brains.?I then suggested that we set up a joint venture for R&D and told Ford that it would benefit immensely from the project. That was one of my more prescient moments! India抯 IT outsourcing boom hadn抰 happened; Tom Friedman and [Infosys抯] Nandan Nilekani抯 conversation about a flat world was light years away梐nd yet there I was trying to convince an American executive that India抯 brainpower was not just inexpensive but world class. My counterpart looked at me as though I were nuts, of course, and politely suggested that we focus on the manufacturing venture. I抳e always maintained that he did us a huge favor. If Ford had taken up my offer, M&M would still be dependent on the company for automotive technologies, and we would never have dared to develop the Scorpio.

What are the key success factors for fostering innovation at M&M?

We抮e working on that, but [HBS professor] Stefan Thomke helped us get a head start. At the last Blue Chip conference, in Kuala Lumpur, we came up with five elements that would foster innovation in the group. One, innovation has to start with insights about the customer. Without identifying a need, you can抰 come up with new products or processes. Two, great products today have great designs. Look at Apple抯 iPhone, for instance, which is my favorite product. Three, you have to encourage experimentation. You must hire people who don抰 listen to you, which I always seem to do! You have to create a sandbox where people can play梐nd fail, often and early. The organization must celebrate failure. Four, unlike Xerox PARC抯 inventions, innovations must add value to the company抯 bottom line. Five, you need to have a sales plan. No innovation sells itself; companies have to find ways of packaging and marketing it.

So you need insight, design, experimentation, added value, and sales plans for innovation, and桰 love using acronyms梩he first letters of those elements spell IDEAS. That captures the essence of what M&M will do to create a culture of innovation.

Would you support projects started by skunk works or allow mavericks to develop new products?

I am completely sold on the benefits of mavericks and skunk works. In the early 1990s, when I was M&M抯 head of research and development, I supported anyone who had ideas, and got great results. Let me give you a couple of examples. In 1992, Sandesh Dahanukar, one of our little-known R&D engineers, pointed out that the chassis of M&M抯 utility vehicles kept breaking down. To manufacture stronger chassis, M&M would have to purchase new presses, which would have cost the company Rs 300 million [US$7.50 million]. However, Sandesh had seen tubular chassis during his interactions with global automobile companies. If we developed one, he told me, we wouldn抰 need to invest in new presses. It was clear that Sandesh was a loner, who excelled when he worked on his own, so I authorized him to develop a prototype. I gave him a starting budget of Rs 600,000 [US$15,000], complete autonomy, and a commitment to increase the investment in small doses at every gateway that he successfully crossed. Sandesh made slow but steady progress, and by 1994 he had developed a successful prototype as well as a new manufacturing process that we still use. His innovations saved the company around Rs 299 million [US$7.475 million]!

In a similar vein, K.J. Davasia, who headed M&M抯 tractor sector in the 1990s, came up with the idea of developing a vehicle that farmers could use for several purposes in addition to work on the farm. In 1995, he asked R.N. Nayak, who then headed the tractor division抯 R&D laboratory, to develop a prototype. Nayak got a budget of Rs 1 million [US$25,000], but he didn抰 get any staff because Davasia had neither people to spare nor the resources to hire new employees. Nayak, too, enjoyed working solo, so he set up a project office in a workshop that belonged to one of our vendors in Mumbai. In 12 months, he designed a concept prototype, made the drawings, and, with the assistance of colleagues, acquired the components to create a prototype vehicle. I was delighted when I saw the vehicle, but for various reasons we didn抰 give the project much attention for almost a decade. In March 2006, we finally started mass-producing the vehicle, and the Shaan, as we branded it, has been a runaway success. In June 2007, the Shaan won an award from the American Society of Agricultural and Biological Engineers for being one of the year抯 most innovative engineering products for the food and agriculture industries.

I抦 convinced that mavericks have a role to play in our innovation process. We need to find ways of harnessing their talent and enthusiasm even as we strengthen M&M抯 formal product-development processes.

Mr. Mahindra, you抮e stepping up the pace of globalization. In addition to taking your SUV and tractor businesses global, you抳e recently acquired several companies in Europe and India to create the world抯 fifth-largest auto-components business. M&M even bid for Jaguar Land Rover in the UK, although you didn抰 win the deal. Is this a strategic inflection point?

I抦 tempted to agree, but I抦 not sure it is. I抦 not forcing all the companies in the group to go global right away or to do so in the same way. There has to be an internal logic for each company to become a global operation. Back in 2002, I did ask all the sectors to explore whether they had global potential. But I don抰 want to mandate a strategic step change, turning every business into a Christopher Columbus overnight. There抯 lots of debate about when enterprises should go global: Should it be after they have become local leaders? Or before梐s was the case with Honda? I am happy to engage in a debate with each company in the group about the right time to globalize; I refuse to mandate globalization.

The nature of the home market surely plays a role in your strategy. India is the world抯 biggest tractor market, so it provides a natural launchpad for globalization.

Having a large home market can also make you want not to globalize. However, since the Indian tractor market is open to foreign competition, and all the multinational companies in the world are setting up shop here, it makes sense for M&M to globalize. But you have to strike a balance between the foreign and domestic markets. I heard a fascinating story from Manohar Parrikar, who used to be the chief minister of (the Indian state of) Goa some years ago. Parrikar comes from a little Goan village called Parra, which was apparently famous for the quality of its watermelons many years ago. People from faraway towns would travel to Parra to buy watermelons; there was something special about them. What people didn抰 know was that they never sampled the village抯 very best watermelons. Those were saved for the village抯 children. When the crop was harvested, they could eat as many watermelons as they wanted to, but there was one condition: They could not throw away the seeds. The kids had to collect all the seeds, and the next year villagers would use those seeds to grow another great crop. Then, the times changed. Watermelon prices soared and the villagers?priorities shifted from growing great watermelons to maximizing profits. They started selling all the finest watermelons instead of giving them to their children. The villagers?profits shot up, but the quality of the watermelons started declining. So much so that today, there are no good watermelons to be found in Parra.

So you must be able to compete in the global market without neglecting your home market. How do you think about these trade-offs in cultural terms?

That抯 complicated, too. M&M has a strong Indian heritage. Although we are creating a transnational company, M&M of course has a home country and its 揷apital?is right here in Mumbai. But I also have to be able to attract and retain people globally, and so, in addition to a physical capital, M&M has established an intellectual 揷apital?(pun intended). I symbolically located that at a university because if any institution transcends boundaries, it is a university. I chose my alma mater, Harvard, since it is an iconic and global entity. I take my senior executives to Harvard once a year, and Harvard faculty members visit us all the time.

Let抯 look at this idea in practical terms. When M&M takes over, say, a French company, the CEO抯 wife is going to say, 揂re you sure you want to work for an Indian business group? Are they financially sound, are they quality focused, won抰 they want Indians to run the company??There are many preconceived notions about Indians, and they will all come out that evening in the kitchen. To tackle these apprehensions, we organize an annual weeklong executive-development program at Harvard for M&M抯 senior executives and their spouses. Our apocryphal Frenchman will be invited to the program, and he will be thrilled to attend. Thanks to an Indian company, he and his wife will have the opportunity to study at the world抯 best B-school, where no national flags fly. They will meet M&M executives from all over the world: China, Germany, Italy, India. They will learn that the company is intellectually open, and it is international in a way that no other enterprise is.

I抦 not going to pretend that M&M isn抰 Indian, but it抯 much more than that. I am building a group where intellect and ideas have no boundaries or nationalities.

Where are M&M抯 big bets on globalization? You spent $120 million to develop the Scorpio, but we haven抰 seen M&M making any other major investments, apart from the unsuccessful takeover bid for JLR.

There can抰 be one big bet on globalization because M&M operates in many businesses and industries. If I say that we must step up the pace of globalization, I may drive our companies to do things they shouldn抰. The next thing you know, they抮e invading Russia, and I don抰 want to retreat in winter as Napoleon did. Our M&A strategy is a function of the industry, the country, the price, and the cultural fit. Eighteen months ago, for instance, I had a conversation with a friend who invests in emerging markets. He was bullish about China in the short term but bearish in the long term because he felt companies there would eventually have to deal with normal industry structures. Consolidation is inevitable in many industries in China because there抯 too much capacity, he argued. I thought about that and later told my colleagues that M&M could wait for the consolidation to happen梠r it could be one of the consolidators and help China emerge as the world抯 largest tractor market. We are therefore in the process of making our second investment in China, which will dramatically increase our presence there. In markets where we want to be global players, we are willing to make the necessary investments when the time is right.

Over the past 25 years, you have led the transformation of the M&M Group three, arguably four, times. Have you followed the same change-management process each time?

I started thinking about how to manage transformations in 1981 when I helped turn around MUSCO. Because it was a small company, I had the time to study what I was doing and to document the lessons I learned. I read every book on transformation and distilled their essence by identifying common themes and eliminating outliers. On the basis of this intellectual exercise and personal experience, I created a four-step transformation loop. As I have already told you, I use acronyms all the time, so I call this ESEE梑ecause 揺asy?is the one thing change isn抰.

The first E stands for envisioning. Before you start any transformation, you have to create a vision of the future. You have to say, 揟his is where the world is going, and this is where I want to take my company.?The vision has to make sense to you; in other words, you must be convinced that your organization fits into the future that you envisage. Then梐nd I had to do this time and again梱ou have to create a structure. You have to decide what your company will look like; you have to know how to place your troops梬here the generals will be, where the lieutenants will be, what the formations will look like.

The third step is enabling. You have to populate the structure with the right people and give them the financial resources they need. This process is akin to laying the supply lines before a battle. Once you抳e done that, you must get out of the way as the army starts moving. However, as chief executive, you still have one task to perform: You have to energize the corporation, which is the last E. You drop in on dealers to interact with customers and visit plants to meet employees梩hat galvanizes the corporation. When M&M was smaller, I used to do an annual pilgrimage梐 yatra, as Indians call it梖lying into faraway towns to meet dealers and customers without advance warning. Just the presence of senior executives on the company抯 front lines is enough to energize people.

I must add that transformation isn抰 a onetime thing. It抯 critical for a CEO to think about change as an end-to-end process and to realize that his or her job is to restart the cycle each time it runs its course.

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Your globalization strategy focuses on tractors and automobiles, but at home you are diversifying into everything from aircraft to movies. Doesn抰 a focused corporation enjoy an edge over a conglomerate even in an emerging market?

Diversified corporations can build strong competitive advantage in developing economies, as research by [HBS professors] Krishna Palepu and Tarun Khanna 10 years ago showed [揥hy Focused Strategies May Be Wrong for Emerging Markets,?HBR July朅ugust 1997]. In any case, M&M isn抰 a conglomerate; it抯 a federation of companies.

What抯 the difference between a conglomerate and a federation?

A conglomerate has divisions, and its stock price represents the value streams of all those businesses. A federation of companies, like M&M, has investments in separate businesses. Each company focuses on a different industry although they have a common owner. The distinction is important because there are two components of focus, managerial and financial.

In 1994, when I restructured the group into sectors, I provided managerial focus to all our businesses. Dedicated teams of managers have run our businesses since then. I kicked myself upstairs to make sure the structure would work; otherwise, I抎 be breathing down the presidents?necks every day, defeating the idea of managerial focus. I believe that business families should behave like aggressive private equity companies. They must allocate capital, demand performance, create synergies, sustain value systems, and implement good governance practices, but they should let professional managers run the companies.

Is it also possible to provide financial focus in a federal structure?

I always said that in time, we would also provide financial focus. We have done so by listing on the stock exchange the entities that handle our interests in each industry, such as Tech Mahindra, Mahindra Finance, and Mahindra Lifespace Developers. Only the companies that we抳e started recently aren抰 listed, but their turn will come. We抳e kept the farm equipment and automobile sectors together in the flagship company because they have similar competencies. For various reasons, the listing process took longer than I thought it would. However, since our flagship companies trade on the bourses, analysts can track their individual performances. That抯 why I tell analysts, don抰 view M&M as a conglomerate or a holding company. M&M is an automotive company with a valuable portfolio of investments, each of which you can track separately.

As long as the subsidiaries grow like weeds and the discount on the flagship company comes down, I will know that the model is working. The proof of concept has taken us almost 20 years, but if we can get all the benefits of being a synergistic group and, at the same time, satisfy the beta trackers, we will be able to prove that a federal structure works. This sounds audacious, but the M&M model may be better than the conventional conglomerate because it抯 transparently more than the sum of its parts.

You said you kicked yourself upstairs, but everybody around you says that your bandwidth is being stretched. As your companies grow bigger, more global, and more diverse, won抰 you have to keep a very large number of business models in your head?

Is it necessary for me to keep every company抯 business model in my head? We have several mechanisms that allow me to oversee the group抯 companies. One is our annual planning cycle. Every company must follow the process, which incorporates 11 elements. We periodically have daylong 搘ar rooms,?meetings at which I review each company抯 performance. We borrowed this idea from Dana Corporation and added some elements from GE. The main performance evaluation tool we use is a version of the balanced scorecard. Organizationally, we抳e set up an office of strategy management that, when necessary, rolls out groupwide initiatives and monitors their progress, and a group management board, consisting of all the sector heads, that meets regularly. We have defined our core values, and there are the annual retreats I spoke about earlier. These mechanisms help me compose the music so that many soloists can play in my orchestra. The players know what抯 not negotiable: the pace, the tempo, the traditions. I have to write the music and then stick to my role of conducting the orchestra rather than trying to play the music myself.

At some point, I抳e got to step back. I have to get my work-life balance right and allow the organization to operate independently. That may not happen if I am available to everybody all the time.

What is the role of the corporate center in a federation of companies?

First and foremost, the corporate headquarters must act as the custodian of the group抯 values. In a world where people view companies suspiciously, markets place a premium on a name that stands for consistent, value-driven behavior. Second, the center must ensure that the federation realizes its biggest benefit: its capacity to be a learning organization. Through the rapid deployment of best practices, you can build a culture that is always at the cutting edge of management and technology. Third, the corporate headquarters must facilitate synergies between companies. Finally, the center must continually assess whether there is demand for its services; if there is, that means the center is adding value to the group抯 companies. Every activity or process that doesn抰 meet these criteria should be eliminated so that the corporate center stays lean and relevant.

There抯 always a debate at M&M about the center抯 role, and I don抰 think there is a right answer. For instance, after I spoke about the importance of innovation last December, my colleagues in the office of strategy management asked me what we should do to make our companies more innovative. I didn抰 want to stipulate anything, so we argued a lot. We finally decided that we抣l create metrics that measure where each sector stands in terms of its innovation capability. After that, it抣l be up to each company to decide how it wants to become more innovative. The sector heads know that at every review, I will ask them what they抮e doing to improve their innovation scores and how they抮e faring. But I don抰 want the corporate center to micromanage the process.

Several M&M senior executives and board members told us that their biggest worry is that you are a very difficult act to follow. Are you creating an organization that will live beyond you?

I抳e told the M&M board that if I get hit by a bus, it can decide who should succeed me. That isn抰 necessarily going to be anyone from my family. I抳e given the board a raft of potential successors in the heads of the group抯 businesses. My personal choice is sealed in an envelope; the chairperson will share it with the board when the time comes.

I would be delighted if the board finally says: Anand Mahindra didn抰 give us a successor; he gave us a bunch of people who can step into his shoes. That would be a fitting epitaph.


President and Fellows of Harvard College
Source: Harvard Business Review