On reflection, it struck me that the conversation this year was very different than in years past. We were no longer talking about reinventing leadership but about adding new elements to the old model. An additive operation in the algebra of change, as my colleague Stuart Albert would put it, not a subtractive or transformative process.

On the opening morning at Davos, I attended a session entitled, “The New Context for Leadership.” Up for discussion were purpose-driven leadership, collaborating across organizational boundaries, and inspiring the younger generation. Peter Grauer, the Chairman of Bloomberg, talked about the results of a study to identify what leadership competencies were most valued in his company. The top performers had contradictory attributes, what he called the “and” factor: They had future vision but were tactically strong; they provided strong guidance but were open to challenge; they relied on extensive networks but were also capable of moving fast (i.e., unilaterally); they were hands-on but also empowering.

A similar idea was advanced at the Women Leader’s dinner on Friday night. Michelle Bachelet, the former Chilean president, said that in changing times the best leaders are those who can be generals one day and consensus-builders the next. Josette Sheeran, U.N. World Food Program Executive Director, agreed, stating that today’s leadership still needs to be hierarchical but also needs to be flexible.

Since the 2008 economic crisis, two very different “rhetorics” about leadership have coexisted. One, the traditional rhetoric, says that our perpetually shifting environment calls for leadership that is more decisive and crisis-oriented than the slow and consensual style that we might prefer in more munificent times. The second, more “politically correct” rhetoric says that the old, command and control model is responsible for many of the problems of the recent years and that only with a more collaborative and inclusive leadership will we get the flexibility, innovation, and new thinking that we need to prosper in a fast-changing and hyper-connected world.

Now it seems that we have settled on a solution — not “either/or,” but “yes/and.” Like Janus, the Greek god depicted as a man with two heads, each facing in opposite directions, our new leader can and must have it both ways: command and collaborate.

There is obvious practical benefit to this kind ambidexterity. But does it exist, and does it inspire? Or is it just a theoretical model? The people who come to mind when I ask my students about a leader they admire fit the “command rhetoric” (e.g., Steve Jobs) or the “collaborate rhetoric” (e.g., Gandhi), but not both. Never in 23 years of teaching MBA and executive courses have I heard someone cited because of his or her capacity to “code-switch” their leadership style. In fact, when we see leaders who do this effectively, we question their authenticity.

But my questions are not rhetorical, for these are clearly complex and volatile times. Are we looking for leaders who can supplement the traditional tool kit, or do we want leaders who will transform it?

Facebook’s success confirms these ideas:

The value of networks. Networks become more valuable as the number of users increases. As the largest undifferentiated network that anyone can join, Facebook’s value comes from the fact that anyone can join. As numbers climbed into the millions and now close to a billion users, Facebook becomes mandatory, not optional, for those who wish to reach their friends or their potential customers.

The power of platforms. Launching “Platform” in 2007 enabled developers to build apps for the Facebook website. And of course Facebook itself is simply a way for others to create content and share it however they wish — with strangers or with intimates.

The importance of partners. Attracting Zynga and other social game developers who could sell virtual goods arguably helps Facebook with another way to make money besides advertising revenue.

The huge human hunger for connections. Facebook offers intimacy and a feeling of belonging in an increasingly impersonal world. It helps like-minded people sort through the crowd and communicate with peers, with sometimes revolutionary effects.

Now back to the IPO. The gargantuan valuation of $100 billion proves another truth:

The triumph of hope over experience. Facebook could indeed exceed expectations — anything is possible in this world of constant surprises — but history offers a different perspective. To be the next Apple on a sustainable basis will require another wave or two of major innovation. Simply mining the current platform and data won’t be enough.

Before Facebook was born, in the distant past of a dozen-plus years ago, there was a dotcom bubble accompanied by proclamations that the Internet changed the laws of business, that business cycles were over, and that cyberspace knew no limits. Valuations soared, until the crash dashed hopes and lost billions. Now social networks are supposed to be different and change the rules. Facebook is certainly a force for enormous change in many social institutions, as Mark Zuckerberg says. He will be a mega-billionaire after the IPO. But that doesn’t mean that ordinary investors can bet their financial futures on friending Facebook.

In the last few years, Facebook has gone through major growth — from businesses using Groups and Profiles to Pages, which are still changing on their own. This evolution was met by a lot of complaining and foot-dragging by the marketers who were responsible for converting their Group to a Page, or similar issues on other sites. Google+ even launched without support for business features and a rule that any business on the website would be taken off until business features were actually launched.

While there is no escaping the changing systems for these platforms, there are ways that you can be better prepared. Marketers who ask themselves the following questions will rarely get caught off guard because their marketing actually speaks to their audience and doesn’t hinge on a specific feature or method of outreach.

Why did the platform come about?
Each marketing platform, whether digital or not, came together with an original purpose or goal: sharing content, keeping in touch, spreading news, and so on. Facebook started so that people could share things they like and keep in touch. While Facebook changes its functionality from time to time, they have stayed true to their core philosophy and tried to make it easier and safer for their users to do more. Other platforms are the same way. Start your plans by looking at how and why the platform began to exist. For example, Google started the AdWords platform, in part, because they could serve ads similar to the keywords users searched.

Google often updates the Terms of Service for their AdWords product. Instead of getting bitten every time this happens, look at Google’s goals for the AdWords product and make sure that your ads match where Google is trying to go by writing relevant, useful advertisements. Google even gives incentives to people who write strong, successful ads with lower prices and better placements since that benefits them on every angle. It’s also critical to Google that people trust AdWords ads and find them useful, or Google risks losing their main profit center.

What is the killer feature for the platform’s audience?
Instead of planting your ads on the edges of what’s acceptable or re-using the same strategy on many sites, optimize your work for long-term success by working with customer interest. Create a buyer persona for the people who use each platform, and then use that to develop your strategy. When you’ve figured out exactly what the perfect item is for that audience, you can create something that has a chance at being really successful.

Zynga, a game company that makes social games primarily for Facebook, has appealed to their customers through the culture of sharing. Their games incorporate the sharing atmosphere very well by encouraging users to share their progress and favorite games with their friends as they play. By aligning their product’s marketing with Facebook’s culture of sharing, Zynga gets their top users to do their marketing for them, and is unlikely to be disrupted by any platform changes that Facebook makes.

Where else is your audience active online?
As you develop a strategy and methodology for each platform that you are on, continue to research and track what other sites or systems your customers are using. These are all additional opportunities to capture the attention of your audience. If you’re not sure what those other platforms are, conduct a survey or ask a few of your current customers where else they’re active online. This is valuable intelligence about where to spread your marketing content. Creating customer interaction on multiple platforms will allow you to build a deeper and stronger relationship with your audience. Just be sure that instead of just copying the same strategy and hoping it works somewhere else, you use what you’ve learned to create something new.

Download this podcast

The controversial action — Britain’s Institute of Directors warned of “anti-business hysteria” while Prime Minister David Cameron declared it “the right decision” — invites exactly the sort of “best practice” debate serious business leaders should have about honest compensation and perverse incentives. People respond to incentives. Poorly designed and/or cavalierly monitored incentives frequently lead to horrendous outcomes.

The behaviors may not be criminal or even unethical but they undeniably lead to decisions where individuals maximize their own compensation at the expense of their organization in potentially destructive ways. This typically holds true for the highest-ranking and most dynamic slices of industry, whether financial services, professional sports, health care or high tech. While Goodwin may no longer be a knight, he got to keep a not ungenerous severance and pension.

The fundamental asymmetry, of course, is the presence of bonuses and an absence of clawbacks. That is, individuals and teams may receive impressively large and ostensibly “performance-based” bonuses if they hit their numbers. However, they typically need not worry about forfeiture if, upon review, those numbers require restatement, revision or repair. Misleadingly-gotten gains are not “clawed back.” Or, colloquially, heads, they win; tails, they don’t lose.

This status quo is unacceptable: any organization that invests more time and thought into designing performance bonuses than considering clawbacks is guilty of bad behavioral economics and even worse management. Clawbacks shouldn’t be punishment for flawed decisions or bad luck; they’re deterrents and insurance policies for organizations that fear that talented individuals may take inappropriate and unsustainable shortcuts to get the bonus. Clawbacks are an essential technique for balancing long-term business health against short-term bonus wealth.

Otherwise institutionalized imbalances in compensation encourage too many people to “game the system.” Traders are notorious for developing schemes that sync with how their compensation and bonuses will be paid out. Their defenders argue that consistent losers will, of course, get fired — so what’s the long-term point of clawbacks? But that ignores the (obvious) behavioral reality that traders who know that their greatest risk is losing their job — instead of their money — might be prone to making even larger bets to win comparably larger bonuses. The upside potential overwhelms the downside exposure. That’s a proven recipe for disaster.

For example, I’ve seen software development teams get a cash bonus and stock options for delivering their code early and under budget. But what became disturbingly clear less than six months later is that the team withheld useful information it learned in testing that would have made the software much more robust and scalable because the revision would have blown the bonus deadline by a month. Developing better software would have paid less. Similarly, there’s been no shortage of savvy salespeople I’ve observed who close large, bonus-winning contracts that have artfully phrased “service level agreement” clauses that end up annihilating margins. A few of the larger contracts even led to “rev rec” (revenue recognition) restatements that triggered audit committee reviews. Yes, the sales team was (ultimately) fired. Yes, they kept their bonus money. Yes, the sales people who played by the rules got nothing.

In America, incentive-based compensation excess, egregiousness and economic dysfunction has led to clawbacks being enshrined first in the Sarbanes-Oxley and, more recently, in the controversial Dodd-Frank financial reform legislation. But it’s far too early to meaningfully assess the future of “clawback cultures” in OECD countries, let alone the BRICs.

But clawbacks represent one of those rare mechanisms which represent a convergence between populist concerns and better incenting high performance outcomes. The public wants assurances that executive compensation is not determined by crony capitalists; investors seek greater confidence that incentive schemes don’t lead to expensively perverse outcomes; and play-by-the-rules employees who invest more effort in creating value than gaming the bonus pool appreciate efforts that don’t reward colleagues and bosses who are too clever by half.

Healthy conversations around clawbacks are as important to risk-management and employee morale as well-designed incentive-based compensation programs and a generous bonus pool. I’d argue there’s no such thing as well-designed incentive compensation programs that don’t have a carefully calibrated clawback component. Emphasizing bonuses at the expense of clawbacks is bad for everyone.

Have you had a constructive clawback conversation with your pay-for-performance people?

It will also require overcoming a few major misconceptions:

Entrepreneurship is confused with self-employment. Whether it’s this decade’s declared 100 million MENA job deficit or the 400 million world job deficit, the implicit assumption in the Davos dialog was that the brute force of self-employment and small business will somehow turn the tide. Why? One reason is the deeply ingrained belief that “idleness is the root of mischief” and that self-employment will get the idle, incendiary youth off the streets. This obviously reflects the conflicting views of youth movements as agents of change versus youthful mobs as threats to the status quo. The second is what I call the “Large Numbers Fallacy”: the idea that millions of self-employed hair dressers and delivery wagon vendors and hawkers (not that there’s anything wrong with these) will naturally evolve into tens of thousands of high growth and high employment-creating ventures. No one I spoke with has a realistic plan for how entrepreneurship will breach this employment gap.

At present there is scant rationale for either assumption, although the jury is still out. Every country indeed has its example of the cell phone kiosk owner who made it big. But in fact, experience and research show that the mindsets and skills, as well as social and economic implications, of high growth entrepreneurship and self-employment are cut from different cloth. In many cases attitudes of the self-employed are anti-entrepreneurial (“If only we had real jobs…”). But the jury has ruled that it is high growth entrepreneurship that creates the employment and most of the other social benefits.

Entrepreneurship is conflated with innovation. Davos leaders who recognize that entrepreneurship is distinct from self-employment and small business, often fall into the trap of equating entrepreneurship with innovation and, by default, technology. Although innovation and entrepreneurship often co-occur, and some of that is technology-based, neither is a prerequisite for the other, and again, they are conceptually and practically distinct. In fact, most entrepreneurship is based on what I have called “minnovation,” small tweaks and excellent execution. Many prospective entrepreneurs are deterred by intimidating messages that they need to have big innovations, otherwise forget it.

Entrepreneurship ecosystems are not checklists. Several other misleading assumptions were embedded in the Davos dialog, such as that young people are better entrepreneurs, despite evidence to the contrary. However the most surprising to me was that despite the new popularity of the catch phrase “entrepreneurship ecosystems,” (for which I am partly to blame) the term is broadly misunderstood as simply a collection of diverse entities: if there are universities, venture capitalists, an incubator or two, as well as some government funding, voila, there is an entrepreneurship ecosystem. Thus, designing one is an engineering task. The term ecosystem actually refers to a self-organizing and self-regulating interaction of independent organisms; it is not a checklist of the local flora and fauna. And in nature, biological ecosystems are usually not designed, they evolve naturally.

But at the other extreme, some of the Davos delegates viewed entrepreneurship ecosystems as completely impervious to intentional influence, and when dysfunctional, actually are the entrepreneur’s “enemy”: i.e., entrepreneurs are responsible for all the good things that happen despite the hostile environment; the bad things are because of the government and its errors of commission or omission.

Leaders can indeed impact ecosystem evolution, but this requires both a mindset and a methodology. The mindset reflects an understanding of how the visible and invisible hands of the market can work, interacting with a plan for leaders to become less interventionist, as the elements of the ecosystem take root. The methodology, which we have been developing at Babson, is a set of processes for meaningful engagement of all of the relevant stakeholders, and the facilitation and acceleration of the self-organizing process.

The good news is that many changes in reality start with changes in terminology. The corporate giants and public leaders at Davos have indeed been paying sincere attention to entrepreneurship and its social and economic impacts. Hopefully, this is a harbinger of actions and new realities that are just around the corner.

As I participated, one theme seemed omnipresent — that while events are unfolding in the world at an accelerating pace, increasingly complex institutions are less and less able to deal with them.

I heard it in the opening remarks of WEF founder Klaus Schwab who talked about a growing phenomenon of “burn-out” among world leaders with finite energy and time to put against seemingly bottomless complexity. An example was a discussion session of tired-looking European finance ministers, defensive and elusive about the speed of acting on the Euro crisis.

I heard it in a session led by Professor Michael Porter and Dean Nitin Nohria of the Harvard Business School who were sharing a research project on declining American Competitiveness. The presentation to 50 people was followed by a discussion of antidotes to the dangerous trends they showed. The problem seemed not so much identifying what needed to be done as the lack of a plan for making the changes quickly enough.

I also heard it in an amazing dinner session led by Daniel Goleman (father of the concept of “Emotional Intelligence“) that probed the attributes that great leaders in the future would need to be successful in complex organizations. Three attributes stood out: 1) authenticity and sharp clarity of purpose, 2) empathy (EQ) and the ability to relate to people at the “front line” levels, and 3) self-awareness and humility to constantly question and adapt.

Government is the most visible crucible for this clash of speed versus complexity, yet businesses are not far behind. Today, only 9% of businesses in the world have achieved even a modest level of sustained, profitable growth over the past decade on average (5.5%, earning cost of capital) and that is declining — even though virtually all the businesses aspire to something like this or more. Yet, when we ask executives — as we did recently at Bain & Company to 377 across the world — they say that they do not face inadequate opportunities. Rather, their biggest barrier by far (about 85% of the time) relates to the internal complexity of their organizations and the management of their energy against that.

We just completed a multi-year study of the root causes of enduring success. We found an increasing premium to simplicity in the world of today — not just simplicity of organization, but more fundamentally to an essential simplicity at the heart of strategy itself. In every industry, we discovered companies that were enjoying an inherent advantage in dealing with the increasing tension of faster moving markets and increased internal complexity due to this ability to keep things simpler and more transparent than their rivals.

Today, complexity has become the silent killer of profitable growth in business, and sometimes of CEO careers.

We defined the three design principles of the companies who seemed best at creating enduring competitive advantage in a three year study at Bain & Company (Reported in the new book my colleague James Allen and I have just written: “Repeatability“). We called them “Great Repeatable Model” companies and found that they seemed to be able to maintain a simplicity at their core (think of companies like IKEA, Nike, or Vanguard for instance — very large in size, but with a clarity of strategy and purpose that jumps out at you) and turn it into a growing competitive advantage in the world of today — each of which has its own parallel in the three attributes of great leaders of the future. (That is a topic for a future blog.)

However, my question and message for today, after marinating for a week in the issues of Davos:

Is it time to raise the pursuit of simplification to a higher level of importance in most companies?

Letting go takes courage and is not a natural act for most humans, or management teams. But, given the trends of speed and complexity, maybe ask yourself: is this the year for more companies to take the chance of “zero basing” what they do? Will the ability to keep it simple (think of the fact that Apple has only about 60 products still!) be a mantra for competitive durability in the world of the future?

• Banks insured by the Federal Deposit Insurance Corporation have $1.5 trillion in capital — the highest capital levels in the history of American banking.

• The largest U.S. banks have increased Tier 1 capital — the core measure of a bank’s financial strength from a regulator’s point of view — by nearly 50 percent over the last four years.
• Executive compensation has been reformed significantly to align with long-term performance.
• Banks have developed fortress balance sheets, improving credit quality by 54 percent, increasing net income and, restoring aggregate lending to pre-crisis levels of nearly $7 trillion.

Why you’re very welcome, Financial Services Roundtable! You see, almost all of the positive indicators above were enabled by or forced on banks by people working for us the taxpayers (by which I mean Congress, the Federal Reserve, and financial regulators). Most of them — increased capital, executive compensation changes, higher credit quality, fortress balance sheets — would have been fought tooth and nail by the Financial Services Roundtable before the financial crisis. (Because Jamie Dimon always gets bent out of shape when people tar all bankers with the same brush, it should be noted that JP Morgan Chase and a few other institutions were improving credit quality and building up capital before 2007. But the industry as a whole was not. If it had been, there wouldn’t have been a financial crisis.)

There’s a lesson here. If you let the financial services industry do exactly what it wants, the financial services industry will eventually get itself — and by extension the economy — into staggering amounts of trouble. If you force it to behave, it might just thrive.

The question is who that “you” ought to be. Relying on regulators or central bankers doesn’t always work because during good times they have a habit of getting caught up in the same idiocy as the financiers do. And so historically, attempts at controlling the industry’s bad habits have also involved restricting what different institutions can do, and how they are organized. Sometimes these have been imposed by government — the Glass-Steagall division between commercial banks and investment banks, for example — but often they have arisen organically. Investment banks used to all be partnerships. Savings and insurance institutions were usually organized as mutuals.

In recent decades, though, the trend has been to allow old barriers to fall and encourage the creation of the for-profit, shareholder-owned, boundary crossing financial juggernauts that make up the membership of the Financial Services Roundtable. Which hasn’t worked out super well.

I thought about this while listening Tuesday to David Swensen, the legendary manager of Yale University’s endowment, arguing that acting as a fiduciary for other people’s money and maximizing profits are incompatible activities. “A fiduciary would offer low-volatility funds and encourage investors to stay the course,” he said. “But the for-profit mutual fund industry benefits by offering high-volatility funds.”

Swensen said this at a Bloomberg Link conference held in honor of that great fiduciary, Vanguard founder Jack Bogle. It was an event packed with prominent people who work (or worked) in finance, but seem to come from a different, more genteel world than the bulk of modern Wall Street: Bogle, Swensen, former Fed chairman Paul Volcker, former TIAA-CREF CEO John Biggs. One distinguishing characteristic: All of these guys are wealthy. None of them are, by modern Wall Street standards, rich.

For Bogle, that’s because the company where he spent his peak earning years was structured as a mutual — owned by its customers and operated on their behalf. All mutual funds are legally organized along these lines. But all the major mutual fund families except Vanguard are now dominated by a for-profit investment “adviser.” Some of these for-profit advisers (Capital Group and T. Rowe Price spring to mind) have built a reputation for looking out for investors’s interests. But, to follow Swensen’s reasoning, the incentives are all wrong.

A lot of investors seem to get this — which helps explain why Vanguard has grown to account for 17% of mutual fund assets in the U.S., leaving long-time archrival Fidelity in the dust. But Vanguard only became a mutual because of a strange confluence of events in the 1970s, when Bogle was kicked out of the presidency of the for-profit Wellington Management Company, and organized a rebellion among the directors of Wellington’s funds. The organization that had created the mutual fund industry, Massachusetts Investors Trust, had switched from a mutual into for-profit Massachusetts Financial Services a few years before. No firm since has followed in Vanguard’s footsteps.

“Why not?” somebody asked Tuesday. “The profit motive,” replied Burton Malkiel — the Princeton economist, Vanguard board member, and author of A Random Walk Down Wall Street. Or as Bogle told me once: If he hadn’t been forced out of his Wellington job, he probably wouldn’t have done anything to shake up the mutual fund industry, and would have retired “rich as Croesus.”

The profit motive is generally a good thing. It drives hard work, innovation, and the success of the capitalist system. But in financial markets, it’s problematic. That’s partly because of the zero-sum nature of most financial intermediation: Every penny in fees is that much less in investor returns. It’s also the fact that most investors are incapable of judging whether their money manager or broker is doing right by them. And then there’s the issue of risk, as illustrated by the recent financial crisis. You can make a lot of money in finance doing things that are bound blow up in someone’s face a few years down the road. There’s a good chance you’ll have changed employers by then, after all. Plus, if your bank is so big that its failure might bring financial panic, taxpayers will bail it out.

The untempered pursuit of profit, then, is almost never good for the customers of the financial sector. Over the long run, it may not be good for the financial sector, either. So I’m hoping that this new white paper is an indication that the Financial Services Roundtable finally realizes all this, and is about to start lobbying for tougher regulation, a return to true mutual status for the mutual fund industry, a return to partnerships for investment banks, and a breakup of big, complicated financial institutions. That is the plan, right?

The succession process is a crossroads in a country’s development trajectory. For governments, particularly those in emerging economies, smooth successions play an outsized role in the continuity of reform agendas, the confidence of key stakeholders, and the stability of investment regimes. Disorderly successions, in contrast, can trigger damaging battles for control, an exodus of both financial and human capital, and even a shift toward the failure of the state.

These emerging economies have a pivotal role to play in the future of the global economy. The Gulf states, for instance, hold over 40% of the world’s known oil reserves and over $2 trillion in foreign assets. The next generation of public sector leaders in many of these countries cut their teeth in the business world. On their return, they often take up key roles in legislatures, executives, and bureaucracies. These leaders should look to the private sector for guidance when it comes to ensuring smooth leadership successions. Why?

First, the political succession process in many emerging economies — from parliamentary democracies with dominant parties, such as Singapore and South Africa, to nondemocratic polities, such as China — often closely resembles the process of selecting a new CEO within a business. A small group of senior leaders, not dissimilar to a board of directors, selects a new leader to govern on their behalf in consultation and with the tacit approval of key stakeholders. As a result, succession planning techniques developed in the private sector are often applicable to public sector institutions.

Second, businesses are acutely aware of the problems associated with disorderly successions. Reliance Group, India’s largest private company, was split into two in 2005 following a power struggle between the Ambani brothers after their late father, Dhirubhai Ambani, died without leaving a will. In the U.S., Yahoo has struggled to convince investors that it has a clear strategy or a long-term CEO to implement that strategy since Carol Bartz’s sudden departure last fall. Businesses can provide public sector leaders with a much broader range of case studies of both well-managed and poorly-executed succession events.

Third, as a result of the reduction in average CEO tenure over the past decade — in 2011 a CEO of a global company could expect to stay in post for just six years (PDF) — many large public companies have professionalized the succession planning process. P&G, for example, takes a holistic approach to developing a roster of future leaders, rotating its senior executives every three to five years in order to ensure broad exposure and encourage leaders to develop a cross-functional skillset. At GE, succession planning and clear selection processes are institutionalized throughout the company. In the annual “Session C” reviews, the CEO meets with leaders from across GE’s business units to understand the future leadership pipeline. In contrast to these companies, governments in most emerging economies have not invested time in succession planning as their current leaders have aged. However, the recent focus on succession planning in the C-suite has meant that businesses have developed a number of best practices which can be adapted and adopted by these governments.

Effective succession planning alone is certainly no panacea to the challenges facing the governments and citizens of economies in transition. But every emerging economy has a crop of talented leaders passionate about making a difference to their home countries, and proper preparation is imperative. The next generation of public sector leaders need to immerse themselves in the techniques of the private sector if they are to learn to succeed at succession and secure a place in tomorrow’s global economy.

This post is part of the HBR Insight Center, The Next Generation of Global Leaders.

Much of the pique stems from how Fiat built a stand-alone dealer network for a single, mid-priced car. This was expensive, with many dealers spending $3 million to create showrooms outfitted with espresso machines and other costly efforts to evoke Italian style. Conventional wisdom argued for launching the 500 through Chrysler dealers, which could have leveraged both physical infrastructure and the dealers’ flow of customers. Similarly, Fiat could have piggybacked on Chrysler’s service departments rather than create its own. Eventually, once the brand had become established, separate dealers could have sprouted.

This would have been a great way to strangle an excellent idea. If the 500 had been a run-of-the-mill car (like much of Chrysler’s recent line-up), then leveraging Chrysler would have made sense. But Fiat aimed to create a new market — a highly stylish vehicle (that even comes in a Gucci version) appealing to young, independent-minded buyers. That’s not exactly who comes to a Chrysler dealer shopping for a Dodge Caravan. (The B-52′s lyric “I’ve got me a Chrysler and it seats about 20” says it all.) Moreover, at $16,000 for the base model, the 500 costs considerably more than comparably-sized competitors such as the Nissan Versa or Toyota Yaris. Showing the car in a setting similar to its rivals would have fostered unfavorable apples-to-apples comparisons and downplayed the car’s distinctiveness. In a world of low-priced apples, Fiat is striving to be an orange.

Many big markets get their start in small footholds like the one Fiat has targeted. Red Bull first gained traction with young club-goers seeking a mixer. Smartphones began as two-way pagers (no voice capability) aimed at e-mail addicted executives. Once a new idea has captured the attention of the foothold market, the concept can be revised for scale-up, and the early customers can demonstrate to fence-sitters that the product is a good one. It is very doubtful that the 500′s foothold market was lurking in Chrysler showrooms, just waiting for the company to launch a stylish small car.

Other criticism has focused on the initially modest advertising budget. This also misses the point of a foothold approach. Perhaps Fiat could have goosed sales by spraying ad dollars around, but it also would have wasted money by communicating with irrelevant consumers. Many people don’t fit Fiat’s mold, and even individuals well-targeted by demographic criteria (which is how media is bought) might not be early adopters of a new brand. If a car company is trumpeting a modest extension to an existing category, advertising can increase the number of people considering the vehicle. But for a new category, many consumers are going to want to see others driving the car first. Inherently, these categories aren’t going to burst to life but rather germinate and grow.

I’m not saying the launch was perfect. Some dealers were in decidedly unstylish locations. Urban chic goes only so far when it’s set amid fast food restaurants and strip malls. The launch would have been stronger had it been coupled with other Fiat cars or the Alfa Romeo line, which will appear in the U.S. in the next two years. Perhaps service appointments could have been directed elsewhere, although this is where many auto dealers make the bulk of their profits. Marcchione has taken some blame for execution issues, but he doesn’t sound too sorry about the basic strategy. And he shouldn’t be.

Foothold strategies are counter-intuitive. They enable a concept to get big by intentionally starting small, in a channel dedicated to making the proposition stand out. They often target small sets of customers who are can be reached inexpensively. Because the customer is so well-defined, initial versions of the product don’t need to be all things to all people, so the concept can come to market relatively quickly and inexpensively. Feedback from initial customers can lead to rapid revisions of the idea. Even in the automotive industry, with its long development cycles and high upfront costs, Fiat could have held back on some vehicle options for its initial launch, and it could quickly revise the presentation of the 500 in its dealers and customer communications.

A foothold approach wouldn’t have been appropriate for a new Dodge minivan. But for a product attracting a new customer type, carving out a new market position, and highly reliant on image rather than pure function, it can be critical. Fiat’s initial U.S. launch may have disappointed, but the company is now set up well for long-term success.