The Leadership Engine

How Winning Companies Build Leaders at E

Noel M. Tichy

• Publisher: HarperCollins e-books
• Year: 2009
• ISBN:
  9780061748318
• Topic: Commerce
• Subtopic: Leadership

In this Wall Street Journal and BusinessWeek bestseller, Michigan Business School guru and worldwide consultant Noel Tichy brings his special brand of organisational transformation to a practical level that guarantees a leader at every level of an organisation.

Why do some companies consistently win in the marketplace while others struggle from crisis to crisis? The answer, says Noel Tichy, is that winning companies possess a "Leadership Engine" , a proven system for creating dynamic leaders at every level. Technologies, products and economies constantly change. To get ahead and stay ahead, companies need agile, flexible, innovative leaders who can anticipate change and respond to new realities swiftly. Tichy explains that everyone has untapped leadership potential that can be developed winning leaders and winning organisations have figured out how to do this.

In this acclaimed bestseller, Tichy offers colourful and insightful best-practice examples from dozens of leaders gathered from decades of research and practical experience.

One The Leader-Driven Organization

• What Is Winning?

1

The Leader-Driven
Organization

Winning Is About Leadership

• Winning organizations have leaders at all levels

• Producing those leaders is what separates the winners from the losers

Leaders Have Ideas, Values, Energy and Edge

• Ideas and values guide their decisions

• Energy and edge get them implemented

Without Leaders, Organizations Stagnate

• They can’t keep pace with changing markets

• They don’t add shareholder value

In August 1991, Bill Weiss, the CEO of Ameritech, walked into my office with a problem. The company he headed was an old-style Baby Bell telephone company that suddenly found itself having to compete in a new, fast-moving telecommunications industry. In order to survive, it needed to expand its product mix, change its bureaucratic operating style and establish a new working culture based on intense competition rather than stifling regulation. After listening to Weiss describe the situation at Ameritech, my colleague Patricia Stacey and I came to a clear conclusion. “Bill,” I told him, “you are 62 years old and retiring at 65. I don’t think we should be talking about your leading any kind of transformation. Your agenda is to find a successor, make sure he or she is in place and get out of the way. You’ll have to turn it over to that person to do the transformation.”

Weiss was polite but firm. “I can’t do that,” he replied. “We’ll lose two or three more years while that person is getting his or her act together. That would be catastrophic, because within five years, we’ve got to either transform this company or find our markets rapidly shrinking. Until now, our leaders have been unwilling to contemplate anything but gradual change. We’ve got to find a way to radically reform and reorient our company. We’ll have to deal with succession in that context.” ¹

Within six months of this meeting, two of the key potential CEO successors had left Ameritech, and four new potential successors from within the organization were leading a massive cultural change effort called Breakthrough Leadership. The company had also created a temporary organization to run parallel with the operating company. This temporary organization was designed to simultaneously screen and develop leaders for Ameritech’s future, as well as to develop the vision, values and strategy for the new Ameritech. It involved hundreds of leaders and task forces, and intensive development activities throughout 1992. In 1993, this was expanded to thousands of Ameritech managers.

By May 1994, when Weiss retired, the company had been totally reorganized into new business units, and a new CEO was in place: 47-year-old Dick Notebaert. It had thousands of reenergized and motivated employees. And it was primed to take off in the new telecommunications world. From 1993 through 1996, Ameritech outperformed its peers, providing a 19.0% annual return to investors versus 13.9% for the Standard & Poor’s Telephone Index. ² For 1996, Ameritech posted net income of $2.13 billion, on revenue of $14.9 billion. ³In 1998, Ameritech was acquired by SBC for $62.6 billion. In 2000, Dick Notebaert moved on to become CEO of Tellabs.

When Bill Weiss retired in 1994, he even left the board so that Notebaert would have the freedom to run the business on his own. But Weiss gave Ameritech a lasting legacy: In a very short time, he had positioned the company to be a winner by developing a team of leaders who would continue to invest in developing other leaders. In his last three years, he gave a bravura performance of leadership, and he left the company not only in the hands of a strong successor, but also with a keen appreciation for and a culture of leadership.

Weiss himself readily acknowledges that he wasn’t always a great leader. He became chairman in 1984, but for the first seven years of his tenure, he just tinkered, “because our performance was solid and life was comfortable.” But finally he saw that big things had to change if Ameritech was going to survive, and someone had to make those changes happen. “I have to admit my first efforts were at gradual change, incremental change,” he says. “I had to start thinking in terms of radical change; revolution, if you will. I should have done it sooner.” ⁴

Bill Weiss may have been a slow starter, but Ameritech was put on a winning trajectory because he came to understand a secret about winning organizations and winning people: Winning is about leadership. Winning individuals are leaders, people with ideas and values, and the energy and guts to do what needs to be done. And organizations are winners because they have good leaders, not just at the top, but at all levels. Winning companies value leaders, they have cultures that expect and reward leadership, and they actively put time and resources into developing them. Winning companies win because they have lots of leaders, and they have lots of leaders because they deliberately and systematically produce them. This is what separates the winners from the losers.

Most people in business will tell you that developing leaders is an important activity, and that organizations must carry it out in a thoughtful and systematic manner. The reality, however, is that while there is much talk and much surface activity, very few organizations do a good job of it. They talk a good game, but when the chips are down, they don’t follow through very well.

Some companies don’t do a good job developing leaders because they don’t try very hard. Some have good intentions, but they just don’t commit the time and resources necessary to do it. Others, such as General Motors, the former Digital Equipment and the former Westinghouse, like to talk about leadership but actively discourage it by punishing people who dare to think independently. And still others, such as AT&T, have committed huge amounts of time and resources to elaborate well-enforced human resources development processes, but they have been largely taught by consultants and academicians who aren’t leaders themselves. So what they have tended to produce are very articulate managers who are masters of the latest “business-speak” and the fads and fashions of management gurus. But they end up acting like civil servants and bureaucrats, not leaders.

Winning companies, however, deliberately and systematically develop people to be real leaders, to be people with their own points of view who motivate others to action. They use every opportunity to promote and encourage leadership at all levels within the company, and their top leaders are personally committed to developing other leaders. At Ameritech, in one year, Bill Weiss personally spent over seventy days on Breakthrough Leadership activities. At PepsiCo, Roger Enrico devoted more than 120 days over eighteen months to running workshops and mentoring other leaders. And Jack Welch taught at General Electric’s Crotonville management training center biweekly, in addition to availing himself of the many coaching opportunities that present themselves daily.

The big difference between winners and losers, whether they are organizations or individuals, is that winners understand that learning, teaching and leading are inextricably intertwined. Teaching is not some ancillary, nice-to-do activity that is left to the staffers in the human resources area or, worse yet, to outside consultants. Teaching is the central activity of winning organizations. It is hard-wired into everything they do. Larry Bossidy of Honeywell does not run a budget review or a strategy session without making it an important coaching and teaching opportunity. For both Bossidy and his subordinates, these interactions build energy and get the juices flowing faster. In most companies, meetings with the top boss evoke reactions that range from terror to narcolepsy, in which all the participants struggle to stay awake through mind-numbing bureaucratic rituals. In winning companies, any meeting that doesn’t leave the participants better prepared and more eager to do a better job is considered a failure and a waste of time. As Andy Grove of Intel puts it: “It is not right for [the chairman] to allow people to be late and waste everyone’s time. . . . . Just as you would not permit a fellow employee to steal a $2,000 piece of office equipment, you shouldn’t let anyone walk away with the time of his fellow managers.” ⁵

Further, in winning companies, leading and teaching are considered so essential to success that they aren’t reserved for a favored few in the executive suite. Winning companies know that games are won and lost on the playing field, and victory goes to the team with the most good players. So they nurture, and expect, leadership everywhere. In winning companies, teaching, learning and leading are inherent parts of everyone’s job description.

When one Chicago-area hospital threatened to cancel an important facilities management contract with ServiceMaster, it was chairman Bill Pollard who made the plea for a second chance to bring down costs and increase quality, but it was the ServiceMaster manager at the hospital who got together with his workers and figured out how to change their cleaning procedures to get the job done. The new procedures worked so well that crew members from the hospital were soon teaching other crews. ServiceMaster is a low-tech service company making world-class returns of 25% ⁶ a year for the past twenty-five years because it expects all of its workers to lead, and it follows them when they do.

Winning companies are, to be sure, smart operators and savvy competitors. They have the same goals as everyone else in business, to create value for their shareholders, employees and customers. And they grow—and keep growing—by efficiently delivering a constant stream of desirable goods and services to those customers. But rather than concentrating on coming up with winning strategies for the marketplace, winning organizations start by getting smart, energized people in the right places so they will make the right decisions. The philosophy of winning companies, as Larry Bossidy puts it, is, “At the end of the day, you bet on people, not on strategies.” ⁷

In the 1980s, if you asked investors and managers if companies would need lots of people who could creatively destroy and rebuild businesses, many would say, “Sure,” and promptly turn back to managing their balance sheets. Leadership wasn’t a topic that grabbed a whole lot of attention, and when leaders did attract interest, it was mainly about who was going to make the next $600 million in a leveraged buyout.

In the early 1990s, leadership nearly slipped off the screen as a relevant management topic as popular new theories focused on corporate cultures or on work processes as the keys to success. But, as many executives have learned, leadership does matter. The results of leadership matter. And failure to deliver those results can be professionally fatal.

It’s true that leadership is harder to quantify than “net income” and “operating costs.” Its components are “soft” qualities, such as ideas, values, energy and edge. There’s no line on the profit-and-loss statement that says “Leadership—$240 million.” But the existence of leaders and the need for leadership are hard facts. Just look at the continuing successes of General Electric, ServiceMaster, Intel, PepisCo and Royal/Dutch Shell versus the dismal failures—which led to the ousters of the CEOs—at Eastman Kodak, Lucent, Westinghouse, Philips, General Motors and IBM. And look at IBM today. In 1992, IBM lost close to $5 billion. Since Lou Gerstner arrived, under a new team of leaders that he has both hired from the outside and developed within, IBM has provided investors with a better return than competitors every year but one. In 2001, the company made close to $5.5 billion. ⁸

Companies with strong leaders win in their industries and in the capital markets. And the companies that are good at producing leaders win most often. In fact, one of the markers, or corollary traits, that I have noticed about winning organizations is that they are usually net exporters of talent. They are so good at producing leaders that other companies routinely hire them away. When AlliedSignal’s board decided it was time to find a successor to chief executive Edward Hennessy, it raided GE to get Larry Bossidy. ⁹ 3M hired former GE executive Jim McNerney as CEO and Home Depot hired former GE executive Bob Nardelli as CEO. ¹⁰

What Is Winning?

Before I go further in talking about the qualities of winning organizations and winning leaders, let me start by defining what I mean by “winning.” I have just two criteria:

1 Success in adding value

There are many ways you could choose to measure this, but for corporations, I don’t think there’s a better one than the capital markets. For not-for-profit organizations, the test is whether they are growing and improving their use of assets (productivity).

2 Sustained excellence

For established companies to qualify as winners, they must have a continuing track record of success in the capital markets. A quarter or two in the limelight as a “darling of Wall Street” doesn’t do it. For start-ups, especially in high-tech businesses where products have the shelf life of an ice cube on a hot sidewalk, the question is: Have they been able to redefine themselves as their businesses have grown and their initial products faded? The test for nonprofits is: Do they have a continuing impact, and are they growing to impact more people? ¹¹

Lots of people will argue that success in the capital markets isn’t the same thing as, or doesn’t even necessarily require, success in adding real value. This was true during the dot.com mania years when many high-priced initial public offerings were examples of the capital markets rewarding companies without solid track records. But their incredible valuations were almost always based on a gold rush mentality that doesn’t last, and the bubble did burst, causing the prices to tumble when the initial euphoria wore off, and created huge numbers of bankruptcies all culminating in the biggest one in history—Enron. ¹² There is also the big debate over the influence of Wall Street on corporate decisionmaking. Many people are worried that the health of our society and the long-term prospects for the economy are being sacrificed to meet the demands of “greedy” stock traders and institutional investors. It is true that some short-sighted and small-minded executives may have found quick rewards in the stock market by downsizing and laying off hundreds of thousands of workers. But despite these seemingly “irrational” examples, the markets in my opinion are in fact the fairest and most objective measure of leadership. Long-term market performance measures whether or not a leader is truly enriching shareholders (which is after all their primary, or one of their primary, missions).

The truth is that the capital markets have given bigger and more lasting rewards to well-managed companies that have good leadership. Studies have shown that downsizing to prosperity does not work. A study by New York–based Mitchell & Co. looked at firms that had cut more than 10% of their workforce in the mid-1980s. While Wall Street initially applauded the moves with higher stock prices, two years later the majority of the firms were trading below the market and their comparable industry groups. ¹³ Another study of 1,000 American companies found that investors place a higher value on companies that improved earnings through growth in revenue than on those that did so by cutting costs. ¹⁴

The roots of some of the confusion about how to enrich shareholders (grow vs. cut) can probably be traced to General Electric, where CEO Jack Welch slashed approximately 100,000 jobs and sold off $8.5 billion in assets in the early 1980s. ¹⁵ After these actions (which won Welch the title “Neutron Jack”), the company’s stock price soared. GE is now No. 1 in total market value in the world, topping $230 billion in July 1997. ¹⁶ There is, of course, a connection between GE’s stock price and the asset sales and layoffs, but it isn’t as direct as many Welch wannabes may think. The layoffs were never his goal, nor did he ever set any layoff target. Rather, Welch used the asset sales, layoffs and concurrent acquisitions to reposition GE and prepare it to be a better competitor in the future. He was exercising good leadership. After fifteen years, the capital markets aren’t rewarding GE for downsizing; they are rewarding it for the results of good leadership.

According to research by Columbia University finance professor Larry Selden, the companies that are the most successful in the capital markets, the ones that are consistently in the top quartile of the S&P, maintain annual growth rates of 12% in revenue and a 16% operating return on assets. These numbers are not just financial abstractions. They are the real measures of whether a company is pleasing customers and making a profit, the two things that will ultimately determine whether it stays in business and employs anybody.

Since the late 1980s, the capital markets have been signaling that they understand the importance of good leadership. In the slower-paced “good old days” before global competition and international capital markets pushed everything into fast forward, executives could keep their jobs by plodding along and making small adjustments to the status quo. But those days are gone. The world is moving too quickly for bureaucratic caretakers to stay on top. Success in the new global marketplace requires constant innovation, redeployment of resources and risk. Investors are demanding success, and they are holding executives responsible. The ones who don’t deliver are soon unemployed. Just talk to John Akers, Kay Whitmore or Jim Robinson. On Akers’s watch, IBM’s market value plunged nearly $50 billion, and he was ousted by the board. ¹⁷ While Whitmore headed Eastman Kodak, the company failed to grab the lead in digital imaging technology while diverting its resources to such misguided acquisitions as Sterling Drug. In 1993, Whitmore was let go by Kodak’s directors because he didn’t “move faster and further on . . . . enhanced earnings.” ¹⁸ And at American Express, Robinson missed the fact that the marketplace was changing, and sat by while customers traded the prestige of holding an American Express card for the more tangible benefits offered by issuers of the new affinity cards. As a result, American Express has seen its share of the market drop from 26% in 1985 to 15% in 1996. But that’s not Robinson’s problem any...

Table of contents

• Cover
• Title Page
• Dedication
• Epigraph
• Contents
• Author’s Note
• Preface
• Introduction
• Handbook for Leaders Developing Leaders
• Chapter 1
• Chapter 2
• Chapter 3
• Chapter 4
• Chapter 5
• Chapter 6
• Chapter 7
• Chapter 8
• Chapter 9
• Chapter 10
• Handbook for Leaders Developing Leaders
• Notes
• Sources
• Index
• Acknowledgments
• About the Author
• Also by Noel M. Tichy
• Critical Praise for The Leadership Engine
• Credits
• Copyright
• About the Publisher