Success formula extract

The Success Formula How smart leaders deliver outstanding value

Andrew Kakabadse

Bloomsbury Information An imprint of Bloomsbury Publishing Plc LON DON • N E W DE L H I • N E W YOR K • SY DN EY

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Bloomsbury Information An imprint of Bloomsbury Publishing Plc 50 Bedford Square London WC1B 3DP UK

1385 Broadway New York NY 10018 USA

www.bloomsbury.com BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published 2015 Š Andrew Kakabadse, 2015 Andrew Kakabadse has asserted his right under the Copyright, Designs and Patents Act, 1988, to be identified as Author of this work.

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers.

No responsibility for loss caused to any individual or organization acting on or refraining from action as a result of the material in this publication can be accepted by Bloomsbury or the author.

British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.

ISBN: HB: 978-1-4729-1684-6 ePDF: 978-1-4729-1686-0 ePub: 978-1-4729-1685-3 Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress.

Design by Fiona Pike, Pike Design, Winchester Typeset by Deanta Global Publishing Services, Chennai, India Printed and bound in Great Britain

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Contents About the author

xi

Acknowledgments

xiii

List of figures

xix

Foreword

xxi

Preface Introduction

xxiii xxv

1 Understanding value

1

2 Diversity of thinking

23

3 Discipline 1—Evidence

43

4 Discipline 2—Mission

61

5 Discipline 3—Alignment

75

6 Discipline 4—Engagement

95

7 Discipline 5—Leadership

113

8 Discipline 6—Governance

131

9 Discipline 7—Wisdom

151

10 Key questions

177

Notes

183

Index

187

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Foreword Robert Swannell, Chairman, Marks and Spencer, UK What matters in business?

First, results. Executives and their organizations have to deliver performances that satisfy all the stakeholders involved.

Second, how you behave. What kind of manager and leader are you?

What kind of culture do you help create and nurture in the organization? How do you treat people you work with?

It is tempting, especially reading the media, to regard results as the be-all and end-all of corporate life and to begin to believe that they exist in some kind of vacuum. Reality is different. Results and behavior are inextricably linked.

I don’t believe that true sustainable value can be created without values.

If anyone didn’t believe that before the recent banking crisis, surely it is now clear. I spent my working life in banking. It’s a simple business at heart that depends on the trust of depositors and customers to exist from day to day. Trust depends on values and behaviors that are real and demonstrated every day, year after year. Businesses without values don’t stand the test of time.

In terms of behavior, as a leader it is worth reminding yourself of how you would have liked to have been treated earlier in your career. If you were fortunate, you would have worked as part of a team where you were given freedom to make things happen and achieve results. Your role in the success of the team and the organization would have been acknowledged, perhaps celebrated. Often this does not happen. It should.

The work of leadership is to build such engagement so that all contribute and their contribution is fairly acknowledged. The leader also must build trust. As a chairman, this is a vital part of my role. Trust is not an abstract concept; it is a day-to-day reality and it is built on respecting

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xxii Foreword

individuals, listening to their concerns, and distilling and communicating them. The last element is vital. Communication needs to be open and should be encouraged throughout any organization.

Engagement and trust take time. It is a long-term commitment, but one that needs to percolate into your daily activities. You must, for example, spend time on the front line of the business. In the retail world, this is comparatively easy. You can visit a store. You can feel the mood of the business and its ethos. But it is not that difficult in any business. Only by being there on the commercial front line will you really understand the company, its culture, and its performance.

Results and behavior—not necessarily in that order—lie at the heart of my view of business. This coincides with the most persuasive themes of The Success Formula. As Andrew Kakabadse argues, business is not a complex science governed by a complex algorithm, but a compelling combination of art and science.

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Introduction Each and every organization—and individual—has an idea of what success looks like. It might be a matter of getting through the next quarter, mere survival. It might be a specific target—a level of profitability, market share, ROI, or some other on offer from the host. It might be a grand vision of creating a different world.

Over the last five years, I have traveled across the globe interviewing leaders to gain new insights into the nature of organizational success and how it is created. In-depth interviews were carried out in over 100 organizations in private, public, and third sectors in fourteen countries.

Insights and quotations from the research interviews are used throughout the book.

Those interviewed were all senior leaders in their organizations, including many CEOs and chairmen. Their companies, from Europe, North America, Asia, Africa, Australasia, and the Middle East, spanned industries from financial services to fast-food restaurants; airlines to IT; car making to chemicals; public services to pharmaceuticals; software to shampoos; heavy machinery to home appliances; telecoms to transportation; mining to banking; cereals to minerals; and retailing to railways.

The Success Formula is the result.

My research—supported by the global leadership firm, Heidrick & Struggles—found that the starting point for any successful organization (or, indeed, any individual) must be value. Always. Value is the currency of success. The types of value organizations seek to create and how they approach doing so lie at the very core of any understanding of what success looks like and what is required to make it a reality.

Different types of organizations seek to create different sorts of value— whether it is shareholder value, social value, stakeholder value, or financial value. But all organizations must create value to legitimize their existence and to be regarded by themselves and others as successful.

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xxvi Introduction

Creating value, therefore, is the primary purpose of leadership and the building block of every success story that adorns annual reports, magazine covers, and more.

How do leaders create value? And how do they create value that can be sustained? The leaders I talked to in my research fell into one of three broad categories, according to their approach to value creation. Their approach was typically one of the following: • Replicate: reproduce a previously successful strategy/value proposition.

• Formulate: take a gamble on an unproven strategy/value proposition.

• Evidence-led: Create a value proposition hypothesis and interrogate it with evidence.

Clearly, the replicate and formulate approaches are flawed. Replicating what worked elsewhere is a surprisingly commonplace approach. After all, that is what many consulting firms effectively sell. I have also encountered many executives who have simply applied the same approach, wisdom, and ideas at a series of organizations; they are corporate groundhogs in search of their next groundhog day. The value this delivers will inevitably diminish with time as the world and contexts change.

If someone has a track record, it can be persuasive—for recruiters, colleagues, and others. But what if they are intent on simply doing the same thing again but in a different context? A track record is obviously good, but it needs to be combined with a willingness to evolve, develop, and respond to new contexts.

The formulate category includes executives—and there are many—who see the creation of strategy to deliver value as a gamble, an intuitive and somewhat desperate art. They formulate strategy in a glorious vacuum.

Sometimes it works, but good fortune has a knack of petering out fairly quickly.

Executives willing to wrestle with reality, to interrogate the facts, have a much better chance of repeating the successful creation of value.

What I discovered in my travels in C-suites worldwide is that smart leaders create value and deliver success through what I describe as

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Introduction xxvii

evidence-led stakeholder engagement: they build the commitment and passion that delivers value through real evidence rather than neat consultant-generated strategies, or distant dreams. In these successful organizations, evidence is not an aberration, but the result of hard work, persistence, and structure. Reality is robustly and constructively interrogated and examined. Organizational success is built on a disciplined approach to an array of key issues—from mission to diversity.

The insights from my research have a deceptive but refreshing air of simplicity: success is about delivering value and this is best and most reliably achieved through engaging with people, markets, and data and then gathering evidence on that reality and making decisions accordingly.

Sounds simple. Reality is quite different. Engaging with people within their context in order to win over their commitment, appreciating the finer points of competitive advantage, locality by locality, and pulling all that together through a cleverly thought-out global corporate strategy require a sophisticated level of what I describe as diversity of thinking.

When managers are comfortable with complexity and are able to leverage that defining difference, then leaders can genuinely claim that the organization delivers value. Value delivery and diversity of thinking are inextricably linked. They are the two sides of the same coin and both are required to create organizational riches. The challenge for the leadership of the enterprise is to nurture a mindset of value delivery together with a diversity of thinking so that true differentiation is realized.

These insights led to the development of the success formula, a simple but powerful means of getting to the heart of value. It argues that three elements are critical to value creation: strategy, engagement, and alignment.

Strategy: the plan for how the organization intends to create value going forward Engagement: the extent to which people will voluntarily invest their efforts beyond the financial or contractual benefits to them and Alignment: the structures, systems, processes, and protocols necessary to position the organization to realize its strategy, objectives, and desired outcomes.

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xxviii Introduction

How these elements are configured is the difference between value creation and value destruction. As always, below the simplicity lies a sometimes dauntingly deep vein of complexity, which we will explore. The Success Formula explains how the three elements work and what organizations and leaders need to do to deliver value.

Value is the lifeblood of organizations and the raison d’être of leaders.

My hope is that The Success Formula will broaden our understanding of the meaning of success and the vital role played by value and evidence in making success a reality.

Andrew Kakabadse, September 2014

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Chapter 1 Understanding value What is your definition of success?

I have asked this question of executives throughout the world. Among them was Georges Dabaghi, general manager of Vubiquity in the Middle East and for the CIS countries, and formerly with SeaChange, Lucent Technologies, and AT&T. Vubiquity is the world’s largest provider of multiplatform video services and Georges has been involved in telecommunications in the Middle East and Africa for nearly twenty years. His answer was characteristically thoughtful and explored some of the issues others raised when the question was posed: I’m tempted to say that success is about meeting goals you set earlier, but I think there is more to it, a feeling of creating value somehow, that you created something. I would measure success on more than one dimension.

There is financial success, which you cannot ignore, whether it is revenue growth, profitability, or the number of employees you have.

And then you have the non-quantifiable elements of success: employees’ happiness, your own happiness, how others look at you and whether you bring value to their businesses and the community they belong to.

Even though it’s a very small example, we created our own company in the UAE [United Arab Emirates] so that all our financial transactions pass through UAE banks, all our food and drinks and hotels and conference booking, and travel is passing through local entities, which is adding more to GDP, bringing more value and making the economy here a little bit more prosperous. I see that as success.

Success is also measured by how much you give—to the industry, to other operators, to people doing menial jobs and so on.

Georges Dabaghi’s answer to the question of what constitutes success raises many of the issues we will explore in the pages that follow. Success

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2 The Success Formula

is a potent and often troubling cocktail of the short-term and the longterm, money and conscience, the company and the world, and the individual and the organization.

So, what is success? To distill it down, success is the creation of value—economic and social benefits and outcomes that serve a purpose for the people they are intended to help, in accordance with a set of values that the organization subscribes to.

Organizational success generally comes from having a clear plan or strategy to deliver on a mission. But a strategy is not a success until it delivers its intended value.

“I think the most important role for the CEO is to, first, develop a great leadership team and to develop with that leadership team a clear strategy,” Renè Obermann, CEO of Deutsche Telekom, told me.

“This involves analyzing the business and its perspectives; understanding the market and changes in the market; understanding technologies and the key drivers for the business; and then developing a strategy.

Thereafter, the CEO and leadership team provide strategic clarity to the organization and constantly work on the alignment and execution of that strategy. All of this in order to generate value to all stakeholders.”

Successful organizations create value. Organizations, of course, come in many shapes and sizes, flavors and colors. This book is predominantly concerned with companies, but the same points apply to all organizations. The definition of success will vary from organization to organization, but the need to create value in support of a mission is universal.

A variety of values In the case of a company, this might be shareholder value. Asked what success looks like, Sally Tennant, CEO of Kleinwort Benson Bank, replied: “Creating shareholder value, having a larger client base where you’ve delivered and your clients are satisfied. You measure that partly by being one of the places where people want to come and work. And have a top quality team so that you could fall under a bus and the place wouldn’t collapse. I don’t think it’s success if it’s down to an individual.”1

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Understanding value 3

In the 1990s, the focus of organizations worldwide shifted to generating shareholder value. Suddenly this was seen as the most relevant measure of a company and leader’s success. Its allure has since paled, but it is clearly a vital ingredient in any consideration of what constitutes corporate success.

Pure financial value also has its place. Chris Gibson-Smith, chairman of the London Stock Exchange and formerly the chief geologist at BP, recounted to me how he helped “turn a cash negative, one and a half billion, into the largest single source of cash revenue in the BP group worldwide.” Turning losses into profits, creating financial value where it didn’t previously exist, can be immensely exciting and satisfying. This is the corporate equivalent of alchemy, the marvelous transition of losses into profits.

Clearly, companies need to make money to survive and provide value more generally. But that is not the be-all and end-all of most organizations—or should not be. As Henry Ford observed, “A business that makes nothing but money is a poor kind of business.” In my interviews, it was interesting how little emphasis there was on financial performance. It is necessary but not sufficient, the organizational equivalent of breathing.

These are enduring themes—as old as business itself. Money, price, and profit are simply indicators of value. They are by-products of value creation. So, too, is quality. As the great management thinker Peter Drucker observed: “Quality in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for. A product is not quality because it is hard to make and costs a lot of money, as manufacturers typically believe. This is incompetence. Customers pay only for what is of use to them and gives them value. Nothing else constitutes quality.”2 In other words, value is in the eye of the beholder. Value is something that is created in the mind of another person. It may have a price tag or it may be something less tangible. Value might be seen in terms of social value. Increasingly, the companies I encounter throughout the world have a clear notion of contributing to society more generally.

They want to help make the world a better place, while still making a profit.

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4 The Success Formula

Value is often also seen in terms of the stakeholders involved: the individuals, groups, or organizations with a direct interest in the activities of a corporation. These include shareholders, customers, suppliers, employees, investors, and members of the community in the location where the company operates.

Stakeholder value thinking has been central to research at Harvard University and many American corporations. In particular, the work of Michael Jensen has been influential.3 In recent years, thousands of initiatives have been launched and billions of dollars have been spent in the quest for improving stakeholder engagement to generate value. Yet, the results are mixed.

Our notions of value are continually evolving. Leading the current intellectual charge is the familiar form of Michael Porter of Harvard Business School. The originator of the Five Forces framework now talks of “creating shared value.” The debate about what constitutes value is gathering pace as the next set of challenges facing companies become clearer. “[Companies] remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success,” lament Porter and Mark Kramer in their 2011 Harvard Business Review article “Creating shared value.”4 Calling on companies to take the lead in bringing business and society back together, Porter and Kramer argue that “the solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress.

Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking.”

Delivery failure Value in its many manifestations is at the center of corporate life.

Different types of organizations will seek to create different sorts of

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Understanding value 5

value, but all organizations must create value to legitimize their existence. Value is truly the currency of success.

So far, so good. But while it is easy to agree that delivering value is the essential ingredient of success, time and time again it has become evident that value is not being delivered. In the success formula of many organizations, the numbers simply don’t add up. Value is left on the factory floor or the boardroom table.

Consider the very basic notion of financial value. If corporate profitability alone is taken as the key measure of value, the reality is disappointing.

This is brutally exposed in Richard D’Aveni’s 2012 book Strategic Capitalism. “America’s long run profitability was highest during the 1950s and 1960s,” reports D’Aveni. “Trouble started in the early 1970s but the U.S. rebounded until returns peaked somewhere around 1980 in both the services and manufacturing sectors. Since then we have seen a continuous, long run decline in corporate profitability (return on assets), even during periods of economic growth. The decline has been about 3 percentage points in profitability for both sectors from their peaks of 9 percent in manufacturing and 5 percent in services around 1980. (It is worth noting here that service industries have not been the saviors anticipated. They haven’t filled the employment gulf created by the downsizing of the manufacturing sector. Nor have services generated the same level of return on assets that manufacturing did over the last 50 years.).”5 By this measure, US companies have, on average, been less successful over time. Increased global competition accounts for some of the decline, but there are other factors at work—including value destruction as a result of misguided management. In particular, one pernicious trend is at work: the tendency to manage companies for the short term in order to boost the share price, to the detriment of the company’s long-term position.

Value is being unsuccessfully delivered in other areas. We will come to a variety of examples of this later. First, to better understand how companies have failed to deliver value, which defines success, let us look at value propositions. They are the starting point of value. Modern management theory dictates that all organizations should have a clear and compelling value proposition. In simple terms, a value proposition

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6 The Success Formula

is a positioning statement that explains what benefits (value) the organization provides for whom and how it does it uniquely well. The value proposition is derived from the competitive advantage enjoyed by the organization.

In his highly influential work prior to his championing of shared value, Michael Porter argued that there are three generic strategies that companies can pursue based on their market positioning and competitive advantages. They are either low cost, or differentiation, or focus. In this view, a company chooses between one of two competitive advantages—either it competes via lower costs than its competitors or it competes by differentiating itself along dimensions valued by customers to command a higher price. A company also chooses one of two types of scope—either focus, offering its products and services to selected segments of the market, or industry-wide, offering its products and services to many segments. Which generic strategy a company adopts reflects these choices.

As useful as Porter’s model still is, an organization’s strategy should follow from its value proposition rather than vice versa. This often does not happen.

Failure to define the value proposition properly is one of the most common problems in organizations. But there is another, potentially even more insidious, danger. Too many senior management teams—led by ambitious CEOs—create a strategy to support a flawed value proposition, or for reasons that have little to do with value creation. Business history is replete with examples of CEOs who went on an acquisition spree—buying companies not because they were adding value but because they were empire building. Value propositions can be left behind in a headlong rush to pursue imaginary or elusive alternative sources of value.

Interestingly, too, the very same traits or behaviors that made leaders successful earlier in their career can derail them. Indeed, what has been a highly successful strategy for a CEO over many years can unwind in spectacular fashion if the context changes. The evidence shows that a CEO who was widely admired for his or her strategy and value proposition thinking can become infamous for the very same strategy and value proposition at a later time.

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Understanding value 7

Banking without value When the Royal Bank of Scotland (RBS) acquired NatWest Bank, a bank three times its size, for £23.6 billion in 2000, for example, its newly appointed CEO Fred Goodwin was the toast of London’s Square Mile.

Goodwin had joined RBS in 1998 as deputy CEO to Sir George Mathewson, who had ambitions to develop it from a regional bank into an international player. Mathewson led the NatWest deal, but it was Goodwin’s diligence and sharp mind that impressed investors and won them over to cement the deal in the face of fierce competition from its rival the Bank of Scotland. In January 2001, Goodwin was promoted to CEO and cut 18,000 jobs by merging parts of RBS and NatWest.

Nicknamed “Fred the Shred” for his ruthless ability to acquire and absorb banks, over the next seven years Goodwin presided over RBS’s rise to global prominence as the world’s largest company by assets (£1.9 trillion) and fifth largest bank by stock market valuation. But if RBS’s rise was meteoric, its fall was even more precipitous. In 2008, during the banking crisis, it was forced into nationalization—bailed out by the UK tax-payer.

In October 2008, Goodwin officially resigned as CEO. Shortly afterward, RBS announced that its 2008 loss totaled £24.1 billion, the largest annual loss in UK corporate history. Goodwin’s lack of humility, reluctance to give up his undeserved bonuses, and failure to show contrition over his handling of the crisis led to his becoming the United Kingdom’s poster boy for the excesses of the banking industry.

His unpopularity contributed to his knighthood—awarded in 2004 for services to banking—being canceled and annulled in February 2012.

Goodwin’s rise (and eventual fall) should not really have come as a great surprise. He was simply replicating a previously successful strategy that had worked for him as RBS expanded. The trouble was that the context had changed. The same high-risk, aggressive strategy that had made the RBS Group into a global banking powerhouse, creating massive increases in shareholder value, led to its failure some eight years later.

Yet, with one or two notable exceptions, how many voices warned of the dangers?

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8 The Success Formula

This is a story repeated many times in corporate history. As contexts change, highly successful companies and leaders can find themselves high and dry, stranded, clutching an outdated business model and a value proposition that makes no sense in the new world order. A predisposition for a perceived value proposition (it has worked before, so it will work again) blinds the leader to the evidence needed to deliver value. The success of the past poisons the individual’s capacity to be adaptive to today’s circumstances and, as everyone in business knows, today is always different. Always.

Flaws of the value jungle At least Fred Goodwin and the like have a track record of delivering value. Less obvious but more common are CEOs who believe in a flawed value proposition. In other words, they believe that their strategy will create value for stakeholders even though their value hypothesis is untested and there has been no systematic gathering of evidence. These leaders formulate a value proposition and then move to create a strategy to deliver it. Rather than test the hypothesis and open it up to debate with stakeholders, they forge on with their unproven value proposition.

Typically, they are selective in soliciting opinions, listening only to those who agree with them or support their worldview. The results are usually disastrous.

You might think this sounds highly unusual. But, the reality is that CEOs and organizations regularly pursue strategies that even if perfectly executed are misguided because the value proposition is flawed. Over time, a gap develops between the reality of what’s happening on the ground and what the CEO believes is happening. The CEO goes into denial, choosing to ignore information that does not fit with his or her value hypothesis. The organization creates capabilities and delivers products and services that are out of kilter with what customers value. The last person to know is often the CEO, who increasingly adopts a bunker mentality, refusing to listen to the evidence from the market.

One senior manager described his experience on being parachuted into a problem area of a company that had been ignored for many years.

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Understanding value 9

An untested strategy had been failing but until he arrived no one had done anything about it: When I arrived at my office there was about a quarter of an inch of dust on my desk. And that dust was reminiscent of the dust that was on the company. The people walked around with their heads down.

There was a culture of fear. In my first hour I felt gripped by this no-can-do culture. I walked around as if I was a ghost. Not a single person knew who I was or came to say hello. My first interaction was with the company lawyer, who said: “Are you the new guy in charge of China? You better read this because we’re about to get sued big time and I need to brief you.” So this was nine o’clock. It was a terrible place. I walked around for a while and then went back to my seat and said, what am I going to do?6 What this manager was experiencing was the result of a strategy that had not been evidence-tested. Everyone in that part of the business knew it was failing but the fear culture meant that the message had not reached the CEO at corporate headquarters.

Indeed, one of the most daunting facts of a CEO’s life is how little real information he or she receives. People’s default setting is to give the CEO good news. Bad news rarely percolates through the hierarchy. It needs to be sought out. If you have ever watched the TV series Undercover Boss you will have seen this in practice. In each episode a business leader comes face to face with the day-to-day reality of his or her business on the front line. In virtually every instance, he or she is dismayed to find poor processes, inadequate resources, demoralized people, and unhappy customers. The staggering thing is that it requires a TV program for business leaders to confront reality.

Testing, testing More enlightened CEOs, on the other hand, are always testing their value propositions and value hypotheses with their stakeholders. They are endlessly curious to understand what stakeholders really value.

They are constantly testing their perceptions against reality. So, they visit their company’s stores, they talk to customers, they mingle on the factory floor, they call people to thank them, and much more.

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10 The Success Formula

Leaders have to constantly hunt down the truth by pursuing evidence.

As Ed Rapp, president of Caterpillar’s Construction Industries group headquartered in Singapore, explains: The biggest risk in this job—and I would say any job of leadership—is isolation and filters. Every time I look at a presentation the question I ask myself is how many filters has it been through before it got to me? If you maintain access throughout all levels of the organization it really does give you the ability to bypass the filters that develop in a large company.

The worry is if people don’t always put reality on the table. What I keep trying to help people understand is we’ve got a lot of talented people and if we put reality on the table I’m convinced as a group we can fix it. If we don’t have reality on the table we can’t fix what we can’t see. So that’s the one challenge I continue to work, getting people to feel comfortable delivering bad news, feel comfortable putting tough issues on the table. However, when they put reality on the table, they also need to come with suggested solutions.

Leadership is not just about identifying issues, it’s also all about fixing them.

The truth is elusive. Organizations are made up of human beings with their usual array of concerns, worries, fears, prejudices, and much more. Understanding and capturing the range of realities and perceptions that people hold in any organization is fraught with difficulties, but essential if the power of the success formula is to be understood and exploited. Evidence must be the mechanism to surface these realities and to act as the platform for constructive and continual dialogue.

Listen to how Mick Davis explained his role as CEO of the global mining company Xstrata: In the case of Xstrata, we have 35 to 40 people in our head office and none of us aspires to—or probably has the skills to—run any of our individual operations. We can identify risk, we can interrogate information, we can ask the right questions and we know how to evaluate performance. What we don’t do is attempt to take on any of the individual operations’ management decisions, which means we find no need to build a bureaucracy.

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Understanding value 11

The trick to managing numerous operations successfully is to narrow down “who does what.” We have a clearly defined and proscribed “role of the center.” In most organizations, there is a blurring of who takes responsibility and accountability; but, if you want to be an organization in which your executives have freedom to act, you actually have to give them this freedom. And that means a very, very small head office in which you don’t have people at headquarters second-guessing what the people who run the various components of the whole enterprise are doing.7 Note the importance attached by Davis to asking questions, interrogating reality, seeking out the evidence. Get to the truth and then give people the freedom to execute.

In an interview, Richard Laxer, president and CEO of GE Capital Europe, Middle East and Africa, explained his approach. “My job is to create a strategy for the business. I spend a lot of time on that and the only way I can do it is by staying close to what’s happening externally and internally. It can’t be a strategy that’s developed in a vacuum; it has to be something that reflects the real world.”8 It is perhaps no surprise that vacuum-packed strategies tend to be vacuous.

The ability of an individual or organization to deliver value can never be taken for granted. At every stage it needs to be tested and tested again.

Value creation To better understand the dynamics at work here, let’s take a step back.

If value is the route to success, how do you create value?

This was something I put to all the leaders I interviewed. Their responses were revealing. Over time, it became clear to me that there are two different approaches to creating value as a leader. One is about perceived value; the other is about delivered value.

In the course of my research, I noticed that these different ways of going about creating value indicated two different types, or styles, of leaders.

The creator of perceived value is more likely to be a big picture thinker who elevates strategy above all else, while the creator of delivered value

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12 The Success Formula

is characterized by his or her closeness to customers and other stakeholders. Most leaders have a default setting, leaning toward one or the other mindset.

Let’s take a look at what I mean by perceived value.

Leaders with a predisposition for perceived value start by formulating a value proposition (actually it is probably best described as a value hypothesis) and then look for evidence to support their strategy. They have a preconceived notion of how the organization can create value and enact a strategy to achieve it. Usually, the strategy emanates from inside the boardroom and is informed by a value hypothesis that determines the strategy.

Consider the recent history of one of the great success stories of the first flush of the technology age, Hewlett-Packard. In early 2005, news emerged of an imminent boardroom reshuffle at HP. The move marked the beginning of the end for Carly Fiorina, the company’s high-profile and controversial CEO. On February 9, Fiorina stepped down from her position at the helm of the $80 billion company. In a press statement, Fiorina declared that her exit was related to differences with the board over “how to execute HP’s strategy.”

Prior to becoming CEO, Fiorina had been a highly successful executive.

Much of her success had come from her keen intellect, charismatic charm, and strategic boldness. Yet, the very same attributes that had brought her success earlier in her career contributed to a lack of judgment that led to her downfall. Her talents blinded Fiorina to the evidence that her chosen strategy was destined to fail. She didn’t listen to the people around her. The ultimate thing that derailed her career at HP was her inability to achieve alignment among HP managers in order to engage the company’s workforce with her vision.

A big contributing factor was the company’s poor performance in the months prior to her departure. But underpinning that performance and creating tension within the company was Fiorina’s controversial merger with Compaq, starting in 2002, which she saw as the key to the company’s future. Fiorina was so convinced that her strategy would create value for the company and its customers that she forced it through despite the concerns of board members including Walter Hewlett, son of the company’s cofounder, who strongly opposed the deal.

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The claims of synergy failed to materialize and the company lost considerable value.

Analyzing the case in Fortune at the time, Carol Loomis asked: “Did the famed merger that Fiorina engineered between HP and Compaq produce value for HP’s shareholders? Second, with that merger almost three years past, is HP in shape to thrive in its brutally competitive world? The answers are no and doubtful.”9 This was a classic case of a CEO with a very clear idea of what she thought would create value for the company, who failed to truly interrogate the evidence and to take her board with her. More than that, Fiorina made her perceived value the centerpiece and make-or-break move of her tenure.

Belief limited Fiorina’s time at HP exemplifies a pattern among CEOs with this mindset. This type of leader justifies his or her strategy with “perceived value”—“a belief.” This may be no more than an unproven value hypothesis supported by analysis—that the prescribed value proposition is attractive and can be achieved in the future. This type of leadership approach is to formulate a value proposition and then act on an unproven belief. The process of engagement is to win support from other key managers and board members, while overriding the views of those who question the efficacy of the strategy.

As a result, a damaging whirl of organizational politics is usually unleashed.

One senior manager in Australia confided that his CEO’s attempts to achieve a major change of structure and practice in the organization were pursued without any trial run. “The CEO’s friends in the top team and on the board supported his idea and those who attempted to challenge were browbeaten into submission. The line managers did not dare say a word and yet they all knew that a new service offering to the market was going to fail. In this case, it was a vigilant press and media in Asia and Australia that brought the failing strategy to the attention of the board. What happened? We, the general managers, got the blame.”

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With the perceived value approach, there is a real danger that strategy will become dogma as senior management will seek to justify its preconceived view of the world and value creation. Once a bandwagon is moving, it takes a brave man or woman to stand in its way. In one case, for example, I encountered a legal services firm which had decided it should go into employee development. The head partner was convinced that this was what the market wanted but didn’t check with customers or service deliverers whether that would create value. It didn’t and is a good example of how a strategy-driven approach can backfire.

What happens next is an all-too-familiar pattern: value creation becomes uncoupled from reality and from the evidence. Routine and denial take over and the organization may run on preexisting competence for some time rather than on excellence. But ultimately it is doomed to failure.

In recent years, no idea has done more damage in this regard than the slavish pursuit of shareholder value. Even Jack Welch, the celebrated former CEO of General Electric who consistently delivered on it during his tenure, described shareholder value as “the dumbest idea in the world.”

The preoccupation with shareholder value has contributed to a growing gap between the real market and the expectations market. One of the most outspoken critics of this process over recent years is Professor Roger Martin, the former dean of the Rotman School of Management in Toronto. In his book Fixing the Game, Martin points out that CEOs and their top teams are often incentivized to focus more on expectations of success and value than on creating real value through the goods and services their companies produce.

The “real market,” Martin explains, is the world in which factories are built, products are designed and produced, real products and services are bought and sold, revenues are earned, expenses are paid, and real dollars of profit show up on the bottom line.

The “expectations market” is the world in which shares in companies are traded between investors—in other words, the stock market. In this market, investors assess the real-market activities of a company today and, on the basis of that assessment, form expectations as to how the

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company is likely to perform in the future. The consensus view of all investors and potential investors with regard to expectations of future performance shapes the stock price of the company.

“What would lead [a CEO],” asks Martin, “to do the hard, long-term work of substantially improving real performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is. And of course, improving real-market performance is the hardest and slowest way to increase expectations from the existing level.”10

Delivered value While some leaders play the expectations markets, others gather evidence from stakeholders inside and outside to determine the value the organization is delivering today and can deliver in the future.

A strategy is then put in place to support those findings—and is deliberately exposed to challenges from stakeholders to create engagement.

These are value delivery-driven organizations.

Connecting the dots of reality on a daily and dynamic basis is the foundation to truly delivering value. Alexey Marey, chief executive of Alfa Bank, one of Russia’s largest private commercial banks, operating in the turbulent and rapidly changing Russian and Ukrainian banking markets, explains: Historically, we said we would try to create value in people’s lives.

This means different things to various groups of people. We are the best in internet banking and mobile banking. We are the best in customer experience, so we care. And that’s what we try to promote.

We compete on speed and professionalism. We aim to be smarter because we give people more freedom. One of our core values is entrepreneurship because we are privately owned and therefore it allows people to not only work by the rules but actually create the rules. It drives a certain culture within the bank. And the core of the relationship is your current account—the account that is used every day.

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16 The Success Formula

Looked at this way, value is not an abstract notion but an inescapable and common touch point. Companies that are successful over a number of years find ways to inculcate their values and approach into the acts of value creation and delivery.

This point was powerfully brought home to me when I was talking with John Neill, chairman and group chief executive of the Unipart Group of companies: The Unipart Way is a philosophy of working underpinned by tools and techniques which form part of our knowledge management systems. But to grasp it you generally have to see it in action and so we’ve created an experience here in our company including our company university, a teaching distribution center, factory, and office, which enables employees, current and new ones as well as our potential clients, to see the Unipart Way in action and that generally enables them to grasp the power of it. Many then say could you implement the Unipart Way for us? And often the answer is yes.

Gathering and reviewing evidence is central to the Unipart Way. In particular, this includes: • embedding the Unipart Way, tools, techniques, culture in the offices, the distribution centers, factories, and in fact anything and everything that is Unipart • promoting a problem-solving philosophy that engages all • emphasizing an evidence-based approach through pertinent data gathering to improve quality, cost, and waste issues from top to bottom of the organization • becoming self-reliant, self-confident, and self-sufficient in the tasks and techniques, in fact, the knowledge base of the Unipart Way, and • acting as a coach to others.

In this way, Unipart combines the hard side of evidence with the soft side of engagement.

Leaders like John Neill strive to create a culture that constantly interrogates the evidence to test the strategy. These sorts of leaders are driven by value creation among stakeholders outside of the boardroom and are focused on “proving” their strategy every day with the evidence gathered. This is “delivered value.”

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Equating success As these two worldviews became clearer from my interviews, I created a shorthand way to denote each approach. It uses the three elements described earlier—strategy, engagement, and alignment. What I found was that the three elements were important to both approaches, but the way they were combined was significantly different. In some organizations strategy came first and was used to drive engagement and alignment. I denote this as: STRATEGY × (ENGAGEMENT + ALIGNMENT) In organizations driven by S × (E + A), the leadership focus is on creating and then implementing the strategy. Unfortunately, the two other elements that make up the context—engagement and alignment—are not factored into the strategy. If their sum is not a positive number, then strategy alone will not create value as it is simply a multiplier of their combined values. (This is strategy multiplied.)

What emerged from the research is that strategy is important, but it’s not the most important factor. The key to long-term success is getting the balance between the reality of engagement and the reality of structure and systems alignment, and the very delicate relationship between engagement and alignment to make things happen now versus strategic thinking, which aims to shape the future.

The research provided surprising results, challenging some key parts of traditional business school thinking. Since the 1920s, the way business schools teach has been heavily influenced by the approach of the Chicago School of Economics, which emphasized the importance of getting the strategy right to realize competitive advantage.

Such thinking was based on the rationalist philosophy of Sir Francis Bacon. The essence of rationalism is that “once it is clear to all what is the right strategy then all will fall in line.” Yet, my research found that such rationalism is not the mindset of those leaders who create and deliver best practice. Getting the strategy right is step one. Step two is holding the tensions and contextual reality of each organization between alignment and engagement. What this research shows is a fundamental shift in leadership emphasis.

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18 The Success Formula

We have moved from a world where leadership was about formulating a value proposition, creating a strategy to support it and then executing on that strategy, to a world where leadership is about testing a value proposition with stakeholders to create the right balance between alignment and engagement in order to develop a strategy that can be implemented.

The old leadership model was driven by the belief of the leader. The new model is driven by evidence, which fosters the belief of the organization in what the leader and the strategy is trying to do.

To make better sense of this in my interviews I developed a formula—not in the scientific sense, but more as an aide memoire, a handy reminder; a constant and simple means of making sense of these organizational phenomena I was being exposed to.

The predominant success formula described earlier—think of the HP example—is when an organization is being led by perceived value. This is the corporate equivalent of putting the cart before the horse. Strategy is used to drive engagement and alignment. In other words, strategy comes first and then the stakeholders are expected to execute on it—even if they don’t agree with it or have not been consulted. The leadership focus is to get the strategy right. The result is usually resistance, leading to a reluctant and highly politicized organization that is likely to eventually fracture.

The leadership focus of this poor but commonplace practice can be summarized as: STRATEGY × (ENGAGEMENT + ALIGNMENT) = VALUE PROPOSITION Worse still is a situation where the organization pursues a strategy based on an unproven value hypothesis and the organization is aligned behind it. This is the corporate equivalent of lemmings marching off a cliff in step. It is summarized as: (STRATEGY × ALIGNMENT) + ENGAGEMENT = VALUE PROPOSITION When the only objective is to drive cost out of the business, this formula can work in the short-term, but at a human and cultural cost. (This could be described as engagement plus.)

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One executive confided how the efficiency with which his CEO drove cost out of the business eventually led to the CEO losing his job and much more: He got the strategy right and then we as a team sorted out our roles and who was responsible for what and then just drove the new structure hard through the organization. Many were traumatized. They had been there for many years, good and loyal and in many ways well able to contribute. But they did not fit the new cost consciousness that was needed. Cost was really driven out of the business and quickly. Many left but we also brought in new hires that had nothing to do with our history and old culture and the new organization was built on them. We then faced the very awkward situation of having to have the CEO leave. He certainly was not the one to build the new entity. He was just hated even though what he was doing was right.

It took a lot of courage and hard conversations with the chairman and the board to persuade the CEO to leave. When he went we were all relieved. Had he stayed he would have destroyed the very entity he had created.

Best formula The organizations I encountered that had sustained success over many years had a different success formula. They were focused around value delivery. The onus was on achieving engagement and alignment of view.

These two elements, together with the market conditions, constituted the context within which the organization had to operate and therefore within which the strategy had to be effective. The strategy was then added to support and serve the proven value proposition.

In other words, in the best performing companies, the strategy is a good fit with the context, not the other way round. Rather than attempting to shape the context to fit the strategy, these organizations place great store in collecting evidence to understand the context. This open-mindedness and willingness to consider multiple points of view, in effect a mindset of diversity of thinking, allows them to maximize alignment and engagement. Seen in this light, the purpose of collecting evidence is to optimize these two components (alignment and

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20 The Success Formula

engagement). The evidence gathered may support or challenge the value proposition underpinning the strategy. Either way, senior management should listen to it. If the evidence contradicts the value proposition, then the strategy has to change. Collecting evidence becomes the safety catch that prevents an organization from embarking on a disastrous strategy. Fully understanding the context sharpens the strategy.

The leadership focus of this delivery-based approach can be distilled down to: STRATEGY + (ENGAGEMENT × ALIGNMENT) = VALUE DELIVERY The logic of S + (E × A) is this: First achieve consensus about where value lies, and the organization’s capability to deliver it. Then, and only then, formulate a strategy to deliver that value, and constantly test that strategy and the assumptions that underpin it with stakeholders and reality. This is Strategy plus.

Understanding the success formula—S + (E × A) = V—and the disciplines it involves, is the subject of the rest of the book.

Understanding value: In summary • Success is the delivery of value.

• Our understanding of what constitutes value is constantly evolving and differs from organization to organization and from individual to individual.

• There are two general approaches to creating value as a leader: perceived value and delivered value.

• Delivered value demands constant questioning of reality and the gathering of evidence.

• There has been a shift in the best performing companies from getting strategy right and structure following to a two-step approach of getting the strategy right and then paying attention to the unique balance of alignment and engagement in this context.

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• Best performing companies have a structure preceding strategy to initiate change.

• Strategy + (Engagement × Alignment) = Value Delivery

Key questions • In your organization, what really constitutes success?

• Is value really delivered?

• Are you a leader who pursues your own ideas and convinces others of their merit?

• Are you a leader who is willing to test your ideas through evidence and see which will survive scrutiny?

• What do those around you really think of you?

• If you are the chairman, what criteria do you use to evaluate the strategy and value proposition that emanates from the CEO and the management team?

• If you are the CEO, do you harness the opinions of general management on the strategies you wish to pursue?

• If you are a general manager, what do you do when the strategy given to you from above is unlikely to work?

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Chapter 2 Diversity of thinking The starting point for this book was sustainable success. How can and how do some organizations repeatedly achieve success? As we have seen, success is about delivering value. This led to an examination of value in all its many guises. Creating value—and thereby achieving success—means different things to different people at different times and in different situations.

The more I talked to managers and leaders, the more I began to see that this simple observation about success had profound implications.

Stakeholders view the organization through different lenses depending on where they are. If success has multiple meanings and interpretations depending on where you view the organization from, then how it can best be pursued will also look different from different angles. Think about trying to create a three-dimensional map of a landscape that you wish to navigate. It may not be obvious from the top of a hill that an area below is covered by marshland, or that there is a deep ravine in the way. The same is true for an organization trying to create a strategy.

It is only through an understanding of the diversity of viewpoints that the leadership can hope to see the full picture. By surveying the area from multiple positions, it is possible to build up a composite view that combines knowledge on the ground with the view from the hill.

Diversity of viewpoints—what I call diversity of thinking—becomes a competitive advantage. Success demands both value delivery and diversity of thinking.

Much of the recent debate about diversity has centered on the best way to allow different voices to be heard—a wholly laudable and important goal. Typically this is characterized along the lines of gender, race, and religion. These are useful but limited ways to describe how the world looks from where an individual is standing. As we shall see later in this chapter, recent study shows that gender and nationality are at the bottom of the list of priorities when it comes to diversity. What really adds value to the conversation is the ability to seek out different

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24 The Success Formula

perspectives and points of view, to see the world through the eyes of others. This is the really critical aspect of diversity in organizational life.

It provides a way of fostering the alignment and engagement necessary to achieve the success equation.

Clearly, diversity of people is important. But, diversity of thinking is the essential element. Without it there will be no true diversity. In the same way as there are people who have one year’s experience twenty times, there are culturally diverse teams that look at the world through blinkers. Diversity of thinking is what we need to build in organizations.

The road to diversity This became clear as my interviews progressed. I began to notice a pattern. Senior managers talked about the difficulties of aligning the multiple meanings of success and operational perspectives in a way that engaged the enthusiasm of their people to execute on the strategy.

Many of these senior managers understood that without the necessary coalitions and support in place further down the organization, especially at general manager level, they could not deliver the value proposition.

Managers in the front line, however, had a different concern. Time and time again they explained how, by overlooking the obstacles they faced in their part of the business (the marshland or ravines), their strategy was doomed to fail.

The general managers in particular had important information and evidence that senior management needed to know about to avoid making bad decisions. The general managers had a unique point of view within the organization and they wanted to be heard. They wanted to have a voice in the conversation.

This diversity of opinion and viewpoint within any organization is the essence of diversity of thinking and I have come to the conclusion that it is absolutely vital to the sustained success of any organization. Indeed, my research suggests that the leaders who achieve sustained success apply broad interpretations of value, and emphasize the importance of creating value for stakeholder groups. They encourage and reward diversity of thinking.

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Robert Swannell, chairman of the UK retailer Marks and Spencer, is among the senior business leaders who promotes diversity of thinking. “You have to bring calm and clarity to some really quite intractable problems. What I have always tried to do is build around me groups of people who enjoy working with me and each other and that means giving them the freedom and the acknowledgement of their part in the success of anything I do. You need a style of leadership that helps people to be a part of that.� This sort of inclusivity is a key component of diversity of thinking.

A way of working In Shanghai I asked a group of executives what a leader newly appointed to China needed to know about the Chinese. Some said it was knowledge of the history of China, the Chinese culture, Chinese people, and the particulars of Shanghai. However, one opinion stood out against the others. Yes, knowledge of China and the Chinese is interesting for the dinner table, but to do business here you need to have a mindset of diversity of thinking. Why? Because understanding your and others’ competitive advantage is going to create the critical advantage. Through embracing diversity, the enterprise is differentiated from others.

These words were repeated across the world by some of the highest performing leaders I met. It is not knowledge of national culture but more a positive attitude to diversity of thinking that contributes to the success formula. A collection of people from across the world can still offer a blinkered view. Equally, a mono cultural team can offer diversity of thinking.

Diversity of thinking emerges as much a vital concept as that of alignment and engagement. Indeed, engagement and diversity of thinking are two sides of the same coin. One cannot function without the other.

The organizations that impressed me most were the ones that had truly and powerfully embraced diversity of thinking. The more I studied them, the more I came to realize that diversity of thinking is not just rhetoric in these organizations, it is a modus operandi. They are successful because they listen to and show respect for diverse points of view.

They use the diversity of thinking as a platform to gather evidence

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26 The Success Formula

about external market forces and internal capabilities and adjust the strategy accordingly.

Truth be told, my research highlights unexpected findings concerning diversity. Attending to cultural, national, regional, and faith-based differences does not add a great deal of value to the effective functioning of the organization. This suggests that a great deal of corporate money is wasted. An initiative to have more women in the senior echelons of a company is meaningless if fundamentally the company’s culture does not embrace diversity of thinking. An open-minded approach does not work in a narrow-minded organization.

Developing a culture of diversity of thinking enables the organization to better engage with a wide variety of agendas and interests and integrate them in order to enable the pursuit of the mission of the enterprise.

Diversity of thinking allows these organizations to see the world through the eyes of their stakeholders—employees, customers, suppliers, shareholders, local communities—and to respond to its ever-changing nature. Diversity of thinking provides them with the eyes and ears to comprehend and capitalize on their business universe. It is, I believe, an approach that allows organizations to execute on a global strategy.

Global thinking The word global is key to any modern understanding of diversity of thinking. The context for the success formula to be delivered is now truly global. Organizations are global. Leaders now have to be global in outlook and experience. In her book, The Culture Map, Insead’s Erin Meyer makes the interesting point that being a global executive was once the preserve of the chosen few who traveled the world, but now it is much more generally experienced—global managers may never leave their desks but can be emailing, Skyping, conference calling, and communicating with people from other cultures. We are all globalists.

Many of the leaders I interviewed had riveting stories about how their international assignments, projects, and experiences—not to mention the challenges—had shaped their leadership. It is from their diversity of

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background and experience that people develop a unique viewpoint, which fosters diversity of thinking. It is diversity of thinking rather than gender, race, or faith that is the most powerful and beneficial element in an organization’s ability to sustain success. Through penetrating diversity of thinking, gender, race, and faith are harnessed to their full potential.

Take Jeff Fettig, chairman and CEO of Whirlpool: I grew up in a small town in Indiana, and I jokingly tell people that for 18 years I’m not sure I ever left the county! Certainly, I was never outside of a two-state radius. And then my first ten years at Whirlpool I was really travelling, living all over the US and as we began to execute our globalization strategy, I was in the opening wave of US expats. It certainly helped me and shaped my thinking, but it also helped the company as a whole.

We’ve always, even way back then, talked about diversity. But, once you travel and, particularly, live abroad, you are immersed in different cultures and learn that the US is pretty insulated, and doesn’t necessarily always have a good perspective of what happens outside our country.

So, what did Jeff Fettig learn?

You learn that there are different ways of thinking about things—some you may agree with, some you may not agree with, but nevertheless, they aren’t necessarily right or wrong, they’re just different. And that’s when you start really understanding diversity. So, for all those reasons, it was great for me in my career, as a person. It forced me to demonstrate, without leaving companies, that you could operate in very different businesses, because our businesses outside the US were completely different than the businesses inside the US. So, you get, in a way, multi-company experience, within the company. And it just so happened that was a critical part of our strategy, so I was fortunate to be where our strategy was being enacted live.

I think there’s a great myth that there are all these cultural differences between people. And my view is that there are cultural differences, but not with people—there’s just cultural differences with cultures, and people are people—and that a best practice that works in one

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part of the world, will likely work in other parts of the world. We’ve got 25 years of demonstrating that that’s true. If you respect cultures and respect people, then you will do well anywhere in the world.

Diversity plus Given such role models at the top of most large organizations, it is surprising that encouraging and enabling diversity is still an issue of discussion. Even in the second decade of the twenty-first century, many corporate boards remain astonishingly lacking in diversity.

The debate about diversity tends, inevitably, to become bogged down in how many—or how few—women now sit on boards. This is undeniably important. But, despite all the publicity this issue attracts and the introduction of quotas in some countries, the figures remain low.

According to research by Heidrick & Struggles in Europe, the proportion of women on European boards is 17 percent. This figure is higher the further north you move. The lowest proportions are in Portugal (7 percent) and Poland (8 percent). The more positive news is that the trend is upward. The proportion of women on European boards has increased by nearly 70 percent over the last four years. It is also notable that women are more likely to fill the roles of non executive directors.1 Age is another area of debate explored by the Heidrick & Struggles European research. The reality is that the people on company boards tend to be those who have accumulated years of relevant and useful experience. In Italy and Spain, around one in six board members are over seventy. The Heidrick & Struggles research shows that the overall average age of board directors is 58.3. Chairmen tend to be in their sixties and CEOs in their early fifties. Over a third of European board members have some form of CEO experience.

Boards are also becoming more international in their make-up. The proportion of non national directors on boards is 30 percent—up from 23 percent in 2009. Companies are increasingly eager to add board members with experience and expertise in Asia.

The will to change appears real. In its European research, Heidrick & Struggles found that a total of 63 percent of its survey respondents

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rated a diversity mix as being important for board effectiveness.2 If boards are to be more alert to the external environment, their make-up must mirror that environment. “You need a diverse board, and what I mean is diverse in mind. All questions are asked and they need to be asked from different angles,” stated one internationally experienced chairman of a global multinational.

Of course, it is one thing to be willing to build a more diverse board and quite another to actually do so. Heidrick & Struggles surveys show that nearly two-thirds of directors find it difficult to hire well-qualified ethnic minorities and more than half reported that it was hard to hire qualified women directors. Nor is there widespread trust in the mechanisms for fostering diversity. The Heidrick & Struggles European research suggests that among men on boards, only 13 percent support quotas compared with 41 percent of women directors.

Board members argue strongly that diversity for diversity’s sake is dangerous and likely to be self-defeating. Instead, diversity must be rooted in meritocracy and the attainment of business goals. The needs of the business drive diversity.

And more diversity appears to be an unstoppable trend. “Boards will also need to widen their lens beyond executives with operating experience and look for diverse candidates who are in functional roles, former government or military leaders, who serve not-for-profits or are entrepreneurs,” predicts the Heidrick & Struggles report Bringing Asia onto the Board.3

Components of diversity My study breaks down diversity of thinking into five components: • A passion for diversity of thinking The desire to search for something new and escape from routine and predictability, which inhibit the wish to explore, is the first sign of possessing a passion for diversity of thinking. Leaders with such a passion often hold many interests and are able to converse across a number of subjects. Their presence attracts welcome attention as they are able to impress others, quite unintentionally, with their range of

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30 The Success Formula

knowledge. As one senior Chinese executive said to me, “John is an interesting person to do business with. We do not just talk numbers and results, but have conversations across many fields. My people have really taken to him. It’s his insights into the Chinese psyche that they find most attractive.”

Ed Rapp of Caterpillar told me of his background: I hail from a very, very small town in the Midwest with a population of 700 and I had three older brothers that went into the family business. By the time I got there I decided the business just wasn’t big enough for a fourth and convinced my parents to let me go to college 30 miles down the road at the University of Missouri. I graduated from there in 1979 and the interviewer from Caterpillar came on campus and I researched like everybody does for a job interview and what really intrigued me was Caterpillar’s global operations. I asked the guy on the interview, if at Cat it was really possible to experience the globe. I’ve used his quote a thousand times and he said “young man, Caterpillar is a company where if you work hard and apply yourself you can see the world and you get paid to do it.” That’s what I have been doing for the last 35 years.

But adjusting to global cultures is not as easy as it seems. I went through three stages of cultural diversity training. Stage one was why don’t you guys just do it my way and this is going to be a lot easier. It was not a very successful stage. Stage two was to understand the differences in how people from Northern Europe look at an issue versus someone from Southern Europe or Latin America. But phase three and I think probably the big benefit of spending as much time in Europe as I did was understanding that cultural diversity is good for the business. People will just look at things from a different angle, they protect you from your blind spots so I think its debate and discussion based on the knowledge they have in the business but also the fact that they will just look at things from a different perspective than maybe I will.

The best leaders are open to new experiences and perspectives. They have a passion for learning about themselves and discovering the world.

They develop in stages, but they do develop a worldview as well as new views about themselves.

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• International exposure Having international exposure is not pre ordained. Many of the leaders I talked to had actively sought it out. What I found amazing while talking to business leaders throughout the world was the global momentum of their careers. It was not that the careers appeared pre determined, but once they got moving they appeared to take on a life of their own. Take Sam Su of Yum! Brands in China. This is how he explained his career: My family is from mainland China, but I grew up in Taiwan and finished all my education up to university level there. I served in the army for a couple of years; then I came to the United States to study for an engineering degree at Penn State. After two years, I went back to Taiwan and worked there. I worked for a petrochemical company for three years, and then I decided it wasn’t the career I wanted, so I came back to the States and studied at Wharton. I got an MBA there, and so re-started my career. I was recruited by Procter & Gamble for their international business. I went to Germany and worked there for three years to get sort of certified, and became a brand manager.

Then I was sent back to Taiwan. And so I worked for another three years at Procter as a brand manager and associate. So then in 1989 I decided that was enough.

I joined KFC International, first in Japan. I was interested in what was happening in Japan and we had a very successful business in Japan. And then things changed. After six months they had a reorganization and I was asked to move to Hong Kong. So I became the marketing director of Asia Pacific. And because of the reorganization my territory expanded to include China, so I came to China at the end of 1989. With my boss as head of Asia Pacific we decided that China was mismanaged, so we changed the management team.

I became, as a side job, acting general manager of China. The China GM job became bigger and bigger over time, so I stayed on and gradually quit the other marketing director responsibility. Along with that change, my territory of responsibility continued to shrink.

I was at one time the head of North Asia, and then shrunk it to Greater China. Eventually I shrunk it to only mainland China. But the fact mattered that the China business was growing so much, I didn’t get paid less, I got paid more. I also got a bigger title, and so

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on and forth. So 20-something years later I’m still here and I’m now the chairman-CEO of the China region.

For successful leaders, truly global experience is now essential but, like Sam Su, they have to go looking for it and be able to maximize its organizational and personal value.

• Open communication I asked Catherine Livingstone, chair of Telstra, about the make-up of her board: The first order value is challenge. There’s no one on the board who’s a shrinking violet, that’s for sure, and they will challenge from different perspectives. I’ve just been through five hours of challenge and the outcomes are better for it. And because there’s a good relationship between the board and management, management doesn’t feel threatened by the challenge and in fact management is happy to push back and then the outcomes are better. There was one particular issue we discussed today where management put forward a recommendation on a particularly tricky situation and some of the board members thought that was the right thing to do and others didn’t. As a result of the challenge we’ve actually ended up with a better solution, a solution that no one had thought of initially. Well, we hope it’s a better solution, but I think the board add value because they come from different perspectives, different industries; it’s the diversity of thinking. So different questions that they ask might not be challenges, but maybe just questions for further understanding.

But again that leads to evolution of ideas.

Kevin Lobo, chairman and CEO of the Stryker Corporation, was born in India, grew up in Montreal, and has worked in the United States and Europe. What knowledge had he acquired along the way?

I learned to be more open-minded by living in different countries, as well as changing industries. I became more receptive about what business models are needed to drive success, and you just don’t use the same hammer for every nail. That is a big advantage.

I also adapt to different styles. You become, much more flexible as a leader, and you become more insightful, to look through style, to

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understand what really are the drivers of the business, and which people can be successful, and you don’t have a cookie-cutter view of talent, when you do your talent assessments.

We have board members with many different backgrounds. It gets back to open-mindedness, so if someone’s challenging, I don’t start off with a defensive attitude, ever. The term we use in American sports is a home game and an away game, and if you haven’t, been in away games frequently in your life, then you tend to think you’re right; you tend to be defensive, and more ingrained in your approach. If you have spent a lot of time in away games, in foreign environments, then you just have a different way of operating, where you’re more prone to listen and be open to different suggestions. It doesn’t mean you’re not confident, but there’s a different level of open-mindedness.

For Kevin Lobo, exposure to different cultures and ways of life created the open-mindedness that induces a positive attitude to challenge. He continues: The biggest surprise coming in as a new CEO was how much time you get to spend with your board, it’s vitally important, and it’s been very rewarding. The board members share their unique perspectives with me and give me advice about how I could be more effective, about how we can work together and ultimately how we can increase shareholder value. I have found that my time with each board member and the entire group has been very, very helpful. So when I am traveling, I’ll drop in and see a board member and I think that time is extremely important, and frankly, that’s helped build trust among the overall board, knowing that I have those individual relationships, and they can talk to me about something outside of the board meeting.

The theme of trust was reinforced many times over in this study. Robert Swannell of Marks and Spencer captures the point admirably: Trust is a very important component. The people who I was advising [when I was an investment banker] and the people who worked with me trusted me in many different ways, either with their particular personal issues or their concerns for the company. I think in many

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ways these experiences set me up for being a chairman, listening, distilling, fostering trust. These are the key qualities you need.

Robert’s use of language is indicative of the trust he has generated; note his expression “working with me,” not “for me.”

Vadim Makhov, chairman of the OMZ group, a Russian organization, is in his early forties. He shoulders the responsibility of upgrading and repositioning the nuclear and other engineering assets of Russia: a most sensitive and demanding undertaking. In two-and-a-half years, he has achieved what his predecessors could not have hoped to realize. Vadim embraces diversity. His conversation can switch from the management and leadership of OMZ to global politics to philosophy, and to the improvement of the quality of life of the Russian citizen. For all this, he is action-focused. Explains Makhov: The customer normally gives us the projects which nobody else can do—even the best competitors. This normally takes three years by international standards; they want it to be delivered yesterday. So one of the very big projects we’ve got was when all of our foreign competitors simply refused to participate because they say we need at least one year more. We were the only ones who participated and now we’re managing it. During this project, this big customer told us okay, if you make it you would pass the test so you would earn money on further projects. You passed a very tough test. In many other projects it’s the same.

Talking in Dubai with Georges Dabaghi, the general manager for Vubiquiti for the Middle East and the CIS countries, I asked which place he called home.

“That’s a difficult question! I’ve been wandering for 23 years during which I’ve lived in five countries,” he replied. “I don’t know, I’m tempted to say home is where the heart is, but I find also home is where the mind is. Home has shrunk. Home lives in the internet, in your mind, and in your heart. As you walk down the street, you have the world at your fingertips, all these restaurants, all these cultures.”

Exposure to different cultures stimulates the learning of how to integrate in different environments. This surfaces a deep instinct about working with others and gaining their respect. Key to this is open and frank communication. The message is simple: open up.

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• Engaging with the center Diversity of thinking is an important element of the relationship between the corporate center and its operational centers. The interplay between the two is often fraught and unproductive. Diversity of thinking requires the presence of open and honest communication.

Positioning for competitive advantage in different localities is necessary but may not be in keeping with the demands, protocols, and processes of the corporate center. However, the targets and KPIs require that the operating business develop the necessary skills to be differentiated within its country or region. The operating business may clash with the systems of the corporate center and the need for consistency of practice across the enterprise. There is no easy way round this other than managing upward. This is a distinct skill. It requires patience and the time to develop more intimate relationships with the key corporate directors, particularly those running support functions.

This is easier said than done. “But that takes time and means I am away from my customers and the key people in the region. How can I do both, as doing one may lose me business and doing the other alienates me from the center?” one executive asked me as I explained the need to engage with the center.

Expecting diversity of thinking from those in the region is insufficient.

The corporate center itself needs to exhibit its own diversity of thinking and display an understanding of the varying contextual demands in each of the regions and business areas.

David Cunningham, president of Asia Pacific for FedEx, holds the corporate center of his organization in high regard: In the case of FedEx I’m obviously biased, but I think it’s an iconic company. There are few places that I’m aware of where you have the opportunity to work with an individual to create an industry in which you work and is as engaged today and is as passionate today as he was, you know, 15, 20, 30 years ago.

Regretfully, most senior managers do not share David Cunningham’s experience. My research notes are littered with complaints and concerns about the lack of diversity of thinking at the center and the blockages that have to be constantly renegotiated.

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The problem, seen from the viewpoint of the general manager, is often that the center won’t listen. He or she is constantly having to explain the reality on the ground to people at corporate HQ who simply don’t listen. There are two sides to every story, of course. There are examples where the GM is unable to see the bigger picture or could be achieving more than they are. But, and this is the point, if successful organizations are those that welcome and encourage diversity of thinking, then ignoring the point of view of a key layer of senior managers is misguided.

Worse still, it is likely to lead to a disconnect between the people who are creating the strategy and the people responsible for making it work on the ground.

Listening first and making managers feel they have been heard is an integral part of evidence-based leadership. This does not mean that all evidence and opinion is taken at face value. But it should mean that that they are taken into account. General managers are prone to the usual human frailties of ego and arrogance, but they have an unrivalled perspective on how the strategy will play out in their markets. They should be included in the conversation, not shut out of it.

One senior general manager told me: I run probably the highest performing and most cost-efficient part of the company. In Asia I have fewer people than anywhere else, but I make more than twice the profit of any other region. I am seen and sometimes even openly accused of being a renegade. I just do not fit with the systems and processes of the company. I just do not need these costs and that is what irritates my vice president and colleagues. When I retire, I foresee one of the VPs coming to my office to, in their eyes, to put right what I have done wrong. Cost will increase, the business will be run down and then they will blame me.

What keeps me here is my pride and my need to protect my people.

These high performers will be first to go when I leave.

He may or may not be correct in his analysis. But he clearly feels strongly about the situation. The question for the senior management team is how to respond. How can his passion be channeled in a productive way?

Diversity of thinking in organizations is only possible when the culture of diverse thinking is promulgated from the top of the organization.

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When this does not happen, the corporate center is likely to impose disciplines and protocols that at best provide little value to the businesses and at worst alienate the critical business heads.

Ask the following four questions to the key business heads as a test of the level of diversity of thinking at the center: • What value does the corporate center provide?

• Does the corporate center support your pursuit of competitive advantage for your business?

• Do the processes and procedures of the corporate center support the doing of business in your area?

• Do you as a business head feel part of the top team?

Simple yes or no answers will quickly indicate the level of diversity of thinking, which stimulates engagement between the corporate center and the operating businesses.

For Jeremy Hunter, president of the Henkel Group in India, the answers to the four questions are all a resounding yes. He explains: I get a huge amount of support . . . a huge amount. And it comes in different ways. So we operate a matrix management system. I sit as the president of the Henkel group here in India, but I don’t have all the levers that I pull. So, nominally, at least half the people on our management team report outside of India. Finance reports to regional finance, supply chain operations reports to regional operations and so on. It clearly works but only if both parts of the matrix work well together. We get regular visits from people that run the functions, run the supply chain, run operations, run the different SBUs. I get a huge amount of support from the regional guys in terms of investment, in terms of commitment, then that’s also been very strong.

• The team The selection of the right people for the top team is increasingly critical. This must be based on a desire to learn rather than tokenism.

Attracting a team made up of people with diverse skills, experiences, and outlooks enables the team to avoid group thinking and to make the right decisions for the business. Diversity of thought is the key.

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This was brought home when I was talking to Doug Elix. He recounted how his cultural antennae had been developed over his career. In Asia he recalled giving an award to one of his staff for doing an outstanding job. Routinely, he presented the award in front of the other members of the team. Afterward, the recipient came to him and asked him not to do so again. For the recipient, the public recognition was embarrassing. He thought the team should be acknowledged rather than an individual. Leaders have to be sensitive to such cultural and personal issues.

Elix expanded the point: To me, when I hear someone talk about cultural diversity, I think of it not only as diversity of people, employees, managers, board members and so on, but also as diversity of the markets in which you operate.

It’s a globalized world, it’s highly interconnected, and any mediumsized business is probably never going to be able to say they operate in a local market and they only have local competitors. There are going to be global competitors in any sizeable market. So, even if you don’t have designs on going out to markets outside your home market, you have certainly got to understand how others can behave, and get yourself competitive—and to be competitive, you’ve got to understand how they think and how they manage and how they are likely to approach a market.

If you go back say 30 to 40 years and consider America. Had they thought more about Japan’s mind-set, then the future of their electronics industry may well have been different.

It is one thing for the top man or woman to applaud the diversity in the enterprise, but the real test is the opinion of the general managers and key country heads.

Here’s the view of Stephan Gerlich who was managing director of Bayer, India: I believe that a company like ours does not need to force cultural diversity, because our company is just a mirror of the society where we operate. We reflect the society we’re in, and we’re catering to that as a company. And therefore, that cultural diversity within India

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is natural. We have people from South India working and living in north India and that is not obvious because normally family ties don’t make these moves easy.

For many decades we had a very German management in Germany.

With more globalization, naturally you find today a much more diverse management- Bayer AG’s CEO is Dutch-American; our CEO for Bayer crop science is from Ireland; the head of pharma in China is from India. I mean, an Indian in China, who would have thought that years ago? This diversity, I think, has come to us very naturally because of our global setup and access to talent all over the world.

You just have to pick the best man or woman for the job.

Stephan Gerlich epitomizes the quality of diversity in Bayer. As he so rightly points out, diversity is not only good for business, it makes business!

Making sense of diversity of thinking So what do the statistics from the latest, not yet published, research that I have conducted with Heidrick & Struggles say (Figure 2.1)?

Actually, the stats say much the same as the senior executives I talked with. Diversity of knowledge, experience, background, and diversity of contribution are at the top of the list when it comes to what organizations require of their leaders. In order to make sense of the range and diversity of challenges, developing a global, overarching mindset is vital.

Only then can those who think differently be appreciated and the space made to attract a diverse group of people. Although important, gender and nationality are at the bottom of the list.

For the high-performing organization, the message is that it matters little who you are, or where you have come from. What is critical is to have developed that necessary diversity of thinking that appreciates the nature of challenges and dilemmas and the engagement necessary to work through contrasting agendas.

Diversity of thinking is at the heart of this book and of the success formula. It is the sense-making part of value creation. There are three distinct elements to it.

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A diverse blend of knowledge/expertise A diverse range of different experiences/backgrounds A diversity of contribution A global mindset Members who think differently A diverse group of people A diverse gender mix A diverse nationality mix 1 The Executive/Management Team

2

3

4

5

The Board

Figure 2.1 Diversity.

• First, diversity of thinking allows an organization to capture multiple experiences, context, and interests.

• Second, that data may be used as evidence to understand the opportunities and threats facing the organization if it pursues a given course or strategy.

• Third, the evidence is interrogated (teased out, tested, and challenged) as the basis for strategic decisions.

An important point to recognize here is that evidence may be rejected or set aside in the interests of the organization, but the process by which it is collected and considered must be fair and handled with respect. It is the job of senior managers to decide which pieces of evidence are relevant and important. If people feel they have been heard, they are far more likely to engage and align with the strategy.

Diversity of thinking: In summary • Diversity of thinking is fundamental to strategy and execution.

• No diversity of thinking = no overview • No overview = no ability to recognize how to work through the tensions between Engagement × Alignment

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• Diminished understanding of the dynamic between engagement and alignment leads to comments being seen as criticism and negativity. Good people leave.

• No diversity of thinking = no talent pool • No talent pool means there is no effective strategy. If this is the case, then it matters little what the relationship between Strategy, Engagement, and Alignment is. All three are deficient.

Key questions • Do you display a diversity of thinking mentality that not only challenges but also excites the others around you?

• Do you display a diversity of thinking that gives others the confidence that you will be able to pull together the multiplicity of views and agendas to maximize competitive advantage?

• When your diversity of thinking is challenged, are you willing to give air time to the views of others?

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ISBN:9781472916846

An Extract Taken from The Success Formula

by Andrew Kakabadse OUT 2015 UK - 12.03.2015 AUS - 09.04.2015 US - 07.05.2015

Available online and from all good book shops