July/August 2015 by Chief Executive Group

Derailing Disruption

How to defend your business from startups, p. 22

Economic Development Which states are winning in the West, p. 42

Smart Manufacturing How CEOs can lead a manufacturing renaissance, p. 48

Leveraging Servitization

Make the most of the technology you already have, p. 51

JULY/AUGUST 2015

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CONTENTS

July/August 2015 No. 277

FEATURES 32 Cover Story

30th CEO of the Year: The Portable Performer Jim McNerney successfully overcame challenges at 3M and GE before taking the helm of Boeing, the world’s biggest aircraft producer. By J. P. Donlon

42 Economic Development Regional Report: The West Incentive-hungry businesses continue to flee California, but the West shows promise. By Warren Strugatch

SPECIAL EVENT COVERAGE

Smart Manufacturing Summit By Jennifer Pellet

48 Reinventing American Manufacturing for the 21st Century Staying abreast of new technologies like additive printing, the Internet of Things and Machine to Machine is more important than ever.

51 CEO ROUNDTABLE The Industrial Internet of Things and the “Servitization” of Manufacturing How smart, connected devices can boost productivity, and deliver a competitive advantage.

Fixing America’s Aging Technology Infrastructure

CEO ROUNDTABLE

What can be done about the antiquated equipment hampering our manufacturing renaissance?

Creating and Maintaining Manufacturing Ecosystems CEO ROUNDTABLE

How public and private sectors can work together to create innovation-nurturing environments.

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COVER PHOTOGRAPH BY G AIL HANUSA

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CONTENTS

Editor in Chief J.P. Donlon Editor at Large Jennifer Pellet Creative Director Marne A. Mayer Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper Associate Copyeditor Carl Levi

DEPARTMENTS 8 Editor’s Note

26 Risk Report

Personal Privacy/Data Security Risk Remains CEOs’ No. 1 Concern

10 CEO Watch

• Josten’s Chuck Mooty on marketing memories • Sonova’s Lukas Braunschweiler on reaching an underserved market • CEO Confidence: Confidence Hits a Low Point

28 Tech Talk

Get Your IT Together Give up on perfection. “Graceful failure” can help you get what you need from your tech investments.

18 Chief Concern

By John Danner

Time for a Do-Over

How do you move on when you’ve picked the wrong CEO candidate?

By Thomas J. Saporito

20 Mid-Market Report

The Capital-Without-Debt Quandary

64 CEO Passions

Model Railroading for Geeks

Meet Tom Lawson, an avid collector of trains from the pre-1940s.

By George Nicholas

68 Executive Life

22 Making

Corporate Rock

By Michael Gelfand

What lessons can four CEOs learn from playing together in a rock band?

Technology Work Retraining “Goliath” to Face Digital David

How the “big boys” can level the playing field By Nitin Rakesh

22 Sonnenfeld

The Patterns of Parting Patriarchs

The four ways CEOs leave often dictate how succession can be smoothed. By Jeff Sonnenfeld

72 Flip Side

You Can Look It Up

Statistics don’t lie... or do they?

By Joe Queenan

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 277, July/August 2015. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at One Sound Shore Drive, Suite 100, Greenwich, CT 06830-7251, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2014 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Greenwich, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NONPOSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive, P.O. Box 15306, North Hollywood, CA 91615-5306. Subscription Customer Service:

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CHIEF EXECUTIVE OF THE YEAR 2015 SELECTION COMMITTEE

ChiefExecutive.net TIMELY CONTENT TO HELP YOU RUN YOUR BUSINESS

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DAILY BEST OF THE WEB We scour dozens of websites so you don’t have to. Top stories for CEOs to help you start your day

CEOS IN THE NEWS Advice from successful CEOs, along with news and information about your industry peers

CEO INSIGHTS Insider information from experts on leadership, strategy, operations, marketing, sales, manufacturing and much more

PLUS Important lists and rankings you can reference all year long, including: Best & Worst States for Business • Best Companies for Leaders CEO Confidence Index • CEO of the Year • Annual Wealth Creators

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EDITOR’S NOTE

Leadership and the Rise of Smart Manufacturing The trouble with business culture is that creating it is a bit like trying to nail mercury to a wall.

IN THEIR LATEST BOOK, The Real-Life MBA, Jack and Suzy Welch spend a fair amount of space on business culture—far more than I remember Jack talking about it when he was CEO of GE. “You will lose your best people, that is unless you have a culture that’s not about shutting people down; it’s about setting people free,” the Welches write. In this issue’s cover story on our 30th Chief Executive of the Year, Boeing CEO Jim McNerney says that he is most proud of creating a distinct fifth culture from the four competing cultures—Hughes, Rockwell, McDonnell Douglas and Boeing—that formed the foundation of today’s Boeing. There is simply no getting away from it. Business culture drives performance. Jack Welch, McNerney’s former boss, describes it in his book this way: “What you want as a leader is to create a team that’s like the house of that kid you knew in high school—the house where everyone wanted to hang out because it was where all the fun staff and action were.” The trouble with culture is that creating it is a bit like trying to nail mercury to a wall. But no fewer than five of the previous CEOs of the year named it a priority. In our interview, McNerney underscores the strengths and weaknesses in American manufacturing and addresses what leaders must do to improve. Future competitiveness, he argues, will lie at the junction of design and manufacturability. Getting control over the design-sensitive and manufacturing-process sensitive drivers is where all producers must strive to excel. He admits that Boeing slipped a decade ago by farming out the carbon fiber material fabrication for its fuselages and airfoils. Knowing the details of processes enables a producer to jump the

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learning curve faster and find the next stage of development. Regarding learning curves, we recently held our third and biggest Smart Manufacturing Summit, partnering with the State of Indiana and Cummins, arguably the state’s best-known manufacturer. In coverage beginning on p. 8, Tom Linebarger, Cummins’ CEO, discusses the challenges his company faces in aligning multiple factories-of-the-future into one seamless production scheme. Eli Lilly’s Maria Crowe and Stanley Black & Decker’s John Lundgren share their experiences in adopting 3D printing and deploying data analytics. Microsoft Dynamics’ Christian Pederson reminds us that technology, whether the Internet of Things, 3D printing or Big Data, now bleeds over all functions, so CEOs need to be aware of all these components and skill sets. Smart manufacturing has the potential to trigger innovation and productivity and enable and spur growth. The Wall Street Journal dubs it “The New Industrial Revolution.” But Brian Kennel, CEO of Swissbased Tetra Pak, writes in a Huffington Post blog that small- and medium-sized companies in the $3-trillion U.S. manufacturing sector largely are missing out on the benefits of using embedded sensors and integrated software to collect plant operations and supply chain data, analyze that data and drive real-time improvements in production, procurement and processes. Cost is a big reason. Many such companies have an aging infrastructure of plant equipment and are understandably reluctant to face replacing existing systems. But companies must find ways to overcome these hurdles—or face the prospect of battling competitors who have.

I LLU ST R AT I O N BY T I M TO M K I N S O N

J.P. Donlon

Creating a strong culture is a perennial leadership challenge. By J.P. Donlon

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CEO WATCH

CAPTURING MOMENTS Chuck Mooty golfing in Ireland with his children, Will, John and Paige Mooty

CEO INSIGHT / JOSTENS’S CHUCK MOOTY

Marketing Memories How do you sell high school memorabilia to an Instagram and Twitter generation? By Jennifer Pellet REMEMBER THAT glossy hardcover tome that documented school politics, embarrassing hairstyles and ridiculous fads? Whether it’s prominently displayed on a bookshelf or gathering dust in your parents’ attic,

you probably have one somewhere. Chances are, you also sprang for a high school class ring—after all, nearly everyone did. That’s not the case anymore though. At a time when teenagers

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are self-documenting their lives on a daily basis, the concept of investing in a time capsule capturing high school life seems as outdated as a 1980s-era Farrah Fawcett flip hairstyle. Little wonder then that sales of traditional-style yearbooks have been declining by an average of 4.7 percent for several years now. Unfortunately, there are a number of companies in the business of making and selling those memory-preserving keepsake class rings and yearbooks. Minneapolis-based Jostens is one of the largest, a $700 million company best known for producing school yearbooks and high-end customized jewelry (aka school rings). “There’s no doubt we’re up against a cultural shift,” admits Chuck Mooty, who has been striving to make the 117-year-old company more relevant

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AT&T congratulates Boeing’s Jim McNerney on being named Chief Executive magazine’s 2015 CEO of the Year.

CEO WATCH

in today’s digital age since taking the CEO seat in January of 2015. Mooty is no novice at leading transformation. He came to Jostens fresh from bringing a troubled mill, Faribault Woolen Mills, back from the brink of bankruptcy, having previously steered Fairview Health Services through a crisis. During his 18 months at Jostens, he moved quickly to bring new products to market, incorporate digital platforms in existing ones and explore new lines of business. “We realized that we just haven’t created a lot of new products—haven’t tried to figure out the next generation of our product offering,” he explains. Mindful of the need to compete with the instant gratification that social media engagement can offer, Mooty worked to incorporate mobile apps and digital tools in the yearbook-creation process. Jostens recently rolled out Replay It, a mobile app that lets students, parents and faculty upload photos and videos to a centralized yearbook website. “It serves the purpose of helping to feed material for the yearbook production, but it also lets you create your own customized subsection of photography and video that you want to encapsulate,” he explains.

WHO

Chuck Mooty, CEO of Jostens WHERE

Minneapolis SIZE

$700 million, 2,600 employees MENTOR/LEADERSHIP GURU

“My father and eight years reporting to Warren Buffet.” LEISURE INTERESTS

Golf/tennis In the company’s custom-jewelry business, two new, more contemporary style options have given students more ways to personalize their school rings. The launch seemed to deliver a bump— new jewelry products made up 20 percent of the company’s 2015 class ring sales. Perhaps more significant, however, is the effort Mooty is leading to leverage the company’s core capabilities to reach new markets. Recently, for example, Jostens convinced the Army and Air Force Exchange (AAFES) to let the company design custom jewelry for members of the military.

“We are actually providing engagement rings to servicemen and women,” says Mooty, who notes that the company’s technology enables customers to produce a customized product within 10 days. “When you can offer consumers the ability to create what they want and know that they will have an American-made product on their doorstep within seven to ten days, that’s very powerful.” Since school rings tend to be a seasonal business, Jostens has historically run at about 60 percent capacity— which gives the company plenty of ability to serve new markets. “With the AAFES project under our belt, we can now go to other potential retailers with an offering,” Mooty explains. While Jostens’ hoped-for transformation is far from over, signs suggest that Mooty is making inroads. “We have actually already started to turn the tide,” he says. “We were in nearly a 10-year decline in rings; and this year, we will actually be slightly positive as far as ring volume, which will be a huge change. “Going forward, the development of our brand will be about creating brand relevance for our products, as well as the services and technologies we provide. That really is our purpose and vision of our organization.”

THORNS AND ROSES

A Slow Start for START-UP Companies that began operating in START-UP NEW YORK’s tax-free areas during 2014, the program’s first year, created just 76 jobs, according to a new report THORNS from Cuomo’s own economic development agency. The long-term growth projections aren’t much more impressive. Over the next five years, the 54 companies that were granted START-UP status in 2014 are committed to creating 2,085 jobs—not even a rounding error in a statewide economy whose 600,000 private firms employ nearly 7.6 million people. 12

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Uber has hit back at London Mayor BORIS JOHNSON’s plans to cap the number of minicabs operating in London. The Mayor of London wants to limit the number of minicabs operating in the ROSES city, arguing that the increase is causing more congestion, increasing air pollution and adding to the number of illegally parked vehicles. According to a letter seen by the Financial Times, Jo Bertram, the head of Uber’s business in the UK, is asking for a chance to debate the issue with Johnson. Why stop there? Uber should challenge New York Mayor Bill de Blasio to a debate.

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From our cloud to yours Congratulations, Jim McNerney, Chief Executive magazine’s CEO of the year. When we designed the Microsoft Cloud to help people do more and achieve more, we were inspired by leaders like you—and all of the people who make Boeing great.

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CEO WATCH

CEO CASE STUDY / SONOVA’S LUKAS BRAUNSCHWEILER

A Sound Strategy A new CEO hopes to be heard by the underserved hearing-aid market. By Jennifer Pellet The Challenge You’re recruited to replace the CEO of a multinational Swiss hearing-aid manufacturing company abruptly washed out by a scandal. Found culpable of issuing a late profit warning that enabled insiders to sell shares, your predecessor, his CFO and the company’s chairman were all forced to step down—leaving a gaping hole that you must now fill. In taking the helm, you will leave your current role as CEO of a defense company owned by the Swiss government and return to the public-company sphere.

The Context When Lukas Braunschweiler became CEO in 2011, Staefa, Switzerland-based

Sonova Holding AG was a leader in its market, selling its hearing aids and cochlear implants in more than 90 countries. Still, the company’s new CEO saw plenty of opportunity for growth. “Going in, we were able to identify areas underdeveloped by the industry as well as by Sonova,” Braunschweiler recounts. “For example, I was amazed that Asia accounted for just 10 percent of the company’s sales.” What’s more, the hearing-instrument market in developed countries was—and remains today—underserved, with just 20 percent of those who could benefit from hearing aids using them. Under Braunschweiler, Sonova began extending the reach of its four core

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brands—Phonak, Unitron, Advanced Bionics and Connect Hearing—to drive growth in what has long been a complex and fragmented market. “This is a $15 billion to $16 billion market in which three-quarters of the value-added in the industry is with the service channel—the audiologists, professionals who recommend and fit these instruments,” explains Braunschweiler. “We are at the mercy of the professionals when it comes to products.” The company is also under tremendous pressure to innovate. On average, two-thirds of the hearing instruments sold in any given year are products less than two years old—suggesting that a strong pipeline is critical. After all, newly launched technologies like hearing aids that connect to body sensors or smartphones are often what prompt reluctant potential customers to finally address their compromised hearing.

The Resolution Broadly speaking, innovation is at the core of Sonova’s competitive strategy. The company devotes 7-8 percent of its revenue to R&D in an ongoing effort to enhance the experience of end users, notes Braunschweiler. “We see full automization of what we wear—instruments that let you alone and communicate with each other—as one of the big drivers,” he explains. “You walk through your living and listening situations and they adapt automatically, adjusting to different conversational environments.” That innovation mindset also extends to marketing and sales. Braunschweiler likens his space to that of the optical industry back before the advent of value-oriented chains like LensCrafters began edging in on the eyeglass and contact lens marketplace once dominated by the storefront operations of individual opticians. While still dedicated primarily to wholesale, the company has been methodically building out a retail presence it began

CEO WATCH

some 20 years ago, hoping to make inroads in a market its CEO describes as “ridiculously underpenetrated.” “We want to get more customers, more end users, into stores, so we are developing our own channels, partnering with channels and making sure existing channels aren’t disappearing,” he explains. “If someone wants to retire and sell us a store, we might step WHO

Lukas Braunschweiler, CEO of Sonova WHAT

Hearing-aid manufacturer SIZE

$9.3 billion market cap, 10,000 employees UNIVERSITY

Zurich Polytechnic PHILOSOPHY

“Humility is important— and loving what you do.” PET PEEVE

“Having more than 10 emails in my inbox.”

in and integrate it into a more professional network.” Last year, the company risked the wrath of its independent partners to ink a deal with Costco, hoping that building a presence within the wholesale retail chain’s 600-plus locations nationwide would boost its market share. “It was not an easy year because the independents didn’t like us too much for a while,” reports Braunschweiler. “However, that’s come back now; and in February, we had a higher total market share. It’s a little bit like a ‘you cheated on me but I still love you’ attitude.” Sonova recently committed to a similarly aggressive retail strategy in Germany, where it is acquiring Hansaton Akustik GmbH, a large, family-owned hearing aid manufacturer. The company had previously acquired the retail chains Vitakustik Hörgeräte GmbH and Fiebing Hörtechnik GmbH in 2006 and 2009 respectively. “We had retail on a low level there before; but now, we will start to go vertical,” says Braunschweiler, who has been busy smoothing the ruffled feathers of German audiologists since the announcement. “Independents can be very emotional—very nervous that this is the beginning of the end.”

The Endgame Sonova generated double-digit organic growth in the financial year 2013/2014 and revenues of more than $2.14 billion. During his tenure, Braunschweiler has clarified the company’s strategic focus on developing a direct retail presence in the U.S., Canada, France and Germany. “We had retail distribution when I came on board, but it was kind of an undercover operation, where we had everything on the balance sheet; but it wasn’t transparent,” he says. “We have made it a transparent part of our corporate strategy; and while that was risky, next to our products, I consider our distribution power to be one of the most important assets we have.”

The Lesson Often, setting a strategic course is easier than sticking to it through stormy weather, says Braunschweiler. “My personal strategy and the strategy of the company are very centered on focus,” he says. “We can’t do everything. We have to focus on a couple of things and stick with them—and sometimes that’s hard for the team. You have to have the guts to suffer for a while without changing course. That takes resolve.”

CEO CONFIDENCE

CEO Confidence at Lowest Point This Year CLEARLY, CEO CONFIDENCE has been affected by

the negative economic reports of late, including flat or reduced U.S. job growth, GDP and manufacturing output. Some economic forecasters are even starting to plan for the next recession. As a result, in May, CEOs reported having less confidence in their expectations for overall business conditions a year from now than they did in April, and their confidence was the lowest it has been all year. CEO confidence is down 4.5 percent from January, to 6.41, from 6.71. In fact, the level of confidence has not been this low since October 2014, when CEOs’ outlook was 6.36 out of 10. 16

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6.75

THE UPSHOT Dip reflects flat job growth, GDP and output

6.5

6.25

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FEBRUARY

MARCH

APRIL

MAY

CHIEF CONCERN

Time For a Do Over How do you move on when you’ve picked the wrong CEO candidate? By Thomas J. Saporito

SEEING THE NEED for a new CEO, a client went about it the right way and began developing a thoughtful, strategic succession process. The company began grooming two or three in-house candidates, eventually zeroing in on one they thought would be ideal. However, the dynamics changed as the process went on. In cultivating their CEO-to-be, they came to realize they were actually betting on the wrong horse. At first blush, this situation seems like a prime example of a succession process that failed, but that would be shortsighted. The CEO candidate’s weaknesses were revealed before becoming CEO. That’s not a failure. While it may be inconvenient and perhaps a bit maddening, it is part of the process that can’t be ignored. According to Strategy and Business magazine, of the country’s 2,500 largest companies, 78 percent of all CEO successions in 2014 were planned—a new high. More companies are making succession planning a priority

than ever before. However, CEO transitions don’t always work out. A 2012 RHR CEO Transition Summary shows that 36 percent of respondents went through an unsuccessful transition. And while the main goal is obviously to find your next CEO, a proper succession process will also let you know when you’ve chosen incorrectly. Here are some factors to consider: Be Proactive No one wants to believe that his or her heir apparent isn’t the right choice. In fact, the choice may have been the right one when you made it, but situations can change. The strategic direction of the company may be different than when you started the process and the top choice may not have the skills to lead the company down that new path. Or the candidate might not be who you thought he or she was. In a 2009 RHR survey, 60 percent of directors admitted they lacked the proper tools to fully interview and evaluate candidates. Another 44 percent said they didn’t have adequate

time to have meaningful interactions and in-depth discussions with candidates. It’s vital, though, that time be spent with all candidates in a variety of settings and interactions. Multiple touch points are needed to see how the candidate performs over time and how he or she interacts outside of a business setting. These touch points will help confirm your choice or raise red flags. Follow Your Convictions It’s one thing to realize that you might not have the right person in line for top job; it’s another to act on it. You’ve invested time and expense in your choice and letting go might not be the easiest thing to do. A board’s initial tendency may be to rationalize that any issues spotted are minor and that it’s best to stay the course. That’s rarely the right decision. It might be the easy choice now, but it could cost you dearly once that person is in control and the stakes are much higher. Moving Forward Losing your top candidate is brutal, but it’s not the end of the world. Most companies are not GE or Pepsi with a seemingly endless line of successors. That doesn’t mean you can’t be prepared for such a crisis. If you started your search early, you should have already identified executives on your bench who, while not your first choice, are highly talented and scalable depending on the needs of the company. The mark of a good succession process is being able to look down at the next level and identify employees who can be elevated with the right amount of planning and time. That’s where scalability is crucial. Those people should be rotating in and out of key positions, so you develop a deep, mature bench capable of leading you into the future—whether the people on it were your first choice or not.

DR. THOMAS J. SAPORITO is chairman and CEO of the consulting firm RHR International. This column is part of a series on leadership.

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Soaring high American Airlines congratulates The Boeing Company’s Jim McNerney on being named Chief Executive’s CEO of the Year.

MID-MARKET REPORT

The Capital-Without-Debt Quandary How do middle-market companies secure the funds they need to grow without taking on too much debt?

NEARLY ALL middle-market companies plan to expand over the next 12 months, according to a recent study by the National Center for the Middle Market and the Milken Institute. Yet, the majority of middle-market firms surveyed do not anticipate taking on additional debt to achieve their growth goals. ¶ In fact, most companies with annual revenues between $10 million and $1 billion reported planning to use cash on hand to fund expansion and new projects in the coming year. Only about two in 10 small and mid-sized businesses plan to take on debt to finance growth. Among the larger firms—with revenues of $100 million to $1 billion—70 percent plan to finance growth with existing resources. ¶ The statistics, tables and charts to follow offer a snapshot of how middle-market companies fund growth and feel about debt. How Middle Market Firms Raise Capital Thirty-two percent of small and middle-market firms have not raised capital in the last three years.

32% Loan from bank

10% Loan via nonbank lender 10% Operated on retained funds

9% Debt investment from friends and family

9% Family offices 8% Equity investment from friends and family 32% None of the above/do not intend to raise capital

APPROXIMATELY

60 PERCENT OF MIDDLE- MARKET EXECUTIVES FEEL THAT A 20% DEBT-TO-ASSET RATIO IS RIGHT FOR THEIR BUSINESSES.

“Would You Consider Going Public?” Companies who have not considered listing cite firm size as too small or concerns about meeting compliance and regulatory requirements.

92% 3%

3% Company currently listed Have considered listing Have not considered listing Don't know

What Kind of Debt Do Middle-Market Companies Carry? Bank debt is the most common route for small and mid-market companies. Under $500K

$500K-$2.5M

$2.5M-$10M

$10M-$50M

$50M-$100M

$100M-$1B

60% 50%

“How Much Debt is Right for Your Company?” 93% of middle market companies feel their companies should have little or no debt.

40%

46%

47%

30% 7% 20%

Moderate debt (Around 50%)

10%

Little debt (Around 20%) No debt Bank debt

Private debt

Project debt

20 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2015

Publicly held debt

Other types of debt

None of these

*0 percent chose "Highly Leveraged"

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MAKING TECHNOLOGY WORK

Retraining “Goliath” to Face Digital David The well-worn Biblical allegory praises the triumph of the underdog, but what if you’re Goliath? Here’s how the “big boys” can level the playing field. by Nitin Rakesh EVERY TIME A TECHNOLOGY is introduced, a new crop of innovators step forth from the crowd—agile, ambitious, armed with new technologies and business models and eager to challenge the Goliaths of their industry, who have largely grown the traditional way. The problem is that today’s Goliaths can find themselves caught between two different modes of operation: the methodical, conservative approach that built their enterprises and the disruptive, fast-paced, innovate-on-the fly approach that defines today’s digital startups. So, what course should these enterprises take? EMBRACE YOUR INNER GOLIATH Many enterprises attempt to meet the disrupters on the wrong terms. The stories are all-too familiar: established players refuse to adapt, innovate too slowly or abandon the business models behind their successes. Any of these approaches can lead to defeat at the hands of a disruptive upstart. Rather than trying to evolve into something they aren’t, market leaders should fend off the disruptive threats by capitalizing on their innate strengths, such as their financial power, their brands and their customer information. Industry heavyweights can apply the following strategies to counter the threat from the digital innovators:

STRATEGY NO. 1: BUY In 2011, Allstate took advantage of its financial resources to acquire Esurance, a strategic play that gave the company a foothold in the online insurance market. Thus, they were able to quickly market their products in a fast-growing digital marketplace by capitalizing on financial strength that startups simply don’t have at their disposal. STRATEGY NO. 2: COLLABORATE Sometimes, the smartest play can be not to compete at all, but to collaborate. Large enterprises are surrounded by an ecosystem of customers, vendors and competitors with collective knowledge and experience that can be leveraged to bring new products and services to market. A good example is ApplePay, which brought Chase, Citi, Capital One, Bank of America and others together with Amex, Visa and Mastercard. They were able to collaborate to launch a mutually beneficial new service—even though it competes with their own digital-payment initiatives. STRATEGY NO. 3: CAPITALIZE ON YOUR BRAND Digital channels enable companies to reach new markets and launch new products in a cost-effective manner, and an established brand can be a big success factor. American Express and Walmart worked together to launch Bluebird, a digital alternative

to checking accounts. Using a prepaid card model and digital tools like electronic bill payment, mobile deposit and personal finance tools, Amex leveraged its trusted brand to reach a market segment that historically was not served by their products. STRATEGY NO. 4: PUT CUSTOMER INFORMATION TO WORK Customer information and insight is the most precious commodity in the digital era. The ability to analyze data to derive actionable perceptiveness is perhaps the most powerful, yet least understood, asset for established companies. Nissan was able to leverage data captured on millions of forms submitted through their website in order to associate customer preferences about car models and features with a geographic region. They are now able to market their products more effectively through customized advertising campaigns and regional websites, and they can intelligently adapt their vehicle manufacturing and distribution based on regional preferences. Business is more often likened to war than to any other human pursuit. While the strongest most often prevail, disruptive innovation can turn the tide in favor of nontraditional players. This new reality will define winners and losers for years to come; for large enterprises, those that develop a strategy and adapt fastest will come out on top.

NITIN RAKESH is CEO and president of Syntel, a provider of integrated technology and business services.

22 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2015

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SONNENFELD

The Patterns of Parting Patriarchs Jeffrey Sonnenfeld

How does someone know the right time to leave? There is no universal recipe.

CONVENTIONAL WISDOM HOLDS that succession is tricker when the boss is the brand. Examples include KFC founder Col. Harlan Sanders, Holiday Inn founder Kemmons Wilson and Pepsi savior Walter Mack, all of whom went to war against their own enterprises in retirement. There are, of course, exceptions. Recently, we have seen seemingly smooth changings of the guard in the tech sector, with Microsoft CEO Steve Ballmer, Cisco CEO John Chambers and Oracle founder Larry Ellison stepping down after 16, 20 and 38 years respectively. However, the far-less-tranquil succession pattern lives on. Examples abound in the personality-infused world of fashion. In 2013, Men’s Warehouse founder George Zimmer was ousted at age 64 by his board after 40 years as CEO. American Apparel’s Dov Charney, Abercrombie & Fitch’s Michael Jeffries and Lululemon’s Chip Wilson’s CEO were also unseated after stormy board battles. Each presided over years of sinking market performance, soaring salaries and conduct as bizarre as it was offensive. Many feel that the short-term orientation of activists and metrics of proxy firms demand an unrealistically rapid learning curve from new CEOs. Research suggests that effective managers can require 18 months or so to navigate the taking-charge process. Yet, Fortune 500 CEO data shows a paltry median tenure of 4.9 years. Terms range wildly, however. Fully 20 of these CEOs have 20-plus years of service, and an additional 26 have been in office for at least 15 years. At the extremes, 84-year-old Rupert Murdoch has been CEO of News Corp for 63 years, Berkshire Hathaway’s Warren Buffett, also 84, has been in office for 59 years,

71-year-old Fred Smith has led FedEx for 42 years. At 91, Sumner Redstone has led National Amusements since 1967, with control over CBS and Viacom. How does someone know the right time to leave—and how can boards ease the transition? While there is no universal recipe, in 30 years of research on CEO exits I have identified four dominant departure styles: Monarchs, driven by an elusive quest for a lasting legacy, either die in office or are toppled by a palace revolt. They are most common in family and small- to mid-sized businesses, where the CEO is central to the identity and vitality of the business. They are often brilliant visionaries who believe there is only one truly indispensable person—and they know who that is. Boards must be sure to protect good successor candidates that the monarch sees as threats. Generals leave reluctantly—and then stage a return. Often, they have the unrivaled credibility to make major changes in keeping with disruptive developments in the strategic context. Their challenge is to resist exaggerating a sense of crisis as a pretext to engineer their return to power. Ambassadors function as wise elder statespersons. Examples include Cisco’s John Craig Barrett at Intel, McKinsey Founder Marvin Bower, Eric Schmidt of Google or Bill Gates at Microsoft. They generally have an excellent relationship with an internally groomed protégé and can serve as mentors. Governors serve a bounded term of office and seek new adventures elsewhere. These leaders are most common to larger enterprises. The challenge for their boards is to ensure that they don’t get diverted to new opportunities too soon or engage in fire-sale asset auctions to embellish short-term credentials.

JEFFREY SONNENFELD is senior associate dean for leadership studies; Lester Crown professor of leadership practice, Yale School of Management; president of the Yale Chief Executive Leadership Institute, and author of The Hero’s Farewell and Firing Back.

24 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2015

I LLU ST R AT I O N BY T I M TO M K I N S O N

The four ways CEOs leave office dictate how succession can be smoothed. By Jeffrey Sonnenfeld

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Congratulations,

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We salute you for leading the industry to a higher level of performance.

RISK INDEX

Personal Privacy/Data Security Risk Remains CEOs’ No. 1 Concern High-profile data-hacking cases continued to dominate the news over the last three months, while terrorism in the corporate environment elevated everyone’s fears. PRIVACY CONCERN STABLE, WHILE CONCERN OVER TERRORISM INCREASES With data breaches affecting nearly everyone today, including children, privacy of data continues to rank the highest among CEO concerns for themselves and their families, as compared to geopolitical/terrorism, liability threats, physical damage/natural disasters and physical/family security. However, that concern is down slightly—1.2 percent—from six months ago (6.57 avg. rating in May vs. 6.65 in December). Conversely, CEO concern over geopolitical/terrorism risk increased the most at 11 percent (to 4.68 in May from 4.22 in December). The survey is conducted by Chief Executive, in partnership with PURE Insurance.

Privacy/data security risk still ranks highest among CEOs’ personal risks DEC 2014 7 6

MAY 2015

The majority of CEOs (75.8 percent) are either moderately or highly concerned about their and their family’s data/privacy risk. As the thefts of tax return data from the IRS in April and May showed, even the federal government is not safe from a breach. In addition, mobile pay apps and chip-based credit cards have not yet been proven safe from data/privacy risk.

-1.2%

GAP

+10.9%

+7.6%

+6.5%

DEGREE TO WHICH DATA/ PRIVACY RISK AFFECTS CEOS AND THEIR FAMILIES

CONCERN LEVEL

+1.2% 20.1%

4 2

55.7%

Physical Damage/ Natural Disasters

Liability Threats

Physical/Family Security

Privacy/Data

3. A domestic employee filing a claim

2. Young drivers on their policy (under 26)

4. A contractor who gets injured on their property (e.g, gardener, handyman)

5. Actions of a family member

FEAR OF TERRORISM IS ON THE RISE Terrorist attacks at the Boston Marathon and the offices of Charlie Hebdo have increased people’s concern about their family’s safety in public. That concern shows in CEOs’ responses to our risk survey. Compared to December, the number of CEOs highly concerned about the risk of geopolitical events or terrorism increased by 11 percent. It was the highest increase of all five categories. Furthermore, their confidence that they can mitigate that risk for themselves and their families has dropped 2.5 percent. DEC 2014 MAY 2015 GAP

COMFORT WITH LEVEL OF PROTECTION AGAINST DATA/PRIVACY RISK CEOs have a low level of comfort with their ability to protect themselves and their families from the type of data/ privacy risk that exists today. Less than one-third (28.5 percent) of respondents felt highly comfortable with their ability to protect personal data with the resources available to them today. Nearly 40 percent have a low level of comfort, indicating that they do not feel confident about being able to protect themselves and their families from this risk.

COMFORT LEVEL LOW MEDIUM HIGH

-2.5%

+10.9%

28.5%

4.22

4.68

Degree to which this risk affects you and your family

26 / CHIEFEXECUTIVE.NET /

24.1%

Geopolitical/ Terrorism

FEAR FACTOR: TOP 5 PERSONAL LIABILITY ISSUES ABOUT WHICH CEOS ARE MOST CONCERNED 1. A car accident involving themselves or a family member

5.91

5.76

Comfort with level of protection and/or risk transfer

JULY/AUGUST 2015

LOW MEDIUM HIGH

32.2%

39.3%

TECH TALK

Get Your IT Together Give up on perfection. “Graceful failure” can help you get what you need from your tech investments. By John Danner IF ONE APHORISM characterizes many a CEO’s experience with large IT projects, it’s “Sh** Happens”— where the missing letters aptly describe the likely culprit. There’s good reason, since it turns out that roughly 7 out of 10 major IT projects fail. They bust their budgets, blow their schedules and/or underdeliver their promised benefits. Worse yet, there’s probably no area of business that absorbs more money with less understanding by those who approve those funds than IT. Think about it. You wouldn’t hold the title you have without a solid grasp of the financial side of your enterprise. You can pretty easily determine if a new marketing or sales strategy is panning out or a supply chain needs attention. A visit to the manufacturing floor can clarify why, what and how things may need fixing there.

But for most CEOs, IT continues to be a very expensive black box— with its own indecipherable jargon, invisible complexity and vexing interconnectedness, all with disturbingly unpredictable vulnerability. Even a screwup in R&D is usually not as career- or enterprise-threatening as a hack or meltdown of a sensitive IT system can be. Assuming you’re not an IT guru yourself, how can you better your odds of getting what your company needs from its IT investments? The answer: don’t bet on success, focus instead on how your IT organization and its gear can “gracefully fail.” Because failure is like gravity—it’s an inevitable fact and force of life, especially when things get complex. In IT parlance, you can’t erect an impenetrable firewall against failure. I learned this “graceful failure”

28 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2015

concept in conversations years ago with Bruce Schneier, a world expert on network security. Graceful failure requires accepting failure as inevitable, respecting its cleverness and embedding agility to keep its arrival from wreaking mortal havoc on one of your company’s crown jewel foundations—such as a retailer’s customer trust (think Target’s 2013 Christmas hacking fiasco). And it can be a powerful check on the hubris with which many CIOs and IT consultants pitch their latest requests for funding—aka “coding the happy path” or the “happy day scenario,” i.e., IT plans that assume everything will work as planned. If you’re on the receiving end of one of those pitches, here are four specific things you can do to make your IT investments more graceful-failure savvy:

穢 2015 Southwest Airlines Co.

Congratulations, Jim! 7KDQNV IRU NHHSLQJ XV 議\LQJ KLJK DOO WKHVH \HDUV

TECH TALK

The Wisdom of Small Bets

Ask what is this project’s “Pareto Path,” i.e., how can you get the critical 20 percent of functionality that will most likely get you 80 percent of the benefit? The answer can reveal stepby-step alternatives to a big budget proposal. Dave Williams, CEO of WeHeartIt, a widely popular social networking site, asks his team to ruthlessly cut back any new IT project proposal to the smallest, simplest unit that allows them to get it in front of customers for their early feedback—before making a big commitment to any grander vision. He borrows a page from the lean startup movement with this “minimal viable feature” approach; and is willing to have a slightly bumpier launch of a new product in exchange for faster direct user intelligence to anchor his IT engineers’ efforts. Similarly, Suketu Gandhi, a partner in A.T. Kearney’s IT consulting practice, warns his CEO clients “not to build an atomic bologna slicer” when all they need is a simple sandwich. By paying close attention to why your business exists in the first place, as CEO you can better decide which new functionalities will truly strengthen that foundation and which are frills.

The Logic of Off-The-Shelf The road to IT hell is paved with customized bricks. Beware claims that yours is such a unique organization that you need unique technology solutions. Sometimes that just results in encasing existing business practices in the next generation of software. This issue is an equal-opportunity problem for all vendors and customers. Pat McIntyre, former CEO of Pure Fishing, the world’s largest fishing

“

Failure is like gravity—it’s an inevitable fact and force of life, especially when things get complex.”

tackle company, faced this challenge head-on in installing an SAP platform across that global organization. His best advice to fellow CEOs: get personally involved, both on the front end to ensure you have buy-in from all major affected stakeholders and throughout the process to strike the right balance between standardization and accommodation of legitimate custom needs. McIntyre said CEOs need to be willing to be the “integrator” in both settings; otherwise, they can end up playing the IT equivalent of “Whack-A-Mole,” trying to deal with constant customization requests as they pop up.

Understand the “Sell By” Date

What’s the likely replacement/upgrade cycle of the underlying technology? You don’t want to buy a carton of milk that’s likely to go sour before you can finish it. Even major IT companies can get this one wrong. IBM’s CEO Ginni Rometty recently acknowledged her company did not anticipate how fast customers were shifting to the world of BYOD (Bring Your Own Device) workplaces, mobile and cloud computing platforms, social networking and big data tools. If sophisticated

tech providers have trouble with their own “sell by” dates, you can appreciate how much more important it is that you focus on them in your IT choices.

Anticipate the “Hacker Scenario”

Ask your people specifically how they can defend the underlying system vulnerabilities once exposed by a clever intruder or disgruntled insider. Better yet, minimize that exposure early on. For example, rather than attack this issue with brute force investment and staffing of its IT infrastructure, WeHeartIt relies on sophisticated Big Data analysis and machine learning support from a team at wise.io to flag early signs and emerging patterns of hacking to hijack traffic and content on its site. Virtually every business today is an information enterprise, regardless of the actual products and services it sells. But IT can produce as many blunders as wonders. You need a skeptical investment review process that recognizes both factors. These four steps don’t make you a Luddite, just a bit more erudite in your IT investment decisions. After all, it’s the IT you want to happen, not the other stuff.

JOHN DANNER is a senior fellow of The Lester Center for Entrepreneurship at Haas School of Business, University of

California, and a co-author of The Other F Word: How Smart Leaders, Teams, and Entrepreneurs Put Failure To Work.

30 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2015

You’ve earned your wings. Congratulations, Jim McNerney of The Boeing Company, on being named Chief Executive’s CEO of the Year.

CEO OF THE YEAR

THE PORTABLE PERFORMER As complex organizations go, there are few companies with as many moving parts as Boeing, which JIM McNERNEY has transformed since he became CEO in July 2005. McNerney also successfully overcame challenges at 3M and GE to become one of the U.S.’s most respected business leaders. After dealing with the air-pocket concerning the Dreamliner, he has been on a smooth flight path for the world’s biggest producer of aircraft and the nation’s largest exporter. By J.P. Donlon

WHEN JIM MCNERNEY first came to Boeing 10 years ago,

the company had grown through a series of acquisitions and a big merger with McDonnell Douglas. He took over on July 1, 2005, after two major military-procurement scandals had tarnished the company’s reputation. Six months later, at the company’s annual leadership retreat in Orlando, Florida, McNerney orchestrated a “scared-straight” speech by Boeing’s top lawyer, who laid out in ➼

CEO OF THE YEAR

blunt terms the potential consequences of any further breaches of integrity. It worked, appeasing those questioning the character and the moral compass of the company. Even his critics said he “righted the ship.” McNerney set out a plan to impose discipline by pushing hard to cut costs and increase productivity across all its businesses. The $100 billion Chicago-based firm is approaching its 100th year in business in 2016 and is healthier than at any time in recent memory. CNBC’s Jim Cramer thinks the company is on a roll in part due to the economy being in the midst of an aerospace cycle. Airlines are rolling in cash, thanks to the major decline in the cost of oil. Companies like Boeing, with its highly efficient Dreamliner 787s, enjoy an almost unbeatable edge. Airlines want aircraft in the worst way because they can sell every seat that they offer. For its part, Boeing doubled its production over the last five years and intends to increase it another 40 percent over the next four years. The company also took steps to thank shareholders by announcing a $12 billion share buyback in December 2014 and a 25 percent dividend hike. McNerney reports that Boeing’s backlog of orders has never been higher. “We are in a good place,” he says. Overall, growth and financial performance has improved, with five-year cumulative returns to shareholders significantly outpacing the broader S&P index and its Aerospace & Defense Index. The company navigated some strong turbulence along the way. From 2007 through 2013, McNerney encountered disastrous and expensive troubles with the 787 Dreamliner program—from the initial delivery of the jet coming more than three years late to the grounding of Dreamliners worldwide for three months last year

due to overheated batteries. But despite the storm over the 787 and the labor disputes, McNerney held his course. He expanded the South Carolina site into a full-fledged commercial-jet assembly center and broke Puget Sound’s traditional hold on that central Boeing role. Boeing acquired the South Carolina 787 parts plants not out of any grand design, but because its outsourcing partners had come up short. Even through the 2008 global recession, production of 777s and 737s was unfazed. Jets rolled out efficiently and cash rolled in to Boeing. McNerney has expanded the company’s presence in international markets. Approximately 80 percent of Boeing Commercial Airplanes’ backlog and 36 percent of Boeing Defense, Space & Security’s backlog is with customers outside the U.S. For the defense, space and security business this is a dramatic jump from a decade ago, when international business represented 7 percent of the company’s defense business. Born in Rhode Island and educated at Yale with an MBA from Harvard, McNerney has had a storied career. Early on, he worked at Procter & Gamble and McKinsey & Co. In 1982, he joined GE, where he held top executive

34 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2015

positions, including president and CEO of GE Aircraft Engines, GE Lighting, GE Asia-Pacific, GE Electrical Distribution and Control and GE information Services. When Jeffrey Immelt was tapped to replace Jack Welch as GE’s CEO in 2000, two rivals for the post were almost immediately lured to other companies—McNerney to 3M, which saw an immediate market value increase by more than $6.5 billion, and Robert Nardelli to Home Depot, where shareholder value jumped almost $10 billion. Since Boeing is the nation’s largest exporter, it’s no surprise that McNerney chairs President Obama’s Export Council. The tall, affable executive is a former chairman of the Business Roundtable and currently serves on the boards of P&G and IBM. McNerney is mindful of the legacy he inherited. Along with the numerous models and photographs of Boeing’s commercial fleet that adorn the walls of the Chicago headquarters are dramatic scenes of B-17s and B-29s from the Second World War. Boeing produced 91,000 airplanes during that conflict, more than any other power on either side of the conflict. Chief Executive’s J.P. Donlon recently spoke with McNerney at his Chicago headquarters.

THIS PAGE: GAIL HANUSA; PREVIOUS: ROBERT FERGUSON

JET SETTER Boeing has doubled production over the last five years

With all the success Boeing has had, both in private and government aviation, what is the next big thing?

JIM McNERNEY: It is more of the same, but refreshed with new technology. Ours is a growth industry for two reasons: One, there’s an underlying growth in the application of aerospace technology, whether it’s satellites or airplanes or rockets or drones or whatever, as we penetrate more applications. Then there is a kicker to that growth, which is the refreshment of new technologies. The 787 is a good example, where you obsolete the base, and get a multiple on an existing growth-market trajectory. I still think things will fly and will go into outer space. There will be surveillance, intelligence, reconnaissance kinds of missions and the need for better technologies and the data that manipulates them.

I was hoping you might say something specific, like you’re working on a spaceship to Mars. JM: As it turns out, we are. The Space Launch System would be an example of a program that we’re working. We’re building a rocket in Michoud, Louisiana that’s significantly bigger than the Saturn V and will have the ability to go beyond the moon, beyond the asteroids, to Mars and even beyond that. By 2018 we will test the system in anticipation of a missions by 2021 or 2022. How do you keep entrepreneurial and innovation momentum in a big company, dealing with long lead times and complex technologies? JM: The bigger you get as a company, the more that challenge is important to meet. We do it two ways. One, people are imbued with a sense of mission in this company and are excited by the things they do even if they’re a relatively small part of it. For example, the Triple 7 is the result of tens of thousands of engineers designing it and 5,000 or 6,000 suppliers working with us. And it all

that borders on “Nobody can do what we can do.” We’ve got to manage that very carefully. Comparing your Boeing experience with 3M and GE, how have you changed as a leader? JM: I’m a more mature leader than I was when I left GE 15 years ago. I recognize the role of culture and the motivations of people and their alignment to a greater degree than I did when I was younger. At GE, I was a typical young manager who felt that I could think my way through anything. And because the answer was obvious, everybody would follow. As I went from GE to 3M to Boeing, I consciously adopted a different style. I’ve always been a pretty interpersonal person. I tend to be one who tries hard for alignment. I just have a broader set of tools now to get that alignment.

has to come together. The thing that we do uniquely is bringing various things together—that final systems integration against performance parameters. Systems engineering and the manufacturing process to support it—that is Boeing’s sweet spot. It helps to have something that is fundamentally exciting to begin with. “Hey, I’ve got an idea. Let’s design the world’s greatest airliner,” “Hey, I’ve got an idea. Let’s design a rocket that goes to Mars, then we’ll take people to Mars,” “Hey, I’ve got an idea. Let’s design an autonomous aircraft that can fly halfway around the world and stay aloft indefinitely like a satellite.” The kind of people attracted to our company are willing to be a small part of a big exciting thing. What is your role in all of this? How do you, doing what you do, push this forward? JM: It’s not one thing; it’s kind of everything. Because you’re right, the biggest challenge of a CEO is to keep everybody aligned and feeling motivated about being aligned, and to be able to afford career growth and financial opportunities for those who are aligned. Painting a picture of what we’re all doing and why it’s important, and supporting each and every person to get it done, is a big part of my job. When you become bureaucratic, people move along for reasons other than their performance. The discussions between a manager and the employee are not as candid as they should be, because everybody’s feeling trapped in the middle of something. This can be difficult with tens of thousands of people, but a little easier here because of the fundamental excitement and passion that we have for what we do. Managing that part of our culture is very hard. It comes down to making people feel special about the special stuff we do, without embedding in them a feeling of arrogance that can morph into an attitude

What would you describe as your most difficult challenge over the last 10 years? JM: It was defining a culture that we all wanted to grow toward, and in so doing, getting people out of the old legacy cultures that they were in. Recall that Boeing when I got here was a relatively unintegrated set of four companies. It was Boeing, Rockwell, Hughes and McDonnell Douglas, each of which had its own sites, its own language, its own culture. Some of the turbulence I inherited had to do with lack of alignment—people didn’t understand each other. Functions weren’t stitched together to protect the company. Career pathing did not have the same language, the same set of development around it. In such circumstances you can [try to] have one of the four cultures win in that process, or you could define a fifth. That was the hard part, defining a fifth; creating all the hooks and handles that link career development, mission statements and business objectives while maintaining growth and productivity improvement. So there’s no loser among the cultures; rather, there’s a fifth, better one that we’re going to for. This was hard work during the first year and a half. Have you got that fifth culture nailed in?

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CEO OF THE YEAR BOEING’S PERFORMANCE GOES THE DISTANCE

JM: You never want to declare victory on something like this. There are still parts in the middle of our company where it hasn’t totally taken hold. But I would say we’re 70 percent of the way there. It takes a decade or more to really get that done.

TOTAL ANNUAL AVERAGE RETURN TO SHAREHOLDERS 20%

25.2%

17.4%

You delivered something of a thunderbolt when you warned that Boeing would move manufacturing and engineering jobs out of the country if Congress doesn’t reauthorize the Export-Import Bank. Is this a hard-bargaining chip, or a prediction on your part? JM: I recall this a little differently. ExIm Bank is a treaty among 60 countries where they agree on the running rules of providing export credit for everybody’s domestic champions. Quite frankly, this treaty curbs a lot of bad behavior in the sense that there are a lot of countries that, if not bound by this treaty, would subsidize the heck out of their indigenous champion. There are countries that will

5 YEARS

10 YEARS

(ANNUALIZED)

NET INCOME COMPOUND ANNUAL GROWTH 30%

32.9%

20%

11.3%

5 YEARS

10%

10 YEARS

EPS (CAGR) 30%

32%

20%

S O U R C E : C O M PA N Y R E P O R T S

Some analysts are skeptical about sustained demand for the 787 going forward in light of its current production costs. They point to the fact that United Airlines likes the 787, but withdrew its order for 10 Dreamliners, choosing older, less efficient, but less costly planes instead. Where does Boeing go from here? JM: We are coming down the learning curve on the cost of the 787 and have more to go. This is typical as new planes roll out. The plane will be significantly less costly to build in the future. Secondly, we have so many orders for 787s, we don’t know what to do with them—we’ve got about eight years of backlog, which is too big. If we could produce more at [the same] quality and cost, we would. This is the highest-demand widebody of all time, and we’re at the highest production rates of a widebody ever for us. So this is a huge success. The United case is a story of a successful customer who needed a bigger plane than he thought he was going to need on some routes. So instead of having a 310-passenger airplane, he needed a 360-passenger airplane. We were glad to accommodate him. The backlog of our company actually went up a little.

10%

12.4%

5 YEARS

10%

10 YEARS

(GAAP)

subsidize, to a far greater degree than the ExIm rules allow, their domestic champions, even though in the U.S. we don’t believe in that so much. So, the structure of the ExIm Bank controls bad behavior and allows the quality of the products to be the differentiator on a global basis, not who throws the most money at it. If one of the 60 unilaterally withdraws, it puts your domestic players at a disadvantage. Many deals in the developing world require export credit financing or you’re not allowed to bid. So it’ll be a competitive disadvantage for us and the U.S. economy if we don’t have this facility. My point in answering that question was simply, there would be an inevitable bias for exporters to look at other places to build things if you could get this kind of support everywhere else in the world except the U.S. That was my point; it was not a

36 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2015

threat. It was simply a statement of what economic incentives do. But there are at least two presidential aspirants and many congressmen who want to kill this, calling it a New Deal relic, a vestige of crony capitalism and saying that companies like Boeing, if they are as good as we think, should easily be able to get financing through the other means. JM: Look, I realize that we’re in the silly season right now. People are changing positions and finding new ways of looking at life, depending upon the race they’re in. Ultimately, though, I have confidence that the U.S. Congress will come together and realize that we have a level playing field out there. It’s been reauthorized by Democratic as well as Republican presidents, as well as liberals and conservatives. Let’s keep it. Also, this doesn’t cost the country anything. We don’t lose money. It’s not a spending program. This makes money for the U.S. government. Boeing is an icon of American manufacturing. It has considerable knock-on effects on American manufacturers. Give us your critical assessment of American manufacturers as a class. How good are we versus global competitors? Where does it most have to improve? JM: It’s an important question. We’re in the beginnings of a renaissance in U.S. manufacturing, after having experienced a steady, slow erosion over the last couple of decades. American manufacturing has struggled with higher costs in the U.S. as compared to other places, which accounts for the offshoring. It has also struggled with a regulatory environment that is not as supportive as it’s been historically, which curtails investment. It struggled with the strong dollar recently. It struggled with a lack of STEM-educated folks to design things, and it’s struggled with the readiness of the workforce to build things. For example, when a Boeing employee comes in to be a machinist, one of our assemblers, it used to take two weeks of orientation. Now it takes two to three months of orientation to address these readiness issues. So there have been headwinds that we’re

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GE congratulates Jim McNerney on winning CEO of the Year. From serving as CEO of GE Aviation to his current position as Chairman and CEO of Boeing, Jim’s vision and leadership has allowed him to reach incredible heights.

T:10.75”

TO SOMEONE WHO NOT ONLY REACHED FOR THE SKY, BUT ALSO WENT THERE.

CEO OF THE YEAR beginning to address. We’ve tried to rationalize the regulatory process, to engage in education, to advance STEM and to work with community colleges and apprentice programs that help prepare worker readiness. America is really good at the nexus between the design and manufacturing processes. There are countries that are good at the manufacturing process, and there are countries that are good at design. But very few are good at producing globally competitive products by marrying the two together. I see a lot of kids now beginning to come out of engineering schools that are taught to design for manufacturability. They’re now taught to do things that we need, as opposed to theoretical things. It’s going to take a while for this to show up. It’s darkest just before the dawn. American manufacturing is finding its way. What advice would you give manufacturers about where they most need to improve? Over the last 20 years, too many of us have pursued horizontal business models. To use the old Japanese term, we “hollowed out” our manufacturing and became horizontal in the sense that we controlled a lot of suppliers, but we controlled less vertical engineering and manufacturing. We became assemblers. In industry after industry, including our own, we learned some lessons: That it’s very hard to control quality,

“ We have so many orders

for 787s, we don’t know what to do with them—we’ve got about eight years of backlog,

which is too big. ”

cost and delivery, which are three key fundamentals. There’s more discussion about re-vertical integration. We’ve got to get more control over more of the design-sensitive and manufacturing process-sensitive things. For example, when I came here a decade ago, after we invented the carbon fiber material for airplanes,

BOEING’S STRONG LONG-TERM STOCK PERFORMANCE 180

2.20.15 $158.31

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S O U R C E : C O M PA N Y R E P O R T S

we farmed out the ability to make a fuselage and make an airfoil. I thought that was wrong. Again, it’s not just the design, it’s the ability to manufacture without learning curves and get to the next material fast. I had to literally repurchase some of our supply base, to bring them back into Boeing, to get them on this pursuit of design and manufacturing together. If you ask me where we’ve got to change, it’s getting more control over one’s design and manufacturing processes. What has been the single greatest accomplishment or thing that you are most proud of as a leader? Three things: Bringing the cultures together around one distinct culture. I am proud of our leadership development pipeline and take personal ownership for that. The 300 to 400 people that represent the future of this company are a better and more broad-gauged pool than the one we inherited a decade ago. I’m also proud of the business results, the revenue and earnings growth, and the change in our market position from losing market share to gaining market share over the last five years. This will set us up well for the 21st century.

P&G Congratulates Jim McNerney 2015 CEO OF THE YEAR From Jim’s early days as a P&G brand manager to his current service as the Presiding Director of P&G’s Board, Jim has always been motivated to ﬂy faster and farther.

? CEO OF THE YEAR

Why Jim McNerney

“To me, the selection of Jim McNerney makes sense for a variety of reasons. I’m extremely impressed with who he is both as a CEO and as a citizen. The company that he runs is large, complex and extremely important in terms of the industry. I think he’s just an outstanding choice for this award.” — Bob Iger, Chairman and CEO, Walt Disney and 2014 Chief Executive of the Year

“I’d echo what Bob said, and add that all of this has been done in a climate where we’ve had major regulatory and macroeconomic challenges. Jim’s skill in maneuvering through this is exemplary.” — Christine Jacobs Former CEO, Theragenics

“Jim by far excels at each one of the criteria that we set forth to select the CEO of the Year. In addition, his leadership of the Export-Import Bank and his work there represents great effort to ensure that the U.S. is positioned well to compete on a global basis.” — Thomas Quinlan President and CEO, RR Donnelley

“Jim McNerney is running one of the most important companies for our country that has faced a tremendous amount of global headwinds, as well as domestic challenges. He’s navigated all of those extremely well and stayed a leader, both in the U.S. as well as around the world. He has been a great generator of both job growth and high shareholder returns.” — Tamara Lundgren President and CEO, Schnitzer Steel

“Jim has delivered tremendous performance in a challenging global environment. He is a true leader both inside and outside of Boeing.” — Dan Glaser, President and Chief Executive, Marsh and McLennan Companies

Each year, the selection committee for the Chief Executive of the Year award meets at the NYSE to review the candidates and choose an honoree. In 2015, the committee (l. to r.) is Fred Hassan, Tom Saporito (advisor to the committee), Maggie Wilderotter, Bob Iger, Tamara Lundgren, Tom Quinlan, Christine Jacobs, Dan Glaser, Bob Nardelli, and Mark Weinberger. (NCR’s Bill Nuti not present.)

“Jim is genuine. He’s a great listener and learner. He handles complexity extremely well. He’s both an internal and external leader, whether in the boardroom or in Washington, D.C. He’s an ambassador for our country around the world. He runs a very important company that actually carries millions of people every single day where they need to go, with safety top of mind. And he’s delivered great and consistent financial results over the years for his shareholders.” — Maggie Wilderotter Executive Chairman, Frontier Communications

“I’ve had the pleasure of knowing Jim and working with him for over 20 years, and I think what the committee saw is someone who clearly emerged as a best-in-class leader in all 11 categories we set forth to evaluate. He sets the bar high for his peers. He is clearly an admired leader both within the company and within the industry, and he brings a level of global perspective to Boeing that certainly has demonstrated itself in its financial performance.”

— Robert Nardelli, CEO XLR-8

“Jim stepped into a culture of political intrigue, scandal, competitive ferocity and other geopolitical headwinds that triggered a lot of backlash against great U.S. companies like Boeing, and he transformed this magically. In a very short amount of time, he restored the luster of Boeing to become a great global icon of U.S. industrial greatness. In addition, he is a tremendous global statesman in a variety of sensitive diplomatic matters. We’re proud to have him as our honoree this year.” — Jeffrey Sonnenfeld President and Chief Executive, Leadership Institute Yale School of Management

“Jim is absolutely the right person. He personifies what’s good about the private sector. He has demonstrated courage and tenacity for a company that is very

40 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2015

important for the U.S., and he has kept his company strong at a time when there are enormous global pressures and unfair global competition. For this and other reasons, he really is best in class on all the criteria that we looked at.” — Fred Hassan, Chairman, Zx Pharma and Partner Managing Director, Healthcare at Warburg Pincus

“Jim is a great example for all of us. He has led a great company for a long time, and he’s extended that leadership outside the company to serve us well in Washington.” — Mark Weinberger, Chairman and Chief Executive, EY

CRITERIA FOR EVALUATING A CHIEF EXECUTIVE OF THE YEAR Each year’s selection committee agrees upon the criteria to be used in evaluating finalists. In making a final decision, some committees have emphasized different criteria than others, but most of the following 11 elements have been in general use since 1993. 1 Courage 2 Leadership 3 Vision 4 Demonstrable impact on company, industry and business in general 5 Degree of difficulty 6 Sustained performance 7 Employee engagement, leadership development and internal people processes 8 Innovativeness 9 External benchmarks: Customer value and shareholder value created 10 Moral dimension, personal character (Is there a coherent “higher” purpose?) 11 CEO respect/beacon of excellence/reputation

VALERIE CAVINESS

Members of the 2015 Chief Executive of the Year Selection Committee faced a challenge choosing among an impressive list of finalists. In the end, they selected Boeing’s Jim McNerney. Comments from each of the judges follow.

United Technologies is proud to congratulate Jim McNerney for being named Chief Executiveâ&#x20AC;&#x2122;s CEO of the Year. We salute your commitment to innovation and relentless passion for setting new and higher standards for the aerospace industry.

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ECONOMIC DEVELOPMENT

REGIONAL REPORT

The West

Incentive-hungry businesses continue to flee California, but the West shows promise. By Warren Strugatch

THE DIVERSITY OF THE WEST—geo-

graphically, politically, culturally and economically—thwarts most attempts to pigeonhole this complex, nine-state region. “Perhaps the region’s main appeal is that it’s so diverse,” says Angelous Angelo, founder and principal executive officer at Austin-based AngelouEconomics. Enormous diversity is found in California alone, with its remarkable positioning in an array of markets and sectors, including technology, finance, agriculture, food processing, business and professional services, entertainment and many more. Some of those industries, admittedly, are hurting. Agriculture is wilting from four years of drought; the music business continues its shrinkage, and much of the state’s

film and TV production industry has been lured away by incentive-laden government officials dispatched from every state in the union. The appeal of being near, but not in California continues to attract business to the neighbors. “A lot of states have been playing the ‘We’re Cheaper Than California’ relocation game for the last decade,” says Thomas Stringer, who heads the site selection and incentives advisory program at Ryan, a global tax services firm. “People love to throw a wrench at California because it is such an innovative and creative place,” says native Angelino John Rocca, who heads his own incentive consulting firm. “The state’s doing far better than you’d think from reading the news.” Indeed, local residents still launch businesses in

42 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2015

California, or—as they always have— migrate west from around the country for a new start. The road, of course, runs two ways. Every day, companies leave the Golden State in search of less regulated, less costly business environments, such as those found in neighboring states like Nevada and Oregon, and beyond, in Washington, Utah and Colorado. Meanwhile, states like Wyoming, Montana and Idaho may attract relatively few migratory companies, but continue quietly nurturing their own home-grown industries—crops, cattle, minerals, fuel, light manufacturing—while maintaining their traditional sense of independence and resistance to government overreach and regulatory creep. Western states are positioned for

economic success in the latter half of the 2010s, thanks to continuing innovation, increasing exposure to global distribution patterns, Asian markets, Pacific trade routes, key infrastructure improvements and access to a young, well-educated work force.

NEVADA

Diversification Through Incentives

IT COST NEVADA at least $1.3 billion last year to lure Tesla Motors to Reno to build the world’s largest lithium-ion battery plant. The winning package it offered was far and away the largest economic incentive deal of 2014, shoving Nevada to the center of the national economic-development main stage. The expanding alternative-fuel car manufacturer says it will invest $5 billion and create 6,500 jobs. Insiders say the full-court press to attract Tesla reflects a desire among state leaders to diversify the state’s wilting economy, long associated with casinos and construction. Hammered by the Great Recession, Nevada’s gambling and construction industries remain well below pre-2008

peaks. Business advocates say that the state is rebounding. “The Silver State has reemerged as one of the fast-growing states in the nation,” asserts Dr. Stephen Brown, director of the Center for Business & Economic Research at the University of Nevada at Las Vegas. Brown cites strong growth across most industries since 2012. However, much of Nevada’s labor market is transitory, and large numbers of workers continue to leave the state in search of jobs. “We believe that the Nevada economy will continue to see improvement in 2015 and 2016,” he says. “The gains in 2016 should be stronger than in 2015.” Housing construction should rise 8.3 percent this year, and 11 percent in 2016, he forecasts; gambling revenues should rise 2 percent his year, and 2.5 percent next. Nevada’s population, formerly the fastest-growing in the nation, is slated to grow this year and next by a slow-but-sustainable 2 percent. Tourism is up, too. Nevada’s tax burden ranks eighth lowest out of 50 states, and it ranks third in the Tax Foundation’s State Business Tax Climate Index. Nevada spends over $33.4 million per year on incentives.

COLORADO

#11

Labor Supply Continues to Grow

COLORADO EMPLOYMENT grew 3.3

percent in 2014, led by trade, transportation and utilities, construction, financial activities and professional and business services. All sectors of the state’s economy—save the information industry—are predicted to continue growing this year. According to economist Richard Wobbekind, executive director of University of Colorado Boulder’s Business Research Division, innovation and infrastructure development are driving economic growth across the state. Meanwhile, employers are resisting wage increases. Colorado “remains a magnet for young, college-educated adults, helping attract more technology firms to the area,” says Mark Vitner, senior economist at Wells Fargo. For example, Lockheed Martin has completed a new commercial space headquarters just outside Denver and is slated to hire 500 new employees. Panasonic Enterprise Solutions is building a new hub

How The States Stack Up Rank Best/Worst GDP States 20151 Rank 20132

GDP Per Capita ($)2

Top Corporate Tax Rate (%)3

Right to Work4

Education Quality of Jobs Quality (K-12)/ HQ Green State Service5 Incentives5 Incentives5 Incentives6 Post-Secondary5

Nevada

44,408

Yes

A-

B+

B- / C

Colorado

51,955

4.63 (flat)

B+

A-

B+ / B

Utah

45,165

5 (flat)

Yes

B+

B-

B+

B -

A-/ B

Wyoming

67,858

Yes

B+

B+ / C

Idaho

35,375

7.4 (flat)

Yes

A-

B+

B+ / C+

Montana

39,251

6.75

A-

B+

B+ / C+

Washington

54,654

N/A

B-

B+

B/B

Oregon

53,750

7.6

C+

A-

B/B

California

53,497

8.84 (flat)

C-

B- / A-

Sources: 1 Chief Executive Best & Worst States for Business 2 Bureau of Economic Analysis 3 Tax Foundation 4 National Right to Work Committee/National Right to Work Legal Defense Committee 5 Interviews with site selectors James Renzas, Thomas Stringer, Angelos Angelou and John Rocca 6 In the Tax Foundation corporate tax rate rankings, Washington is listed as “Not Available.” Officially, the state has no corporate tax; instead it collects an array of alternative taxes that are difficult to rank.

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WHY WE’RE HERE / OREGON WHO Haralee Weintraub, CEO of Haralee.com The women’s clothing manufacturer moved into converted private home in Oak Grove, a mixed-use neighborhood in Southeast Portland, in 2005. WHY OREGON “So many people are former employees of Nike, Columbia Sportwear or Adidas going out on their own, starting their own companies or looking for contract work. Pattern designers, small sewing companies, sample sewers are all plentiful.” BOTTOM LINE “Everything for my company is made here in Portland. Small companies here are used to meeting the high standards of companies like Nike. It isn’t hard to find one that can do a good job, even though my fabrics are difficult to sew.”

site selector James Renzas, principal of the RSH Group. “This is especially so for people considering relocating from places like California. They will not mesh with prevailing values.” Utah’s tax burden ranks 23rd lowest out of 50 states, and it ranks 9th in the Tax Foundation’s State Business Tax Climate Index. Utah spends over $207 million per year on incentive programs.

WYOMING

#17 near Denver International Airport that will employ 300 people. Other leading job growth sectors for 2015 include the leisure and hospitality sector, which is expected to add 11,200 jobs, and the education and health services sector, which is expected to add 9,300 jobs. A state filing-fee holiday possibly helped accelerate new business registrations and renewals, up nearly 14 percent in 2014 over 2013. Initial high expectations for a legalized marijuana industry have largely been dialed back, after initial tax receipts proved underwhelming; advocates say give it time. Efforts by the Colorado Association of Commerce and Industry to get the legislature to act on such issues as transportation funding, K-12 education testing reform and local healthcare finance were tabled due to what the association called partisanship and politicking. Colorado’s tax burden ranks 31st out of 50 states, and it ranks 20th in the Tax Foundation’s State Business Tax Climate Index. Colorado spends over $995 million per year on incentives.

UTAH

#15

Continued Moderate Growth

THE UTAH ECONOMIC COUNCIL

called 2014 “a good year” overall for Utah’s economy, and predicted “con-

tinuing moderate growth and improving economic conditions” in 2015. Utah’s job-creation rate, 3 percent in 2014, will taper off to 2.5 percent this year, according to the Utah Economic Council. Driven by a strong technology sector, employing one out of five state workers, Utah companies hired at well above the national average, and unemployment continued to trend down, reflecting the Beehive State’s long-standing position as one of the country’s top states by employment; currently Utah boasts the nation’s second-lowest unemployment rate. Still, graduates talk about the difficulty of finding jobs, while employers declare filling jobs problematic. “We see the labor market continuing to improve,” says CBRE research analyst Joseph Farrell. “There is room to grow.” The ongoing expansion of Salt Lake City International Airport continues at a rate of nearly $20 million a month, pumping multiplier dollars into the economy. In April, the American Legislative Exchange Council ranked Utah the nation’s top state based on its performance on three key variables: state gross domestic product, absolute domestic migration and non-farm payroll employment. Living and working in Utah is not for everyone; the prominent role of the Mormon Church deters significant numbers of potential relocators. “I think church/state is an issue,” says

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Lowest Tax Burden

EXTRACTION OF natural resources has

been driving the Wyoming economy for decades. Increasingly, a combination of expanding regulations and softening commodity prices are causing investment to sift to other sectors, including technology, manufacturing, tourism and infrastructure. Cheyenne is emerging as a data center hub with deals inked by Microsoft, EchoStar and Green House Data. Last year, a gun manufacturer, Magpul, relocated to Cheyenne from Colorado after Colorado passed gun-control legislation. Last year was a strong year for the hospitality industry, and 2015 has continued the pace. Both the Eastern Shoshone Tribe and the Northern Arapahoe Tribe are expanding their casinos, near Lander and Riverton respectively, to include convention centers, water parks and other amenities. Several regional hydration projects are underway, including the Gillette Regional Water Supply Project and an addition to the Cumberland Rail Spur. A slate of community college, undergraduate education and professional training programs, some housed in new or nearly complete construction, is in progress. Wyoming’s tax burden ranks lowest out of 50 states, and it ranks first in the Tax Foundation’s State Business Tax Climate Index. Wyoming spends over $89 million per year on incentive programs.

IDAHO

#28

Agriculture is Still the Story

AGRICULTURE CONTINUES to drive

Idaho’s economy. Farming has expanded at 5.5 percent annually since 1980, with roughly three times greater than the U.S. as a whole. Most job growth, however, is non-farm. Healthcare and social assistance jobs are expected to pace job creation through at least 2022, followed by growth in retail, hospitality and professional and business services, according to the Idaho Labor Department. Last July, Idaho introduced a new tax reimbursement incentive program that provides a tax credit as high as 30 percent for up to 15 years on sales, payroll and income taxes. A dozen companies have tapped the program so far, including Skywest Airlines, which is building a new facility in Boise, and Amy’s Kitchen, which produces organic foods in Pocatello. The Gem State’s seasonally-adjusted unemployment continued to fall this spring, reaching a seven-year low of 3.8 percent in March. Meanwhile, total employment jumped 5,400—the largest one-month increase on record—to exceed 757,000 for the first time. Still, business leaders would like the state to invest more in infrastructure upgrades. Backlogged bridge and highway projects—valued at over $260 million and with no funding in sight—concern business leaders, says Roy Eiguren at Eiguren Fisher Ellis Public Policy, a lobbyist in Boise. He says business leaders support a fuel tax to pay for the projects, but have not found the political support to make it happen. Idaho’s tax burden ranks 24th out of 50 states, and it ranks 19th in the Tax Foundation’s State Business Tax Climate Index. Idaho spends over $338 million per year on incentives.

MONTANA

#29

“More Sustainable” Growth

PATRICK BARKEY, director of the University of Montana’s Bureau of Business and Economic Research, calls the first half of the current decade “something of an economic miracle” in Montana. Thanks to the Bakken oil boom, rural communities that had been depopulating for decades have revived and are growing again. Tumbling crude prices late last year have dashed cold water on the miracle talk—mining earnings were down in 2014, and will drop lower this year—but forecasters like Barkey call the current situation more sustainable. Economic growth is occurring more evenly across the major industries, with healthcare, professional business services and retail trade adding workers and paying higher wages. Tourism is counting on gains during the decade’s second half, as well, but other key industries face less cheery paths. Metal prices have been in retreat for three years running, and the state’s ranchers and farmers face a slowdown in the growth of global demand. Says Barkey: “It all adds up to… more balanced, but possibly slower, economic growth.” Montana’s tax burden ranks 37th out of 50 states, and it ranks 6th in the Tax Foundation’s State Business Tax Climate Index. Montana spends over $101 million per year on incentives.

WASHINGTON STATE

#33

Picking Up Speed

A SLOWING CHINESE ECONOMY,

concerns about Greece exiting the Euro zone and geopolitical instability in the Middle East and Europe constitute “vital threats” to Washington State’s economy, according to the Washington State Economic and Revenue Forecast Council. Washington’s sluggish economy is expected to “pick up speed” and sync up with the rebounding national economy, forecasters at JPMorgan Chase said last spring. Job cuts

WHY WE’RE HERE / WASHINGTON

WHO Michael Gasparenas, CEO and founder, Trusted Few SITE HISTORY In 1997, Michael Gasparenas immigrated with his family from Lithuania to Chicago, and from there to Seattle. Gasparenas started the contractor referral service, Trusted Few, in the West Lake Union neighborhood, then took office space in downtown Seattle. His staff of eight now occupies about 2,000 square feet on the 21st floor of a 25-story downtown building. WHY WASHINGTON “Washington is great for business because it has many startups, startup support groups, investors and conferences. A huge pool of talent has been attracted here by industry giants like Amazon, Microsoft, Starbucks, Boeing and T-Mobile. Washington’s amazing schools attract creative and talented individuals that further boost local entrepreneurship and economy.” BOTTOM LINE “In Seattle I find myself surrounded by entrepreneurs. The talent, the transportation, and the taxes work in favor of what I am doing right. I would not relocate to another city at this point.”

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ECONOMIC DEVELOPMENT

announced last year by Boeing and Microsoft will likely be offset by hiring at Amazon, helping prod the state’s efforts to at least keep pace with national job recovery, according to business analyst Dick Conway, writing in Seattle Business magazine this winter. “Washington is a great alternative to California,” says Renzas, “it just hasn’t been effectively promoted.” Executives should take the state more seriously, he says. “They have a great location, a great workforce, and a super-duper airport” offering nonstop flights around the world. Washington’s tax burden ranks 24th lowest out of 50 states, and it ranks 11th in the Tax Foundation’s State Business Tax Climate Index. Washington spends over $2.4 billion per year on incentives.

OREGON

#42

Turning the Corner

ONE DAY THIS SPRING, an individual

who started a new job somewhere in Oregon restored the state workforce to its 2008 footprint. The employment

news came as a relief to a state clawing for signs it had finally rounded the corner on economy recovery. “The economy is not healed,” acknowledged Josh Lehner, Oregon’s chief economic analyst. But, it’s a start. “We’re starting to see strong wage growth in the last six months, and that’s a good sign,” he said. Another good sign is seen in the technology sector, which absorbed over 30 percent of the state’s available real estate space in 2014, according to the commercial real estate company JLL. Expanding aerospace and drone-manufacturing sectors, including names like Boeing, Cloudcap Technologies and Precision Castparts, are leading the way. Business leaders have staked out proposed mandatory paid sick leave and proposed minimum wage hikes as key legislative bills they’re keen on defeating, says Shawn Miller, president of Miller Public Affairs, a lobbyist in Portland. Oregon’s tax burden ranks 16th out of 50 states, and 12th in the Tax Foundation’s State Business Tax Climate Index. Oregon spends over $865 million per year on incentive programs.

WHY WE’RE HERE / CALIFORNIA WHO Adam Xavier, CEO and co-founder, RoadLoK SITE HISTORY Adam Xavier co-founded RoadLoK, a motorcycle aftermarket wheel lock manufacturer, with his identical twin, Eric, in 2006, near their home in Newburgh, New York. The company manufactures what it says is the world’s only motorcycle antitheft immobilizer. In 2011, Adam stepped down as CEO, moved to Santa Monica and founded a second company using an unrelated technology (in the fashion industry). In 2013, he returned briefly to New York in order to relocate RoadLok to Santa Monica, leasing machine shop space a few blocks from the beach. WHY CALIFORNIA “Success out here has been setting up distribution networks and meeting partners and potential partners. People are a lot easier to reach out to than they were out East. There is a feeling of collaboration. The majority of motorcycle manufacturers are located here. We’re near our partners and our prospective partners, our vendors and potential vendors. And people are happy. If you’re not feeling happy, go sit outside a few minutes or go to the beach. You’ll feel better and you’ll deal with customers better.” BOTTOM LINE “My incentives to relocate here were all quality of life. I live a block from the office. I walk to work and I walk to the gym. I come to work feeling good. I have a sense of balance, environmental consciousness and human connection. I feel what I have here is unmatched anywhere else. There is no other place I can truly call home.”

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CALIFORNIA

#50

A Tale of Two States

WHICH IS THE REAL CALIFORNIA?

The state that’s been leaking corporate employers such as Toyota, Raytheon, Nissan and eBay? Or the state that added more jobs in 2014 than anyone anticipated, surpassing Texas as the country’s biggest job creator? The state besieged by drought and high taxes, or the state whose economy is booming? California is “a tale of two states,” says site selector Renzas, based in Orange County. “We’ve got urban areas doing great, offering six-figureplus salaries and more jobs than they can fill. And, elsewhere, we have rural areas with low wages and high unemployment.” Silicon Valley continues to thrive, and a surging biotech industry is bolstering San Francisco and San Jose. Less happily, the state’s epic drought is desiccating the state’s enormous, water-intensive agricultural industry. While the outmigration of corporate headquarters seems to be lightening up, CEOs are still launching spinoffs and new divisions in neighboring western states. Native companies like Apple and eBay have recently built highspeed networking centers in Arizona and Nevada, respectively, bypassing the Golden State. California’s tax burden ranks 4th highest out of 50 states, and it ranks 48th in the Tax Foundation’s Business Climate Index. California spends over $4.17 billion per year on incentives. Gov. Jerry Brown has streamlined several earlier programs, including the flagship California Enterprise Zone, into a new tax credit program called California Competes. The initiative has gotten early mixed reviews, but says consultant Rocca: “Give the governor credit for coming up with a way to reward job creation.”

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SMART MANUFACTURING SUMMIT CEOs toured the Cummins Midrange Engine Plant to learn about applying lean principles for continuous quality and cost improvements

REINVENTING AMERICAN MANUFACTURING FOR THE 21ST CENTURY Staying abreast of new technologies like additive printing, the Internet of Things and Machine to Machine remote monitoring is more important than ever. By Jennifer Pellet

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IN APRIL, manufacturing CEOs convened

in Indianapolis to connect with and learn from top-performing peers and to share insights and experiences on leading American manufacturingâ&#x20AC;&#x2122;s comeback at Chief Executiveâ&#x20AC;&#x2122;s 3rd annual Smart Manufacturing Summit. The articles to follow aim to capture some of the learnings about additive manufacturing, robotics, automation and mobile connectivity that participants shared. P H O T O G R A P H S BY J E F F S P U R LO C K

Q&A / THE CUMMINS ROAD TO SMART MANUFACTURING EXCERPTS FROM J.P. DONLON’S INTERVIEW WITH CUMMINS CHAIRMAN AND CEO TOM LINEBARGER AT THE SMART MANUFACTURING SUMMIT Founded in 1919, Cummins now has more than 80 plants making diesel and natural gas engines, for companies around the world. How has the company’s manufacturing process evolved? In the 1950s, Cummins had a few plants making a few engines, primarily for North American trucking companies. Today, our supply base and our customer base are both global, so the field of play is completely different and the level of complexity is exponentially more difficult. Our plant managers used to have huge accountability; the plant manager was kind of the center of the universe. He or she was responsible for quality, for people, for delivery, and they were the ones that made sure that our product was what we said it would be and it go there on time. The challenge now is all about the supply chain. That means that any effort by a plant manager to fix a technical problem in one plant has as much potential to make things worse as to make things better. So most of our focus around manufacturing excellence is in trying to make the total supply chain work. A lot of how the system works together is about IT, of course, information sharing and commonality. If you standardize everything, you don’t get innovation. If you let innovation run completely free, you don’t get enough standardization to be able to run the system effectively. That’s where a lot of our focus is today. What is your core manufacturing challenge? In the commercial engine business, we don’t have huge production runs. The largest single thing we manufacture, the Dodge Ram pick-up [engine], is 100,000 units. Most things that we make are a few thousand per year or a dozen a year. Variation is why people buy from us. On the other hand, we need scale. Almost all of our customers also make engines. We have to be able to do the things cheaper, more places and with more technology than they can or we’re not needed. That means we’re always looking for ways to provide variety at scale. That’s the core challenge. A lot of our investment in manufacturing technologies are efforts to deal with variation in a way that is less costly and high quality, ways to be able to deliver on short lead times and get to scale in terms of what suppliers we buy from and how we engineer the product.

Why is reducing cycle time so critical for Cummins? We have learned that if we have a long lead time, people change their orders within that period, which creates chaos. So we work to reduce the lead time to the point where they don’t have time to change their minds. In some cases, the reason they change is that they base their orders on forecasts of what they expect people to order from them. If we can get our lead time inside these windows where the customers aren’t forecasting anymore, they’ve already got firm orders, there’s less chaos. Then we have to move that back to our suppliers so that they can get lead times that are inside our window of firm orders. Then there’s just less chaos and change in the entire chain. How have technologies like additive manufacturing benefitted your process? We’ve used additive manufacturing for years to make fast prototypes. We’re now pushing additive manufacturing in remanufacturing. It’s common for our customers to bring in old engines to salvage components. However, there’s often damage to the components. For example, particles sometimes get inside a turbocharger’s housing and chip the ends of turbine wheel. We used to throw away about 80 percent of turbine wheels, which are very expensive. Now we use additive manufacturing—a laser deposition, laser cladding process—to put material

Cummins CEO Tom Linebarger urged CEOs to contact their Congressmen about the issue of trade promotion authority

back on the tips of these wheels so we can re-machine the tips and salvage wheels that we would once have thrown away. How is Cummins leveraging the Internet of Things? Like many companies, we gather information in our manufacturing process that helps us from a supply chain and complexity point of view. We’re also using telematics [tracking and diagnostics] in the fields. Even though we test and model everything before a product launch, we still end up having issues to resolve when they finally get experienced by customers. With telematics, we can bring information from the sophisticated control systems and sensors on engines to a large database and query that database to solve issues much more quickly. A few months ago, I looked at a map of the 20 largest customers around the world that showed which of our heavy-duty engines were experiencing a fault and listed all the fault codes. It’s very visual, so you can look and say, “Why are we having so many of those in this area? Is it the cold weather?” With our old system, which is still in use, dealers give us feedback, which we process through our warranty claims system. Then the warranty database brings up issues that are recurring. You can imagine the lag time.

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PANEL / MANUFACTURING TRENDS AND IMPERATIVES TWO VETERANS OFFER THEIR OBSERVATIONS ON PUTTING TECHNOLOGICAL ADVANCES INTO PRACTICE.

SPOTLIGHT

WHO Maria Crowe, President of Global Manufacturing Operations, Eli Lilly and Company, a $20 billion Indianapolis-based pharmaceutical company with 27 manufacturing sites in 13 countries. ON GAME-CHANGING TECHNOLOGY As part of our global quality remediation program, we installed a set of IT tools that were common to all of our manufacturing plants. Before, we had a lot of homegrown systems in use at our different locations. Now we have a common set of global business processes and data element definitions across the globe at all of our manufacturing sites. We review a set of metrics for every site and every contract manufacturer every month and all of that data is in the system. It’s really given us the ability to understand how we operate our manufacturing, where our products are going and where they are in between—from the shop floor to [that destination]. The evolution and connectivity of automation and IT coming together is the one of the biggest changes we’ve seen. ON HAVING THE RIGHT TALENT You can have a great production process but if you don’t have people capable of doing the work, whether that’s an engineer or a scientist, you don’t really have anything. Recruiting in the right places, on-boarding people appropriately so that they understand the company’s values and objectives and developing them so that they can play multiple roles are all critical. In manufacturing at Lilly we don’t hire people into a job or function, we recruit

in engineering and science and then they go from there into quality or operations or other places because we need a technical base across the organization. People are our most important asset. WHO John Lundgren, Chairman and CEO, Stanley Black & Decker, a leading provider of tools and storage, commercial electronic security and engineered fastening systems. ON GAME-CHANGING TECHNOLOGY The ability to base what we do, what we produce as well as how it’s used in the workplace, on real performance data rather than opinion has been the biggest game-changer for us. We now have central processors within products that give us data about how they’re performing on the job site, which we couple with end user feedback. The combination of qualitative and quantitative data enables us to design to value. In the past, we have built costs into products that weren’t adding a benefit that our customers were willing to pay for. For example, 50 percent of our revenue is

Eli Lilly’s Maria Crowe with Stanley Black & Decker’s John Lundgren, who advised CEOs to tie compensation to operating metrics outside of the U.S.—but the math of trying to sell a $500 Dewalt power tool to a general contractor in China who is making $2 an hour just doesn’t work. Being able to use the data we capture to design products for different price points in the marketplace has had tremendous value to us. ON DRIVING ADOPTION People tend to do what you pay them to do. At least 10 percent to 25 percent of the compensation of every single individual in our company is based on their performance against operating metrics like shortening the cycle time, improving inventory turns, etc. Five years ago, if I went to the shop floor and asked, “What were your working capital terms last month?,” no one would have known what I was talking about. Today, that guy or that woman can tell you. I think aligning the incentive of everyone in the corporate with what we’re trying to accomplish is really important.

2015 LEADERSHIP IN AMERICAN MANUFACTURING AWARD

Chief Executive’s Marshall and Wayne Cooper with Cummins’s Tom Linebarger and Chief Executive’s Bob Grabill

THE MANUFACTURING SUMMIT began on a celebratory note, with Chief Executive’s Marshall Cooper presenting TOM LINEBARGER, chairman and CEO of Cummins, with the magazine’s annual Leadership in American Manufacturing Award. Cummins has been on a revenue and innovation roll

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since Linebarger took the helm in 2012. Last year, the company recorded its highest revenue ever—$19 billion—representing an increase of 11 percent over the previous year, and launched 67 new products. Cooper also commended Linebarger for his work with the Indiana Economic Development Corp. and the Heading Home Minnesota

Business Task Force. “One of his personal goals is to make sure that Cummins maintains its incredible legacy of leadership and stakeholder involvement built on sustainable and profitable growth even after he’s gone,” Cooper said. “For all of these reasons we are grateful and proud to honor Tom Linebarger with this award.”

CEO ROUNDTABLE

THE INDUSTRIAL INTERNET OF THINGS AND THE “SERVITIZATION” OF MANUFACTURING IN OUR INFORMATION AGE, virtually every company generates huge amounts of data on a daily basis. In theory, we know that data can be collected, analyzed and crunched in real-time to deliver intelligence that companies can use to boost productivity, gain a competitive edge and expand their businesses. Many companies use smart, connected devices to do just that—increasing efficiency, boosting revenue and creating new business models. However, many more are not, Colin Masson, global industry director, manufacturing at Microsoft Business Solutions told CEOs gathered for a Chief Executive roundtable discussion held in partnership with Microsoft. “We don’t think that small manufacturers have realized how easy it is for them to get into this,” he noted. “These questions come up consistently over and over again: ‘How do I add service to what has traditionally been a product-centric marketplace? How do I drive highmargin, high-value services by using the Internet of Things?’” Happily, in some cases, the answer increasingly involves leveraging data that is already being collected. “Often, customers have invested in those assets already, but they haven’t fully utilized them,” asserted Frank Kulaszewicz, senior vice president, architecture and software at Rockwell Automation, who cites the high-ticket office building elevators produced by ThyssenKrupp as an example.

Microsoft Business Solutions’ Colin Masson, Vertical Solutions’ Kim Brault, ASQ’s Ajoy Bose discussed the IT challenge of small manufacturers

“They’ve always had factory automation controls that enable technicians to diagnose service issues,” he noted. Now the company is using those sensors to boost the safety and availability of elevators, enabling it to realize a new revenue stream (See sidebar, p. 52). “This is a good example of building a business model around safety and availability, so that beyond the initial purchase price you have an ongoing annuity of providing services afterward,” explained Kulaszewicz. This “servitization of products” has become a growth opportunity for the company, which now provides maintenance for both its own elevators and those of competitors. “They have about 500,000 other company’s

“As soon as you say Big Data, everyone thinks that means big money...You don’t have to have massive investments in server farms and specialists in big data to build that infrastructure.” —COLIN MASSON

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elevators on service contracts—those competitors are pretty sad about that,” noted Masson. In other cases, companies use connected devices to change user experiences and communicate with customers more effectively. Network connectivity, for example, enables Coca-Cola’s smart vending machines to conduct real-time test marketing, track trends and drinking preference and adjust a machine’s selections accordingly. The resulting data helps Coca-Cola understand customer-buying patterns, deliver more relevant advertising and change the customer’s experience. For Hydro Electronic Devices, the ability to monitor and analyze 15 variables simultaneously is what customers want. “It’s the algorithm,” said CEO Paul Ludwig, whose company manufactures and markets electronic controls for mobile equipment applications, including software that is used to implement vehicle-control strategies. “Show me a dashboard that

tells me where my vehicle is and that tells me what I need to know before I need to know it—the two or three variables that tell when this hydraulic cylinder is starting to fall off. The end decision is where you see the value.” Being able to pre-empt the downtime machinery failure can involve is

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MANUFACTURERS WORRY THAT MORE

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CONNECTIVITY WILL OPEN A DOOR TO CYBER THREATS

a huge plus for his customers. What’s more, over time, patterns and correlations in that kind of data give companies a better understanding of why a piece of equipment fails and what design modifications could be done to prevent that failure. All of these examples involve “machine learning,” or taking the data insights of the IoT to the next level by mining historical data with computer systems to make predictions about

future activity. That activity can be anything from trends and behaviors to performance patterns. “It begins with cause and effect—or predictive maintenance, which is normal math,” said John Dyck, global director, software at Rockwell Automation. “Then you move into machine learning, which is these models that you teach about the machine; and then it takes off from there and gets smarter by itself and begins making non-causal predictions over time.”

The Next Level

Initially, IoT capabilities and machine learning involved a huge investment in complex software and deep expertise. However, as with most new technologies, implementation has become more cost effective as cloud technology and streaming analytics have evolved and become more widely adopted. “As soon as you say Big Data, everyone thinks that means big money,” Masson noted. “I think that’s changed. You don’t have to have massive investments in server

ThyssenKrupp: Lifting Productivity

OVER THE COURSE OF A LIFETIME, the average

urban office worker spends literally years waiting for or stuck in elevators, according to a recent building-efficiency study. Clearly, keeping elevators running smoothly can have a significant impact on worker productivity—and,

in turn, offer a competitive edge to the elevator company able to deliver what matters most to its customers in buildings all over the world: reliable service. That’s why ThyssenKrupp Elevator decided to look for ways to move from preventative maintenance

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to pre-emptive maintenance by harnessing the Internet of Things. The company worked with Microsoft and CGI to collect data from sensors and systems and draw it into a central, cloud-based dashboard for a real-time view of key performance indicators. By feeding data about things like motor temperature, shaft alignment, cab speed and door functioning into dynamic, predictive models, the company was able to anticipate repairs—to know

which cabs would need repairs before they even went down. Its technicians can access information about the 1.1 million elevators ThyssenKrupp maintains worldwide in realtime from PC dashboards or mobile device. The result? “We have the ability to use live data to bring elevator reliability to new heights, reducing costs for ourselves and for our customers,” says Executive Chairman Andreas Schierenbeck.

“When connecting a plant to the Internet, security is something you really have to think about.” —BRYAN TANTZEN SENIOR DIRECTOR CISCO

net,” says Bryan Tantzen, senior director of Cisco’s manufacturing IoT business. “You better have a firewall, anti-virus software and security plan. We hear about baby monitors being hacked, televisions being hacked. When connecting a plant to the Internet, security is something you really have to think about.” From theft of intellectual property or sabotage to cyber mischief that could interrupt operations, CEOs pointed to a number of potential security risks raised by the IoT. “There are several levels,” said William Brindley, technology manager at Pratt & Whitney. “There’s a tragedy level—shutting off two engines on a two-engine aircraft. Another is an interruption in our

SPOTLIGHT

farms and specialists in big data to build that infrastructure. We’ve driven cost down to the point where even the smallest manufacturer can hook up equipment and start to experiment.” Beyond cost, manufacturers worry that more connectivity will open a door to cyber threats. “People want to connect everything to the Internet, but it’s just like connecting your PC to the Inter-

PANEL / WHAT’S NEXT IN ADDITIVE PRINTING Panelists RICK SMITH of The Additive Manufacturing Council, J.P. DONLON of Chief Executive Group, JORDAN BRANDT of Autodesk and WILLIAM BRINDLEY of Pratt & Whitney agreed that the capabilities of of additive manufacturing are evolving rapidly, even as costs drop.

manufacturing capability that shuts down a line or shuts us down entirely. And then there’s classified information because we’re a defense contractor and we’ve experienced incidents of our vendors being hacked. So we are very connected inside of our four walls, in our intranet, but we don’t connect our manufacturing capability outside those walls.” Strong security protocols, however, can overcome such resistance, noted

Dyck. “When we were working with an automotive supplier, initially he said, ‘Heck no, you will never put my data into the cloud,’” Dyck recounted. “But when we dug deeper into his $18 million maintenance budget and showed him we could prevent downtime on big hydroforming presses, all of a sudden the story changed to, ‘If you can convince my IT people this data will be secure, we’ll have that conversation. And we did, and we are.”

CEO Roundtable Participants ■ DOUG BATHAUER CEO, Integral Technologies ■ AJOY BOSE CFO & Interim CEO, American Society for Quality ■ KIM BRAULT VP, Vertical Solutions ■ KRIS BRANNOCK SVP Strategy, Vertical Solutions ■ WILLIAM BRINDLEY Manager, Advanced Manufacturing and Aftermarket Technology, Pratt & Whitney ■ J.P. DONLON Editor-in-Chief, Chief Executive Group ■ JOHN DYCK Global Director of Software, Rockwell Automation

■ FRANK KULASZEWICZ SVP, Architecture and Software, Rockwell Automation ■ PAUL LUDWIG CEO, Hydro Electronic Devices ■ MIKE SHIELDS CEO, eLogic

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■ COLIN MASSON Global Industry Director, Manufacturing, Microsoft Business Solutions ■ BRYAN TANTZEN Senior Director, IoT, Cisco ■ SCOTT WHITLOCK President, Flexware Innovation

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PANEL / TECH INNOVATIONS THREE PANELISTS SHARE INSIGHTS ON THE IMPACT OF THE INTERNET OF THINGS, ROBOTICS AND AUTOMATION ON ADVANCED MANUFACTURING WHO Frank Kulaszewicz, SVP Architecture and Software, Rockwell Automation, a provider of industrial automation and information solutions ON LEVERAGING DATA One of the biggest trends we talk about is the convergence of information technology and operational technology. Those were kept separate in the past. All of the investment and value that was made in a factory environment to run operations was an isolated island. It was there but couldn’t be leveraged for other purposes. So the goal is to take advantage of that information to deliver value in productivity and, more importantly, transform the enterprise.

your business. That’s probably the biggest risk in any type of innovation—that CEOs don’t understand or don’t accept that there is innovation happening that they may not be fully up to speed with. WHO Bryan Tantzen, Senior Director, Discrete Manufacturing, Internet of Things (IoT) Group, Cisco Systems, a multinational provider of Internet Protocol-based networking products and services related to IT ON LEVERAGING TECHNOLOGY It’s really important to start a level up from how you get the data or how you look at it. Start with what you want to do with the data. What is the burning pain point that you want to solve? Or your critical business objec-

SPOTLIGHT

WHO Christian Pedersen, General Manager, Microsoft Dynamics, a developer of CRM and other software for corporate sales, service and marketing departments ON APPLYING DATA ANALYTICS TO THE MID-MARKET The world is your data source. You need to think about how you can use that to differentiate your business. For example, for a beer company, there’s little worse than running out of the type of beer customers want on a hot summer day. So one beer manufacturer combined its own sales data with weather forecasts and historic weather reports to more accurately forecast demand. ON THE CEO’S ROLE I don’t think CEOs need to know all about the technologies, but you do need to have a sense of what’s actually possible. Otherwise you’re limiting yourself on a lot of potential innovation in

[From left] Rockwell’s Frank Kulaszewicz with Cisco’s Bryan Tantzen, who urged CEOs to identify a goal for data analysis before focusing on collecting it

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Microsoft’s Christian Pederson says CEOs need a sense of what technology is capable of to leverage it tive? Then work back from that to what data you want to gather. Also, whether you’re a small manufacturer or a larger one, start with one plant or one line on one plant. Pilot that and measure the before and after to build a concrete business case.

RECEPTION AND BRIEFING AT THE GOVERNOR’S MANSION Gov. Mike Pence welcoming TOM LINEBARGER of Cummins and HASNAIN MERCHANT of Kuss Filtration to a reception at his personal residence. Pence is addressing Indiana’s skills gap by making career and technical education a priority in every high school in the state.

CEO ROUNDTABLE

FIXING AMERICA’S AGING TECHNOLOGY INFRASTRUCTURE SOME THINGS MAY, INDEED, get better with age—but manufacturing facilities are not one of them. That unfortunate fact is at the root of an issue hindering America’s ongoing efforts toward a much-heralded Manufacturing Renaissance. The average age of manufacturing assets and equipment currently in operation in the U.S. is closing in on 20 years, according to the Bureau of Economic Analysis. What’s more, investments by U.S. firms in the upgrades and upkeep of equipment and facilities has averaged 3.8 percent of revenue in recent years—far below the 6 to 9 percent typically required to stay current and compete effectively with foreign rivals. “We running behind the times,” Raj Batra, president of industry automation at Siemens, told CEOs gathered for a Chief Executive roundtable held in partnership with Siemens. “If you think about how outdated you feel when your cell phone is six months old, how is it okay to have an automation asset that’s 30-plus year old automation asset on your factory floor?” Creaky, antiquated equipment and facilities are inherently problematic. More susceptible to cyber risks and lacking the latest smart manufacturing tools and technology, they hinder efforts to improve productivity and shorten time to market. They’re inherently problematic in a marketplace where the mantra is mass customization—a time when producing smaller batches of a wider variety of goods is becoming de rigueur. Finally, they

“If you think about how outdated you feel when your cell phone is six months old, how is it okay to have a 30-plus year old automation asset on your factory floor?” —RAJ BATRA, SIEMENS

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are a liability during a window in which America has the opportunity to reverse a decade-long race toward outsourcing production to countries with low-cost labor. “The good news in this sea of bad news is that technology is very scalable,” noted Batra, who pointed out that digitization can cut time to market in half and reduce engineering time by 30 percent. “People think that it’s technology that you can only deploy in a $1 billion-plus enterprise. But I’ve seen car washes that are using state-of-the-art technology.”

The Digitalization Decision For many companies, time-to-market drives the desire to pursue digitization. The upside varies from companies like Boeing, which would benefit from the

ability to speed up design processes and power through its huge backlog of aircraft orders, to companies in industries where trends come and go so fast that lengthy lead times translate to a warehouse full of unsellable inventory. Software can erase the boundaries between the real and virtual worlds. By enabling companies to plan and project the life cycles of products and production facilities, it can dramatically reduce both the time it takes to bring a new launch to market and to move the assembly line. Randy Hauser, president of Chicago Metal Fabricators, would like to harness this technology to streamline the front-end production of the heavy components and large assemblies his company makes. “We’re a job shop, and we have to create processes every day, because we’re doing custom products and have rolling product lines,” he explained. “I would like to be able to digitize the

parameters of the old equipment I have, what it can and can’t do, and then, when I get a part in, model it. Then I can have the software tell me which is the best equipment to run it through.” In many cases, digitization also enables companies to fix design flaws earlier in the process, noted Batra, who recounted working with the Jet Propulsion Lab to build the rover that went to Mars. “We couldn’t send it back and forth to Mars to figure out how it would land in the atmosphere, so we had to virtualize the environment, model it and simulate everything. Once everything is digitalized, your options are immense. The data you get from a product that is all sensored up lets you do everything from control the service aspect of it and better design the next generation of products. It’s a virtual cycle of improvement.”

Coping with Costs While most participants agreed that digitalization has enormous

Maserati: Driven by Digitalization THE ITALIAN AUTOMOBILE COMPANY MASERATI is known for luxury

cars—not stellar manufacturing processes. In fact, high-end vehicles are a bit like couture fashions, their very bespoke nature is at odds with the very idea of efficient, automized manufacturing. At the same time, long waits for luxury items are not as well-tol-

erated by customers as they once were, nor do the economics of low-volume production of even these high-end cars work well for auto makers. The sophisticated design and complex technology of sports cars today also demands the kind of sophisticated design technology and state-ofthe-art production pro-

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cesses that can ensure the highest level of quality. So when Maserati set out to design its new Ghibli, the company looked for ways to increase its production volume while retaining the exclusive feel of its cars. Digitalization enabled the car maker to virtually create, simulate and test car designs, significantly reducing the number of

prototypes necessary. Using team software, engineers were able to collaborate from different locations, significantly reducing analysis and development times. The result? Virtual planning and simulation of the production line enabled the company to produce three times as many cars as before while maintaining the same level of technology.

“People think that it’s technology that you can only deploy in a $1 billion-plus enterprise. But I’ve seen car washes that are using state-of-the-art technology.” —RAJ BATRA

potential, many business leaders expressed frustration about navigating implementation and justifying the cost. Those leading private companies pointed out that owners sometimes have unrealistic expectations for a return on capital investments. “You can’t buy anything for a six-month ROI,” said one CEO. For others, the price tag simply seems too high. “I’d love to have a completely automated system—design it, model it and push the button and it goes,” reported David Price, CEO of Brown Industries, which builds top quality van bodies, trailers, rail equipment and custom vehicles. “But we haven’t found the right people who can come in and do it cheaper than we can here with lowcost labor. We only build 800 trucks a year, three or four a day, each one different. For all the programming required by every different type of truck, you would need a full team of staff spending more man hours programming than I think you would actually building the truck.” The pressure on public companies to perform in the short term is also an issue, noted John Leonardi, president of Foth Production Solutions. “Publicly held organizations tend to spend a little less [on capital investments] and use more Band-Aids,” he said. “The smaller privately held companies might actually spend a little more automating

because they don’t have the pressure of the shareholders.” The cost barrier, however, is coming down. “It’s off-the-shelf technology,” noted Batra. “I see golf ball manufacturers digitalizing.” Furthermore, research suggests that American manufacturers are well aware of the need to invest in updating and upgrading facilities. Results of a recent study by the Manufacturing Institute showed that

about 20 percent of companies expect to spend more than 40 percent of their operating budgets on capital expenditures over the next five years to bring old machinery up to speed. Another recent survey reported that while only 19 percent of respondents were currently using Big Data to increase decision quality in the manufacturing process, 70 percent were interested in doing so. Clearly, most business leaders see transformation as inevitable—more a matter of when than if. “We know there’s going to be huge value created,” summed up Doug Bellin, global senior manager of manufacturing at Cisco Systems. “But where do we start? I can’t redo the whole plants so what can we do to add some things to it? It’s that old saying—how do you eat the elephant? One bite at a time. Which bite do you start with? That’s the hard part.”

CEO Roundtable Participants ■ BOB BARTELS Director of Division Media Relations, Siemens ■ RAJ BATRA President, Automotive Division, Siemens ■ RANDY HAUSER President, Chicago Metal Fabricators ■ DOUG BELLIN Senior Manager, Global Industries, Cisco Systems ■ WAYNE COOPER Chairman, Chief Executive Group PETER GOBEL GM, Concorde, Reko International ■ MIKE KILLIAN Practice Advisor, Cisco

■ JOHN LEONARDI President, Foth Production Solutions ■ MIKE MCLAUGHLIN President and CEO, Cast Technologies ■ DAVID PRICE CEO, Brown Industries ■ LEN RESTIVO Regional Sales Manager, Siemens

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■ TED DICKMAN CEO, BKD LLP ■ JEFF SANDERS C-Owner and Executive Vice President, Hill & Wilkinson ■ MICHAEL WEIS SVP, Acme Manufacturing

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PANEL / CLOSING THE SKILLS GAP TWO CEOS OFFER OBSERVATIONS AND INSIGHTS ON FINDING, TRAINING, ALIGNING AND MOTIVATING THE RIGHT PEOPLE

SPOTLIGHT

WHO Joe Henderson, Director, Advisory, People & Change, PwC, the world’s second-largest professional services network ON FINDING TALENT Almost 80 percent of participants in our 18th Annual Global CEO Survey reported that they were concerned about the availability of skilled workers. A war for talent is starting, with CEOs looking for not only technically skilled workers, but people skills, communications skills. To fill that need, CEOs are starting to pull talent from

different industries and working with educational institutions, high schools, technical schools, universities. ON CROSS-GENERATIONAL MENTORING The Swedish/Swiss manufacturer ABB is doing something that could be replicated anywhere. As Baby Boomers move toward retirement, part of their job becomes having a formal mentoring relationship with a new hire. It’s basically a joint effort between those two people to talk about what the younger generation employee needs to learn and how

THE INDYCAR RACING EXPERIENCE [From left] VIC LEONINO and JORDAN BRANDT of Autodesk were among the Summit participants who had a chance to experience the Indianapolis Speedway in a pace car driven by a professional driver

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PwC’s Joe Henderson [above left] says that formal mentoring is helping bridge the talent gap at ABB, while Rolls-Royce’s Allan Swan [above] is working with local high schools to develop talent to capture that data. It may be a video posted on YouTube or a typed document. But it’s ongoing and they need to spend a certain amount of hours each day on it. Often, that relationship keeps going after the person does retire. WHO Allan Swan, VP Planning & Control Defense Sector, Rolls-Royce, the world’s second-largest maker of aircraft engines ON DEVELOPING TALENT On the engineering side, we spend a lot of time at the pre-college stage. We sponsor, mentor and support students at the high school level beaucse we want to get them excited about aviation and about RollsRoyce. We spend time on that because we have big talent gap there. On the skilled labor side, we’re looking at doing something similar, talking to people at the pre-college stage about opportunities on the factory floors. Apprecentice schemes are common in Europe, particularly in the UK, where people who are vocationally very good serve threeor-four-year apprenticeships and get a degree at the end of that. We’re not quite there yet, but we’re looking at it.

CEO ROUNDTABLE

CREATING AND MAINTAINING MANUFACTURING ECOSYSTEMS FOR INNOVATION-DRIVEN GROWTH IN A GLOBAL MARKETPLACE where capital, goods, information and technology flow seamlessly across time zones, the concept of location as a competitive advantage can feel counterintuitive. Yet the economic environment in which a business operates continues to factor heavily in its ability to compete. First popularized by Michael Porter in The Competitive Advantage of Nations, this notion explains why businesses in a particular field often tend to congregate in certain geographical areas. Massachusetts, for example, has long been home base to a dispropor-

tionate number of medical device companies, while California’s Silicon Valley remains one of the world’s best-known tech clusters. Such ecosystems or clusters benefit the companies within them (which gain access to a pool of specialized suppliers and skilled employees), as well as the local economy (through job and productivity growth). The win-win that ecosystems represent was not lost on the public and private sector leaders who recently gathered for a roundtable discussion held in partnership with the Indiana Economic Development Corporation to discuss

“We have a strong reliance on traditional manufacturing; we need to make sure that we evolve as new manufacturing technologies, materials and techniques emerge.” —VICTOR SMITH, INDIANA ECONOMIC DEVELOPMENT CORPORATION

Sperry & Rice’s Jim Gregory and Indiana EDC’s Ian Steff with Indiana EDC’s Victor Smith, who shared his experience launching a public-private partnership initiative aimed at easing materials transitions for manufacturers

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how the government, academic and private sectors can work together to create and nurture manufacturing ecosystems. “To begin with, each of the three must understand one another better than they do,” asserted Byron Pipes, professor of engineering at Purdue University. “I’ve spent a lot of my life explaining industry to university and university to industry, and a fair amount explaining government to university and vice versa as well. We need to continually spend time understanding one another and our motives and goals. Often they might appear to be in conflict but we can work conflicts out to our mutual benefit when we interact with each other well.”

The Trouble With Talent For business leaders in the manufacturing sector, a dearth of talent is often the most critical barrier to an ecosystem’s development. “We have a hard time getting people with strong science backgrounds to come into manufacturing,” noted Maria Crowe, president of global manufacturing operations at Eli Lilly. “They think it’s dull and boring and that there’s nothing interesting about it. We need to get kids interested in this at a young age.”

As a result, potential employers clustered in a geographic area often face a supply and demand imbalance, agreed Todd Clark, president of Lincoln College of Technology, which provides manufacturing training at 31 campuses in 15 states. “At this year’s career fair we had 88 employers representing more than 5,000 job openings,” he recounted. “When we only have 600-700 students graduating, that represents a real challenge.” To help address the issue, Lincoln partners with Purdue University on its M-STEM3 program, an educational initiative designed to engage students in STEM (science, technology, engineering and math) disciplines. Schools, industry and public entities participating in M-STEM3 collaborate on ways to change the perceptions of middle school students and their parents on today’s manufacturing environment and to provide manufacturing educational materials to teachers. “We also work with a local high school on a program where we provide students with training on auto diesel and collision repair techniques for 10 hours a week,” said Clark. “They’ll graduate with a leg up and be able to get into those trade areas more quickly.” In the private sector, companies often resort to other ways of attract-

“We have a hard time getting people with strong science backgrounds to come into manufacturing...they think it’s dull and boring... We need to get kids interested in this at a young age.” —MARIA CROWE PRESIDENT OF GLOBAL MANUFACTURING ELI LILLY

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ing talent to manufacturing jobs. NIBCO combats the talent issue with a generous tuition reimbursement program, reported Alice Martin, the plumbing manufacturing company’s vice chairman and chief people officer. If a new hire pledges to stay on for a given number of years, the company will cover his or her college tuition. “Our open-door, open-checkbook policy is one of our competitive advantages in recruiting,” she said. “We think education is really valuable for all of our associates so I’m happy to send them to college, to a trade school or for Six Sigma certification. It’s an investment in our people, and it also means they’re going to stay with us for a while.” Once critical mass is reached and specialized suppliers and skilled employees begin flocking to the area, business ecosystems often become self-sustaining. Yet even established clusters are vulnerable to change. Over time, developments like a shift in buyers’ needs, over-consolidation and groupthink can derail a thriving cluster. The floundering of Detroit’s once-thriving automotive industry ecosystem after participants collectively failed to embrace a trend toward fuel-efficiency is one example.

Indiana’s Evolving Ecosystem Indiana currently boasts a vibrant manufacturing ecosystem, which benefits from the state’s central location and skilled workforce. However, the state is well aware of the need to be proactive about staying in touch with the needs of the manufacturing sector, Victor Smith, Indiana’s secretary of commerce, told roundtable participants. “My concern is about maintaining our relevancy going forward,” he said. “We have a strong reliance on traditional manufacturing; we need to make sure that we evolve as new manufacturing technologies, materials and

SPOTLIGHT

Panelists JORDAN BRANDT of Autodesk, RICK SMITH of The Additive Manufacturing Council and WILLIAM BRINDLEY of Pratt & Whitney offered insights on the implications of new technologies, materials, processes and economics.

SEEING THE SITES CEO Summit participants toured the Cummins Midrange Engine Plant (CMEP), a green facility where the Cummins Turbo Diesel Engine is assembled. CMEP is unique in that it is mostly underground, which is key to both its efficiency and its minimal impact on the environment.

techniques emerge.” At issue is the fact that Indiana has a concentration of automotive manufacturers dedicated to metal forming, machining, diffusion bonding and brazing. “But cars are less and less metal and more and more composite,” explained Smith. “How do we not wake up one day and find that the metal is gone but our folks are still tooled up and geared up to do metal manufacturing and only metal manufacturing? That’s what keeps me up at night.” To pre-empt that unhappy prospect, the Indiana Economic Development Corporation committed $15 million to participate in a multistate public-private partnership to expand research, development and job creation in composite material technology. The initiative involves five states—Indiana, Michigan, Ohio, Kentucky and Tennessee—that

collectively represent 70 percent of the U.S.’s automotive manufacturing industry, said Byron Pipes, a professor at Purdue, who explained that one goal is to make transitioning to composites materials technologies more affordable for companies. “One of the concepts we’re developing is the Composites Virtual Factory. It will be a platform to give companies the simulation tools they need to do virtual manufacturing of a part before they invest in the tooling and machines required to make it.” Aimed at transforming U.S. automotive manufacturing and backed by $259 million in funding, the Institute for Advanced Composites Manufacturing Innovation represents a formidable investment in multiple ecosystems. However, companies and public sector organizations can participate in or launch similar efforts on a smaller scale.

Advanced Technology Services does that by working with high schools and universities to spur interest in science and technology. “We sponsor high school robotics programs in small communities where we do work on machinery and equipment for our client companies, trying to get kids interested in working with their hands in science and technology,” said Dick Blaudow, co-founder and CEO of the company, which provides maintenance services to manufacturing facilities. “We also have internships for high school kids.” At the university level, the company has sponsored a Leadership Development Program for juniors and seniors at Southern Illinois University in Carbondale for 14 students each year for the past nine years. Participants start the day at 5 a.m. with an exercise routine and receive

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CHIEFEXECUTIVE.NET

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business etiquette training in addition to the opportunity to attend industry conferences and learn leadership skills. “We provide scholarships, and they don’t have to be ‘A’ students to get in—I never was,” said Blaudow. “We look for kids who are willing to work hard and have held a leadership role in something like Boy Scouts or church. There’s no requirement that they have to work at our company but six of them are now in fairly important leadership roles within our company.” While programs like Blaudow’s are helping to change the misperceptions that the next generation of talent—and that generation’s parents—have about manufacturing jobs, they are few and far between, noted Gil Kaplan, senior advisor to Indiana Manufacturing Policy Institute. “AOL’s Steve Case is doing a bus tour through the Midwest to encourage technology entrepreneurial activity,” he said. “I’d love to have some of that spirit directed toward manufacturing. My daughter, who recently graduated from college, told me that all her classmates want to do is go to a room somewhere in California and dream up the next Uber. We’ve got to try to create that kind of energy about manufacturing that peo-

CEO Roundtable Participants

■ JOHN BERNADEN Head of Corporate Affairs, Rockwell Automation ■ DICK BLAUDOW CEO, Advanced Technology Services ■ TODD CLARK President, Lincoln College of Technology ■ MARSHALL COOPER CEO, Chief Executive Group ■ MARIA CROWE President, Global Manufacturing Operations, Eli Lilly and Company

■ SUSAN ENGLISH Vice President, Lincoln Technical Institute ■ JIM GREGORY CEO, Sperry & Rice Manufacturing ■ GIL KAPLAN Senior Advisor, Indiana Manufacturing Policy Institute ■ ALICE MARTIN Vice Chairman and Chief People Officer, NIBCO ■ BYRON PIPES Distinguished Professor of Engineering, Purdue University

■ DAVE ROBERTS President, Battery Innovation Center ■ VICTOR SMITH Secretary of Commerce, Indiana ■ IAN STEFF Senior Adviser for Nanotechnology & Advanced Manufacturing, Indiana Economic Development Corporation

SPOTLIGHT

ple have created about the Internet.”

PANEL / ADVANCED MATERIALS FOR ADVANCED MANUFACTURING Panelists ANTHONY DUTTON of IBC Advanced Alloys, DOUG BATHAUER of Integral Technologies and WILLIAM BRINDLEY of Pratt & Whitney offered perspective on how the accelerating development of coatings, composites and other material processes is impacting manufacturing.

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CEO PASSIONS

Model Railroading for Geeks Presented in partnership with PURE Insurance, this installment of CEO Passions features TOM LAWSON, an avid collector of trains from the pre-1940s. By George Nicholas 64 / CHIEFEXECUTIVE.NET /

JULY/AUGUST 2015

THOMAS A. LAWSON, a model train enthusiast since he was six, has installed 350 feet of tracks on two levels in rooms over the three-car garage of his 1767 colonial home in Rhode Island. “Tracks even run through a bathroom,” he says. “When you have a dedicated train room, you can punch a hole in any wall as long as it’s for track.” Lawson is CEO of Johnston, Rhode Island-based FM Global, which insures nearly $9 trillion in business properties in 130 countries. He owns more than 1,000 model train cars. “For some train lovers, the scenery is the show and the trains run through

Left: Diesel locomotives from the Chicago & Eastern Illinois Railroad Above: Standard-gauge, tin-plate replicas of pre-war trains

Right: This replica of a wireless culvert loader that places steel coils onto freight cars is part of a setup on display in Lawson’s attic

it,” he says. “I like the action. I love the wiring and command control. You can power locomotives separately by radio control and you can hear the tower talk to the engineer and all the sound effects. As an electronics geek, I’ve always liked this part of the hobby.” His setup includes a culvert loader that places steel coils onto freight cars, as well as a gantry crane that uses a magnet to load and unload cargo, both of them wireless-controlled. “I love these gadgets,” he says. “They’re toys for kids, but they’re also toys for adults.” The trains are in O scale, about four inches high and 1/48th the size of real trains. He also has a collection of trains in the slightly larger standard gauge in his attic. Lawson’s parents bought his first train set—American Flyer in the HO scale—when he was six. This smaller

scale was the most popular one for kids growing up in the 1960s. He began collecting these trains, but some years later they were collecting dust in the attic when his eight-year-old son discovered them. Lawson and his son built setups on sheets of plywood in the basement. His son lost interest in trains when he was 15 or 16, though. “He came to find other things more

interesting, like girls, cars and sports,” says Lawson. “Although he grew up, I didn’t.” Lawson went on to build a layout with large garden-scale trains in his Texas backyard in 1999. Exposed to the elements, it became weathered and more realistic looking over time—until a job relocation forced Lawson to abandon completing it.

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CEO PASSIONS

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After moving to Rhode Island in 2001, he installed 500 feet of track in another backyard, garden-scale setup, with miniature shrubs to approximate trees. Finding that gardening took too much time, he took that out to concentrate on O scale. “Some day, when I have more time, I’ll get back into the outdoor, garden-scale setup,” he says. Lawson’s most prized trains include a set of locomotives and cars that he had custom painted in the livery scheme of the Chicago & Eastern

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Below: Using miniature shrubs to simulate trees and 500 feet of track, Lawson built an elaborate garden-scale setup in the backyard of his home in Rumford, Rhode Island

Illinois Railroad. His grandfather repaired steam and diesel engines for the railroad and his father was a machinist for its diesel engines. “I still remember all the sounds and smells of the trains near my grandparents’ house,” he recalls. “The C&EI models are not the most valuable ones in my collection, but they’re the ones that mean the most to me.” To Lawson, model trains are the perfect combination of favorite pursuits: electronics, carpentry, play and collecting. “I display as many train cars as I can, especially the older, standard-gauge, tin-plate cars, which simulate what trains were like before 1940,” he says. “My dream is to have a big building designed to look like a train station. I’d have most of my trains running and the rest of them on display for everyone to enjoy.”

EXECUTIVE LIFE

IN TUNE The Moderators formed when a group of CEOs came together to do a one-off concert for charity

Corporate Rock

What lessons can four CEOs learn from playing together in a rock band? By Michael Gelfand A BUSINESS LEADER who delivers extraordinary results is often lauded as “rock star” leader. But what do you call a CEO who delivers extraordinary results while moonlighting as a member of a popular rock band? In the case of Denver-based cover band, The Moderators, it depends which CEO in the 12-member group you’re talking about. The Moderators’ four founding members are all business leaders: Mike Fries, the band’s lead singer, is the CEO of Liberty Global, the

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world’s largest international cable TV operator. Drummer Bob Deibel is president of Denver-based OfficeScapes, a workspace furniture provider. Guitarist Ed Haselden is CEO and chairman of Haselden Construction, a 400-employee building contractor based in Centennial, Colorado, while guitarist Bryant Martin is CEO of a Bella Vida, a Denver-based construction distributer and real estate development company that operates in Costa Rica.

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The group got its start back in 2006 when the core four met as part of Denver’s Young Presidents Organization (YPO) and decided to form a rock band for what was supposed to be a one-time performance at an upcoming YPO event. “We got together as a favor to the event’s planner and rehearsed a few songs,” recalls Haselden. “We came to enjoy [playing], and received such a resounding response at the show that we thought we’d try to keep going.” The band began rehearsing regu-

larly in Deibel’s basement (much to the chagrin of Deibel’s wife); but as things started coming together, they moved their gear into a roomier “garage” where the noise wouldn’t bother anyone and the space was more in keeping with their day jobs: Haselden’s airport hangar. After eight months of woodshedding (going off to practice), the Moderators played their next gig; and from that moment on, they’ve been on fire. They’ve built a strong reputation and a large fan base throughout the Rocky Mountain region as a top cover band, and they’re showing no signs of slowing down. Today, the band is very selective about where it performs, choosing elite, large-capacity venues rather than slumming it on the typical bar-band circuit with the other cover bands in the area. Another thing that makes them different from all of the other

WHO Bob Deibel, President & Owner, OfficeScapes C O M PA N Y S I Z E $200 million, 600 employees BUSINESS Provider of office, healthcare and educational furniture INSTRUMENT Drums I N F LU E N C E D BY Keith Moon, Alex Van Halen, Danny Saracen

cover bands is that aside from paying lighting engineers and roadies to haul their equipment, the band donates all of its revenue to charity. “Early on, we produced a show at a local music venue with 1,000-people capacity, lined up a few sponsors, charged $10 a person and raised $30,000, which we then gave to a local school program,” says Haselden. “The next year, we did one, got the Mile High United Way involved and made over $100,000 for charity.” This past November, the band was backed by a gospel choir at Denver’s Gothic Theater and raised more than $200,000, but that’s still small in comparison to the types of gigs they’ve been doing of late. “Last year, we played the Fillmore Auditorium in Denver, which holds 3,700 people,” recalls Haselden. “It was an annual gala event; and as the showcase performer, our band played 18 songs with the Colorado Symphony backing us up, and we raised $1 million for charity.” As you might imagine, the band’s charitable mission has been rewarding for all of its members. “Many of us are actively involved in the community outside of the band, but it’s been very gratifying to see the band become a highly visible platform for community engagement,” says Deibel. “The band is far more interesting to other people than any of the other avenues of community involvement I might be doing. Despite my best efforts otherwise, the local business community sees me as [a] stiff corporate guy. When they realize I’m also the drummer in the Moderators, it gives them a chuckle.” Bands are notorious hotbeds for dysfunction; so being in an artistic venture with so many other Type A personalities, where no one is in charge, has helped teach each of the Moderators’ founders new ways to channel their own leadership skills. “Being in the Moderators isn’t something that’s given me a balance in my corporate life,” explains Deibel. “It’s informed it as an extension of it.” Bryant Martin readily admits that

WHO Mike Fries, CEO of Liberty Global C O M PA N Y S I Z E $19 billion; 36,000 employees BUSINESS International cable operator INSTRUMENT Vocals I N F LU E N C E D BY Bono (U2), Bon Jovi, Tom Petty

what keeps the band dynamic interesting is that nearly half of its members occupy the corner offices at their respective day jobs. “In most work situations I’m in, I’m the decision maker,” he says. “I do what I want, how I want, when I want. But that doesn’t work in a band.” Deibel concurs, referring to the band as one would talk about a compelling business school case study or a successful lab experiment. “It’s been interesting to see our leadership styles blend,” he says. “We’ve become pretty effective at melding our collaborative and decision styles.” “It took us a while to settle into this,” says Deibel, “but I have been impressed by the vision some of the other members have had to help us

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CHIEFEXECUTIVE.NET

EXECUTIVE LIFE

WHO Bryant Martin, President of Bella Vida C O M PA N Y S I Z E 100 employees BUSINESS Central American real estate development and construction products distribution INSTRUMENT Guitar I N F LU E N C E D BY Duane Allman, Jimi Hendrix, George Harrison

ROCKING ON Led by a core group of four, the band is now 12 members strong and sometimes backed by a choir

WHO Ed Haselden, Chairman & CEO, Haselden Construction C O M PA N Y S I Z E $300 million, 400 employees BUSINESS General contractor throughout the Rocky Mountain region INSTRUMENT Guitar I N F LU E N C E D BY Eric Clapton, Derek & the Dominos

evolve. Being in this band has really taught me some things about the value of thinking big. I would not have envisioned the path this band has taken, and I wouldn’t have had [the] grand vision to think as big as some of my co-founders have done.” “I’ve had to realize that it’s not just about me,” says Haselden, “which is sometimes hard for a CEO to get over. I’ve had to learn patience and how to become more collaborative with the entire band. There are 12 people involved, and everyone’s playing their own part in each of our songs. When you’ve got all that going on, the performance can get muddied up quickly, so you have to create space for all the parts. That collaborative process is what we should be applying in business. “My day-to-day style is more like that of an autocratic dictator,” he adds, “but it’s become apparent to me that patience and collaboration are really important. All the other guys are as strong-headed as I am; and if we don’t set aside our egos to do what works best for [the] band, we won’t succeed. Singer Mike Fries, who cites “chutzpah” as his biggest influence as lead singer for The Moderators, runs a

global company with 36,000 employees and is not one to shy away from being in charge, but he has no problem sharing leadership responsibilities in The Moderators. “Great CEOs understand that collaborating is just as important as calling the shots,” he says, “And we’ve divided up the chores so that everyone’s chief of something.” Is there a downside to so many CEOs sublimating their egos? “We could use a few rules,” admits Fries, noting that without a spandex-clad prima donna barking out orders, everyone’s left to make their own decisions. While the band isn’t suffering as a result, some areas of their act might benefit from a change-management program. “Choreography and wardrobe are not our strong suits,” he says, “but everyone takes it seriously when we’re on stage, and the crowd can tell we’re having a great time up there.”

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FLIP SIDE

You Can Look It Up In Ecuador alone, lateness costs the economy $724 million a year— and Ecuador doesn’t even have an economy.

Statistics don’t lie… or do they? By Joe Queenan

THE OTHER DAY, I read that foodborne illnesses in the U.S. cost taxpayers between $14.1 billion and $16.3 billion a year, depending on whose numbers you believe. The figure appeared in The New York Times, so for many people, it must be true. That number includes the fallout from illnesses and hospitalization, lost time at work, diminished productivity and work done haphazardly because so many people feel a bit nauseous. There was a time when I would have sat up and paid attention to this bold statement. I have always been a huge fan of statistics of dubious validity. I once read that back pain costs the American economy $635 billion a year. I also read that when CEOs are even mildly late, it costs this country $90 billion in lost productivity. In Ecuador alone, lateness costs the economy $724 million a year—and Ecuador doesn’t even have an economy. Well, not a real one like ours. Lately, however, statistics have been becoming somewhat more esoteric—less credible, less rooted in hard, unassailable data. For example, a current ad for CVS says: “There is a hidden epidemic. This year it could cost tens of thousands of lives.... And it’s costing you and your fellow Americans

$300 billion annually. It’s a drug problem… but not the kind you think. It’s what happens when people don’t take medicine as their doctors prescribed.” Hmmm. Since CVS is in the business of selling drugs, the company is not a completely disinterested party here. So there is an ever-so-slight possibility that the $300 billion could be slightly overstated. But what bothers me is the lack of rock-solid documentation. To be truly credible, such figures must include footnotes citing a study at the School of Economic Studies at the University of Manchester or something scholarly that appeared in The Journal of Pain. Otherwise it sounds like something the boys upstairs got a couple of puckish millennials to dream up. For these kinds of stats to truly rattle the public, they have to sound like “According to a study published in The Annals of Forensic Nostalgia, chronic absentmindedness and unauthorized day-dreaming are costing the American economy $789 billion a year.” Or maybe, “Tight shoes are costing the American economy $654 billion a year in lost productivity,” says Dr. Serge Palomino, who holds the Elector of Saxony Chair at the University of East Westphalia. Lacking this kind of academic ornamentation, the numbers seem disembodied, abstruse and vague. Recently, Barron’s reported: “It is easy to understand how China could consume more cement in the three years between 2009 and 2011 than the U.S. consumed in the entire 20th century.” I love this kind of bold assertion, and desperately want to believe it. I even know the person who put it in print, a distinguished colleague from my time at Barron’s. But until I get official confirmation from somebody who works construction in the Bronx, I’m going to have to take that statement with a grain of salt. Well, MSG.

Q U E E N A N I LLU ST R AT I O N BY T I M TO M K I N S O N

Joe Queenan

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