An excerpt from the first chapter, "The Two Keys to Breakthrough Results."
Gary Dicamillo took over Polaroid Corporation in 1995. It was his first job as CEO, but he was hardly inexperienced. He had gone to Harvard Business School and built a successful career. Before coming to Polaroid he was a high-ranking executive at Black & Decker, charged with turning around the company’s power tool division. Though trained as a chemical engineer, he described himself as a “consumer products guy.” The press portrayed him as smart, likable, and decisive.
Polaroid’s board knew that the company faced some strategic challenges. Its signature instant cameras weren’t the big hit that they had once been. Digital photography was coming down the pike fast, threatening traditional film-based cameras. But the right CEO with the right strategy, the board believed, could turn things around and lead the company into a profitable digital future. After all, Polaroid had been conducting intensive research and development on digital imaging for nearly fifteen years. Its image-sensor technology and image-compression algorithms were highly advanced, and were protected by several key patents. It even had a professional-grade digital camera, the PDC-2000, ready for production. When the camera came out in March 1996, it won rave reviews from analysts and photography experts.
But though Polaroid seemed to know where its future lay, it wasn’t able to get there. The reason is clear in hindsight: though the company had great R&D, it didn’t have the other capabilities required to execute a winning digital strategy. Five years later, Polaroid’s business was a shambles, and the company filed for the protection of bankruptcy court. Its digital cameras were doing poorly in the marketplace. Its instant camera and film sales were continuing to decline. Polaroid was eventually acquired by a Midwestern holding company, Petters Group Worldwide, which owns a variety of consumer brands.
In late 2002, Warren Knowlton took over a company called Morgan Crucible, a 150-year-old UK-based manufacturer of carbon, ceramics, and other industrial components. Like DiCamillo, Knowlton was assuming the role of CEO for the first time. And he, too, was an experienced executive. He had spent twenty years with Owens Corning and five with Pilkington, the big international glass manufacturer.
Morgan in late 2002 was in far worse shape than Polaroid in 1995. Sales had declined for three straight years. Profits had vanished. Debt was high, and pension liabilities were three times the company’s market capitalization. The banks were growing nervous. So were shareholders: Morgan’s stock price had declined 90 percent between 1997 and 2002.
And yet, only three and a half years later, Knowlton had executed a transformation. By mid-2006, Morgan’s continuing businesses had registered 5 to 6 percent revenue growth for three straight years. Operating margins were more than three times what they had been when Knowlton arrived. The company had paid down its debt and secured its pension fund. The share price had risen more than tenfold, and analysts were once more issuing “buy” recommendations.
One company that should have succeeded but didn’t. Another that seemed destined for failure but turned itself around. Two smart, experienced, and capable leaders. What accounts for the difference?
We will try to answer that question in this book, and not just for Polaroid and Morgan Crucible. Rather, we want to use these two companies and many others to dissect the challenge of improving an organization’s performance. We want to highlight the lessons learned by leaders who have run the management gauntlet, who have learned to achieve results for their companies as they rose through the ranks. We hope to distill the best of their insights and experience for other CEOs, especially those new to the job, and for every up-and-coming general manager who may one day aspire to the corner office.
Our aim is not to convey new strategies; rather, it is to articulate a short list of business fundamentals that are essential to performance improvement, and then show how to apply them. Staying focused on the fundamentals takes enormous discipline. Whenever new leaders take over the reins of a business unit or indeed any kind of organization, they face a daunting list of tasks. They find they must spend time with other managers in the company, with key customers and suppliers, and with the company’s financiers. They must simultaneously look to the future and run the day-to-day business. If the company is public, the new general manager will feel the pressure of reporting quarterly results. If it’s a private company, a division of a corporation, or a nonprofit, the pressure will still be there—it will just come from investors, bosses, or donors, who will expect answers about cash flow and covenants and forecasts. Knowing what to do and in what sequence can become an overwhelming challenge, particularly since everything initially appears so urgent.
Today the pressure on managers is more intense than ever. The average price-to-earnings ratio on Wall Street and other global exchanges has generally been climbing for thirty years. Companies find that they must deliver increasing levels of growth and profitability or leave themselves vulnerable to takeover. Top executives facing this clamor for performance naturally expect quick results from everybody under them. Managers throughout the organization “have to perform or perish,” said CEO John A. Challenger of the outplacement firm Challenger, Gray & Christmas, which tracks managerial tenure. “If you don’t produce immediate results, you just don’t have much room to move.”
One sign of the increased pressure is that nobody gets much time to show what he or she can do. Between 1999 and 2006 the average tenure of departing chief executive officers in the United States declined from about ten years to just over eight. The distribution is bimodal: about 20 percent of CEOs have very long tenures (the average is twenty-three years for this segment), and about 40 percent last an average of less than two years. (In 2006, median tenure of departing CEOs was five and a half years, well below the average.) And it isn’t just CEOs who face this kind of time bind: the job tenure of chief financial officers, chief operating officers, chief marketing officers, and division general managers is even shorter than that of CEOs, and now stands at around three years, on average. BusinessWeek in early 2007 wrote about several high-level managers whose tenures lasted less than a year. “The brutal reality,” said the magazine, “is that executives have less time than ever to prove their worth.”
So there is the challenge: nearly every CEO and general manager today is expected by his or her stakeholders to achieve new breakthroughs in performance. Those who don’t make visible progress toward that goal within the first year or two may find themselves looking for another job. It is precisely because of this growing breakthrough imperative that general managers today need to get off to a fast start. They don’t have time for mistakes, or for going back and redoing what they should have done right in the first place.
Despite the intensity of these pressures, despite the high expectations and short time frames, a number of CEOs and general managers turn in truly exceptional results. Warren Knowlton is one example, but there are plenty of others. Three years after Bill McDermott came on board as the new CEO of SAP Americas and Asia Pacific Japan, the division had more than doubled its core business, adding seventeen points of share in the market for integrated business software. Under chief executive Idris Jala, Malaysia Airlines went from near-insolvency to profitability in less than a year. When Kathleen Ligocki took over Ford of Mexico, the division was expected to lose $89 million in the year she arrived. At the end of the year it had made $200 million—a turnaround of nearly $300 million compared to what had been projected. In the world of private equity, John Chidsey and his team reversed a long decline in Burger King’s fortunes, while Gerald (Jerry) Storch launched a promising turnaround at Toys “R” Us. Comparable achievements can be found in the nonprofit world. Wendy Kopp of Teach For America, for instance, created an ambitious growth plan that took the organization from 4,000 applicants a year to 18,000, and from 1,000 teachers to 5,000, while simultaneously putting it on a firm financial footing. Great managers in any organization “want to chart [its] destiny,” says Ligocki, “and somehow have the strength to perform under the pressure that it takes to do that.”
Accomplishments like these raise a whole series of questions. Can outstanding performance really be traced to one great manager and the team he or she assembles? If so, what makes those people successful? What do they know that others don’t? Can other managers learn their secrets?
Much has been written about what makes great leaders, and we agree that a successful general manager must have the attributes and skills of a great leader. But by the time people get to be general managers, they have necessarily exhibited leadership abilities and a talent for running organizations. They have beaten out dozens of competitors, risen through the ranks, taken on more and more responsibility. And yet many still don’t succeed. So leadership attributes, while necessary, are not sufficient to explain managers’ relative performance.
Similarly, much has been written about the attributes of “great” or “excellent” companies. But our concern is different. We wanted to study how general managers can achieve breakthrough results as they tackle the task of running any business. It may be easier if they find themselves in companies that regularly and consistently outperform the competition. But we want to help them meet the challenge even if they find themselves in average or underperforming organizations.