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Easy Money, Bad Deals, Poor Timing: The General Electric Debacle // Summary of ‘Lights Out’

December 14, 2020 By Nagesh Belludi Leave a Comment

The story arc of the unraveling of General Electric should be familiar to followers of business news over the last two decades. Wall Street Journal reporters Thomas Gryta and Ted Mann’s crisp Lights Out: Pride, Delusion, and the Fall of General Electric (2020) draws together the vital episodes in one impassive narrative. It’s brimming with lessons about the hazards of obsessively focusing on impressing Wall Street.

Decades of Bad Decisions and Careless Oversight Ruined GE

The fall of General Electric is really the story of how long-time CEO Jeff Immelt got saddled with the doomed legacy of the previous CEO, Jack Welch.

In 2001, Immelt took over a ship that was in trouble but wasn’t sinking yet. Unbeknownst to many analysts and investors—and overlooked by Jack Welch-buffs,—General Electric had been spoiled by greed, lack of transparency, and “lax oversight and buried risks.”

As a rising star, Immelt was part of Welch’s apparatus, perhaps to a smaller extent, at the GE Medical Systems division that Immelt ran previously. Early in his tenure as CEO, Immelt realized the scope of a disaster in the making. However, he didn’t act quickly and decidedly enough to fix the ill-fated ship’s rotten bits.

To focus on the stock’s negative return during Immelt’s 16 years as CEO and pit it against the sixtyfold return over Welch’s 20-year term is myopic. This argument is definitely understandable, yet it is scarcely convincing.

Welch’s good times couldn’t last forever, and Immelt had a tough act to follow. Yes, Welch was a forceful numbers-obsessed management mastermind who transformed GE into the world’s largest, most profitable, and best-admired company during his tenure as CEO. However, many of the mistakes of his corporate strategy manifested years later.

Welch would argue that he pushed his underlings to produce results, not fraud. But even if the CEO didn’t bend the rules himself, Welch cultivated an environment of pressure that incentivized people to do just that.

Welch was fond of saying, “You reinforce the behaviors that you reward. If you reward candor, you’ll get it.” Welch’s playbook rewarded—and got—the worst traits of modern capitalism. In so doing, he sowed the seeds of the company’s tragic decline.

Jack Welch’s Playbook Was Long-term Destructive to GE

Welch had a take-no-prisoners attitude to running GE. He set overly aggressive targets for his managers. He engaged in accounting shenanigans and consistently “managed” the numbers to maintain the myth of consistency and limitless growth. Behind the scenes, Welch’s machination was made possible by crafty-but-legal accounting practices (with auditor KPMG’s blessings, nonetheless,) mazes of financial deals, and murky structures. Welch even underfunded reinsurance reserves by $9.4 billion, helping pump up profits from 1997 to 2001.

Managing financial results wasn’t unique to GE, but the degree of GE’s reliance on the practice was. Management, with its customary swagger, treated the frenzy of last-minute tweaks and transactions each quarter as entirely natural. GE executives have acknowledged that they worked to make sure earnings were always growing in a nice smooth trajectory.

Immelt knew—or came to comprehend—of all this tomfoolery but didn’t break GE’s bad habits swiftly. Specifically, Immelt didn’t dismantle the GE Capital unit, the company’s most significant liability, and it continued to haunt GE. Under pressure, the complex conglomerate structure that Welch had held together during the good times of the ’80s and the ’90s started falling apart towards the end of his tenure.

The winds were shifting on Welch. GE’s share price had soared for years, making it, for a time, the world’s most valuable company. [During Welch’s] final eighteen months, the share price fell 33 percent. … [Bond-market guru Bill Gross commented,] “Institutional investors have wondered why a company can continue to produce 15 percent earnings growth year after year, quarter after quarter.”

An Addiction That Was So Hard to Break

Decades of Bad Decisions and Careless Oversight Ruined General Electric At the heart of General Electric’s fall is how GE Capital came to gain an outsized influence over the parent company and ruined it. Under Jack Welch, GE Capital’s business model of high leverage and “financialization” was resoundingly successful. Financial engineering, e.g., recognizing revenue from long-term service contracts for power-plant repairs and jet-engine maintenance, is not only suspect, but it cannot manufacture results beyond the short term.

GE Capital was the nonbank bank that was embedded in the company’s fabric. Everything that GE produced was leased, rented, or loaned by GE Capital. In other words, the industrial side was sustained by the rise of GE Capital. It was too interlinked to everything else, and that impeded Immelt’s “definancialization” plans.

In the ’90s, Welch embraced the notion that it’s a lot easier to make money in financial services than in industrial manufacturing. The Capital unit provided huge dividends (with enormous risks) while the industrial side was less profitable but more stable.

No wonder, then, that Welch made GE Capital a gargantuan part of GE. GE Capital became the vehicle for his headlong obsession with enhancing pure shareholder value.

Sadly, Welch bet the farm on the continued success of GE Capital. It misused GE’s high-quality credit rating and became a colossal lender and a major shadow bank. Welch’s bet went sour in 2008—GE Capital was the largest commercial paper issuer going into the financial crisis. It needed a $139 billion government bailout, and it has continued to drain the company’s bottom line ever since.

Jeff Immelt focused on pivoting GE towards core industrial businesses. He doubled GE’s investment in R&D. He sold off slower-growth, low-tech, and nonindustrial businesses, but not soon enough. He managed to keep revenues growing and delivered high margins until the financial crisis hit.

Cleaning Up the Mess Left by Welch

Even as Immelt went about restructuring the company around industrial products, he continued to rely on GE Capital “for smoothing out rough quarters and delivering easy profits.” It was a hard addiction to break.

Lights Out acknowledges that Immelt was “playing with a tough hand,” and he knew that “his success would be attributed to his predecessor but his failure would be seen as all his own doing.”

The authors reveal plenty of leadership blind spots. Immelt was a genial and assertive salesperson, and he didn’t like hearing bad news. He didn’t like delivering bad news either.

CEOs are expected to be optimistic, but Immelt was unfailingly overoptimistic. Perhaps his overconfidence was a manifest outcome of the company’s cultural dynamics. Sadly, when a company is doing well, such CEO attributes as optimism, audacity, and foresight that Immelt’s leadership personified are heralded as brilliant, but when things go wrong, they’re the first to get the blame. Results are all that matters.

Some board members … had … a poor impression of Immelt’s deal-making skills. The knock on Immelt was that he chased trends, arrived too late, and paid handsomely. One rival CEO joked that he was “fad surfing.”

At General Electric, Jeff Immelt Made Bad Decisions and Was Slow to Make Changes

Immelt Made Bad Decisions and Was Slow to Make Changes

Immelt spent over $100 billion on ill-timed share buybacks to shore up earnings-per-share and so the stock price. He had a history of overpaying for acquisitions. He was reluctant to back away from deals that he was dead set on, even when the deal’s prospects became dubious during the parleying.

Immelt tended to start negotiations too high, sometimes to the surprise of others involved in the deal, leaving little room for negotiation. It wasn’t uncommon for the board to approve one of Immelt’s deals, only to have him ask for approval to pay more in order to make the deal work. In some ways, this tendency simply reflected Immelt’s experience as a salesman. He’d always needed to close deals, and for a company like GE, paying a little more didn’t seem to cause any concern.

No decision could be more illustrative of Immelt’s fateful deal-making than the one for Alstom, the French power generating equipment company. Immelt set his reputation on that deal because GE Power would be “the centerpiece of his new GE.” Immelt didn’t walk out on the deal even after regulators forced General Electric to divest Alstom’s lucrative service business and take on 30,000 high-cost employees in Europe.

Worst of all, the deal was spectacularly mistimed. With the Alstom purchase, Immelt doubled down on fossil-fuel-fired turbines just as renewables were becoming more cost-competitive. Demand for GE Power’s products collapsed in next to no time, and that unit’s profit plunged 45% in 2017. The whole Alstom transaction turned out to be an out-and-out disaster. In 2018, General Electric took a $22 billion goodwill impairment charge for the Alstom acquisition.

Hope and Optimism Could Take Immelt Only So Far

It’s both easy and unfair to comment on what GE should have done. Immelt’s prospects were seriously encumbered by the September 11 attacks, post-Enron accounting rules, the 2008 financial credit crisis, and a substantial recession that hit the energy industry.

The world in which Jeff Immelt had thought he would be leading GE had been turned upside down. The recession and the uncertainty that followed the terrorist attacks had dampened the global growth on which GE’s industrial businesses depended. And changes to accounting rules in the wake of the Enron scandal, by requiring that the company now account for the vast financial holdings on its balance sheet at GE Capital, had eliminated an easy and reliable source of paper profits to smooth over rough periods.

Lights Out explains how, during the last five years of his tenure, Immelt’s misfortunes piled on. GE Healthcare took a pause (it’s innovative, high-profit machines had become increasingly commoditized.) The GE Renewables business rarely turned a profit. The GE Transportation unit’s sales stagnated. GE Power built an extensive inventory hoping for a return in demand for its large, expensive machines. The merger of GE Oil and Gas with Baker Hughes turned out to be untimely too.

For many investors, GE had lost its mojo. Its lackluster performance, fuzzy financials, and unknown risk just didn’t fit with a lot of investment portfolios.

Leadership Mismanagement, Self-Dealing, Collusion

The deplorable collapse of General Electric, and GE Capital, in particular, was fostered by the board’s abysmal stewardship.

GE’s board was dysfunctional. It comprised too many directors who owed their cushy positions to Welch and Immelt and merely rubber-stamped their strategic actions. As chairman of the board, Immelt promptly cast out Welch-appointed directors who objected to his plans.

As they’d done under Welch, the board usually tended to approve Immelt’s recommendations and follow his lead. Some felt that Immelt manipulated the board, and it was whispered that members were chosen and educated to see the company through his visionary eyes. There was concern that the board didn’t entirely understand how GE worked, and that Immelt was just fine with that. Like many CEOs who are also their company’s chairman, he made sure that his board was aligned with him.

Just last week, GE agreed to a $200 million fine to settle a Securities and Exchange Commission probe into feel-good accounting at its Power and Insurance units.

General Electric Recent CEOs: Jack Welch, Jeff Immelt, John Flannery, Larry Culp

Too Steeped in the GE Culture to Effect a Major Transformation

Immelt was replaced by John Flannery, a finance specialist. Flannery had run the business development team when GE Power bought Alstom. He wasn’t likely to kick off any dramatic changes in GE’s business strategy. His proposals for GE’s transformation were consistent with Immelt’s strategy.

Flannery tried to stop GE’s hemorrhaging of money but wasn’t quick enough either. He showed reluctance—caution perhaps—to take risky and complicated actions that could have been costly or even impossible to reverse.

If Immelt was known for his vaulting optimism, Flannery soon became known for his indecision and endless analysis. Few decisions, even major ones, were final. A critical strategic move, like the separation of a major division, could be made, only to be reassessed at any time. Flannery’s style was quickly grating on top executives who worked with him.

The board got insecure quickly because of widespread public criticism that it had waited too long to remove Immelt. “After sixteen years of Immelt, Flannery thought that he had more time to turn the ship around, but when he looked for support from the board, there was none there.” Fourteen months into his term, Flannery was forced out.

For the first time in its 126-year history, GE, which prided itself as a talent factory, handed the leadership baton to an “outsider” to bring a fresh perspective.

New CEO Lawrence “Larry” Culp is generally admired for his stellar record of accomplishment at Danaher, a smaller industrial conglomerate. “Culp had more experience, and he also had no emotional attachment to GE.” Culp had joined GE’s board six months before and had started questioning the wisdom he’d received from Flannery and his team.

Having an outsider take charge of a storied company marks how much change the board desired. GE may not reclaim its once-celebrated footprint. But it’ll continue to be one of the great American business stories.

Jack Welch’s GE: Everything Worked Until It Didn’t

Recommendation: Must-Read Thomas Gryta and Ted Mann’s excellent Lights Out: Pride, Delusion, and the Fall of General Electric. It’s a great reminder that even America’s most iconic companies—and the world’s leading businesses—can go off the rails if things go wrong.

It wasn’t Immelt’s fault that the entire oil sector had turned south. But he was responsible for GE investors being so openly exposed to the collapse. … He had spent sixteen years at the top and, regardless of what Welch had left for him; he’d had plenty of time to fix it.

Lights Out is a revealing, reasonable, and accessible narrative of how a thriving company was humbled by sheer misfortune and poor leadership.

Jack Welch’s razzle-dazzle capitalism party could last only so long.

The Checkered Legacy of Jack Welch, Captain of Wall Street-Oriented Capitalism

March 16, 2020 By Nagesh Belludi Leave a Comment

The legendary Jack Welch, the former Chairman and CEO of General Electric (GE) 1981–2001, died two weeks ago.

Welch was the most prominent business leader of the post-war era. Under his leadership, GE metamorphosed into one of the world’s largest, most profitable, and best-admired companies. He expanded GE’s market capitalization from $12 billion to $410 billion on the back of the steady economic expansion of the 1990s. Welch also became the poster child for “new globalization,” and GE led American companies in gaining access to new markets and lower-cost labor. (Note: GE Medical Systems was one of my first consulting clients out of college.)

For nearly three decades, until his star faded away in about 2008, Welch was the talk of corporate America. He was lionized for streamlining the industrial giant’s top-heavy bureaucracy and empowering managers to spot problems and make changes promptly.

Welch became the font of all sorts of pearls of management wisdom. He was the exemplar after whom American managers patterned themselves—“What Would Jack Do?” became a familiar business mantra. Companies borrowed six-sigma, rank-and-yank, stretch goals, and his other managerial innovations. In 1999, Fortune magazine designated Welch as the “manager of the century.”

Jack Welch Legacy #1: The Messy and Embarrassing $180 Million-Divorce

In 2002, Welch’s reputation took a first big hit when his wife Jane Welch exposed his extramarital affair with Harvard Business Review editor Suzy Wetlufer (later his third wife.) The affair started when she was interviewing him for her publication. Jane, a sharp corporate lawyer whom Jack had extolled as “the perfect partner” in part for taking up golf and playing with his business associates, had even confronted Wetlufer over the phone and cast doubt on her journalistic objectivity.

Welch’s private life became fodder for gossip, and he became a regular feature in New York’s supermarket tabloids. The proceedings of the divorce divulged the extravagant pension benefits that Welch had gotten for himself. Among other lavish allowances, he had kept a company plane and an apartment in New York’s Central Park West—just these cost GE some $1.7 million a year. GE would supply Welch with fresh flowers, wine, dry cleaning, and even vitamins. After a public outcry, Welch was forced to forfeit many of these retirement benefits.

Jack Welch Legacy #2: The Aura Deflated

Welch transformed GE into a super-conglomerate and a Wall Street-darling during his 21-year tenure as CEO. Sadly, Welch’s business model became overly complicated, and many of the mistakes of his strategic deals manifested years later. The most consequential case in point was GE Capital, the finance division that delivered the parent company a near-fatal blow during the 2008 financial crisis. Welch had overconfidently let GE Capital grow unchecked during his tenure, and its easy profits had masked problems at GE’s core industrial divisions.

After a much-publicized “Super Bowl of CEO succession planning,” Welch bequeathed his successor Jeffrey Immelt with a puffed-up corporation. Welch retired in September 2001, and the “house that Jack built” started to crumble right away in the wake of the 9/11 attacks. After failing to curb GE’s sagging profits, Immelt was fired in 2017 following his ill-timed deals for GE’s power division.

All told, Welch’s undoing was his exceptional obsession with shareholder value. He made countless deals—many unrelated to GE’s traditional core competencies—and championed corporate efficiency to the detriment of initiatives that may have sustained GE’s long-term competitiveness.

GE is now a derelict shadow of its former self. Its market capitalization has fallen from a peak of $600 billion in 2000 to $82 billion today.

Jack Welch Legacy #3: The “GE Man” Turned out a Dud

Welch’s other legacy was going to be the “GE Man.” Trained at the knee of Welch, GE’s vast managerial talent was commonly recognized as one of the world’s best. Its leadership development program, headquartered at the famed Leadership Center in Crotonville, New York, was the best training ground for future executives. In April 2005, Fortune magazine noted,

When a company needs a loan, it goes to a bank. When a company needs a CEO, it goes to General Electric, which mints business leaders the way West Point mints generals. … One headhunter estimates the company harbors another dozen execs of FORTUNE 500 caliber.

Alas, Welch’s protégés were mostly disappointments. Much of the long line of managers whom he had mentored at GE has failed to achieve runaway success in running big firms—3M, Boeing, Chrysler, Home Depot, Honeywell, Pentair, ABB, and, undeniably, GE itself.

John Flannery, another “GE Man” who succeeded Immelt, was fired after just 14 months. Flannery was replaced by Larry Culp, the first outsider to run GE in the company’s 126-year history!

Jack Welch Legacy #4: “Jack’s Rules” for Management Success

Welch and his management style earned much criticism for insensitiveness and abrasiveness. Yet, some of his leadership techniques are worth emulating.

Nurture a “boundaryless” culture. Cultivate an open organization by removing the barriers that inhibit people and organizations working together. Foster an informal culture that expedites the free flow of ideas, people, and decisions.
Involve everybody to enhance productivity. Welch instituted a brainstorming process called “Work-Out” that enabled frontline employees and workers to propose improvement ideas to the bosses who are required to take action “on the spot.”
Empower people. Delegate and get out of the way. “We now know where productivity-real and limitless productivity-comes from. It comes from challenged, empowered, excited, rewarded teams of people.”
Embrace meritocracy. Let ideas and intellect rule over hierarchy and tradition. “The quality of the idea is determined by the idea, and not the stripes on your shoulder.”
Eliminate bureaucracy. “Anything that you can do to simplify, remove complexity and formality, and make the organization more responsive and agile, will reduce bureaucracy.” Welch once called bureaucracy “the Dracula of institutional behavior,” since red tape and rules and regulations tend to rise from the dead every few years.
Simplify. Drop unnecessary work. Work with colleagues to streamline decision-making. “The way to harness the power of these people is not to protect them … but to turn them loose, and get the management layers off their backs, the bureaucratic shackles off their feet and the functional barriers out of their way.”
Focus on continuous improvement. “Don’t sit still. Anybody sitting still, you can guarantee they’re going to get their legs knocked out from under them.”
Act with speed. “Speed is everything. It is the indispensable ingredient in competitiveness.”
Get good ideas from everywhere. Study competitors. Abandon the “not invented here” mindset and embrace best practices that are “proudly found elsewhere.”

Welch’s playbook has been studied in dozens of management books, including the three best-sellers he wrote: Jack: Straight from the Gut (2001,) Winning (2005; with wife Suzy Welch,) and The Real-Life MBA (2015; also with Suzy.)

Jack Welch: Captain of Capitalism Whose Star Faded Away

Welch’s most significant legacy will be the Wall Street-orientation of business corporations. He promoted an obsessive focus on creating shareholder value, and in so doing, helped incite the current fixation on quarterly earnings. That, and the burn out of the General Electric that Welch left behind, is testimony to the potential after-effects of sacrificing the long-term well-being of corporations to meet short-term targets.

Make Friends Now with the People You’ll Need Later

June 10, 2019 By Nagesh Belludi Leave a Comment

Addison Schonland of the commercial aerospace consulting firm AirInsight describes how the 737 MAX hullabaloos have exposed shortfalls in Boeing’s crisis communications and public relations:

The MAX crisis demonstrated to everyone in aerospace media how poorly Boeing was prepared for the recent crashes. More importantly, Boeing was unprepared for the onslaught of information that started to flow freely after the crashes. … In the absence of communications from Boeing, subject matter experts, whether highly qualified or not, become media stars overnight. An information vacuum cannot exist in today’s 24-hour news cycle and the Internet. The demand for information is great, and somebody will fill the vacuum.

The fact that Boeing had to clam up about the crashes for legal reasons is well understood. But the lack of transparency about design decisions, how the company made trade-off choices when creating the MAX, and issues related to the certification process left Boeing exposed.

Boeing Crisis Management and Public Relations Shortfalls: Leadership Lessons from the 737 Max Disaster Rival Airbus has traditionally reached out and established relationships with the aerospace media:

Airbus spends a lot of money once per year inviting the media to an event it calls “Innovation Days”. A week ago, at the most recent event, there were 130 media members from almost every country. Airbus briefed the media on both their products and plans …. Airbus provided access to the key leaders so attendees could speak with them and ask questions, with unrestricted Q&As with C-Suite executives who stayed for a substantial period of time.

Airbus clearly has an ROI. From the perspective of an attendee, and having attended several, is that the media comes away from the event informed. But more importantly, attendees feel they understand what Airbus is doing.

Airbus, through these events, communicates with the trade and news media. This communication provides attendees with, de minimis, a sympathetic view. If Airbus had suffered the two crashes, we believe the press would not have attacked the company the same way it has Boeing.

Schonland highlights how such a web of relationships becomes indispensable during a crisis, whether the crisis is self-inflicted or caused by external events:

By not being more open Boeing has helped create a gap between itself and much of the media. … Boeing has lost any control of the [737 MAX disaster] story. Whatever Boeing does provide now is seen as biased and self-serving—there is little goodwill from the media. When [Boeing CEO] Dennis Muilenburg goes on television for the rare interview, he does not come across as well as he might. Why is that? Because everything he says is now filtered through a non-sympathetic, hyper-critical lens.

Boeing needs to invest in the small army of trade and press media that cover the industry—not just a handful of selectees. This small army provides crucial perspective en masse during a crisis and fills the vacuum with educated views and perspective.

Businesses that fail to develop such goodwill or simply lose their way with regard to public relations become vulnerable to condemnation and backlash. This can result in a wide-ranging loss of credibility, as has transpired with Boeing and its leadership.

Idea for Impact: Invest in formal and informal relationships with key external constituents who can help your business—and personal—interests. The Guanxi tradition in the Chinese culture has it just about right in placing a huge emphasis on building social capital through relationships. From Wikipedia,

At its most basic, guanxi describes a personal connection between two people in which one is able to prevail upon another to perform a favor or service, or be prevailed upon, that is, one’s standing with another. … Guanxi can also be used to describe a network of contacts, which an individual can call upon when something needs to be done, and through which he or she can exert influence on behalf of another.

3G Capital and the Fringes of Cost Management // Summary of Bob Fifer’s ‘How to Double Your Profits in 6 Months or Less’

April 24, 2019 By Nagesh Belludi Leave a Comment

3G Capital’s Playbook: Look at EVERYTHING—There are No Sacred Cows in Cost-Cutting

Brazilian private equity firm 3G Capital's Playbook for Cost-Cutting: Zero-based Budgeting During the past decade, the achievements of the Brazil-based private equity group 3G Capital have drawn attention to the aggressive cost cutting methods outlined in management consultant Bob Fifer’s How to Double Your Profits in 6 Months or Less (1995.)

3G has raised the profitability of its acquired businesses by sacking thousands of workers, shutting down factories, simplifying operations—even using cheaper ingredients. In Israel, the 3G-controlled Heinz was forced to rebrand its iconic ketchup as “tomato seasoning” after a cost cutting-inspired shift to GMO-derived constituents. 3G’s playbook, however, encourages increasing budgets for strategically important business functions—for instance, Kraft Heinz has increasingly expanded spending on advertising and product improvement.

At every 3G-run company—Anheuser-Busch InBev, SABMiller, Heinz, Kraft Foods, Burger King, Tim Hortons, Popeyes,—the “zero-based budgeting” accounting tool forces managers to justify all claims on their organizations’ financial resources. As I noted in a previous article, this method forces managers to justify every line item on a team’s budget as if it were new a claim for an entirely new project, instead of merely being carried over from the prior year:

Zero-base budgeting advocates say that it detects inflated budgets and unearths cost savings by focusing on priorities rather than simply relying on the precedent. Managers secure a tighter focus on operations by justifying each line-item in their budgets, thereby reducing the money they allocate to the lowest level possible. Managers can also contrast competing claims on their ever-scarce financial resources and therefore shift funds to more impactful projects.

How to Double Your Profits has become a must-read for all managers affected by any 3G deal. This obscure book, purportedly written in just 15 hours, was also a favorite of such business luminaries as Sanford Weill (of Citigroup,) Bob Lipp (Travelers Insurance,) and Jack Welch (General Electric.)

3G’s methods have upended an entire industry known for characteristically lower profit margins. The specter of being acquired by 3G has forced Unilever, General Mills, J.M. Smucker, Nestle, Pilgrim’s Pride, Phillip Morris, and other consumer staples companies to implement sweeping cost cutting programs.

Every Expense is Evaluated to Be Cutback Unless It Contributes Directly to the Bottom Line

How to Double Your Profits obsesses about cutting costs by any and all means possible. Every corporate resource is a cost-center that must be pared down to the bone—unless it’s a strategic function. When it comes to marketing, for example, the author recommends outspending the competition in both good and bad times.

Seventy-eight brief chapters (“steps”) deal with every possible drain on time, money, and people in the modern corporation: reducing layers of management, cutting the amount of time managers spend in meetings, shrinking corporate expense accounts, eliminating first-class air tickets, getting rid of pointless reports, and so on.

Focus on profits. “We’re here to make a profit. In fact, we’re here to make as much profit as we possibly can. Profit is the most accurate, most all-encompassing measure of whether we truly are the best. … Profits benefit all of us … when the profits slow down, we all suffer.”
Run a true meritocracy. Set expectations about how performance will be measured and what rewards will accrue to what levels of performance. “Within any level or group of employees, there must be wide disparities in salary, tied to demonstrable differences in performance and contribution to the bottom line.”
Avoid paralysis by analysis, make decisions faster. “Superb managers are instinctual, making the right decision most of the time based on limited data. The quantification that less-skilled managers insist upon is in fact illusory: They wind up making decisions based upon that which can be quantified rather than that which is important. Most of the critical variables in any business decision can only be judged and evaluated based on experience and instinct, not quantified.”

Much of the advice is effective, if predictable, but some suggestions are clearly crooked:

Step 24 / Declare Freezes and Cuts: “Send a letter declaring an across-the board 3% reduction to suppliers. Make sure the letter is from someone high up and intimidating….(after getting the bill) deduct 3% from the bill and say, ‘Didn’t you read my CEO’s letter? Are you trying to get me fired? “
Step 37 / Accounts Payable: “Never pay a bill until the supplier asks for it at least twice. You’ll be surprised: A few suppliers will take as much as two years before they finally get around to asking for their money.”

But Then Again, There is only so Much Fat to Cut out: The Crisis at Kraft Heinz

When discharged without due forethought, elements of Fifer’s cost-cutting mindset could lead to corporate myopia and an utter disregard for such intangible assets as human capital, brand value, and corporate philanthropy.

Certainly, in businesses with substantial cost inefficiencies and bloat, cost-cutting can produce considerable gains in profits, but even with these firms, gains will be time-limited, because there is only so much fat to cut out.

Cost Cutting and The Crisis at Kraft Heinz Aggressive cost-cutting has been blamed for the recent travails at Kraft Heinz. Over the last three years, Kraft Heinz’s fading return on invested capital and decreasing sales point toward a leadership team that has been giving precedence to near-term cash flows to the detriment of its long-term competitive position (“moat.”)

With the expansion of cut-price private-label brands, consumers are no longer remaining devoted to brands like they once did. Kraft Heinz’s roster of products is less appealing to customers than it used to be, and cost cutting hasn’t helped—Kraft Heinz has invested just 2%–3% of its sales on brand spending, as against 7%–9% at comparable consumer goods companies.

Recommendation: Fast Read ‘How to Double Your Profits’

Bob Fifer’s How to Double Your Profits in 6 Months or Less, even if out-of-date and brash in style, could help drive systematic cost-consciousness in large firms that have bloated cost structures in the hypercompetitive business environments.

Entrepreneurs, managers, and employees will find in How to Double Your Profits many ideas for establishing a culture where every employee feels liable for adding value to the organization’s bottom line. The key takeaway lessons are:

Determine which costs are strategic (costs that bring in business and improve the bottom line) and over-invest in those processes as long as they are effective, i.e. producing better results. “Place the burden of proof on justifying costs, not on eliminating them.”
Avoid over-quantifying and over-analyzing processes and results, particularly when the extra precision will not have any bearing on business decision-making.
Consider business processes as a means to an end—a focus on business results should trump a focus on business processes. In other words, focus single-mindedly on business results.

Complement with Francisco Souza Homem de Mello’s The 3G Way (2014) and Cristiane Correa’s Dream Big (2014)—informative books on 3G written by Brazilian business journalists who’ve covered 3G and its founders over the years. Warren Buffett, who regularly teams up with 3G Capital, recommends these books.

No Boss Likes a Surprise—Good or Bad

January 16, 2018 By Nagesh Belludi Leave a Comment

Never surprise the boss, particularly on potentially volatile issues that could affect your project’s timeline, budget, or performance.

Even good surprises can backfire. Many an example exists of employees bringing the boss what they believe were good news, only to realize later that that the surprises weren’t so good after all.

Consider the following example of a Boeing test pilot pulling off a shocking stunt on a prototype aircraft, much to the exasperation of his company’s leadership.

A Reckless Stunt That Created a Buzz

Boeing 707 Dash 80 prototype The Boeing 707 was America’s first passenger jet aircraft. Prior to the 707, which entered service in 1958, air travel was mostly limited to the affluent—and even they were hesitant about air travel’s safety. The 707’s in-service safety record and its economic characteristics quickly made travel more accessible and dependable. The 707 ushered in the Jet Age.

But for Boeing, today’s leading aircraft manufacturer, developing the 707 was a big gamble. The 707 had no orders, and Boeing embarked on its development entirely on the wager of its prospective commercial success. When the aircraft’s design commenced in 1951, Boeing’s estimated development costs were $16 million. That was roughly 20% of the company’s value, and more than twice its yearly profits—nearly all of which originated from military contracts.

The Demonstration That Was Far from What the Boss Had Authorized

Boeing built its first and only 707 prototype aircraft in 1955. The company’s leadership decided to show off the aircraft at Seattle’s Seafare Hydroplane races on August 7, 1955.

The display plan was to have Boeing’s Chief Test Pilot, Alvin “Tex” Johnston, do one low pass over the racecourse so that the airline executives, industry pundits, and government officials who attended the high-profile event could witness Boeing’s new undertaking.

Johnston had other plans. In his mind, the audience needed to be sold on the plane’s performance and safety. Seized by the impulse to flaunt the agility of the 707, Johnston had a little more in mind than just an unpretentious flyby.

During the in-air demonstration (see YouTube video,) with the aircraft soaring over Seattle’s Lake Washington, Johnston suddenly pulled back on the controls, and the plane started to climb at a speed of 400 miles per hour. Then, he did a complete 360-degree roll and flew the plane upside down for a moment. As the crowd watched in shock and amazement, Johnston did a second barrel role.

Overconfident Employee, Furious Boss

Alvin Melvin (Tex) Johnston, Boeing Test Pilot In the startled crowd was Boeing’s legendary president William “Bill” Allen. Allen, who had authorized no more than a simple flyby, thought that Johnston’s first barrel role was a mistake. When Allen witnessed the second barrel roll, he feared that either Johnston had lost his mind, or the aircraft was in grave trouble.

According to Robert J. Sterling’s Legend & Legacy: The Story of Boeing and Its People (1991,) Allen summoned Johnston into his office the next day. Allen demanded an explanation and inquired why Johnston had foolishly risked the company’s only prototype.

Pleased with his successful accomplishment, Johnston offered a simple explanation, “I was selling airplanes.” Johnston explained that he had previously tested barrel rolls on the prototype, and it was a safe maneuver. He hadn’t risked the aircraft at all.

Allen reproached Johnston and told him that he appreciated the efforts, but Johnston was never to do anything that had not been approved previously.

Never Let Your Boss Be Surprised by Bad News

If there is only one thing worse than delivering bad news, it’s not delivering bad news as soon as you know that some trouble is brewing.

No boss wants to hear about any looming issue from some third party—especially if it could be worrying—and put her on the spot with her peers and superiors.

When you fail to report any bad news, you are leaving your boss exposed to being blindsided with a potential problem, and the perception that your boss doesn’t have control of her organization.

Idea for Impact: A Good Employee is Predictably Excellent

The surest way to delight your boss is by setting the right expectations, discussing and coordinating on a plan of action, and delivering on her expectations of your performance.

When the status of important any project changes, make it a priority to bring your boss and other affected constituents up to date. If, right from the beginning, you’ve made the true picture clear, your boss may be less surprised with the bad and the good.

Never surprise your boss—just keep her clued-in on a regular basis.

A Sense of Urgency

December 18, 2017 By Nagesh Belludi Leave a Comment

The most successful managers I know are highly attentive of their colleagues’ sense of urgency and incessantly adapt to them.

In his excellent Steve Jobs biography, Walter Isaacson evokes Apple CEO (and operations wizard) Tim Cook’s responsiveness and a sense of urgency:

At a meeting early in his tenure, Cook was told of a problem with one of Apple’s Chinese suppliers. “This is really bad,” he said. “Someone should be in China driving this.” Thirty minutes later he looked at an operations executive sitting at the table and unemotionally asked, “Why are you still here?” The executive stood up, drove directly to the San Francisco airport, and bought a ticket to China. He became one of Cook’s top deputies.

Idea for Impact: Bosses and customers often respond more positively to your focus on creating a sense of urgency before emerging problems erupt in a crisis.

Learning from the World’s Best Learning Organization // Book Summary of ‘The Toyota Way’

November 27, 2017 By Nagesh Belludi Leave a Comment

Toyota is a Paragon of Operational Excellence

Toyota is the World’s Most Benchmarked Company, and for Good Reason

Toyota’s cars are reputed for their reliability, initial quality, and long-term durability. It is the pioneer of modern, mass-production techniques and a paragon of operational excellence. Even if its reputation has taken a beating in the last few years because of the uncontrolled acceleration crisis and major product recalls, Toyota’s long-term standing as the epitome of quality production is undeniable.

Toyota measures and improves everything—even the noise that doors make when they open and close. As cars roll off assembly lines, they go through a final inspection station staffed by astute visual and tactile inspectors. If they spot even a simple paint defect, they don’t just quietly fix the problem merely by touching up the paint to satisfy the customer or their plant manager. They seek out systemic deficiencies that may have contributed to the problem, and may hint at deeper troubles with their processes.

World-Class Processes, World-Class Quality

As Jeffrey K. Liker explains in his excellent The Toyota Way, the genius of Toyota lies in the Japanese expression ‘jojo‘: it has gradually and steadily institutionalized common-sense principles for waste reduction (‘muda, mura, muri‘) and continuous improvement (‘kaizen.’) Liker, a professor of industrial engineering at the University of Michigan (my alma mater) has studied the Toyota culture for decades and has written six other books about learning from Toyota.

Liker establishes the context of The Toyota Way with a concise history of Toyota Motor (and the original Toyoda Textile Machinery business) and the tone set by Toyota founders Sakichi and Kiichiro Toyoda. Quality pioneers such as Taiichi Ohno, W. Edwards Deming, and Joseph Juran instituted groundbreaking philosophies that shifted Toyota’s organizational attention from managing resource efficiencies in isolation to managing the flow of value generated by the Toyota Production System (TPS.)

“No Problem is the Problem:” How Toyota Continuously Improves the Way it Works

Liker devotes a bulk of his book to the distinct elements of Toyota’s foundational principles: continuous flow, minimal inventory, avoidance of overproduction, balanced workload, standardized tasks, visual control, etc. He drills down to the underlying principles and behaviors of the Toyota culture: respect people, observe problems at the source, decide slowly but implement swiftly, and practice relentless appraisals of the status quo. Liker states, “Toyota’s success derives from balancing the role of people in an organizational culture that expects and values their continuous improvements, with a technical system focused on high-value-added flow.”

Toyota mindset and the organizational discipline

Companies that have tried to emulate Toyota have struggled not with understanding its management tools but with putting into practice the mindset and the organizational discipline that permeates everything Toyota does. “Understanding Toyota’s success and quality improvement systems does not automatically mean you can transform a company with a different culture and circumstances.”

Book Recommendation: Read The Toyota Way. As Liker observes, “Toyota is process oriented and consciously and deliberately invests long term in systems of people, technology and processes that work together to achieve high customer value.” The Toyota Way is comprehensive and well organized, if tedious in certain parts. It can impart many practical pointers to help improve the operational efficiency of one’s organization. Peruse it.

Postscript: I’ve taken many tours of Toyota’s Georgetown, Kentucky, factories and a few associated suppliers—once as part of a lean manufacturing study tour organized by Liker’s research group and other times privately. I strongly recommend them for observing Toyota’s matchless culture in action on the production floor. I also recommend the Toyota Commemorative Museum in Nagoya for a history of Toyoda Textile Machinery and Toyota Motor and their management principles.

Don’t Lead a Dysfunctional Team

November 22, 2017 By Nagesh Belludi Leave a Comment

The difference between functional and dysfunctional teams often boils down to effective team leadership. If you’ve been asked to lead a team, you’ll get more from your team members if you know what’s expected of the team, and manage your roles and responsibilities.

Define the charter. Find out what your customers want. Find out how much latitude your team has—decision-making, reporting procedure, access to resources and information. Make sure there’s organizational support for these matters.
Build on strengths. If team members are selected for you, determine what each person can contribute to the team’s effort. Ask members to identify their strengths.
Set ground rules. Discuss how the team will operate. Be clear about performance expectations. If necessary, write down the rules agreed upon by team members.
Develop a mission and goals. Get your team talking about what needs to get done, by whom, and when.
“Herd the sheep.” Part of your job is to be a sheepdog. Keep people together and herd them toward goals.
Break up conflicts. Disagreements are fine, even healthy, but outright hostility or anger is counterproductive. Stop the discussion, clarify positions, and try to find areas of agreement.
Avoid groupthink. Don’t compromise too much for the sake of consensus, harmony, and “esprit de corps.” Don’t settle on the lowest-common-denominator decision upon which everybody agrees.
Build bridges. Keep your sponsor, your manager, and each team member’s boss informed of the progress of the team’s assignment.
Be visible. Any crisis calls for constant, candid communication. Knowing how to step up your communications efforts to the right levels during confusion is a powerful tool in managing a crisis.
Captain the ship. You’re responsible for your team’s every outcome—good or bad. You are wholly accountable for everything that happens under your authority. Never pass the blame should things go wrong.
Make the work fun. Give your team lots of recognition. Celebrate the team’s accomplishments.
Establish freedom and autonomy. Empower team members to innovate and make decisions. Encourage all ideas and make sure that they are respected, no matter how strange they may sound. Micromanage only when you must.
Assess performance. Periodically, ask the team to rate its performance. Resolve any problems as quickly as possible.
Get stuff done. Don’t lose sight of your goals and your mission. The only thing that matters is the relevant results.

Office Chitchat Isn’t Necessarily a Time Waster

October 4, 2017 By Nagesh Belludi Leave a Comment

When Employees are Happy, They Work Better

Managers who disapprove and clamp down on impromptu encounters that people have at their desks, in the hallways, by the elevators, in the lunchroom, or by the water coolers can create a work environment that’s unpleasant, even repressive.

If truth be told, what may seems like idle chitchat actually forges links between people and encourages a culture of openness that can help people work toward common goals.

Informal, spontaneous conversations between coworkers, especially between colleagues from different departments, will not only give people a chance to know each other better, but also create a feeling of collaboration. The camaraderie that grows from employees sharing a little fun can go a long way toward fostering a feeling that they’re part of a team.

Chitchat is About Building Relationships

During those inconsequential “idle moments” of office conversations, important information is being exchanged. You’re learning much about others and offering details about yourself.

Whom can you trust? Who possesses strong convictions? Who has a broad experience or in-depth knowledge?
Who is a stimulating brainstormer? Who has the wherewithal for workarounds to problems?
Who can open doors for you? Who can facilitate otherwise hard-to-get connections?
Who can influence the leadership decisions? Who can evangelize your project to the right people? Who can bend the leadership’s ear? Who can be your cheerleader?
Who can lend a consoling ear in moments of problems or crisis? Who sees the bright side of problems?
Who can help you with questions on software, help you decide health insurance plans, or fix the printer?

Casual Conversations are About Networking and Leaving Positive Impressions

Small talk and casual conversations are an important element of collegial workplaces. People like talking about themselves, so if you can remember a nugget of information from the last time you met (kids, pets, and travels are great topics) bring it up.

To be respectful of others’ time, remember this two-minute rule: unless you’re discussing a topic of some importance, try to wrap up your small talk and casual chats in two minutes. Pay attention to your listener’s non-verbal cues and adjust the extent of your conversation. You can always arrange to convene later, “I’d love to hear more, but I’m in a rush. Why don’t I call you afterhours? How about we meet up for coffee this weekend?”

Nevertheless, don’t let chatter go too far and negatively impact your productivity or those of others. If you’re considered as too chatty, others may to resent bumping into you. If you tend to talk too much about yourself, you’ll be judged self-absorbed and interpersonally clueless.

Likeability is Important in How You Will Be Perceived in Your Workplace

Cordiality is a significant persuasive technique because people are much more likely to feel warmly towards those they like. They’ll do things for you if you earnestly show interest in them, chat with them on a regular basis, and make them feel good about themselves.

Colleagues who don’t chat can come across as arrogant or abrupt. Highly competent but unpopular professionals don’t thrive as well as their moderately competent, but popular counterparts.

Small Talk is a Critical Tool for Creating a Personal Bond with Your Coworkers

Even though an office is primarily a place of business, chatting about non-work topics and establishing rapport with coworkers is important. People who know and like each other tend to have each other’s backs and help out when necessary.

Even if, eventually, you’ll be accepted or rejected based on the more tangible aspects of your work, the fact of the matter is that these interpersonal impressions matter a great deal along the way and can even shape how people judge your more actual work.

Idea for Impact: Balance your dedication to your workload with a cooperative nature, you will gain needed allies to get things done and to help your career progression in the company.

How to Manage Smart, Powerful Leaders // Book Summary of Jeswald Salacuse’s ‘Leading Leaders’

August 22, 2017 By Nagesh Belludi Leave a Comment

How to Manage Smart, Powerful Leaders: Book Review of Jeswald Salacuse's 'Leading Leaders'

The Most Valuable People are Often the Most Difficult to Manage

As you climb the career ladder, you will find yourself working increasingly with many other powerful leaders—both inside and outside your organization—who hold the key to your success. Often, you may share responsibility and control with a variety of leaders over whom you may lack authority and influence. Compared to others you’ve worked with in the past, many of these leaders will be more talented, ambitious, competitive, accomplished, assertive, controlling, and ego-centric.

According to by Jeswald W. Salacuse’s Leading Leaders (2005), driving change when you lack influence over other leaders requires you to tread carefully. You must employ all the diplomatic and tactical skills at your command. “Your ability to lead other leaders arises not just from your position, resources or charisma, but from your will and skill.”

The Only Way to Lead Leaders is to Do What is in Their Interests

Salacuse’s central idea in Leading Leaders: How to Manage Smart, Talented, Rich, and Powerful People is that your success depends exclusively on your personal ability to negotiate shared and conflicting objectives, and subordinate your interests to theirs. “Move your followers to take action by characterizing a problem or challenge in such a way that it is in their interests to do something about it.”

To do this, you must determine the interests of those you wish to lead and then make it loud and clear to them that you are indeed serving their interests. This requires meticulous listening, reframing of your objectives in terms of their interests, and respecting their authority and autonomy.

Salacuse breaks the challenge down into “seven daily tasks,” each of which takes a chapter in Leading Leaders.

How to Direct and Negotiate the Vision: To negotiate a compelling vision for your organization that other leaders will buy into, decide on your direction for them and then have a strategic conversation on that subject. Lead an open discussion that allows for their enthusiastic participation. Do not impose your new vision from the top. Through a series of premeditated questions, pilot them to your conclusions. Such collaboration ensures that the leaders will own and support the decisions you select for them. Learn to identify those internally influential people relevant to your objectives and appeal to them. “Beware of becoming so intoxicated by your own vision that you fail to see clearly the reservations that members of your organization may have about pursuing that vision enthusiastically.”
How to Integrate and Make Stars a Team: Your job as the leader is to make sure that all the members of your organization understand that they have common values, shared history, and collective interests. Focus on communication. Demonstrate both by word and by deed that you put the interests of the organization above your own. Understand the nature of the cultural differences that may divide your organization’s leaders and then seek to find ways to bridge any gaps. “Deal directly with other leaders who are spoilers by converting them or isolating them.”
How to Mediate and Settle Leadership Conflicts: The more autonomous the other leaders are, the greater the odds of conflict over turf, power, style, and goals. A leader must intervene and mediate when other leaders come to disagreement. When conflicts arise, read between the lines. Observe the adversaries’ interactions, and find ways to improve communication. Look beyond the conflicting parties’ stated positions; probe for deeper interests. Work as a bridge, and find areas of agreement that can resolve the conflict. Consider how you could apply the six mediation power tools (incentives, coercion, expertise, legitimacy, reference, and coalition) most effectively to resolve conflicts. “A mediator, unlike an arbitrator or judge, has no power to impose a solution.”
How to Educate People Who Think They are Already Educated: Approach your teaching role tactfully. Leaders tend to be proud and sensitive—they may begrudge being treated as unqualified, unskilled, or inexperienced. Before you instruct them, make sure you understand their frame of reference. To the maximum extent possible, do your educating one-on-one, rather than in groups. Actively involve and invite their contributions. The command and control method of instructing them will be ineffective. Instead, use the Socratic Method—ask questions that encourage people to discover the truth for themselves. “In leading leaders, the most effective instrument is not an order but the right question.”
How to Motivate and Persuade Other Leaders: Learn as much as you can about other leaders—their backgrounds, interests, and their goals. Design the specific, personalized incentives that will accord with their interests—only individualized incentives persuade people to act in desired ways. Agree on future goals for the short term, medium term, and long term, and show how those goals relate to those of your organization. Be open and transparent with information so everyone knows where they are and where they are going. “Motivate your followers by envisioning a future that will benefit them and communicating that future to them in a convincing way.”
How to Represent Your Organization to the Outside World: As a leader, you are always on the stage. Everything you do will be subject to scrutiny. Your every action and statement, whether in public or in private, can affect your organization’s relationships with the outside world—customers, competitors, regulators, media, investors, and the public in general. Actively manage their perceptions and expectations. If those interests are dysfunctional or unworkable, seek to change or transform them through one-on-one diplomacy. “One of the most important functions that leadership representation serves is the acquisition of needed resources.”
How to Create Trust to Get the Most out of Your Leadership: People will trust you not because of your appeal, charm, or foresight, but because they’ve decided that aligning with your leadership will move their interests forward. Understand the people you lead and know their interests. Manage their expectations and deliver what you’ve promised. Reinforce your communications during problems and crises. Be consistent and predictable in your actions. “Openness is not just an easy smile or a charming manner; it refers to the process by which you make decisions that have implications for your followers’ interests.”

Tact and Diplomacy Matter More When Leading Other Powerful Leaders

Recommendation: Read Jeswald W. Salacuse’s Leading Leaders. This excellent book’s insights make a great template for the basics of executive leadership. You can especially learn how to gain persuasive skills in situations where you may not have much influence.

Beyond the academic pedantry (the author is a professor of law, diplomacy, and negotiation,) the abundant examples from political leadership are far more multifaceted than the narratives in Leading Leaders tend to imply, but they serve as good cases in point.

Leading Leaders offers a matchless resource in documenting what constitutes effective emotional leadership, which is, in spite of everything, all about persuasive power and influence to get things done through people. The key learning point is, “In developing your leadership strategies and tactics, you need to take account of the interests of the persons you would lead. Leading leaders is above all interest-based leadership. Leaders will follow you not because of your position or charisma but because they consider it in their interest. Your job as a leader is to convince them that their interests lie with you.”

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