In my 2009 book, 7 Lessons for Leading in Crisis, the first lesson when encountering a crisis is to "face reality, starting with yourself." This week we have contrasting examples of leaders confronting crises who took sharply different paths: JP Morgan's Jamie Dimon and Best Buy's Richard Schultz.
Schultz founded Best Buy in 1966 with a single store called "Sound of Music." He has built his company into an international chain with 1,250 stores, 170,000 employees, and $50 billion in revenues. Although he twice turned the CEO role over to long-standing colleagues, Brad Anderson in 2002 and Brian Dunn in 2009, he never relinquished control. As Best Buy's board chair, Schultz dominated both the board and the company, with few board members or executives who dared challenge his power.
Without question, Schultz is a brilliant entrepreneur who built a great organization. He was named one of the Twin Cities top five executives of the decade in the 1990s. In 2004 Best Buy was named "company of the year" by Forbes magazine. He amassed a personal fortune, retained 20 percent of Best Buy's voting shares, and endowed the Schultz School of Entrepreneurship at St. Thomas University.
In the last three years Best Buy's model of selling all forms of electronic hardware has lost ground to on-line retailers like Amazon, and its sales have slipped. Schultz and Dunn have been slow to react, resisted making fundamental changes in Best Buy's business model. Last December Schultz got some very disturbing news from a reliable source in the company: CEO Dunn was having "an extremely close personal relationship" in Best Buy's headquarters with a 29-year-old female employee. Schultz confronted Dunn with the allegations, which he denied.
What did Schultz do next? Nothing. He buried the issue, not mentioning it to Best Buy's board, its general counsel or head of human resources. Nor did he launch an internal investigation to see whether the allegations were true. Not surprisingly, the issue surfaced again in March, this time directly to members of the board. The board took immediate action, terminating Dunn that day and hiring two experienced investigators, William McLucas and Tom Strickland, to determine the veracity of the charges. Their report led to Schultz's forced resignation as board chair on May 14 and caused further turmoil at the company.
The lesson: Schultz failed to face reality and acknowledge his role in supporting, and perhaps dominating, CEO Dunn. As a result, he was forced to resign in disgrace, a sad end to a brilliant career.
In contrast, Jamie Dimon of JP Morgan, upon learning of the firm's $2 billion loss in a hedging transaction, took full responsibility for the problems. He didn't hide from the media, as he talked openly about what happened. He went on Meet the Press the next day, telling David Gregory, "We made a terrible egregious mistake. We were stupid. There’s almost no excuse for it.” The following day he accepted the resignation of the trader responsible for the losses. He acknowledged that the losses came at an extremely awkward time in the finalization of the regulation of the Dodd-Frank law in defining proprietary trades and hedging, but didn't blame others.
The lesson: While the losses at JP Morgan are not insignificant, they represent less than 10 percent of the firm's annual profits and can be absorbed without basic harm to the bank. While the crisis was front-page news for the past week and has triggered several investigations, Dimon will be able to put it behind him in due course and continue to build his bank. All because he faced reality and took full responsibility for the problems.
Harvard Business School is undertaking a major initiative on improving U.S. competitiveness. This is being led by Professors Michael Porter and Jan Rivkin. A key element is to encourage business executives to take the lead in their local communities to form clusters and to strengthen their competitiveness often by forming industry clusters.
Last week we were in Charlotte with Duke Energy Chair and CEO Jim Rogers to study Charlotte’s initiative around the energy cluster, and we met with over 150 local leaders to talk about our initiative and Charlotte’s efforts. Jim Rogers and I have written an op-ed in the Charlotte Business Journal examining the decisive actions Charlotte has taken to create sustainable jobs in this region. Full piece here.
This op-ed draws upon the case entitled Envision Charlotte: Building an Energy Cluster.
NPR station WFAE hosted a very thoughtful discussion on leadership, economic development, and competitiveness. Read more about the program, or listen.
Google’s announcement late Thursday that it would split its stock 2:1 by creating a new class of non-voting shares has governance experts up in arms. From the standpoint of sound corporate governance, I have not been in favor of dual class structures as they can serve to protect complacent owners or management. As the pressures from short-term shareholders for immediate results have grown, I believe that they have a place if used selectively. Google’s situation meets this criterion since it is integral to the firm’s historic shareholdings and is consistent with its need for long-term investment and strategic flexibility.
On one level this can be seen as Silicon Valley versus Wall Street, but it is indicative of the much larger issue in the struggle for control of corporations that pits advocates of short-term shareholder value against corporate leaders and founders focusing on long-term value creation. For the past quarter century advocates of short-term actions have been on the rise, pressing to replace “complacent management” (their term, not mine), take control of boards of directors, or force the sale of companies. They have lined up a formidable array of shareholder advisory firms, governance experts, academics, lawyers and politicians to provide intellectual and legislative support for their ideas.
Their influence on corporations, boards of directors, and investors has been enormous, contributing to short holding periods for stocks, which have fallen from eight years to six months. Many corporate leaders feel compelled to respond to these influences or face severe consequences, as their never-ending pressure has resulted in much shorter CEO tenure and higher turnover at the top. They are forcing companies like Genzyme to be sold to Sanofi or Kraft and Abbott to split into two companies. On the negative side, managements of such giant companies as General Motors, Sears, Motorola, Hewlett-Packard, Yahoo, and Kodak who bought into their ideas have wound up in bankruptcy or lost their ability to compete. An even greater concern is the devastating impact on the long-term competitiveness of American companies in global markets.
The new generation of corporate leaders understands this impact and is taking steps to reverse it. Leading Silicon Valley companies like Apple, Intel, Facebook, Google, and Seattle's Amazon, as well as established companies like Ford, IBM, Exxon, and Merck are ignoring these short-term pressures to invest in long-term strategies to ensure sustainable shareholder value increases.
While Apple’s market capitalization has skyrocketed from a mere $7 billion in 2003 to more than $550 billion today, the late Steve Jobs “spent zero time thinking about Apple’s stock price,” according to one of his direct reports. In fact, Apple’s stock price did not move upward at all in Jobs’ first six years back at the helm. Similarly, Mark Zuckerberg has fought to retain absolute control Facebook's ownership from its founding through the forthcoming public offering.
Thus, it's not surprising that Google founders Larry Page and Sergei Brin are attempting to retain control so that they can continue to invest for the long-term, as they made very clear in last Thursday’s letter to shareholders:
"We have always managed Google for the long term, investing heavily in the big bets we hope will make a significant difference in the world. Some of these bets have been tremendous, funding our activities and generating significant gains for our shareholders… The ability to take these kinds of risks has been crucial to Google’s overall success and we aim to maintain this pioneering culture going forward. The proposal we announced today is consistent with the governance philosophy we articulated when we took the company public, as well as the trend for newer technology companies to adopt strong dual-class structures. We believe that it will provide great competitive strength—insulating Google from short-term pressures."
Google is repeating the practice of Ford Motor Company when the Ford family took the company public in 1956. As Kevin Hoffman writes in American Icon, Ford would not have survived the turmoil of the last decade without the Ford family's commitment to the company’s long-term survivability without declaring bankruptcy, as General Motors and Chrysler did. While not adopting the dual stock structure, companies like IBM, Exxon, Whole Foods, and Merck are taking similar approaches in their commitment to long-term. They are clear about their long-term goals, share progress openly, but never waver from their direction, in spite of shortfalls in earnings, declines in stock price, and criticism from security analysts, media and short-term shareholders.
It should be noted that these companies are not anti-shareholder. Rather, they are deeply committed to creating long-term shareholder value and prepared to defend against short-term pressures that would take them off course. Shareholders always have the option of selling their shares if they don't like the company’s direction or prospects, which is a more effective means of impacting management than proxy contests. We faced similar issues in my years at Medtronic; only our commitment to patients and dedication to long-term strategy enabled us to increase shareholder value more than forty times during those years.
It is encouraging to see companies with the courage to take a stand for ensuring their companies remain competitive. Ultimately, their actions will make the U.S. more competitive as companies invest in people, research, and facilities to ensure their long-term success.
This article originally appeared in Harvard Business Review.
As the world becomes increasingly global, the need for true global citizens to lead organizations in business, nonprofits, and government is far greater than in decades past. Global citizens who understand the importance of cultural nuances are able to bring people together across organizational boundaries and are more effective working and collaborating anywhere in the world.
Becoming a global citizen requires that aspiring leaders spend time living in different countries early in life, so they can appreciate cultural differences, incorporate what they learn into their work lives, and build networks of global relationships. A key to the success of IBM's Sam Palmisano, for example, was the understanding he gained by living in Japan that enabled him to create IBM's "globally integrated enterprise" in 2006.
Corporations seek leaders who are comfortable in many cultures; they want those who can speak multiple languages and understand the nuances of doing business outside their home regions. In fact, many global companies have formal international rotation programs to build such global leaders. German consumer company Henkel requires its leaders to work in at least two countries to be considered for promotion.
But the benefits aren't just organizational. Living in different countries and cultures can lead to a rounder, more fulfilling life. Take our experiences, for example. Bill had formative experiences living with his family in Belgium in the early 1980s and in Switzerland ten years ago. Leading global businesses since the early 1970s and serving as a board member of two European companies, Bill's travels throughout the world shaped his ideas for developing global leaders. John found working abroad in Europe and the Middle East not only improved his understanding of the importance of cultural and regional differences, but also helped him build a global network of friends and colleagues and lasting memories of the places he visited.
For aspiring leaders who want to become global citizens and increase their global fluency, here are some suggestions to get started:
1. Target at least one fundamentally different culture. While it may be tempting to live in a culture similar to your own — for example, Americans working in Great Britain — the most compelling learning experiences come from living in cultures that are sharply differently from your own. Chinese professionals working in South Africa, for example, will find their existing cultural assumptions challenged as they gain increased humility by learning local languages and coping with different norms.
2. Spend time studying overseas. Studying in different cultures enables young leaders to understand cultural nuances and become actively engaged with global organizations. Harvard Business School now sends all 900 MBAs to work overseas in its Global Immersion Program. Global organizations prefer candidates who have studied abroad because these early experiences will broaden your perspective about seeking fascinating global opportunities throughout your life. Look for opportunities, and if you're already out of school, ask if your organization offers programs to give you experience abroad.
3. Learn the local language. As English becomes the language of business, it is tempting to get by with limited knowledge of local languages. That's a mistake. Learning local languages enables you to appreciate cultural nuances and develop more personal relationships. Being fluent in multiple languages makes it easier to learn new ones and opens up career opportunities.
4. Don't judge cultural differences or local people. When your new environment is sharply different from prior experiences, it's tempting to make snap judgments about your experiences and stay attached to your own culture. Resist that temptation by observing, listening, learning, and understanding rather than judging. Use your insights to improve local ways of operating, but don't rush to criticize.
5. Share international experiences with your family. Living in new countries brings your family much closer together and will be a time for growth, bonding, and learning as a family. Hold parties for your local neighbors, join a local church, and get involved in your children's school. Host regular visits from parents and close friends. Balance breadth and depth in your travels to explore many different areas and countries, and spend time talking with local people. But don't travel so much that you fail to get deeply involved in your new community and explore its richness.
The coming decades will belong to those global citizens who are comfortable operating anywhere in the world and who can collaborate with people of different cultures to develop solutions to the world's most pressing problems. Organizations filled with these global citizens will not only survive but thrive and grow. For you, life will be richer and more fulfilling.
HBR.org published this article on why developing global leaders is America’s competitive advantage.
By Bill George
As global companies focus their strategies on developed and emerging markets, they require substantial cadres of leaders capable of operating effectively anywhere in the world. American companies and academic institutions possess unique competitive advantages in developing these global leaders. They are remarkably open to talented people from diverse backgrounds, and are highly skilled at giving future leaders the knowledge and experience they need to lead successfully in the global economy. As American leaders work with foreign nationals, they become more open, better informed, and more effective in collaborating with people around the world. The ability to develop global leaders strengthens American companies and the U.S. economy, expands America's global trade, and attracts foreign companies to base operations in the U.S.
Let's examine the reasons why America possesses this important advantage:
1. America's higher education system is a magnet for talented leaders from all over the world. The U.S. has become a Mecca for international scientists, engineers and business students — particularly those undertaking graduate studies. Since the 2008 financial collapse, a new generation of business school deans is placing increased emphasis on developing global leaders. In particular, Harvard, MIT, and Stanford have geared their programs toward global leaders: as a result, 26-38% of their graduate students are foreign nationals.
Here at Harvard Business School, Dean Nitin Nohria has revamped HBS's MBA curriculum to emphasize practical leadership and global experiences. In January all 900 of HBS's first-year students — 34% of whom are international students — worked in developing countries. In 2011, 71% of HBS's new cases were written about foreign companies. HBS welcomes 6,360 foreign nationals (64% of the total) to its executive education courses each year, enriching the experiences for Americans as well. As a consequence, these foreign-born executives become more interested in doing business with American companies and many will eventually work in the U.S.
2. U.S. companies actively promote executive officers with diverse geographic and cultural backgrounds. Coca-Cola has been a pioneer in developing global leaders. It started 30 years ago with the progressive and unusual step (for that time) of shifting from local nationals as country managers to global leaders from other countries. This has enabled the company to develop exceptional global leaders. As a consequence, five of its CEOs have been non-American-born, including today's CEO, Turkish-born Muhtar Kent. In addition, eight of its top nine line executives are from outside the U.S. Many global companies have followed Coke's lead by appointing foreign-born CEOs and executives. For example, PepsiCo CEO Indra Nooyi was born in India, Avon's Andrea Jung is Chinese-Canadian, and Medtronic CEO Omar Ishrak grew up in Bangladesh. UK-born George Buckley, CEO of 3M, will be succeeded by Swedish-born Inge Thulin. Half of 3M's executive committee comes from outside America.
In contrast, the CEOs and executives of leading companies in Germany, India, Korea, Japan and China are almost all natives of their home countries. Swiss companies like Nestle, Novartis, and Credit Suisse are notable exceptions, as they have non-Swiss CEOs and a majority of non-Swiss executives.
3. American companies send their most promising leaders abroad for global leadership assignments. Major U.S. companies like Cargill, ExxonMobil, 3M, and IBM insist their line executives have numerous assignments running overseas operations to ensure they understand their global businesses. They also conduct intensive development programs for global leaders through in-house training programs. Two of the best-known programs, GE's Crotonville and Goldman Sachs's Pine Street, are committed to having 50% of participants from overseas entities.
4. The U.S. leverages its pool of top talent to attract research and business units. Many foreign companies are basing research centers and business units in the U.S. to take advantage of America's talented leaders. In 2002 Novartis relocated its research headquarters from Switzerland to Boston and hired Harvard Cardiologist Mark Fishman as its leader. Nestle, Unilever, and Novartis have several business units based in the U.S. French pharmaceutical company Sanofi recently acquired Boston-based Genzyme to tap into America's intellectual capital in biotechnology.
5. America fosters risk-taking and innovation by entrepreneurs who become global leaders.America has repeatedly demonstrated its capacity to develop entrepreneurs who start with revolutionary ideas and create global companies that dominate their markets. Intel, Microsoft, Apple, Genentech, Starbucks, Google, Cisco, Amazon, Medtronic and Facebook are some of the success stories resulting from an American culture that fosters risk-taking, openness, and innovation. Their successes globally have created enormous stakeholder value for their customers, employees, communities, and investors.
In the increasingly competitive global economy, the United States needs to take advantage of its ability to develop global leaders who are capable of addressing the complex challenges facing global institutions. Unfortunately, this unique American capability is often undermined by U.S. government policies, such as limitations on work permits for foreign graduates of American universities that force them to return to their home countries. Visa restrictions also limit U.S. companies from bringing foreign nationals to America for assignments enabling them to become global leaders. American executives, educators, and government officials need to collaborate to strengthen America's leadership of the global economy.
Published in Harvard Business Review.
The realities of globalization, with increasing emphasis on emerging markets, present corporate leaders with enormous challenges in developing the leaders required to run global organizations. Too many multinational companies — particularly Japanese, Indian, German, and some American ones — still concentrate vital decisions in the hands of a small group of trusted leaders from their home country. They hire technical specialists, local experts, and country managers from emerging markets but rarely promote them to corporate positions. Instead, they groom future global leaders from the headquarters nation by sending them on overseas appointments.
This approach worked relatively well for companies selling standard products in developed markets, but as multinationals transition into truly global organizations relying on emerging markets for growth, it's far from adequate. In order to adapt to local cultures and market needs, companies must shift to decentralized, collaborative decision-making. That requires developing many leaders capable of working anywhere.
To address these needs, new approaches for developing global leaders are required:
- The diversity of top leadership should reflect the diversity of the firm's customers.
- Global leaders must be effective in aligning employees around the company's mission and values, empowering people to lead, and collaborating horizontally rather than managing vertically.
- Rather than concentrating on the on the top 50 leaders, global companies need to develop hundreds, even thousands, of leaders comfortable operating in a variety of cultures.
- Developing global leaders with cultural sensitivities and collaborative skills requires greater focus on emotional intelligence, self-awareness, and empowerment than on traditional management skills.
To understand these approaches, let's examine what leading global companies are doing:
Create diversity among senior leadership. To make sound decisions, companies need a diverse set of leaders who have deep understanding of their local customers, especially those in emerging markets. Opportunities at the highest levels, including C-suite and CEO, must be open to people of all national origins. Atlanta-based Coca-Cola is a pioneer in geographic diversity. As early as the 1960s, the company was run by South African Paul Austin. Since that time, Coca-Cola has had Cuban, Australian, and Irish CEOs, leading to today's CEO, Turkish-American Muhtar Kent.
Over the past decade two Swiss companies, Nestle and Novartis, have made dramatic shifts from Swiss-dominated boards and executive leadership to a diverse set of nationalities. Both now have non-Swiss majorities on their boards and several business units based outside Switzerland. Nestle's executive board represents ten different nationalities, while 80% of Novartis executives come from outside Switzerland.
Focus on values, not hierarchy. The characteristics of successful global leaders today are quite different than traditional hierarchical managers. They need high levels of emotional intelligence and self-awareness to unite people of different cultures, many who are new to the enterprise, around the organization's mission and its values and empower them to make decisions without waiting for higher-level directions.
Samuel Palmisano, IBM's chairman and former CEO, recognized that IBM's traditional hierarchical structure would not be effective in the 21st century because it was dominated by product and market silos. In 2003 he reorganized the company into an "integrated global enterprise" based on leading by values and collaboration, and uses special bonuses to empower leaders to extend IBM's culture globally.
Broaden the reach of leadership development. Collaborative organizations like IBM's require far more leaders than the traditional focus on a select group of top leaders. With flatter organizations and decentralization of power, corporations must develop savvy global leaders capable of operating locally and globally simultaneously. IBM's former chief learning officer recently estimated that IBM will need 50,000 leaders in the future.
Unilever has more than half of its business in Asia, and that percentage will continue to increase. The company has undertaken a major initiative to develop 500 global leaders in intensive leadership development programs to prepare them for expanded roles. According to CEO Paul Polman, "Unilever's Leadership Development Programme prepares our future leaders for an increasingly volatile and uncertain world where the only true differentiation is the quality of leadership."
To be effective in global roles, leaders require experience working and living in multiple countries. Extensive travel overseas is no substitute for living there, gaining fluency in local languages, and deeply immersing in the culture. German chemical maker Henkel, whose executives come from a diverse set of countries, insists they live in at least two different countries before being considered for promotion.
New methods for developing global leaders. Developing global leaders necessitates a shift from focusing on management skills to helping leaders be effective in different cultures by increasing their self-awareness, emotional intelligence, and resilience. Dean Nitin Nohria at Harvard Business School recently sent 900 MBA students overseas to work with companies in countries where they have neither lived nor worked.
It's not enough just to work overseas. To process and learn from their experiences, individuals should utilize introspective practices like journaling, meditation or prayer, and develop support networks of peers like True North Groups. There they can consult confidentially with people they trust about important decisions and have honest conversations about their dilemmas, mistakes, and challenges. These experiences enable leaders to develop the self-mastery and appreciation and acceptance of people from diverse backgrounds required to become effective global leaders.
These methods of developing global leaders for the future are still in their nascent phase, but there is little doubt that they will have a profound impact on developing global leaders in the years ahead.
I was very honored to be elected to the National Academy of Engineering this week. For the full list of new inductees see NAE's Press Release.
In the 20th century, a select group of leaders — General Motor's Alfred Sloan, HP's David Packard and Bill Hewlett, and GE's Jack Welch — set the standard for the way corporations are run. In the 21st century only IBM's Sam Palmisano has done so.
When Palmisano retired this month, the media chronicled his success by focusing on IBM's 21% annual growth in earnings per share and its increase in market capitalization to $218 billion. But IBM hasn't flourished because it kowtows to Wall Street. In fact, five years after Palmisano took over, IBM stock was stuck where it had been when his tenure began.
The real story behind IBM's success is the course Palmisano set for 21st century global enterprises. Recognizing that the company's command-and-control culture wouldn't work in the 21st century, he defined leadership as leading by values and created a unique collaborative organizational structure.
In 2002 Palmisano succeeded a legendary leader in Lou Gerstner, who saved IBM from being broken up and put it on a viable course. Whereas Gerstner famously declared "the last thing IBM needs is a vision," Palmisano had a clear vision for the company. He saw its unique strength as offering complete solutions tailored to customers' needs — something no other company could match. To concentrate on customer solutions, Palmisano spun off personal computers and disk drives and acquired PriceWaterhouseCoopers' consulting business.
Executing this strategy required seamless integration of IBM's product capabilities with its geographic reach. This meant abandoning IBM's existing organization, in which product silos and geographic entities operated independently and frequently were more competitive than collaborative. Palmisano reorganized IBM into a "globally integrated enterprise" focused on worldwide collaboration. He cajoled, pushed, and pulled the company into a client-centric, agile structure able to customize delivery of IBM's software assets, hardware assets, and intellectual property.
With 440,000 employees in 170 countries, Palmisano recognized that IBM couldn't be run solely from the top; rather, it needed thousands of leaders operating collaboratively around the globe to fulfill its customers' diverse needs. His first act was to abolish IBM's corporate executive committee.
Palmisano understood that reorganizing IBM's formal structure wouldn't be sufficient; he had to thoroughly transform the company's culture and do so in a sustainable way. His ingenious first step toward creating a collaborative culture was a massive, global collaboration. In 2003 he launched an online, interactive "values jam" involving all employees for 72 hours to determine what IBM's values should be. The three principles that emerged from that event guided decision-making throughout the organization, giving IBM's huge, globally dispersed workforce the discipline necessary to execute the company's new strategy.
Palmisano could not have succeeded at placing values at the center of IBM's operations without strong principles of his own. These are the qualities I believe made him the best CEO, so far, of the 21st century:
Humility and openness. Palmisano has an engaging manner and keen sense of humor. Colleagues say his humility and humor are disarming. In a speech on IBM's 100th anniversary, he said:
The old model of the heroic superman is increasingly archaic. The most active and successful leaders today see themselves as part of the global community and peer groups. They listen as well as they speak. Never confuse charisma with leadership. The first job of a leader is to enable an organization to survive without him or her. The key to that is to build a sustainable culture.
He practiced this by listening intently to employees throughout the organization. He also talked to customers on a daily basis and circumnavigated the globe six times a year to meet customers in person. These relationships were essential in gaining the confidence of customers who had qualms about outsourcing to IBM.
Patience and a long-term view. Palmisano warned against prioritizing shareholders or other constituents, calling this "a false choice," and explaining that "Long-term management is a serious challenge in a world driven by short-term thinking. Forward-thinking leaders are not just achieving measurable success in the short-term. They are innovating in ways that create virtuous circles for a generation or more." He was comfortable making smart bets to position IBM for decades-long growth, such as creating the Emerging Business Organization to incubate new businesses and shield them from P&L pressures. And his time leading IBM's Asia-Pacific business taught him about the value of building long-term relationships, not just doing transactions.
Directness. Palmisano believes the technology industry requires "a high-performance, in-your-face, speak-your-mind culture." He's personable, but blunt. Known for walking out of long meetings to make sales calls, he shortened IBM's two-month annual budget process to six days. Instead of formal performance reviews, he regularly engaged in short conversations, focusing on key initiatives. Many who know him cite his impatience as a strength; it kept him relentlessly focused on execution.
Pragmatism. When the U.S. government cut back on work permits for foreign nationals, IBM had thousands of Indian employees forced to return to their home country. He turned that problem into competitive advantage by relocating most of IBM's software operations to India as its Indian operations grew from 3,000 to 100,000 employees. He also forced partners and distributors to commit in writing to uphold IBM's strict ethical standards. In 2009 he called off the $7 billion acquisition of Sun Microsystems in part due to Sun's egregious golden parachutes.
As Palmisano built IBM into the world's leading information technology company, its competitors dithered. HP suffered from a progression of strategic missteps and failed leaders. Microsoft's enterprise services stagnated. Cisco now sells mostly commoditized products. In contrast, IBM kept laser-like focus on building the global organization to execute its strategy, and financial results followed.
Palmisano once said, "The CEO is not the brand! It is not about you. You are a temporary steward of a wonderful enterprise, so leave it in better shape than you find it." As he concludes his career, he leaves his successor, Virginia Rometty, with an iconic giant poised to dominate its industry for decades to come.
Originially Written for Harvard Business Review on January 18. 2012
This post draws upon several resources, including: the IBM archives; Palmisano's own article, "The Globally Integrated Enterprise" in Foreign Affairst and his speech on the Future of Leadership; aHarvard Business Review interview with Palmisano, "Leading Change When Business is Good;"Rosabeth Moss Kanter's case on IBM and Joseph Bower and Sonja Ellington Hout's case on IBM. The author and Sam Palmisano together serve on the board of directors of the Exxon Mobil Corporation.
MUNICH, GERMANY - The United States seems in awe of China's economic miracle, but rather disdainful of Europe, especially Germany. To the contrary, there is great wisdom in the German economic model from which Minnesotans can learn.
Germany is a jobs machine. Its unemployment is just over 5 percent vs. 8.5 percent in the United States. In Munich unemployment is only 2.2 percent. Germany exports four times as much as the United States with only 30 percent of the population. It has a positive $200 billion trade balance, compared with negative $700 billion for America, and favorable trade balances with China, India and Japan, as well all European countries.
Germans are well-paid, have excellent health care and pension benefits, and save 11 percent of their income. Yet German health care costs only 9 percent of GDP compared with 17 percent in the U.S.
Politically, the country operates like a grand coalition, with narrow differences between moderates on both sides. Politicians put the country's interests ahead of their parties. A decade ago the government went through a restructuring that moderated the cost of wages and benefits to be competitive with Asian countries. Germany is fiscally responsible: inflation is just over 1 percent, and deficits are 3.3 percent of GDP compared with 11 percent for the U.S.
German industrial strategy focuses on sectors where its technology and highly skilled workforce provide competitive advantage: machine tools, automobiles and auto parts, chemicals, electrical equipment and construction. Its financial sector finances German industry at home and around the world. It operates with conservative ratios that enabled most German banks to escape the 2008 financial meltdown.
Leading German companies like Siemens, BMW, Volkswagen, Daimler, BASF, and Thyssen-Krupp are flourishing these days. But there are deeper reasons for Germany's success: relationships between labor and management; its apprentice system, and the Mittelstand -- small and medium-size privately held enterprises.
Labor-management relations. German unions have long practiced "co-determination" with management on corporate boards, but their approach differs dramatically from American counterparts. They are committed to ensuring that their companies do well, produce superior products, and are cost-competitive. Work rules are flexible. Strikes are rare. They focus on collaborative relationships to make their enterprises competitive on a world scale.
Apprentice system: German education utilizes a rigorous system of preparing students for jobs and careers. Students are divided into those who enter gymnasium (high school) to prepare for university education and others who are better suited for careers in skilled positions in 342 recognized trades. They complete their education prepared for a career suited to their talents; dropouts are rare. Those in skilled-labor tracks move into three-year apprenticeships where they learn specific skills, such as computer programming or operating complex computer-controlled machinery. Educators work closely with industrial counterparts to understand skills required for future jobs. Heinrich Heimbold, CEO of Thyssen-Krupp, the world's second-largest steel company, believes labor relationships and apprentices have given his company advantage over U.S. and Asian competitors.
Mittelstand companies. These small and medium-sized firms are export-oriented and focus on high-value manufactured products utilizing skilled apprentices. Typically, they are rural and privately owned and occupy worldwide niche market leadership positions. Mittelstand companies combine long-term approaches with modern management practices like lean manufacturing and total quality management. They work closely with universities and researchers and cluster around large manufacturers. Owner-managers often rub shoulders with workers.
Steven Rosenstone, the new chancellor of Minnesota State Colleges and Universities, believes in the German approach to education and industrial competitiveness. "It's a painful reality that many of the 215,000 Minnesotans without jobs don't have the education needed for the new economy," he said. "By 2018, 78 percent of all Minnesota jobs will require some post-secondary education." Rosenstone is restructuring MnSCU to train people for future needs, and also creating custom retraining programs for existing employees.
Minnesota's CEOs are recognizing the importance of Minnesota's skilled workforce. Cargill CEO Greg Page is leading a task force to address these education issues. Ecolab CEO Doug Baker Jr., who chairs Greater MSP, said: "Ultimately, the education and skills of the workforce is MSP's competitive advantage."
In my view, Minnesota gave up too soon on manufacturing competitiveness to focus on the service sector. It's time to refocus on manufacturing advanced technology products, using skilled labor to enable Minnesota companies to compete globally and restore full employment. It's not too late.
Originially Posted in the Minneapolis Star Tribune on January 7, 2012
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