Lessons for Leaders
Who did it right? Who did it wrong? What can we learn from both? We'll tell you.
By Carolyn Tang
LESSON 1: MATCH THE CORPORATE CULTURE
In December 2000, Robert Nardelli, a long-time General Electric (GE) executive, stepped through the doors of Home Depot corporate headquarters. With him, he brought the financial discipline and tough leadership style characteristic of GE alumni, along with the assumption that such theories would easily translate to Home Depot territory. Unfortunately, this was not the case. In fact, there are both pros and cons to bringing in a new CEO from the outside.
"On the positive side, an external CEO may energize a company, redirecting it into new markets or industries," says Dr. Anne Reilly, professor of management at Loyola University, Chicago. "But on the negative side, a chief executive from outside the company may be unable - or unwilling - to adapt his or her own personal style to match the corporate culture. Nardelli was unable to bridge the gap between Home Depot's freewheeling, entrepreneurial culture and the more structured culture at GE."
One of the first mistakes Nardelli made was alienating Home Depot employees. In his quest to cut costs, he approached the selling, general and administrative expense line with a heavy hand. According to one buy-side analyst for a significant institutional shareholder, "Nardelli reduced labor costs at stores based on mechanical formulas with little or no regard for how that was going to impact the service level that customers were going to receive." Nardelli cut hours, fired full-time employees, and increased the number of less skilled part-time workers. What he failed to realize, the analyst explains, is that in do-it-yourself retail, the service element is critical to the sale.
"You can go into Wal-Mart and buy laundry detergent. You don't really need anyone to sell it to you. But when you go into a Home Depot, you need someone to be able to tell you what you need, and sometimes you need them to tell you how to accomplish a home improvement project," says the analyst. With this, not only did Nardelli alienate employees, but he also created a void between Home Depot shelves and customers.
Nardelli's stringent approach to cost-cutting also raised doubt in shareholders' minds. Although he produced good earnings growth and fairly good returns on capital during his tenure, investors began to wonder whether the results were sustainable. According to analysts, there was a perception that he was too focused on short-term results. For example, one of Nardelli's acquisitions was Home Depot Supply. HD Supply was intended to extend Home Depot's reach beyond the do-it-yourself demographic and into the professional construction and maintenance industry. However, shareholders questioned the wisdom of annexing a business with lower earnings growth, lower returns on capital, and generally weaker financials.
"That Nardelli wanted to infuse Home Depot with a General Electric-like discipline was not the issue," explains Barry Zweibel, president of GottaGettaCoach!, Inc. "It was completely in his purview to do so. That he couldn't engage his employees or get the company's investors to embrace his plan is what led to his ultimate demise as their leader."
According to Zweibel, in order to be successful, a leader must help employees align with and embrace the company's vision. "Nardelli was seemingly unable to, or uninterested in, encouraging his employees to follow him," Zweibel explains. "Instead, he used management-by-fiat to dismantle and discard much of what the employees of Home Depot felt had made their company so successful."
LESSON 2: TURN TENSION INTO TEAMWORK
Lehman Brothers is a legendary brokerage. While the firm survived the Great Depression, it still bore battle scars left by a divisive internal culture that pitted employee against employee. The biggest defeat, however, came in 1984, when the firm was sold to American Express. Lehman Brothers was no longer the powerhouse it once was. In fact, there was no more Lehman Brothers. American Express folded the firm into its existing Shearson division.
Ten years later, the firm got a second chance when American Express decided to spin off the unit. It tapped Richard 'Dick' Fuld to run the company. And one of the first things Fuld did was restore the name of Lehman Brothers. This helped to re-establish the firm's identity and lend a sense of unity to the Lehman staff. The firm had barebones financials, $75 million in earnings and a 2.2-percent return on equity. Fuld certainly had his work cut out for him.
One of Lehman's main challenges was the lack of teamwork that
pervaded the corporate culture. Back in the day, traders often
operated as one-man armies, which did nothing to encourage a sense
of team. "Traders often used their own money and thought of other
traders standing in the trading pits next to them as the enemy,"
recalls Doug Foster, a trading technology consultant who formerly
worked as a Chicago Board of Trade trader. "It was not
However, as the industry became increasingly electronic, more and more competition entered the pits in virtual form. The pit traders went head-to-head against electronic traders who never even saw the floor. Teamwork became significantly more important. "Traders in a group must pool their resources with the firm and their managers in order to make it. Teamwork is not a luxury, but a necessity to survive," says Foster.
And it was this very sense of cohesion that Fuld pushed down the Lehman ranks. In order to propagate the team idea, Fuld spoke the common language: Money. He linked compensation to overall firm performance through equity awards, which meant employees had to think like owners and work together. Today, Lehman employees receive a higher-than-average percentage of their salary in Lehman stock and options. "This makes the trader a team player by default, and he or she must work for the whole group as much as for themselves," says Foster.
One advantage that Fuld had over Nardelli was that he rose to the ranks from within. He grew his career at Lehman, and experienced the full evolution of the firm. "Fuld was a Lehman Brothers insider, able to understand the history and culture of the firm," Reilly points out. "In addition, he used positive reinforcement - equity awards - to implement change. The prior focus on individual achievement was replaced with a new focus on teamwork, and the incentives matched."
The results speak for themselves. In 2006, Lehman Brothers reported $32 billion in revenues, $3.2 billion in profits, and a 19.4-percent return on equity.
LESSON 3: TAKE A LONG-TERM VIEW
Do you remember life before Microsoft Windows? Steve Ballmer, Microsoft's CEO, does. In fact, he's been with the company since it was only 30 employees strong. Today, the software giant employs more than 80,000 people and boasts a corporate campus that rivals Disneyland.
One of Ballmer's strategies is to focus on the long term: Target a market and hammer away at a solution until it is competitive. Take, for example, the Xbox 360, introduced to the world in 2001. Who would have thought that Microsoft would enter the game-console industry? Although the Xbox still faces heady competition from Sony's Wii and Playstation, it is connected to several million US household televisions.
One of Microsoft's keys to success in the video game market is derived from the software business. The system was engineered so that software developers could easily leverage the hardware and design games that took full advantage of the Xbox's capabilities. Sony, on the other hand, is often criticized for relying on proprietary systems and convoluted programming requirements.
Louis Carter, CEO of the Best Practice Institute, believes that understanding market needs, no matter what the market, is one of Ballmer's leadership strengths. "Ballmer allows for a huge pipeline of information around him," says Carter. "He is willing to stand up and hear the feedback. And he closely monitors the needs of his audience - market demands, perceived competitors, customers and employees - to immediately change his position at any given moment."
Another of Ballmer's philosophies is to be patient. Microsoft may not be first-to-market every time, but it always strives to dominate. Then again, Barry Zweibel points out that any company with $44 billion in sales has the luxury of patience.
"Most of us don't have the option of being quite that patient," he says. "Most of us would benefit far more from a mantra of persistence, unless you're one of the few who actually gets three or four shots at the same target." Zweibel suggests that while Ballmer has the ability to hold out for the long term, most leaders should focus on "helping good things happen sooner."
Nevertheless, what Ballmer undisputedly has managed to do is engage and inspire all Microsoft employees. In 2007, the company was ranked one of Fortune's 100 best companies to work for. Zweibel explains that this is a leadership trait that can translate to any industry. "People tend to contribute more fully when they are recognized and engaged as individuals rather than 'incumbents' of an organizational chart, and when they are engaged in and intrigued by something bigger than themselves."
Zweibel says that successful leaders are able to identify and align employee priorities with those of the company. "It's the job of the leader to frame the project, or goal, or vision in terms that connect with each employee's core values and interests," he explains.
LESSON 4: OVERCOME OBSTACLES AS A TEAM
Rodrigo Jordan is a management professor at the Pontifical Catholic University of Chile, and he's also CEO of Vertical SA, a company that utilizes mountain expeditions and other outdoor experiences to teach leadership skills and teamwork strategies.
Jordan says that many participants in Vertical's adventures arrive with a theoretical knowledge of leadership, or are already versed in the corporate leadership playbook. However, by putting those individuals on a glacier or mountain, they are forced to experience the raw qualities of leadership, without the suit and corporate etiquette.
"Expeditions are excellent simulations for the challenges of the changeable business, as the reality of the outdoor environment is unavoidable and consequences are real," Jordan explains. "Resources such as food and water are limited and must be carefully managed. Clearly established communication systems are even more important given the imperfect nature of the technical equipment in the wilderness, while an unpredictable Mother Nature means that there is usually no time to sit around debating the pros and cons of a course of action."
Teamwork is especially critical when trying to reach a summit. Vertical SA recently led an expedition of 11 climbers to Mt. Lhotse in the Himalayas, the fourth highest mountain in the world. Jordan explains that in most expeditions, only three or four climbers are selected to attempt the summit due to the strenuous nature of the assent and the limited weather window available for an attempt. However, not this time. Everyone was still willing and able to make the decision to climb. "We started discussing it, and someone said, 'Why don't we all go?' Our initial reaction was, 'That's impossible.'"
After extensive consideration, the team broke up into two groups that would summit on consecutive days, a first for Vertical. Jordan says that the key to the team's success was that leadership was willing to consider alternative approaches. "In the business world, team members should be able to depend on their team to be open to new ideas, even those that at first seem impossible. However, team members must also be willing to express and explain their opinions. In the business world, as in the mountains, there is no room for 'yes-men' in difficult decisions," Jordan states.
He also points out that no leader is complete without a solid team supporting a common vision. "Fundamental to being a good leader is the ability to put together a solid team, one that balances technical, personal and social skills, and to make sure that each team member reflects the core values of that team," he says. "There are few people in this world who can go it alone, whether you are running a business or scaling the world's highest peaks."
Did You Learn Your Lesson?
Our four case studies suggest that the following traits and strategies are pivotal to leadership success. Take note!
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