bizzXceleration: Performance, Value and Profit

The sad stories start with Thonson the French electronics manufacturer who's been pursuing a chaotic M&A strategy without the operational changes to make all the pieces fit together. A great vision, not a lot of real strategy and no execution. Then there's Pandit at Citi who's made more changes, minor compared to what he'll have to do, but more than has happened since before '98. He's settled on the supermarket story - which actually makes sense to us - but the real question is can he tighten up operations, put a good management system in place and make each division perform well as a division (TWX are you listening ?) and then get "whole > parts" synergies. Of the sad stories the saddest is Ford partly because they're a great American icon, partly because they were once the world's leader in manufacturing. And partly because I've worked with them a small bit over two decades. And every time the same thing - big but not major changes and then falling back on the culture that got them in trouble. Mulally's new team seems to be getting back to their roots and focusing on execution, good customer focus, building products people want and tying it all together. Whether or not he has the time is another question. Right now we're talking about millions of people's jobs and lives for that matter. But keep on eye out - they're really talking the right talk in both C & F and beginning to walk it a bit. These might be serious very long-term opportunities. For a view on how many times this has gone on try The Reckoning by David Halberstam or Taurus: The Making of the Car That Saved Ford by Eric Taub. The latter is particularly sad and scary because there's little difference between that effort and current ones yet Ford walked away.

On the other hand are stories from HPQ and P&G which exactly prove our points. Hurd came in set high standards, cleaned up operations, put better controls in place and, in spite of his reputation for being pure operations, is nicely balancing strategy against execution. The real exemplar is A.G. Lafley at P&G who's done all that but seems to have added the real deep structural change by completely changing the way they develop products and go-to-market. If he can get it built into their DNA it's a fantastic story, a better job and maybe a long-term opportunity. And if you'd like a great read on what can be done try this: The Silverlake Project: Transformation at IBM by Roy A. Bauer, Emilio Collar, Victor Tang, and Jerry Wind. It's the story of how IBM built the AS400 in spite of itself, revamped a huge business completely and put DEC out of business in the process.

There's also a great Drucker and baseball story and a teacher in Harleem story that provide some general principles as well as being great reads. 

We finish up the excerpts hopefully pointing to the future based on Business Week's recent survey of Innovative companies. We've managed to eke out our corporate survival but as we said yesterday it's getting down to the nut-cuttin'. It's almost like somebody's come along and introduced several "Fosbury Flops" all at once. First, there's the filter that'll sort the loosers out - execution. Then there's the replacement vs stars filter, Innovation. And finally the Stars will decide who gets into the Hall of Fame by who best adapts to the profound changes in the global economy. Oh wait, that's more Innovation. But the question is is it sustainable or a one-short ? A Chrysler or MOT vs a Toyota or Apple ? Those differences are going to make all the differences.

 

General & Special

Bankruptcies Rise as Credit Runs Out for Firms `That Should Have Failed' U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit. The filing by Frontier Airlines Holdings Inc. April 11 followed those of three other airlines and companies in restaurants and retailing this year. Increased levels of distressed corporate debt signal that failures will accelerate, says Lynn LoPucki, a professor at the University of California, Los Angeles law school who studies bankruptcies. The amount of distressed corporate bonds jumped to $206 billion April 11 from $4.4 billion in March 2007, according to a Merrill Lynch & Co. index of bonds yielding at least 10 percentage points more than Treasuries. The share of leveraged loans considered distressed was 16 percent at the end of March, the highest since 1997, says Standard & Poor's, based on loans trading below 80 percent of their face value. The wave of defaults on subprime mortgages, loans made to the least creditworthy home buyers, is spilling into the lower tiers of corporate credit, said Anders Maxwell, managing director of New York-based investment bank Peter J. Solomon Co., speaking at a Feb. 28 conference on distressed investing in New York. ``Subprime was just a paradigm for the credit markets overall,'' Maxwell said. ``Now in the corporate market, the shoe is just beginning to fall, and we're poised for a major correction that has been coming for at least a decade.'' Bankruptcy filings have just begun to increase.

Performance Problems

Corporate Chameleon While radical corporate transformations are sometimes necessary, gutting a company and then rebuilding it is just as risky as it sounds. Former Thomson SA Chief Executive Frank Dangeard found that out the hard way. Over the past eight years, he engineered an audacious makeover at Thomson. He dumped the Paris-based company's unprofitable TV business, which made RCA- and Thomson-branded sets and picture tubes, and he bought dozens of small companies to create a €5.6 billion ($8.8 billion) provider of set-top boxes, DVDs and video-production services. He also cut more than two-thirds of the work force and reduced the size of the executive team. By last summer, more than 80% of the company's 23,000 employees had joined since 2001. Then the Canadian-born, Harvard-educated investment banker declared the hard work of assembly finished. Now, Mr. Dangeard's handiwork may be coming apart. Thomson's share price has been cut roughly in half in the past two months to €4.22, and its bonds have been downgraded to junk status. With financial results sagging, Mr. Dangeard stepped down last month as CEO, and this past Thursday he resigned as chairman. But Thomson's latest transformation was extremely unusual in its scope and speed, and it left the company disjointed, says David Collis, a Harvard Business School professor who wrote a case study on Thomson and advised management there for several years. Mr. Dangeard's vision "wasn't a bad one," says Robert Sanders, an analyst at Dresdner Kleinwort. "But unfortunately, there is little evidence that Thomson achieved any synergies from buying all these businesses and putting them together."

Where Pandit Is Taking Citi When Pandit took the helm on Dec. 11, he vowed to make "an objective and dispassionate review" of the company. Now after spending the first 130 days of his tenure "pressure-­testing" more than 50 different units, Pandit remains committed to four global groups—cash management services, investment banking, wealth management, and credit cards. Some contingents had reasoned that Citi would be better off without investment banking or U.S. credit cards. Pandit argues those businesses are critical to the bank's strategy of selling financial products all along the banking food chain from companies to consumers. "It's no longer the model in question now. It's the execution," says the 51-year-old Pandit. "Everybody before me has wrestled with that."

A Star at Toyota, a Believer at Ford But it’s not easy to believe in Ford these days. The auto giant, based in Dearborn, Mich., lost a combined $15.3 billion during the last two years, slashing tens of thousands of jobs and shutting factories to balance its shrinking share of the American market. Last year, Ford ceded the No. 2 position in sales in its home market to Toyota, and its domestic sales have slid a further 9 percent so far in 2008. Moreover, the company has been forced to sell off prized assets like its Jaguar and Land Rover units, to raise cash for its nascent turnaround. “Ford is at a crossroads,” said John Casesa of the auto consulting firm Casesa Shapiro Group. “The business has been declining for 30 years, and the competition is only getting tougher. They need to change to the core.” Mr. Farley says he grasps that reality quite fully, as well as the tortured path that Ford has been on over the last decade. “Some cuts leave a little scar, and some cuts go to the bone,” he said. “Ford’s experience in the last 10 years went to the bone. My hope is that everyone at Ford never forgets what we went through.” Moreover, the Ford brand and its “blue oval” badge have lost their appeal to American consumers. Ford’s own research shows that while nearly 90 percent of vehicle buyers have a favorable view of Ford as a company, less than 50 percent actually consider shopping for its products. The truth, as he saw it at Toyota, was all about the customer — unlike at some other automakers that let executives dictate what cars to build. “One of the many things that Toyota does really, really well is that it can put the voice of the customer right there at the table in front of the chairman of the company, in a way that even he can’t change it,” he said. For his part, Mr. Farley appreciated Mr. Mulally’s plan to streamline and stabilize Ford, then expand the business with new cars and crossover vehicles that consumers really wanted. “What Alan showed me was confidence that there was a plan, that he got the fact that product was the key to the whole thing,” said Mr. Farley. “Every time I asked him a question, that we peeled the onion, it got more interesting.” The Toyota cocoon, with its reputation for quality, safety and reliability, had insulated Mr. Farley from the harsh reality of the American car market. “I remember telling my wife that in all those years at Toyota when we were gaining market share, I didn’t know anyone lost,” he said. “I did know, but I didn’t know.”

Performance Exemplars

A Teacher Schools Big Business One of the most inspiring leaders I've met in the last several years does not run a Fortune 500 company, did not launch a startup in his garage, and has not led an army. He's a schoolteacher. But his persuasion skills are so effective they should be adopted by anyone who manages anyone. Ron Clark taught elementary school in North Carolina. After watching a program about a New York City school that had a hard time attracting qualified teachers, he decided to head to New York with the goal of teaching in one of its toughest schools. Clark eventually landed a job doing just that—in Harlem. He asked if he could teach a class of fifth-graders who had been performing at a second-grade level. The school's administrators wanted to give him the gifted class, but Clark insisted on the underperforming students. In one school year, Clark's fifth-grade class outperformed the gifted class. Raise expectations. Students and employees will improve their game in response to a challenge. Explain why before how. "It's not enough to set a goal," Clark told me. "You need to tell your students why it's important to reach that goal. For my students, it meant a better future. Encourage celebration and praise. In Clark's book, The Essential 55—his rules for success in the classroom—rule No. 3 is applicable in almost any business setting: If someone in the class wins a game or does something well, we will congratulate that person. Show genuine interest beyond business. Clark cultivated a sense of curiosity and respect in his Harlem classroom, requiring students to respond to a question with a question (his rule No. 6). Be positive and enjoy life. Clark's can-do spirit is infectious. His words reflect his optimism, and he refuses to let any of his students speak the language of defeat. Rule No. 50 is simply: Be positive and enjoy life. Clark told me a leader must set the tone, especially with the words he chooses to use. It is up to the leader to set high expectations, to praise people, to believe in them, and to do whatever it takes to help people meet their goals and have fun in the process.

Hewlett-Packard CEO: We can do even better What you see after watching Hurd for a few years, as I have, is that part of his style simply isn't to be satisfied. Despite nearly three years of focusing on improving the selling process at HP, Hurd says the company is still not good enough at sales. "It isn't in our DNA," he says, echoing past comments. He announced Tuesday the company had added 2,000 salespeople in the last year alone. HP's computer business has improved dramatically, but its famous printer business needs to focus more on high-end systems and has done a poor job of forecasting the high-volume inkjet business. The size of its non-U.S. business currently is a source of great strength, but Hurd says HP needs to invest for more aggressively in selling in its home market. "You should think of HP as a company of transformation with a bunch of mini-transformations within that," he says. So the edgy dissatisfaction that has made Hurd such a success is still there. He boils down the CEO's responsibilities to three tasks: setting strategy (not offering a vision); aligning operations and modeling ways to execute on the strategy; get the best team to help the CEO. "There are a thousand distractions that keep you from doing that," he says. But that's where the focus needs to be.

BW Online | July 7, 2003 | Online Extra: "A Catalyst and Encourager of Change" Since becoming Procter & Gamble's chief executive in June 2000, Alan G. "A.G." Lafley has led a turnaround that has defied expectations. For its fiscal year ending June 30, analysts expect P&G (PG ) to post a 13% increase in net income on 8% higher sales. That would bring P&G's annual compounded earnings growth rate under the three years of Lafley's leadership to 15% -- a rate well above rivals'. During that period, P&G's stock price has climbed by 58%, while the Standard & Poor's 500-stock index fell by 32% (it has recently traded in the low $90s). Less obvious than his turnaround success, however, is how Lafley is changing P&G. He's undertaking the company's most sweeping remake since it was founded in 1837. Nothing is sacred any longer at the Cincinnati-based maker of Tide, Pampers, and Crest. Lafley has inverted the invent-it-here mentality by turning outwards for innovation. He's broadening P&G's definition of brands and how it prices goods. He's moving P&G deep into the beauty-care business with its two largest acquisitions ever, Clairol in 2001 and an agreement in March to by Wella. And he's redefining P&G's core business by outsourcing operations -- like information technology and bar-soap manufacturing. P&G: Using the Past to Invent the Future, P&G: New and Improved

• Rethinking Innovation For The Journal's "Viewpoints" series, Procter & Gamble CEO A.G. Lafley speaks to WSJ's Alan Murray about innovation, and why it doesn't always have to be complicated. PG CEO on Innovation Discussing game-changing innnovation, with Alan G. Lafley, Procter and Gamble chairman and CEO and CNBCs Maria Bartiromo.
• P&G's AG Lafley on Innovation In an in-depth interview, Procter & Gamble CEO A.G. Lafley outlines how innovation is at the heart of the consumer goods giant. Its challenge is to, he says, "innovate how we innovate."

Performance Improvement & Repair

Rewarding failure CEO pay has risen faster than corporate profits, but there are major obstacles to changing the system. The answer is that whatever remedies reformers enact, corporate boards can always find a way to pay the boss whatever they like. Over the past 25 years CEO pay has risen regardless of the economic or political climate. It rises faster than corporate profits, economic growth, or average workforce compensation. A recent study by the compensation consulting firm DolmatConnell & Partners found that CEO pay in the companies of the Dow Jones industrials increased at a blowout 15.1% annual rate over the past decade. A more sensible alternative to the current compensation system would require CEOs to own a lot of company stock. If the stock is given to the boss, his salary and bonus should be docked to reflect its value. As for bonuses, they should be based on improving a company's cash earnings relative to its cost of capital, not to more easily manipulated measures like earnings per share. They should not be capped, but they should be banked - unavailable to the CEO for some period of years - to prevent short-term gaming.

Peter Drucker's Winning Team In the summer of 1985, an executive named Peter Bavasi pored over a Harvard Business Review article by Peter Drucker in which the great management thinker described the "widow maker" -- a job so inherently impossible that it was apt to defeat even the best and brightest. Bavasi, though, wasn't looking for a baseball guy. He needed an organizational expert, someone who could help teach his entire operation, from the equipment manager in the clubhouse to the skipper in the dugout, how to be more effective at a broad range of tasks. In fact, Bavasi had long been a big believer in Drucker's concept of MBO, or management by objectives. MBO -- by which managers throughout the organization jointly identify goals, clearly define each individual's responsibility for meeting them, and figure out how to measure the results -- has had its share of critics over the years. Some, for instance, say the system is difficult to implement and doesn't work well in rapidly changing environments. Drucker, who had introduced the idea in his 1954 landmark The Practice of Management, himself pointed out that MBO was no silver bullet against inefficiency. It works, he emphasized, only "if you first think through your objectives." Yet he pointed out "90% of the time, you haven't." Bavasi left after the '86 season, and Drucker didn't consult for the team anymore. But while he did, the turnaround was undeniable: The Tribe won an impressive 84 games, and attendance at Cleveland Stadium soared to nearly 1.5 million from just 655,000 the year before. "Peter had a lot to do with getting us focused as an organization," Bavasi says. "He had us look at everything we were doing to see if there was a good rationale behind it Peter was our MVP."

Innovation Futures

The BusinessWeek 50 Rankings - BusinessWeek The companies that make up the BusinessWeek 50 represent the star performers in each of the 10 sectors that make up the S&P 500. Given our three-year measurement period, our list typically includes a number of companies that are riding the crest of different business cycles, which means this year's rankings include seven companies that are benefiting from the surge in energy prices, as well as 10 companies that gained in different ways from the housing boom. The Class of 2008 is also among the most global groups of companies since we published our first rankings in 1997. Have a look.

A Ripe Time for Open Innovation With the economy softening, it's tempting for companies to turn off the lights and shut the door on innovation efforts until things pick up. But while this might look like a smart move, the impact—lost momentum, team dispersion, and wasted investments—is less than desirable. It doesn't have to be this way. One of the best options for recessionary times, and, some would argue, even in expansive times, is to join forces with another entity with complementary innovation goals. Open innovation is about connecting with others to find new ideas and, often, to co-develop and co-market them. There are many examples of successful open innovation efforts today. Some take the form of pan-industry innovation networks that share in the risks and rewards of their findings. Others are straightforward co-development projects between strategic players.