WHAT IS LEADERSHIP?
It is becoming increasingly clear that in many industries, American companies are lagging behind their foreign counterparts, struggling to catch up in the areas of product quality and operational efficiency. Although many U.S. firms are making great strides in performance improvements, foreign competitors continue to improve at an even faster pace. Thus the gap between the two is widening, not narrowing. If these current trends continue, the United States runs the risk of becoming a second-rate economic power.In an effort to regain the market leadership position they have lost, many American firms have recently begun implementing various management methods and philosophies, hoping these new approaches will solve their business problems. Unfortunately, businesses often identify their so-called problems only in terms of the bottom-line results in their income statements and balance sheets. Because they attend only to financial problems, all too often the root cause of their difficulties -- ineffective leadership -- is overlooked.
Poor leadership is the primary cause of the declining effectiveness of operational methods and strategies of many U.S. industries over the past few decades. At the end of the operational process, poor leadership has resulted in product quality below most customers' tolerance for imperfection.
Although it has begun to improve dramatically, the U.S. automobile industry provides us with a good example of this trend. General Motors, formerly the model of industrial achievement, has come in ti he 1990s to represent what U.S. businesses should never be. GM was the world leader in automobiles following World War II, and judging by its income statements and balance sheets, it continued in this leadership position until the early 1980s. Since then, however, GM's financial statements show a different story -- a story of poor performance that was years in the making. Although GM has been working on improving corporate operations and processes for over a decade, it is only now beginning to take steps that suggest a proper diagnosis has been made of the root cause of its poor performance: ineffective leadership.
The leadership problem at GM was never more evident than in the late 1980s when the board of directors offered to buy Ross Perot's stock in the company for almost $350 million more than it was worth if he would simply resign from the board and keep quiet about the problems at the company. But the stock price premium was just part of the problem, and not the most important part at that. Only a few weeks before the offer was made to silence Perot, the GM board had announced its intention to lay off personnel and close several plants, ostensibly to cut costs. These actions were supposed to save the company about $500 million. As it turned out, $350 million of that $500 million was earmarked for Perot. How do you think GM workers felt about this decision? What do you think it did to their morale, loyalty, commitment, and productivity? How could those workers have reconciled that decision with the company's push to improve the quality of its products? This action by the board, demonstrating a profound lack of understanding of human nature, speaks clearly about the poor quality of leadership at GM.
By contrast, consider Sam Walton and his company, Wal-Mart (the subject of Chapter 3). They stand as a shining example of what can happen when a leader understands and meets the requirements of an effective leadership role. Walton founded Wal-Mart in 1962 and turned the company into the most profitable retail firm in the country (surpassing even Sears and K-mart) in less than thirty years. He did that by believing in his people and by personally taking the initiative to make things happen. As Walton once said, "When it comes to Wal-Mart, there's no two ways about it, I'm cheap. A lot of what goes on these days with these overpaid CEOs who're really just looking from the top and aren't watching out for anybody but themselves really upsets me. It's one of the main things wrong with American business."
Walton was right on target. Ineffective leadership is the most critical problem confronting American businesses today. Corporate executives have become "money men" interested more in finance and accounting than in manufacturing and delivering top quality products and services. If this trend continues, many U.S. firms will lose their ability to compete in global markets.
This book addresses the importance of effective leadership in reversing that trend. It explores the crucial role of leadership in producing long-term improvement in business operations and product and service quality, and it provides a timely message aimed at helping U.S. firms identify and deal with their leadership deficiency. To set the stage for our leadership discussion, we will first discuss the evolution of our current problem.
COMPLACENCY GETS A FOOTHOLD IN U.S. BUSINESSES
Between the end of World War II and the Arab oil embargo of 1973, the United States was virtually alone at the top of the world's economic ladder. Leaders in U.S. business could do just about anything they wanted and still succeed. Unfortunately, lulled by this stability and security, many chose to ignore important issues like modernization, quality improvement, and the development of the people who worked for them. These leaders forgot the important fact that businesses must move forward with as much vigor during periods of great security as they do during periods of strife.
With the luxury of an overwhelming competitive advantage, American executives failed to explore innovative management styles; instead they settled for the status quo, and management systems and organization structures grew excessively bureaucratic. But in the postwar period they continued to dominate the international business arena, largely because their weakened competitors remained so far behind. In their view from the top, it seemed they could do no wrong.
Sadly, it took twenty years to show us the true costs of that arrogance and complacency. In the 1980s, deficit spending by the federal government brought the illusion of economic prosperity to the United States, but the reality of the situation was the further erosion of our economic strength. The U.S. national debt ballooned from $894 billion to $2.837 trillion during this time, and it increased almost another trillion dollars in 1990 and 1991 By 1990 it was also undeniably clear that businesses in many U.S. industries were far behind their foreign counterparts, and that many others were dangerously close to becoming followers in the global marketplace.
POST-WORLD WAR II DEVELOPMENTS IN JAPAN, EUROPE, RUSSIA, AND CHINA
For the reverse of this story we can look back to 1945 Japan. Decimated by the war, the Japanese were forced to rebuild their economy from the ground up. With active cooperation from the government, businesses in Japan launched an unprecedented rise from the ashes of wartime defeat to their current position of economic strength rivaling that of the United States. But the people of Japan deserve most of the credit for transforming their economy. While Japan is poor in natural resources, it is rich in tradition and culture. Its people were willing to sacrifice, save, invest, and work hard, and they laid the foundation for Japan's ascent to economic power. Business and government leaders in Japan harnessed the people's energy and determination and were thereby able to create one of the world's most powerful economies. Less than fifty years after World War II, with a population of 124 million people (about 50 percent of the U.S. population) and a land area the size of Montana, Japan is positioned for world leadership.
Japan has begun to exercise that economic power in its relations with the Association of Southeast Asian Nations (ASEAN). This economic union, comparable to the European Community in many ways, comprises some of the most successful economic powerhouses in the world. Although Japan is not a member of the group, its tremendous wealth and economic success give it great influence over member nations. History leads many in the region to be continually suspicious of Japan's motives, and the fear of Japanese domination of these smaller states will tend to limit Japan's sway in this developing region. Nonetheless, it appears that Japanese business leaders are quickly learning how to form and sustain mutually beneficial economic alliances. We should expect movement in this direction to continue, and as a result that Japan will be even more competitive in the future.
With some qualifications, we would predict the same for Europe. In the devastated aftermath of World War II, the nations of Europe were fragmented, suspicious of one another, and fiercely independent. They still are. Yet with the advent of the 1992 Single Europe Act, we are supposed to be witnessing the dawn of a new era of unity in the European Community (EC). With a combined population of 325 million people and a $4.6 trillion gross national product (GNP), the EC is, and will continue to be, a force to be reckoned with.
It will not be easy for the member nations of the EC to overcome their differences and learn to work together. For example, in June 1992 the people of Denmark rejected the Maastricht Treaty, which would have moved the EC closer to monetary union and common security. Later, the French approved the treaty by only tile slimmest of margins. These actions cast doubts on the union itself. As in the Southwest Pacific region of the world, the nations of Europe are reluctant to give up their sovereignty and independence. The final outcome of the movement to unite Europe is uncertain as of early 1993, but political and economic realities suggest they will eventually see the advantages of working together.
Recent declarations of independence in Poland, Hungary, and other nations formerly in the Soviet bloc signal not only the end of the political threat from communist totalitarianism, but also the beginning of an expansion in the European market as these nations develop market economies. With a combined population of almost eight hundred million people, the economic potential of a union between the European Community and the nations of central and eastern Europe is breathtaking.
To take advantage of the opportunities before them, these countries must learn how to utilize their natural and their human resources. And in that effort, they face the daunting challenge of managing nationalistic tendencies. The peaceful division of Czechoslovakia in 1992 into two separate republics proves that these feelings run strong and deep, and the bloody battles in 1992 and 1.993 to define the states of Bosnia, Serbia, and Croatia from the former Yugoslavia are painful reminders of what Europe risks as it moves toward unity. Here again, though, the political and economic advantages of cooperation should eventually persuade the people of Europe to settle their differences.
And what of the former Soviet Union? In August 1991, a stunned world watched as the USSR unraveled almost overnight and the Commonwealth of Independent States (CIS) emerged. One day we learned of a coup and the return of hard-line communist leadership; the next thing we knew, the Russian people stood up against the coup conspirators and said no. One by one, the Soviet republics declared independence, following the lead of the Baltic states a few months earlier.
And so after more than seventy years of communist rule, the Soviet threat ceased to exist. For decades the Soviet people struggled to survive without modern conveniences taken for granted in the West; indeed, many lacked adequate food and decent living conditions while their leaders poured money into the huge military apparatus required to suppress and sustain a far-flung empire. Following the collapse of the USSR, we learned that the nation was spending almost a third of its GNP on the military while the citizens of the country went without basic necessities. In that light, it was not surprising that the USSR fell apart; the surprise was that it took so long to happen (and that it happened so quickly once it started).
Fledgling democracies are now emerging throughout the republics of the CIS. It is not at all certain what form of government will exist in these nations as the twenty-first century begins, but the potential exists for the creation of a wealthy and powerful commonwealth founded on basic beliefs in freedom, human dignity, and democracy. Given the vast resources of Russia alone -- its vast land area and its population -- the introduction of a market economy could develop that republic into an economic power that could substantially alter the course of human events. The literacy rate in the old Soviet Union was about 98 percent, compared to about 80 percent in the United States. Ironically, in future global competition with the United States, the CIS could find itself in the driver's seat by effectively utilizing its well-educated work force and its natural resource base.
And with a population of about one billion people and one of the most advanced military forces in the world, China should not be overlooked as a potential world economic power. The abundance of low-cost labor in China has already enabled that country to establish itself firmly as a leader in the textile industry. With the capacity to do the same thing in any labor-intensive industry, China can be expected to put significant pressure on firms that fail to modernize and keep pace with changes in technology and management practices. As the 1989 protests (and massacre) in Tiananmen Square showed the world, however, the change to a market economy has ignited the Chinese people's desire for political freedom and has posed a serious challenge to the leaders of this last major totalitarian communist state. With pressures from within and from the free nations of the world, China faces an uncertain future. If it can manage the coming political transition (transferring power from the old communists to the next generation), China may well develop its nascent economic power to rival the United States.
THE TASK FOR THE UNITED STATES
The United States must respond to these profound changes in the world around it. Global competitive pressure and potential future economic threats are forcing U.S. business leaders and government officials to think seriously about the significant changes required to restore the nation's competitiveness in the global economy. The United States has formed a free-trade zone with Canada and will likely form a similar zone with Mexico to capitalize on the human, physical, and fiscal resources of each nation in global competition. Despite inevitable political resistance to such agreements in all three countries, economic realities again suggest that we will continue to move in the direction of increased cooperation with Canada and Mexico.
Our economic prosperity and the prosperity of our children and our grandchildren depend on the decisions our country will make in the 1990s. Never ill our nation's history has leadership been more important than it is today. We lost sight of the leadership factor after World War II, and now we have no choice but to regain our perspective and to address the fundamental problems in both business and government.
Since the end of World War II, business executives have been told to monitor their environments closely and to be prepared to deal with unexpected changes if they want their firms to be successful. Those who followed this advice developed an appreciation for the importance of dealing not only with internal matters but also with the external environment. Additionally, business leaders have become more aware that successful managers in today's complex and rapidly changing world must confront current issues and must, at the same time, develop strategies for the future.
But scanning the horizon for fluctuations that might affect the firm's survival is not the leader's job alone; everyone in the organization should do the same. Significant external changes may originate in industries or areas with which people are quite familiar, or they may come from people, places, or things altogether unexpected or unknown. Everyone in the organization must be on guard to detect changes that have the potential to threaten its well-being, and the leader's performance in motivating people to assume this responsibility can mean the difference between success and failure.
Consider the example of Baldwin Locomotive, the largest and most successful manufacturer of steam locomotives in the United States, put out of business after World War II by General Motors. During the war, GM developed the diesel locomotive. At first, it was a very crude and expensive technology that Baldwin's people chose to ignore, although they were aware of GM's work. Its preeminence in the industry and the belief that the diesel locomotive could not work brought Baldwin down. Had Baldwin's people been diligent, they would have studied the diesel locomotive, understood its advantages, and adopted and improved the new technology in a timely fashion. They did not; Baldwin is history, and Baldwin's leaders were responsible.
The leader's role in nurturing organizational cultures that encourage people to look beyond tradition and to excel is pivotal. In the 1990s it is not sufficient (in fact, it never was sufficient) for leaders to concentrate on controlling internal operations and such short-run performance measures as quarterly profits and production efficiency. They must also focus on finding innovative people and helping these people develop their abilities -- an activity that only shows its true value over time. The payoffs for firms whose leaders assume these responsibilities include an increase in the loyalty and commitment of their employees and improved innovation, quality, and profits.
The importance of each individual's performance to the creation and maintenance of successful long-term corporate performance is being increasingly recognized.
It is people within the organization who come up with new ideas, who develop creative responses, and who push for change before opportunities disappear or minor irritants turn into catastrophes. Innovations, whether in products, market strategies, technological processes, or work practices, are designed not by machines but by people....And so, after years of telling corporate citizens to "trust the system," many companies must relearn instead to trust their people -- and encourage their people to use neglected creative capacities in order to tap the most potent economic stimulus of all: idea power.
People, not organizations, have ideas; people create, and people innovate. In the final analysis, individual efforts determine whether businesses succeed or fail. Thus, we turn our attention to the role leaders play in motivating individuals to exercise their creative abilities and to produce superior quality goods and services. Identifying arid removing impediments to individual performance is one of the most important jobs leaders have. Failure in this role can be devastating.
CREATIVITY IN U.S. COMPANIES
For businesses to compete successfully in today's world economy, they must be creative, and their products and services must be regarded as being significantly better than those of their less creative counterparts. To be creative, firms must adopt an innovative, entrepreneurial, flexible, and responsive approach to solving problems and making decisions. They must also develop a capacity for renewing themselves and for continuously rethinking every phase of their operation. Experimentation is fundamental to this philosophy of corporate life, and disciplined management makes new ideas work once a decision is made to implement them.
Unfortunately, for a variety of reasons, the people in most U.S. companies are not creative. Many companies foster large bureaucracies that generate unnecessary anxiety and effectively stifle innovation. Over the years, they have established deeply embedded traditions of deductive thinking and analytical problem solving, traditions that restrict the number and type of alternatives considered and perpetuate the status quo. To protect these sacred traditions and to minimize opposition to the way they do business, managers in these businesses recruit, hire, and promote people just like themselves. With no diversity in the work force and no creative role models, nothing new happens. And at the root of these problems you will find the people who run the company, the people who should be leaders, but are not.
In our leadership seminars, we use a simple exercise to show executives how pervasive this lack of creativity is. In Figure 1-1 you will see nine dots. We ask the executives to connect all nine dots using four straight lines without lifting their pens from the paper. Try it yourself; it is not as easy as you might think. Some of the executives in our seminars have seen this exercise before, but few of them remember how to connect all the dots. Rarely does a participant in the seminar figure out how to connect the dots in a reasonable amount of time.
Figure 1-2 shows the solution. Once we have shown it to the group, they understand immediately why they were unable to solve the problem and why their firms lack creativity. To solve the problem, they must extend their lines beyond the boundaries they see. What they see in our discussion after this exercise is that in fact there are no boundaries. They simply assume that they cannot go beyond the outer dots, and so they fail to solve the problem. This self-imposed constraint makes an otherwise simple task impossible to perform, yet it is a mistake repeated countless times each day by people in their organizations. This limited thinking within "rules" that do not exist keeps them from competing effectively, and it could, left unchecked, lead to their demise.
Creative companies are different. They attract and nurture intelligent, creative, and innovative people. They use a problem-solving philosophy that emphasizes what is right instead of who is right; they question assumptions, and they promote their best performers. Creative companies do not rely on close supervision and extravagant control procedures to get the job done. Instead, they rely on the character of their employees, expecting the latter to do what is right because it is right, not because they are told to do so. Leaders in these companies have a fundamental belief in and respect for their people, and they recognize that the company benefits when its people are allowed to "act out their aspirations." This approach is especially appropriate in today's business environment. When the old rules and procedures no longer apply, we desperately need creative people with new ideas, new ways of doing new things we have never done before.
Executives must accept the fact that uncertainty and ambiguity will continue to be normal elements of their lives. Survival in this uncertain world of business will be determined more by the ability of leaders to marshal their forces to take appropriate action than by their ability to produce a few consecutive quarters of good financial reports. No longer will the mere application of policies and procedures suffice, even in industries that have relied on them almost exclusively in the past. Leaders must inspire their people with a shared vision and values, not just allow but encourage them to think and act accordingly, and reward them for doing so. It is this ability to make things happen that will separate the winners from the losers.
LEADERSHIP VERSUS MANAGEMENT
Most U.S. organizations are overmanaged and underled. When leaders are more interested in looking good than in doing what is right and necessary, the results can be catastrophic. The U.S. experience in Vietnam illustrates what happens when management supplants leadership and form takes precedence over substance. Jeffery Record, a U.S. defense critic, made this point in his analysis of America's failure in Vietnam: "Too many military men forgot why they were in uniform. Promotion-hungry officers more interested in 'punching the ticket' too often forgot to lead their men and treated them like interchangeable parts in some vast machine....Men cannot be managed to their deaths; they must be led there."
Sadly, American graduate schools of business have exacerbated our leadership problem since the late 1950s. They have spent far too much time teaching students to use a rational, deductive, analytical problem-solving approach in managing people and things, and far too little time on leadership. Abraham Zaleznik, the former Konosuke Matsushita professor of leadership at Harvard Business School, distinguishes the two in this way: "Managers aim to shift balances of power toward solutions acceptable as compromises among conflicting values...[while] leaders develop flesh ideas to long-standing problems and open issues to new options....[Leaders have] much more in common with artists, scientists, and other creative thinkers than they do with managers."
In practice, leaders are team builders who draw forth the talent of individuals to produce results that satisfy both the team members and the team's customers. Managers, on the other hand, typically form committees to address issues and problems. And the difference is clear, according to Ralph Stayer, CEO of Johnsonville Foods: "A team has a vision. Committees have agendas -- often, separate agendas."
Until recently management textbooks discussed their subject almost exclusively in terms of what are known as the "management functions" (including planning, organizing, staffing, directing, and controlling). They, too, paid very little attention to questions about leadership. When they did address leadership issues they focused on psychological, sociological, and anthropological concerns, but they gave only scant attention to the roles leaders play in organizations. Although the management functions are important activities that are essential in keeping an organization running smoothly, merely performing them well is no guarantee of success. For that, leadership is required.
Fortunately, things are beginning to change. For example, it was reported in 1992 that General Electric had implemented a plan to reward and promote executives on the basis of demonstrated leadership ability and to remove those who do not lead. Under John F. Welch, Jr., chairman and chief executive officer, GE divides leaders into tour groups. Type 1 leaders deliver on commitments and share the company's values. Their futures are bright. Type 2 leaders, on the other hand, do not deliver on commitments and do not share the company's values. They do not last long. Type 3 leaders are those who have difficulty delivering on commitments but who share the company's values; they are given a second chance and are relocated.
The final class, Type 4 leaders, deliver on commitments but do not share the company's values. They are autocrats who squeeze every ounce of productivity they can get out of their people. Their performance is good, but only in the short run. According to Welch, their inability to inspire their subordinates and to help them grow professionally is not acceptable "in an environment where we must have every good idea from every man and woman in the organization....We cannot afford management styles that suppress and intimidate." This type of leader may be able to manage, but he or she does not have a clue about what leading is.
As the matrix at General Electric implies, position in the management hierarchy is not always a good indicator of leadership ability. In late 1992 and early 1993 we have seen numerous examples of CEOs effectively forced out of office for failure to lead, including Robert Stempel of General Motors, James Robinson of American Express, and John Akers of IBM. We take this as a positive sign: at the highest level, American business is taking a fresh, critical look at its leaders. The critical question for the future is, will their successors lead more effectively?
HOW LEADERS ARE DIFFERENT
In our view, three things distinguish leaders from managers: vision, strong values and beliefs, and the courage to act to make their visions real.
To a leader, vision is a reality that has not yet come to be; it is not a dream. This vision reflects a depth and breadth of understanding that enables one to detect patterns or trends as they unfold, and it guides a leader through the present and into the future.
A true vision must provide a clear image of a desirable future -- one that represents an achievable, challenging, and worthwhile long-range target toward which people can direct their energies....For example...a corporate leader may have a "vision" of getting back to the basics or cutting the budget. As commendable as these goals may be, they hardly suggest a future distinctly different from and better than the past.
A vision of the future is more than just a plan or a goal. It is a picture of what the future should and could look like; plans and goals operate as vehicles for making that picture a reality. "For leaders, the responsibility is to transform the vision into a reality. By doing so, they transform their dominion, whether an airline, a motion picture, the computer industry or America itself." True leadership acts in direct opposition to mediocrity; it is concerned with greatness. As Henry Kissinger puts it: "Leaders must invoke an alchemy of great vision. Those who do not are ultimately judged failures, even though they may be popular at the moment." True leaders possess vision, and having vision provides a leader with purpose. This will be crucial in moving businesses in our nation successfully into the twenty-first century.
Values and Beliefs
Values and beliefs are critical dimensions in leadership effectiveness because they serve as the basis for direction and action. According to management expert Philip Selznick, "The formation of an institution is marked by the making of value commitments...[and] the institutional leader is primarily an expert in the promotion and protection of values." Put more simply, leaders in successful firms personify the values they profess, and they live the values the business represents.
Ray Kroc, founder of McDonald's, provides a good example of the leader's role in promoting and protecting values. The stated values of McDonald's are quality, service, value, and cleanliness. Cleanliness in particular is difficult to realize, and yet it differentiates McDonald's from the typical fast food restaurant. Like all other fast food franchisers, McDonald's relies on part-time, minimum-wage employees, many still in high school, to keep its stores clean. These are the same people whose mothers cannot get them to make their beds at home. How does McDonald's do it?
As the story goes, one day Ray Kroc walked into one of his franchise stores during the lunch rush, and the place was packed. In the corner of the store, someone had spilled a drink on a table, and it had rolled off the table onto a chair and the floor. The employees were so busy that no one noticed the mess, but Kroc saw it. He could have gone to the manager and brought it to his attention, but instead Kroc went into the back, got a mop and a rag, and cleaned up the mess himself.
No one in the store knew Kroc personally, so the e