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					                        Lecture 7 Reading:
           Leadership and the Psychology of Turnarounds

Kanter, R. M. (2003) ‘Leadership and the psychology of turnarounds’, Harvard
Business Review, June 2003.


      Turnaround situations: where new leaders bring distressed organisations
       back from the brink of failure and setting them on a healthier course
      Need for smart financial and strategic decision-making and also restored
       confidence in themselves and in one another
      Ability to restore confidence in your leader is a necessary antecedent to
       restoring investor/public confidence
           o Inspired and empowered their organisations to take new actions;
               turnaround leaders are ultimately leading a psychological
               turnaround
      Examples:
           o Gillette: company experienced several years of flat sales, declining
               operating margins and loss of market share by the beginning of
               2001
           o Company suffered from the effects of its reliance on trade loading
               (offering discounts to retail customers at the end of a quarter to
               move products and achieve sales targets; this however sacrifices
               margins and jeopardizes next quarter’s sales)
           o Executives rarely sat in the same meetings so initiatives were not
               coordinated
           o SKUs (stock keeping units/ product variations) grew as groups
               made decisions without informing other departments, leading to
               waste and duplication; respect among peers declined
           o BBC: seriously demoralised organisation in 1999; funding was
               secure because of licensing fee but lost audience share, declining
               ratings and outpaced by commercial competitors
           o Employees felt attacked both externally and internally
           o Program developers felt at the mercy of broadcast commissioners
               and felt they were treated unfairly because they had to deal with a
               long bureaucratic process which tended to end in their proposals
               being rejected more than half the time
           o Radio division felt they weren’t as respected and employees
               regularly went to the press with grievances
           o Invensys: global conglomerate that was created through mostly
               acquisitions but was close to failing in terms of financial
               obligations in 2001
           o Insufficient communication across the firm, including few common
               meetings, competition among divisions and inward focus among
               managers
           o Constant restructuring caused fear in employees and reduced
               initiative
           o Employees did not respect many people in the organisation
      Pattern found in the above situations – organisational pathologies
       (secrecy, blame, isolation, avoidance, passivity and feelings of
       helplessness) arise during a difficult time for the company and reinforce
       one another

The Dynamics of Decline: A View from Inside
      IEC’s past success was dwarfed by its lacklustre products and high
       expenses in a shrinking post-tech crash market
      Individuals viewed IEC as a failing company and caused groups to lose
       confidence in them
      Organisation was under a negative halo – “halo effect” defined as the aura
       that surrounds a successful person or organisation
      Company’s leaders thought that they could become successful again by
       exhorting people to reduce their expenses further and launce new
       products faster
      Tighter controls greeted with cynicism from employees, where some
       began to just do the bare minimum expected of them and managers
       distanced themselves from company decisions (would allow them to hold
       others responsible when outside consultants asked)
      Likelihood of secrecy and isolation among managers increased when
       problems mounted
      CEO told managers to focus on improving individual performance and put
       their bonuses at risk
      When meeting current targets became their priority, cross-
       functional/cross-divisional projects were virtually eliminated and
       disregarded the other parts of the organisation’s activities
      Some business efforts were duplicated in the process
      People’s time and effort went to self-protection
      Although reporting requirements increased during IEC’s troubled period,
       communication outside of formal meetings decreased
      No one raised questions for fear of producing angry exchanges and start
       the blame game
      Managers with opportunities were leaving and needed constant
       recruiting to fill holes at the top, leaving critical tasks undone since
       executives were on double duty/ taking care of operational activities too

The Troubled Company’s Cycle of Decline
    Corporate decline stems from an accumulation of decisions, actions and
       commitments
    To cope with decline, IEC did what most in-decline companies did – trade
       loading, where promotional deals to its distributors were offered to move
       inventory
          o Short-term solution to declining sales but made the situation
               worse because it reduced funds available for marketing and
               increased their reliance on promotional deals
    Promotions were a cycle because customers realised that they would be
       able to purchase their products for cheaper prices at the end of the
       quarter
          o Managers began to feel “helplessness” (Seligman)
      People at IEC began to feel as if there was little they could do to make a
       difference in the company’s fortunes
      Low goals were set by managers to guarantee that they could achieve
       them
      Individuals that all felt mediocre began to add up to a system that caused
       people to feel powerless

Reversing the Cycle
    IEC illustrates how one problem can lead to another in a cycle that ails the
       organisation’s culture
    The dynamic:
           o After the initial blow people began to point fingers and deriding
              colleagues in other parts of the business
           o Results in tensions that curtail collaboration and degenerate into
              turf protection
           o Increasing levels of isolation throughout the company and
              engender secrecy
           o Once they no longer act together, people find themselves less able
              to effect change and believe they are helpless and passivity sets in
           o The ultimate pathology of troubled companies sets in: collective
              denial
    People engage in collective pretence to ignore what they individually
       know; known as “pluralistic ignorance”
    The case of IEC showed that a new CEO can pull out of a downward spiral
       by:

Promoting Dialogue
         o Companies compound their financial and strategic woes when they
             keep information a secret from their employees and the public 
             the cover-up is worse than the mistake and problem solving is
             difficult impossible without all the facts
         o Turnaround leaders need to open up channels of communication
             starting at the top
         o E.g. Jim Kilts’ first day as CEO at Gillette in 2001 held a full meeting
             of the operating committee and clearly described his style and
             leadership philosophy
                  Kilts clearly outlined what he expected of managers and
                     employees, and told them that he wanted open dialogue
                  He immediately established multiple communication
                     channels (weekly staff meetings, weekly business
                     overviews from all worldwide executives, an online forum
                     where anyone in the company could post questions and
                     receive answers from Kilts directly, distribution of
                     videotaped dialogues with Kilts for managers in
                     international locations and employee roundtables)
                  Kilts also released performance data of the top team with
                     quarterly report cards for his senior managers and posted
                     them for the whole team to see so they could see where
                     they stood relative to the rest of the team
                    Through the above moves Kilts eliminated secrecy and
                     denial – there was no way of hiding any information
      Almost identical shifts in quantity and quality of communication in BBC
       with Greg Dyke
          o Restructured to remove the layer that stood between top
              management and those responsible for audiences and products
              (broadcasters and show producers)
          o Program people put on the executive committee and given a voice
          o Meetings became more frequent and informal; open and direct
              communication encouraged through personal emails to individual
              employees and broadcasters throughout the BBC
          o Dyke reduced divisions’ formal reporting requirements to the
              executive committee
          o Had personal warmth and made connections with as many people
              as possible
      CEO of Invensys Rick Haythornthwaite and his team made dialogue a
       priority through town-hall-type meetings
      Haythornthwaite still personally involved in the drafting of responses to
       employee questions
          o Questions about cutting the health plan had fallen on him and
              although he hadn’t been part of the decision, he made the
              employees see that it was the sensible course of action
          o Felt that giving the facts to the people was crucial


Engendering Respect
          o Open dialogue exposes facts, tells the truth and builds
             relationships, which are important for a successful corporate
             turnaround
          o Turnaround leaders must move people toward respect instead of
             continuing to blame people; when colleagues respect each other’s
             abilities, they are more likely to collaborate
          o Reconciliation helps people move beyond assigning blame for
             problems and regain respect for one another while becoming more
             personally accountable
          o Haythonthwaite wanted to avoid punishment for past mistakes
             and build mutual respect among colleagues
          o Kept the same people in the company except for one division head
             which signalled that there was quality and talent in the existing
             employees
          o To set standards for a variety of processes, the new leaders looked
             inside the organisation for best-in-class practices as another way
             to raise organisational esteem and confidence
          o Jim Kilts at Gillette helped people look at the facts without getting
             defensive and didn’t feel the need to restructure the company by
             letting people go
          o Kilts didn’t allow blame to be placed in meetings which would take
             away from the objectives and priorities, which meant that people
             could start relying on each other to be accountable
          o Hard to play politics if everything is discussed openly

Sparking Collaboration
          o Turnaround leaders know that problem solving requires
              collaboration across departments and divisions
          o Changing company dynamics requires collective commitments to
              new courses of action
          o New strategies are possible when new kinds of conversation are
              held about combining organisational assets in new ways
                   E.g. Greg Dyke’s first initiative was to called “One BBC:
                      Making It Happen” which highlighted that he was seeking
                      more collaboration throughout the organisation
                   Cross-divisional meetings increased and members
                      discovered areas where they could combine forces to tackle
                      new business opportunities
          o Gillette’s complex organisational matrix meant that there activities
              would intersect between groups i.e. product managers required
              resources and support from IT department
          o Kilts encouraged the formation of operating committees in each
              business unit or regional group and further encouraged the
              creation of cross-matrix operating committees that included
              representatives from all the functions and areas on which the
              business unit depended
          o Created business opportunities that one business unit wouldn’t
              have seen by itself
          o Turnaround leaders don’t continually reorganise the organisation,
              which disrupts them further, but augment the organisation chart
              with flexible (often temporary) groups that open relationships in
              multiple directions
                   E.g. Invesnsys added new groups and roles, cutting through
                      the organisation chart vertically, diagonally and
                      horizontally
                   Top 300 people in rank and 100 additional participants
                      called “ambassadors for change” ensured that people below
                      the managerial ranks would be part of the strategy
                      formulation
                   Recruited experts led in 4 areas that cut across the business
                      (supply chain, customer development, service delivery and
                      project management); only small teams and only
                      responsibility was to set standards within their areas


Inspiring Initiative
            o Once turned around CEOs establish structures that allowed people
                to collaborate, they need to empower their employees to initiate
                the actions that will improve the company’s financial/strategic
                position
            o Dyke showed employees that they were in charge and that they
                could change things if they liked (Jane Root, controller of BBC2)
          o Next step in BBC was to move idea generation from the BBC’s
            executive committee and senior leaders to everyone in the
            company, so that ideas flowed from both bottom up and top down
          o BBC began to take into account the ideas from employees and
            implemented 700 out of more than 2,000 ideas
          o At Invensys, the leadership team conveyed the message that
            employees were expected to show initiative
                 Company created INVEST (identify, nominate, validate,
                   evaluate, start, track) which was meant to find
                   improvement projects already underway in the
                   organisation, as well as new ones; the framework was
                   meant to give them a disciplined project-management
                   process



The Energy For Change
      Important to remember that leading a corporate turnaround isn’t a one-
       size-fits-all process
      It means that a CEO has to pay attention to the specifics of their
       company’s problems and leaders should bring their own preferred
       approaches to the task
           o Haythornthwaite engaged large teams to work on a new strategy
               for Invensys
           o Kilts devised Gillette’s strategy for each line of business himself,
               working with a small group of executives
           o Dyke virtually eliminated consultants at the BBC to force managers
               to think for themselves while Kilts retained many consultants to
               bring an external perspective
      Despite differences in strategies and tactics, all turnaround leaders share
       the task of restoring confidence through empowerment with
       opportunities for initiative
      Leaders must balance activities
           o Most troubled organisations are generally in financial distress and
               cutting expenses is a characteristic turnaround move but
               determines whether the turnaround is a temporary fix or a path to
               sustainability
           o CEO needs to encourage initiative and make people feel like they
               can make a difference to pull out of a death spiral
      Effective turnaround leaders consider the kinds of cuts as well as the
       number, emphasizing reductions in bureaucracy that stifles initiative,
       thus creating conditions for change
           o BBC: Greg Dyke campaigned to reduce overhead over a 5-year
               period from 24% to 15% of revenues by cutting a level of
               management, cutting spending on consultants and consolidating
               support functions and making it clear that they served the
               business units, not the other way around
           o Invensys: Haythornthwaite restored confidence, which raised
               aspirations which is the source of energy for change
   Turnarounds are where leadership matters most
   Managers can stem losses with a few methods, such as cutting budgets or
    selling assets but putting an organisation on a positive path also requires
    that leaders energize their workforce throughout the ranks
   Small wins that the newly empowered people create are the first signs
    that a turnaround is on track
   True test of leadership is whether those being led out of the defeatism of
    decline gain the confidence that produces victories

				
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