TURNAROUND MANTRAS
As companies look to straddle maximising profit with keeping employees motivated, what can businesses do to remain relevant?
In today's turbulent environment, business leaders seek new pathways to success for their organisations. Despite the prevalent discourse on transformation through trends such as digitisation and remote work, many firms struggle with practically executing these transformations.
A historical perspective on the business environment since World War II provides context for these challenges. From 1948 through 1973, real GNP growth averaged 3.7 per cent, unemployment was relatively low, and inflation rarely exceeded 5 per cent, resulting in low interest rates. During this period, American businesses thrived in both domestic and international markets, accumulating a trade surplus of $157 billion. Business practices and literature developed during this era were well-suited to the stable environment. Vertical organisations with short spans of control and powerful staff were effective. Decision-making was deliberate, involving multiple organisational layers. Long-term planning and investment decisions based on discounted cash flow were prioritised, and there was a reluctance to terminate managers or employees.
In this favourable environment, turnarounds were infrequent. Occasionally, management failures led to notable business collapses, such as those of Studebaker, the Henry J, and the Edsel. However, on the whole, the need for turnaround management was rare.
The early 1970s marked the onset of significant challenges. While economists, political analysts, and social scientists may debate the causes, the effects were clear: the rate of environmental change accelerated, and competition intensified. The rapid pace of technological change has also introduced new products that have supplanted previously dominant offerings, further compounding these pressures.
Among the many stories of corporate turnarounds is the success of Best Buy orchestrated by Hubert Jolly, the author of the best-selling book The Heart of Business – Leadership Principles for the Next Era of Capitalism, a Harvard Business School faculty member who formerly served as chairman and CEO of Best Buy. Jolly's successful experiences in turning around Best Buy, as enumerated in his book and articles, provide the basis for this article.
The Culture Angle
Corporate revitalisation encompasses multiple dimensions, including strategy, finance, organisation, culture, and the leader's role. Business turnaround refers to revitalising a struggling or underperforming company by implementing strategic changes and improvements to restore financial stability, enhance operational efficiency, and return the business to profitability. A turnaround aims to address the root causes of poor performance and establish a sustainable competitive advantage within the industry.
Turnarounds have become a common aspect of business life rather than exceptional occurrences. In recent years, companies such as Continental Bank, Bank of America, International Harvester, Braniff, People Express, Commodore, Atari, Control Data, Storage Technology, and Fotomat have all faced significant challenges. These are not small enterprises or confined to troubled sectors such as oil, steel, or smokestack industries. Indeed, it appears that no industry is immune. High-tech, low-tech manufacturing, and service, large and small companies alike are experiencing difficulties. Even prominent firms like Kodak, AT&T, and IBM are making concerted efforts to maintain their longstanding values while streamlining operations to remain competitive.
The Best Buy Story
The vast majority of executives recognise the importance of profit. The challenge lies in realising a noble purpose and achieving meaningful outcomes.The primary objective of a company is not merely to generate profit. While profit is an essential outcome, it is not the ultimate purpose. Business has three imperatives: people, business, and finance. Firstly, ensuring that employees are well-equipped and motivated. Secondly, satisfying customers with products and services that meet their needs. Lastly, achieving financial stability. These imperatives must be balanced. Reflecting on his career, Jolly defineshis purpose as helping to unleash human potential and magic in the world.
Jolly emphasises that it is crucial to recognise that financial success is fundamental to any business. Without profitability, a business cannot survive. However, there are more effective ways to maximise shareholder value than managing a business solely based on financial metrics. Research on companies like Google, Apple, and Microsoft reveals that a clear sense of purpose drives their success. For instance, Google's mission to organise the world's information and Amazon's customer obsession were key to their growth.
As the CEO of Best Buy, Jolly was well positioned to navigate Best Buy through its turbulent times. Its turnaround, instead of focusing solely on cost-cutting, was profoundly human-centric.Several strategic actions were implemented, including aligning prices with Amazon, investing in the online shopping experience, enhancing supply chains and stores, exiting some international markets, and reducing costs. Rather than adopting a conventional cost-reduction strategy, Best Buy’s approach prioritised people.
Headcount reduction was a last resort, recognising that layoffs are only justifiable when all other measures have been exhausted. This approach contrasts sharply with the more prevalent focus on headcount reduction, which often forms a significant portion of a company's cost structure. Of the $2 billion in costs eliminated, 70 per cent did not involve personnel reductions.
Another crucial aspect of the human-centric approach is creating energy within the organisation. This focus on harnessing and amplifying human energy was fundamental to the company’s successful turnaround.
The Leader’s Role
Starting with people within their businesses, who are the primary drivers of any enterprise, is quite inspiring. The title "Chief Executive Officer" does not fully capture the role. Instead,it should be as the "Chief Energizing Officer." The role involves creating energy within the organisation by co-creating the diagnosis, creating the plan, initiating actions, celebrating early wins, and other similar activities.
This inspired the team at Best Buy to create an organisation where employees would love to work, customers would love to shop, communities would benefit, and shareholders would want to invest. Jobs became callings, focused on building a lasting legacy.
Bridging this gap involves focusing on the "why" (strategy) and the "how" (culture). Purpose must be the cornerstone of strategy, influencing portfolio activities, positioning, and marketing. Furthermore, the culture must foster an environment that unleashes human potential.
Regarding leadership, Jolly realised that the old management model—devising smart strategies and plans, instructing others, and aligning incentives—was insufficient. Instead, effective leadership is about creating the right environment. Leaders should act like gardeners, creating a fertile environment for growth. This involves fostering key drivers of extraordinary human behaviour based on research and experience.
Six essential elements inspire extraordinary behaviour:
Meaning: People must feel their work has a purpose, driven from within.
Authentic Connection: Genuine human connections where everyone feels they belong, are respected, and valued.
Psychological Safety: Creating an environment where people feel safe.
Autonomy: Providing freedom and empowerment within a structured framework.
Growth Mindset: Viewing the world as a place of opportunities, not zero-sum.
Learning Environment: Encouraging continuous learning and growth.
The role of leaders is to cultivate an environment where individuals can contribute to their fullest potential, aligning their personal purpose with the company's. This requires a profound shift in leadership approach, focusing on enabling others to unleash their potential and achieve extraordinary results.
During Jolly’s tenure as the CEO of Microsoft, the company's purpose was revitalised to empower every person and organisation to achieve more. This approach, focused on addressing unmet needs with empathy, drove significant growth and profitability. Empathy, while not synonymous with love, is closely related and essential in understanding and addressing customers' and employees' needs.
A common misconception is that focusing on love and human connection in business implies disregarding financial results. This is not the case. The goal is to integrate a noble purpose with a strategy that drives economic value. Companies must balance purpose with profitability, ensuring that their initiatives create value for customers and shareholders.
To make this purpose-driven approach real, consider these key steps:
Go Slow to Go Fast: Take the time to translate the purpose into a clear, actionable strategy. Ensure that this strategy is practical and aligns with business goals.
Create the Right Environment: Establish an environment that supports the purpose. This includes fostering a culture of openness and trust.
Simplify the Message: Keep the purpose simple and relatable. Use stories and practical examples to illustrate how it can be applied in everyday work.
Leadership by Example: Leaders must embody and demonstrate the purpose through their actions. If leaders do not practice what they preach, the initiative will fail.
Follow Through: Continuously reinforce the purpose through communication, training, and recognition. Show how the purpose translates into business success.
Ultimately, integrating purpose with profit requires a clear, practical approach communicated effectively and embodied by leadership. By doing so, businesses can achieve sustainable success while fostering a culture of empathy and connection.
Consider the resurgence of Microsoft, which has used purpose and culture as catalysts for growth, making it the most valuable company globally. Similarly, Netflix has leveraged its culture to create a sustainable competitive advantage. Ralph Lauren’s clear purpose—"to inspire the dream of a better life through authenticity and timeless style"—can serve as a powerful differentiator and enhance shareholder value. The company's share price has increased significantly, demonstrating the tangible benefits of a purpose-driven strategy.
When Strategy and Culture Combine
The turnaround story of IBM is legendary, and Louis Gerstner's memoir, "Who Says Elephants Can’t Dance?" provides an unparalleled account of this transformation. As the CEO who revived IBM from the brink of collapse and restored it to its former glory, Gerstner's leadership from 1993 to 2002 is renowned.
Gerstner's memoir explores strategy and culture, detailing IBM's remarkable turnaround. He underscores the importance of aligning managers' interests with those of shareholders, not through risk-free instruments like stock options but by requiring them to invest their own money in direct ownership of company stocks. This principle became a cornerstone of the management philosophy he implemented at IBM.
Gerstner emphasises a few key principles for success: leadership, customer focus, strategy, and culture.
Leadership is a central theme in this narrative. Gerstner emphasises the necessity of gradually constructing a management team, business by business, individual by individual, and day by day. He prioritised stock-based compensation as the largest component of executive pay, reducing annual cash compensation in favour of the potential for stock appreciation. Executives were required to invest their money into direct ownership of IBM stocks to receive stock options (p.98). According to Gerstner, institutional transformation is unattainable if incentive programs are not aligned with the new strategy.
Regarding customer focus, Gerstner asserts that a successful, focused enterprise deeply understands its customers' needs, competitive environment, and economic realities. His strategic approach, informed by his experience at McKinsey, highlights the importance of a detailed process to comprehend a company's foundational elements. He emphasises the necessity of balancing decentralised decision-making with a central strategy and a unified customer focus. Gerstner's first and most crucial strategic decision at IBM was to keep the company intact. IBM's turnaround hinged on the effective execution of this strategy.
Culture remained a cornerstone of Gerstner's strategy. He dedicated himself to creating organisations that balance hierarchical structures with collaborative problem-solving, regardless of employees' positions within the company. His tenure at IBM reinforced his conviction that culture is not merely a part of the organisation; it is the organisation's essence. Gerstner asserted that an organisation ultimately reflects the collective capacity of its people to create value. He concluded that management does not change culture but invites the workforce to transform it.
Assessment
A continued emphasis on culture
defines business transformation in some of today's best-known corporate success stories.
Leaders such as Hubert Jolly, who have transformed companies into success,
emphasise the importance of a clearly marked-out purpose that serves to inspire and
set the tone for the company.
In environments where providing feedback is culturally challenging, such as in India, anonymous 360-degree feedback can be beneficial. As a leader, it is crucial to set the appropriate tone, emphasising the importance of honesty and creating a psychologically safe environment for feedback. Leaders should model openness to feedback and demonstrate how they use it to improve.
