340 BEST PRACTICES INLEADERSHIPDEVELOPMENT AND ORGANIZATIONCHANGE • Execute. Achieve results significantly better and faster than our competitors by employing innovative, proven, and rigorous management practices. Personally meets commitments and keeps promises. • And always, Ethics and character. Conducts business ethically always and everywhere. Treats all people and all cultures with respect and dignity. Keeps one’s personal ambitions and emotional reactions from interfering. Motorola’s CEO also articulated a five-point plan for achieving business results in which improved leadership effectiveness topped the list. Motorola’s Performance Management Process Motorola’s performance management process is an ongoing cycle of setting per- sonal goals that align with the business’s scorecard objectives, then observing and discussing performance issues, development plans, job match, and career plans throughout the year. The process culminates with year-end assessment of leadership behavior and business results, calibrated across leadership ranks, which in turn informs differential investment decisions (for example, incentive plan payout, executive education opportunities, assignment to special CEO project teams) based on relative contribution to the company’s performance. Outcomes of assessment and calibration of relative performance feed into goal setting for the next year, and the cycle repeats. Planning Dialogue. The planning dialogue occurs at the start of the year, and its purpose is to create mutual understanding of performance expectations between employees and their managers. The discussion focuses on defining results goals aligned with the business or function scorecard, and leadership goals focused on behavior most critical for attaining expected results. Once goals are defined, the discussion turns to establishing professional development and career plans that will enable employees to achieve their immediate performance and future career goals. Checkpoint Dialogues. The purpose of checkpoint dialogues held in the sec- ond and third quarters is to review progress to goals. Key to these discussions is performance feedback from key work partners and matrix managers. Check- point dialogues provide the opportunity for employees and their managers to assess progress to goals and development plans, discuss goal modifications to support changing circumstances, create action plans to address barriers to success, and check for understanding and agreement. Assessment of Results and Behaviors. At year-end, two performance assess- ments are made. First, leadership effectiveness is evaluated via a web-based cart_14399_ch14.qxd 10/19/04 1:16 PM Page 340 MOTOROLA 341 multirater assessment based on the “4e’s ϩ Always 1” leadership standards and administered to executives, their managers, and their subordinates. Rater input is combined statistically to produce an overall leadership behavior score. Second, performance to results goals is evaluated and jointly agreed upon by the employee and manager, using metrics established during the planning dialogue. Calibration. Following year-end performance assessment, managers participate in a calibration process—supported by the web-based information system—to share rationale for performance evaluations and come to agreement on the relative performance of the employees reporting to them. Managers view their direct reports’ results and leadership behavior scores plotted graphically (with results plotted on the horizontal axis and behav- iors plotted on the vertical axis). Discussion follows of each person’s individual and relative contribution based on results, leadership behaviors, and other legit- imate business factors (such as job complexity, stretch in goals, technical skills, special expertise, breadth of experience). The end result is a collectively deter- mined relative ranking of employees into most effective, solidly effective, and least effective groupings. Summary Dialogue. Following calibration, managers and employees complete the summary dialogue to review individual performance through year-end, dis- cuss calibration outcomes, refine development plans, and begin planning for the coming year. Aiding the discussion is a comprehensive feedback report derived from the multirater assessment that not only displays ratings and comments but also suggests development actions from For Your Improvement (Lombardo & Eichinger, 2000) for areas requiring improvement. These suggestions are very useful in guiding development of performance goals, creating development plans, and discussing career plans. Link to Rewards Executive rewards play a key role in driving Motorola’s change to a performance- based culture. Differential investment—rewarding executives commensurate with their overall contribution to the success of the company as determined during calibration—sends a clear message to employees that results and leadership behavior are what count. Leaders considered most effective have produced break- away results and have demonstrated exemplary leadership behavior. They are rewarded with challenging job assignments, promotional and developmental opportunities, and significant monetary awards. Somewhat less, yet still consid- erable, investment is made in solidly effective leaders—those who “deliver the goods” consistently and demonstrate leadership behavior. They are compensated competitively and provided opportunities for continued learning and develop- ment. Modest investment is made in least effective talent to find a way to cart_14399_ch14.qxd 10/19/04 1:16 PM Page 341 342 BEST PRACTICES INLEADERSHIPDEVELOPMENT AND ORGANIZATIONCHANGE improve performance through job reassignment, performance improvement plans, referral to the company’s employee assistance program, or as a last resort, separation with dignity. SO WHAT? By the end of its third full year of implementation, the leadership supply process was producing observable change. In those years, new leadership tal- ents were placed in all but three of the roles reporting to the CEO; one-third of the new senior staff had been brought in from outside the company; and a balance of technical and general management skills among the staff had been achieved. By year-end 2003, Motorola had placed over seventy new leaders in its top one hundred jobs, including a new CEO, COO, CFO, CTO, and six sector presidents. Probably the most telling story, however, is Motorola’s improved business performance in a very tough economic environment. Based on the company’s fourth quarter, 2003 financial report: • Earnings per share were $0.38 (excluding special charges), up from Ϫ$1.78 at year-end 2001 • The company had reported profitability for seven consecutive quarters • Operating margin was 4.3 percent, up from Ϫ6.0 percent for 2001 • The company had reported twelve consecutive quarters of positive cash flow • Net debt was $100 million, down from $7 billion in 2000 • Net debt to net debt ϩ equity ratio was 0.3 percent, the lowest in twenty years LESSONS LEARNED AND “DO DIFFERENTLIES” Reflection over the past three years of development and implementation yields insights into what worked well, and what didn’t work so well. Both provide perspective for others contemplating the leadership supply issue. What Worked Well? • Strong sponsorship by a key executive during the redesign phase led to CEO ownership of the process. • Business leaders were actively involved in the redesign process. Human resources did not own the redesign, but instead worked with and through business leaders who led the redesign teams. cart_14399_ch14.qxd 10/19/04 1:16 PM Page 342 MOTOROLA 343 • Hiring an outside consultant to complete the benchmarking study gave Motorola access to information about leadership programs in other companies without expending scarce internal resources to collect and consolidate this information. • Web-enabling the process was key to achieving consistency of applica- tion throughout the company. It also minimized ongoing administration because the web-based tools compile and report without the need for human intervention. • The Office of Leadership, the new central organization created to manage the leadership supply process, was purposefully kept very small. With web-based tools and implementation carried out by resources within the individual business units, the Office of Leadership was staffed by fewer than ten people, minimizing cost to the organiza- tion and avoiding the trap of creating a centralized bureaucracy. • The CEO mandated that executives comply with the new leadership supply process, particularly with respect to assigning rewards commen- surate with personal and organizational performance. Although unpopu- lar, the mandate served to jump-start the process, short-circuit resistance to change, and quickly gain acceptance as the value of the process became evident. • Establishing semi-annual talent management reviews between sector president and CEO created a rhythmic cadence to the process, reinforced the expectation that development and deployment of leadership talent was to be managed as aggressively as P&Ls, and ensured continued ownership of executive leadership talent and the leadership supply process by the CEO. “Do Differentlies” • The broader human resources organization was not kept up-to-date during the redesign phase. As a consequence, implementation was hampered by the need to assuage feelings of ill will from having been excluded from “the action,” convince HR associates of the need for change, and enlist them as change agents as the process was rolled out. • An external management consulting firm was brought in to build, inte- grate, and pilot HR processes, tools, and procedures. Given the success achieved through partnership with an external consultant in the redesign phase, this approach seemed reasonable. Unfortunately, the consulting team was not up to the challenge and the project lost momentum until an internal team was assembled to take over and com- plete it. In retrospect, the build and implementation phases should have cart_14399_ch14.qxd 10/19/04 1:16 PM Page 343 been led by an internal team from the outset, with consultants brought in as needed to work on discrete, specific components requiring exper- tise not available within Motorola. • The web-based infrastructure supporting the process was developed internally, saddling Motorola with the cost of ongoing maintenance and system improvements. Had the sophisticated HR systems that exist today been available then, the better option would have been to customize commercially available software to meet Motorola’s specific needs. REFERENCES Lombardo, M. M., & Eichinger, R. W. (Eds.). (2000). For your improvement (3rd ed.). Minneapolis, Minnesota: Lominger Limited, Inc. McKinsey & Company. (1998). “The war for talent.” The McKinsey Quarterly, No. 3. McKinsey & Company. (September 2001). “Performance ethic: out-executing the competition.” Organization and Leadership Practice. Charlotte, South Carolina: McKinsey & Company. ABOUT THE CONTRIBUTORS Kelly Brookhouse, in her role as director, leadership, learning, and performance at Motorola from 1999 to 2003, played a central role in conceptualizing and directing Motorola’s leadership supply core process redesign effort, including design and development of the procedures, tools, support materials, and inte- grated information systems required to translate the leadership supply process from vision to reality. Prior to joining Motorola in 1997, Kelly was senior vice president of Aon Consulting’s start-up preemployment testing outsourcing group established in 1994. Her career began as a human resource consultant with HRStrategies, during which time she designed, validated, and implemented pre- employment testing, developmental assessment, and performance management programs for numerous Fortune 100 companies, including Motorola. Kelly obtained her doctorate in industrial and organizational psychology in 1987 and is a member of the American Psychological Society and the Society for Indus- trial and Organizational Psychology. Kelly currently is director, leadership devel- opment at Capital One Financial Services, Inc. Jamie M. Lane, vice president, leadership, learning, and performance, Motorola, Inc., has been with Motorola since 1998 and was actively involved in the lead- ership supply core process redesign efforts. Jamie’s current role is vice president 344 BEST PRACTICES INLEADERSHIPDEVELOPMENT AND ORGANIZATIONCHANGE cart_14399_ch14.qxd 10/19/04 1:16 PM Page 344 MOTOROLA 345 of leadership, learning, and performance for one of Motorola’s business units. During 2001 and 2002, Jamie was responsible for performance management, the TalentWeb, the leadership standards, and organization effectiveness for Motorola. Prior to that role, Jamie was responsible for training and development for Motorola employees, where she led a team of over 300 professionals through nine business-focused learning teams and four global regions. Prior to joining Motorola, Jamie spent two years as a director inorganizationdevelopment and training at McDonald’s Corporation. Prior to joining McDonald’s in 1996, Jamie spent eighteen years with a major professional services and consulting organi- zation. Jamie has an M.S. from Benedictine University inorganization behavior with an emphasis inorganizationdevelopment and international management. She has a bachelor’s degree in accounting and is a Certified Public Accountant. Jamie is a member of the Development, Education and Training Council of the Conference Board, the Executive Development Network, ASTD, and the American Society of Certified Public Accountants (AICPA). She was on the board of trustees for National Technological University. cart_14399_ch14.qxd 10/19/04 1:16 PM Page 345 346 CHAPTER FIFTEEN Praxair An organizational change model for aligning leadership strategy with business strategy in order to drive marketplace differentiation with a heavy emphasis on assessment tools such as customer focus conferences, management practices such as employee surveys, customer scorecards, performance management processes, a series of conferences and follow-up practices, and a commitment to evaluation. OVERVIEW 347 THE OLD GAME IN THE PACKAGED GAS MARKET 347 THE NEW RULES 348 DIAGNOSIS: DELIVERING ON THE PROMISE 349 Early Problems 349 TWO TYPES OF DESIRED OUTCOMES 350 ASSESSMENT: HIGH INVOLVEMENT BUILDS HIGH COMMITMENT 350 Assessment Tools 351 Assessment Steps 351 Assessment Findings 352 Exhibit 15.1: Assessment Steps 353 DESIGN: AN ITERATIVE PROCESS 354 Management Practices Are Central to the ChangeinLeadership Culture 354 Visible Senior Management Support 355 Critical Success Factors in the Design of PDI’s New Leadership Strategy 356 IMPLEMENTATION: ALIGNING LEADERSHIP STRATEGY WITH BUSINESS STRATEGY 357 ONGOING SUPPORT AND DEVELOPMENT: A SYSTEMS APPROACH 358 EVALUATION: ARE WE ON THE RIGHT PATH? 359 S S cart_14399_ch15.qxd 10/19/04 1:17 PM Page 346 PRAXAIR 347 LESSONS RELEARNED 360 NOTES 361 Exhibit 15.2: PDI’s Leadership Philosophy Map 362 ABOUT THE CONTRIBUTORS 364 OVERVIEW Is it really possible to be an A company in a C industry, especially when start- ing as a C player? In the late 1980s and early 1990s Praxair’s then parent com- pany decided to exit the low-margin, high-cost packaged gases (cylinder) segment of the industrial gas industry. But in 1994 different market condi- tions, and a stronger balance sheet, following Praxair’s spin-off as an inde- pendent company warranted reentering this $8 billion market, where sales of packaged gases and consumable hardgoods, primarily to the metal fabrica- tion industry, constitute 70 percent of the total revenue. Despite its long asso- ciation with the industry, Praxair reentered the market as a C player, aggressively acquiring over one hundred small, regional distributors in the United States and Canada to gain market share, as well as to secure a posi- tion in a business with good fundamentals. In the early stages of this acqui- sition period it was unclear what the end-game strategy would actually be. After several years acquisitions were suspended in early 1998 until the longer- term strategic intent could be decided and the acquired companies made more profitable. In time the managers of Praxair Distribution Inc., (PDI) the division respon- sible for Praxair’s packaged gas business in the United States and Canada, came to realize that a fresh approach to this traditional, low-tech industry was required if business results were to be improved. The goal was nothing less than emerging as the clear industry leader, with 6–8 percent sales growth and 15 per- cent net income growth annually, and sequentially improving ROC to above reinvestment levels. These aggressive goals could not be realized without apply- ing new rules to an old game. THE OLD GAME IN THE PACKAGED GAS MARKET Traditionally, regional packaged gas distributors bought their gases (oxygen, nitrogen, argon, acetylene, helium, carbon dioxide, and various specialty gases) in bulk from major gas manufacturers, repackaged them into high-pressure cylinders, and distributed them to welding shops, industrial sites, hospitals, and manufacturing centers. Hardgoods, in the form of welding rods and wire, cutting cart_14399_ch15.qxd 10/19/04 1:17 PM Page 347 348 BEST PRACTICES INLEADERSHIPDEVELOPMENT AND ORGANIZATIONCHANGE tips, helmets, gloves, and welding machines, typically made up 40 percent of the revenue to these same end-use customers. A traditional regional distributor employed eighty to 120 people in functions such as sales, cylinder filling and handling, route delivery, retail store sales, warehousing, and administrative support. Annual sales for these regional com- panies ranged from $2 million to $25 million, but the average was $8 to 10 mil- lion. Pay scales, benefits packages, and employee training were often less than competitive, resulting in turnover exceeding 30 percent a year. Management practices were typical of those found in entrepreneurial, family-owned and operated businesses. Although much larger, PDI was managed in much the same way. THE NEW RULES PDI’s sales in 1992 totaled $250 million but by 1998 were over $900 million, reflecting an aggressive acquisition strategy. Return on capital, however, had fallen from 9.1 to 6.5 percent by 1998, when acquisitions were stopped. PDI’s leaders realized that a fresh approach to the traditional, low-tech industry was required if business results were to be any different. In effect, PDI embarked on a well-known business model, but one fraught with difficulties. Known as a “strategic rollup,” PDI’s business model could be summarized as • Take a highly fragmented industry • Buy up hundreds of owner-operated businesses • Create a business that can reap economies of scale • Build national brands • Leverage best practices across all aspects of marketing and operations • Hire better talent than small businesses could previously afford 1 In a few words, the new business model was to “be big and act small.” The challenge would be to maintain the nimbleness of a small business while lever- aging the economies of scale and market clout of a large enterprise. If the 1995–1998 period was the acquisition phase, 1999–2000 was the fix-it phase. During this period the emphasis was on creating a clear, consistent vision and strategy, replacing nearly 65 percent of the senior management staff who lacked the skills or the desire to execute the new strategy, and implementing disciplined processes in sales, operations, and distribution across all fifteen Canadian and U.S. divisions. Integration and alignment was the focus of the turnaround efforts during this time period. cart_14399_ch15.qxd 10/19/04 1:17 PM Page 348 PRAXAIR 349 Beginning in 2001, the focus shifted to realizing the potential of the new busi- ness model by launching a business strategy grounded on differentiation. New national product and service offerings were introduced during this period based on exclusive distribution rights and private label hardgoods. Growth of the business and eventual leadership of the industry depended on successful implementation of these new rules. One other rule needed to be broken—the traditional management practices that had been standard industry orthodoxy for more than fifty years. The final challenge was to determine whether a new leadership strategy could con- tribute to the overall success of the business strategy. Could the way people are managed contribute to marketplace leadership? DIAGNOSIS: DELIVERING ON THE PROMISE The problem with a rollup business model is that it is especially difficult to exe- cute. The promise of market leadership is hard to deliver. In general, rollup strategies most often get stuck at the second stage of creating an institution that can truly deliver value beyond that achievable by small, regional businesses. In the mid-1990s, PDI found itself facing a number of the problems typical of strategic rollups. Early Problems Problems encountered early on included • A loss of marketshare; new customer gains were more than offset by customer losses • Declining ROC as synergies proved more elusive than originally expected • Diverse cultures within acquired companies resisted changes in operating procedures and new management practices • Employee surveys for two years in a row indicated that PDI was less customer-focused than intended and difficult to do business with, owing in part to a variety of incompatible information technology systems • Management skills of many frontline managers were not sufficient to achieve differentiation through new customer contact behaviors • Frontline supervisors did not understand their role in business- improvement initiatives • Substantially different business and market conditions existed in the United States and Canada, compounding efforts to capture synergies • Acquisitions had been made in low-growth, rust-belt manufacturing regions in the United States cart_14399_ch15.qxd 10/19/04 1:17 PM Page 349 . joining Motorola, Jamie spent two years as a director in organization development and training at McDonald’s Corporation. Prior to joining McDonald’s in. Lombardo, M. M., & Eichinger, R. W. (Eds.). (2000). For your improvement (3rd ed.). Minneapolis, Minnesota: Lominger Limited, Inc. McKinsey & Company.