Jennifer Pellet

188 POSTS 0 COMMENTS
As editor-at-large at Chief Executive magazine, Jennifer Pellet writes feature stories and CEO roundtable coverage and also edits various sections of the publication.

Mining Momentum

Meet Steve Harman, Shell Oil's go-to man when a division needs to fuel growth. Harman grew up in Durham, a small mining village in the U.K. Raised in a coal-mining family, he left school and entered the pits at age 16. Two years later, Harman was back in class courtesy of a program run by the National Coal Board. A subsequent university scholarship to study geography and geology enabled him to leave coal mining-but not coal mines-behind. "Because they pay for your education, you basically sign your life away," he explains. "So I made a 10-year commitment to work with the Coal Board traveling all over the world and consulting on mining developments." Harman had bought out his contract and began working in sales when he was recruited by Shell in 1984. In the 24 years he's been with the multinational oil and Gas Company, he's run various divisions. Most recently, however, his role has been start-up operations and growing and globalizing mature businesses. Harman ran Shell's Marine Products business as CEO, then went on to help architect and lead the globalizations of Shell's Liquefied Petroleum Gas, Marine and Lubricants businesses. In January 2006, Shell tapped Harman to lead Houston, Tex.-based Shell Lubricants, Americas, a division that encompasses operations in 17 countries in North and South America. Were it a stand-alone operation, Shell's global lubricants business would rank it among the Fortune 250, with the markets under Harman's domain accounting for more than 50 percent of its revenues. Harman's mission? To leverage the company's strong share of market and brand recognition in driving growth in a market that's declining as consumers drive less and drive differently in response to rising oil prices. "We spent a lot of time looking at what we call our €˜growth bets'-in other words, where we can provide more value than anybody else," says Harman. The U.S. lubricants market, for example, is very fragmented, with hundreds of competitors vying for customer attention. Shell's strengths included brand recognition of Pennzoil Quaker State, which it purchased in 2002; a significant sales and distribution network, and a sizable investment and research arm. But those pluses come with a flip side. "One of the challenges of running a big company is you can drift toward being too internal, towards bureaucratic dinosaur-type stuff," notes Harman, who introduced a "Sales First" program to combat that tendency. "It's essentially a behavioral program to encourage leaders and staff to look for external opportunities for growth, to go out and get to know their top customers and top prospects personally." All too often, that's the sort of thing companies pay lip service to but don't actually carry out effectively, he points out. "When a [branch] knows the CEO is coming around, they clean their offices and make sure to visit a tame customer," says Harman, who meets regularly with regional staffers for "sandwich" lunches and to tag along on customer calls. "I spend about 60 to 70 percent of my time in the field meeting with staff and customers. Building and maintaining these partnerships with distributors and customers is like a marriage. Sometimes you have to back up and just say, €˜How's it going?'" In addition to guiding Shell toward a more customer-focused culture, Harman is steering the company toward product innovations. Already, Shell's fully synthetic motor oils have gained momentum, with Pennzoil Platinum the fastest growing product in that segment and Q HorsePower winning approval for use in Ferrari and Maserati vehicles. Shell also launched Rotella-T, a diesel fuel product, and its recently launched Rain-X wiper blades quickly became the company's top brand in the car-care business. More innovations-including entries in the new energy and renewables arena-are under way, with time horizons ranging from two to 20 years out. "We're working on a whole range of technologies in the new energies and renewables space," Harman notes. "A world less dependent on oil represents a whole suite of opportunities around new products." In the meantime, his early efforts have already born fruit. Under Harman's tenure Shell Lubricants Americas strengthened its No. 1 position in the U.S. and achieved customer recognition from major customers, including a vendor of the year award from Tractor Supply and a Supplier of the Quarter award from Wal-Mart. "We've won many good pieces of business over the last couple of years and external recognition," says Harman. "I'm delighted with where we are, but I'm never complacent. I'm never relaxed. We're on a journey and that's got to be sustainable."
INboxU.S. Corporate Tax Rate Is Second Highest in OECD Ranking, 2000-2006 Only Japan taxes corporate income at a higher rate than the U.S. Germany had higher tax rates than the U.S. in 2000 but now has a lower rate (38.9 percent). Ireland has a 12.5 percent corporate rate, nearly the lowest in the world, and yet collects 3.6 percent of GDP in corporate revenues, well above the international average. The U.S., by contrast, with its near 39.3 percent rate, has been averaging less than 2.5 percent of GDP in corporate receipts.

Country

Corporate Tax Rate In 2000a(%)

Rank In 2000

Corporate Tax Rate In 2006a(%)

Rank In March 2006

Percentage Reduction In Corporate Rate (%) 

 Japan

40.9

4

39.5 

-3.3 

 United States b

39.3

7

30.3 

-0.1 

 Germany

52.0

38.9 

-25.2 

 Italy

41.3

37.3 

-9.7 

 Canada

44.6 

36.1 

-19.1 

 Spain

35.0

11

35.0 

6

 0.0

 France

37.8 

34.4 

-8.9 

 Belgium

40.2

34.0 

-15.4

 Newzealand

33.0 

16 

33.0

9

0.0

 Luxembourg

37.5

9

30.4

10

-18.9

 Australia

34.0

14

30.0

11

-11.8

 Turkey

33.0

16

30.0

12

-9.1

 United Kingdom

30.0

21

30.0

13

0.0

 Netherlands

35.0

11

29.6

14

-15.4

 Greece

40.0

6

29.0

15

-27.5

 Mexico

35.0

11

29.0

16

-17.1

 Denmark

32.0

18

28.0

17

-12.5

 Norway

28.0

26

28.0

18

0.0

 Sweden

28.0

26

28.0

19

0.0

 Korea

30.8

20

27.5

20

-10.7

 Portugal

35.2

10

27.5

21

-21.9

 Finland

29.0

24

26.0

22

-10.3

 Austria

34.0

14

25.0

23

-26.5

 Czech Republic

31.0

19

24.0

24

-22.6

 Switzerland

24.9

28

21.3

25

-14.5

 Poland

30.0

21

19.0

26

-36.7

 Slovak Republic

29.0

24

19.0

27

-34.5

 Iceland

30.0

21

18.0

28

-40.0

 Hungary

18.0

30

16.0

29

-11.1

 Ireland

24.0

29

12.5

30

-47.9

Unweighted OECD  Average

33.7

28.5

-15.5

Note: Small changes are usually attributable to changes in sub-national rates. (a) Rates for 2000 and 2006 are combined central and sub-central tax rates. Where sub-central income tax is deductible against central government tax, this is reflected in the net rate of the central government. (b) The sub-central tax rate for the U.S. is calculated as a weighted average of states' top corporate income tax rates in 2000 and 2006, deductible in both years from federal taxable income. (c) Includes regional business tax which is levied at a rate of 4.25 percent

Succession Without Tears

CEO succession practices have witnessed a sea change over the past decade. In the not-so-recent past, anointing a successor- regardless of what official corporate policy might state-was often the purview of the sitting CEO. He or she assessed the field, handpicked one or more promising contenders, and winnowed them over time, eventually championing a nominee to the board, which then welcomed the victor into the fold.

While not exactly scientific nor communal, there was sound theory behind this methodology. CEOs, after all, are intimately familiar with both their management team members and the day-to-day challenges of running the company, and therefore best equipped to assessing the competencies of their replacement.

Or are they? In recent years, newly energized boards of directors have been taking a more aggressive role in succession planning, noted participants gathered for a roundtable discussion on CEO succession cosponsored by Chief Executive and Hay Group. Galvanized by increasing emphasis on governance, a bump in CEO turnover of nearly 60 percent, and near universal acknowledgement that designating a new CEO is the most significant decision a board will make, directors are increasingly seeking a more hands-on role in the process.

"All board members are more active these days, so they want to be more involved-particularly in something they see as one of the most important parts of their  job,�VbCrLf asserted Joe McGrath, CEO of Unisys, who anticipates "a substantial difference�VbCrLf in how CEO succession is handled going forward. "We also have more active CEOs serving as directors, and they really want to be- and can be-very effective in giving counsel on this issue because they're going through the process themselves.�VbCrLf

 In the best of cases, such greater director enthusiasm leads to a collaborative effort that results in a seamless and successful transition. But it can just as easily bring about a tug of war that sows discord and disruptive politicking throughout the organization. As an example, Beverly Behan, managing director of the board effectiveness practice at Hay Group, recounts recent work on a corporation's emergency succession plan.

"We asked the board who would step in if the CEO should be hit by the proverbial bus tomorrow,�VbCrLf she recounted. "And the CEO was aghast when he heard who they had in mind. It wasn't someone he thought remotely appropriate-and that, as you might imagine-raised a whole range of issues.�VbCrLf Avoiding that scenario, agreed roundtable participants, often comes down to process. Having a well-structured and defined succession plan is critical to seamless business continuity during both planned and emergency leadership transitions, noted John F. Brock, CEO of Coca-Cola Enterprises. "The final decision clearly needs to be the board's, but there must be a very organized, orchestrated and coordinated process that management drives in a significant fashion,�VbCrLf he said. "Without that you are headed for a train wreck.�VbCrLf

Yet, despite the importance of an effective succession planning process, few companies give the methodology involved even a fraction of the effort devoted to processes in areas like audit, risk and strategy. In fact, only about 50 percent of public, private and nonprofit corporate boards participating in a survey by The Center for Board Leadership and Mercer Delta Consulting reported even having a succession plan in place, and nearly half of the respondents considered themselves "less than effective�VbCrLf in the area of CEO succession.

The good news? More and more boards are now addressing the issue by forming succession committees dedicated to working closely with incumbent CEOs on plans for an effective transition. It's a formidable task, requiring effort on several tricky and time-consuming fronts: continually monitoring current and future business needs, carefully nurturing a leadership pipeline, and ensuring that each potential candidate is given regular and meaningful board exposure. But recent events, from backdating scandals to terrorist threats, underscore the need to have a plan in place so that an internal candidate can take the reigns should a crisis occur.

"Right now, if I got hit by a bus, it would be a serious problem,�VbCrLf said Brock, the first outsider to take the helm of Coca-Cola Enterprises. "But at my very first board meeting 15 months ago, I made finding my successor a No. 1 priority. And we're making some good progress. We will have identified several candidates for CEO succession within the next three or four years.�VbCrLf

Succeeding at Succession Building the leadership talent pipeline is no longer just an issue for human resources, agreed several CEOs, but rather a key responsibility of both the CEO and the board. "As CEO or any manager, you are the chief HR person,�VbCrLf argued Carlos Cardoso, CEO of Kennametal, whomakes a point of interviewing every potential hiree for second-tier and up management positions. "HR owns the process, but it's managers who own the quality of the people they put in positions.�VbCrLf

Bob Ulrich, CEO of Target, also interviews lead candidates for positions several layers down from the top. "People are more serious about the process and do a lot more vetting if they know I'll be talking to the candidate,�VbCrLf he noted. "They don't want to have the occasional turndown where I say I felt the person lacked leadership or doesn't have the appropriate background.�VbCrLf

Kennametal's management program includes a succession plan for 50 spots dubbed as "critical positions�VbCrLf spread through multiple levels of the company. CEO Cardoso is charged by the board with ensuring that no more than 25 of those positions at any given time are without immediate successors in place. Ideally, he noted, those successors come from within. "Every time I have to bring people into the organization, that's a reflection on me personally that I'm not growing my own people,�VbCrLf he said. "One of the things I learned a long time ago is that a good coach is one who makes a team with a losing record into a Super Bowl team.�VbCrLf

Inside Track

When it comes to the next CEO, developing a talent pipeline that will yield multiple internal candidates is viewed as even more critical. Insiders can step in immediately in the event of a crisis and have the added advantages of in-depth knowledge of the business and in dustry, an understanding of the company culture and a working relationship with its board.

"People who come from the outside hit companies like a ton of bricks,�VbCrLf asserted Steve Odland, CEO of Office Depot. "I've done it myself three times now and I can attest that it's very hard to intersect with the culture and you end up doing a little destruction no matter how much you try to preserve.�VbCrLf

That insider advantage is gaining increasing recognition among board members at top companies, according to a recent study by Hay Group. Of 150 boards of leading companies surveyed, 77 percent reported preferring an internal CEO succession candidate. "About a decade ago it was decidedly toward an outside search,�VbCrLf said Behan. "That shift has implications for CEOs grooming executives and mentoring successors.�VbCrLf

At Target, a destination management program also ensures that high potential managers are steered into posts that will round out their work experience and sometimes fast-tracked through a promotion process. "It can be very tempting to keep someone in a job where they're very successful,�VbCrLf noted CEO Bob Ulrich, who began his own career at Target (then Dayton Hudson) in 1967 and was appointed CEO in 1987. "But then at the end of the day, you'll hear, ��Wait a minute. Target is merchandising- driven and he hasn't had enough experience there.'�VbCrLf

Jeffrey Ettinger came to the CEO job through a similar process at Hormel Foods. "I was part of a very deliberate process where a number of candidates were given opportunities to do jobs in various functions,�VbCrLf he recounted. "At the time, I was told by my predecessor that my goal was to make everybody forget where I came from, which was the law department.�VbCrLf

Developing a strong internal pool, however, is a process that must be handled with care. Done well-as was famously managed by Jack Welch at GE and by McDonald's, which lost two CEOs in rapid succession- the transition can be both transparent and effective. But missteps, such as narrowing the field too soon or choosing candidates too close in age to the current CEO, can lead to infighting and upheaval.

"Never underestimate the need for alignment, both within the senior team as well as the board, and maybe even outside stakeholders as that becomes more and more important,�VbCrLf urged Zev Weiss, CEO of American Greetings. "That alignment is always more difficult than it seems.�VbCrLf

 Succession in the Boardroom

While the days when CEOs filled board seats at will are long gone, succession practices in boardrooms are faltering as it becomes more challenging to fill vacant board seats. A dearth of available candidates coupled with rampant director turnover has made recruiting directors with management experience, relevant industry knowledge and financial expertise a challenge.

The increased time commitment and perceived financial and reputational risks related to board service is leading more and more CEOs to restrict their service to one board seat or to opt out altogether. What's more, many also discourage management team members from taking director seats. Director seats once heralded for providing up-and-coming management talent invaluable experience are now seen as a commitment that busy executives cannot afford.

"I want to adopt a policy that none of our people can serve on boards,�VbCrLf said Milton Sender, CEO of Daymon Worldwide. "It takes 12 days a year to be on a board today, plus travel time. You have to focus on your business, and being a director is so tough today that it's not worth the time commitment.�VbCrLf

The challenge of filling board seats with high-value directors has even led some companies to loosen director qualification policies. "We used to limit directors to 15 years of service, but we extended that to 20 because it's so much tougher to get directors these days,�VbCrLf reported Bob Ulrich, CEO of Target.

If anything, CEOs expect the boardroom exodus to intensify. "I'm as fixated on the succession of my board as I am on that of my team,�VbCrLf Rodney O'Neal, CEO of Delphi, told roundtable participants. "The rules are changing when it comes to board members. Today's CEO will have to spend considerably more time on director succession.�VbCrLf

 WHO'S WHO

Gene E. Bauer is managing director of U.S. operations in the Kansas City, Missouri, offices of Hay Group, a global human resources management consulting firm headquartered in Philadelphia.

Beverly Behan is managing director of the board effectiveness practice in the Jersey City, N.J., offices of Hay Group.

John F. Brock is president and CEO of Coca-Cola Enterprises, a marketer, distributor and producer of Coca-Cola products based in Atlanta, Ga.

Carlos Cardoso is CEO of Kennametal, a metal-working and tool production company based in Latrobe, Pa.

Theodore L. Chandler Jr. is chairman and CEO of LandAmerica, a provider of real estate transaction services based in Glen Allen, Va.

Milton Cooper is chairman and CEO of Kimco Realty, a real estate investment trust based in New Hyde Park, N.Y.

J. P. Donlon is editor-in-chief of Chief Executive Magazine, based in Montvale, N.J.

James Eiting is chairman of Midmark, a medical equipment provider based in Versailles, Ohio.

Jeffrey Ettinger is chairman and CEO of Hormel Foods, a manufacturer and marketer of branded consumer food products in Austin, Minn.

Harry Gould is chairman and CEO of New York City-based Gould Paper, a supplier of specialty paper and packaging products.

Joseph L. Herring is chairman and CEO of Princeton, N.J.-based Covance, a drug development services companies.

Graham Martin is managing director of global practices in the U.K. offices of Hay Group, a global human resources management consulting firm headquartered in Philadelphia.

Joseph W. McGrath is president, CEO and director of Unisys, an information technology consulting firm based in Blue Bell, Pa.

John Minasian is vice president and dean of Rensselaer at Hartford.

Ann Mulvale is CEO and director of Oakville, Ontario-based Mulvale Associates.

Ron Naples is chairman and CEO of Quaker Chemical, a global provider of process chemicals and technical expertise based in Conshohocken, Pa.

Steve Odland is chairman and CEO of Office Depot, a Delray Beach, Fla.-based office supply retailer.

Rodney O'Neal is president, CEO and director of Troy, Mich.- based Delphi, a supplier of mobile electronics and transportation systems.

F.J. Pollak is president and CEO of Miami-based TracFone Wireless, a prepaid cell phone provider.

John Ryan is chief executive of the Center for Creative Leadership, a global provider of executive education based in Greensboro, N.C.

Milton Sender is chairman and CEO of Stamford, Conn.-based Daymon Worldwide, a manufacturer of private-label consumer products.

Vickie Tillman is executive vice president of credit market services at New York City-based credit rating agency Standard & Poor's.

Bob Ulrich is CEO of Minneapolis, Minn.-based retail giant Target.

Zev Weiss is CEO and director of American Greetings, a Cleveland, Ohio-based creator and distributor of greeting cards.

Maggie Wilderotter is chairman and CEO of Citizens Communications, a telecom company based in Stamford, Conn.

Top 10 Enterprise Risks

Managing business risk has always been a strategic imperative, but perhaps never more so than today. Explosive global expansion, ever-more-onerous regulatory oversight and an environment of rapid change have spurred a growing awareness about the importance of understanding-and preparing for-potential threats to an organization's competitive position.

For many companies, identifying and mitigating enterprise risk is a critical element of managerial strategy. At Procter & Gamble, for example, responsibility for management of strategic risks has been shifting to the company's global leadership council, CEO A.G. Lafley's leadership team. Those top execs then work with a sub-team of professional risk managers to mitigate risks. What's more, one of the six board meetings the consumer product behemoth holds each year focuses entirely on risk management.

"The buck stops with me and, in the end, with our board of directors," Lafley told CEOs gathered for a roundtable discussion cosponsored by Ernst & Young and Chief Executive Magazine. "So we focus on strategy-and leadership development, management succession and risk management are three things we try to do at the board level."

The growing emphasis on risk management in the upper echelons of corporations is due in part to the power that the Internet has bestowed upon the average citizen. Disgruntled customers flame companies for disappointing service; amateur comics record elaborately staged prank requests to call centers and post them online. In short, a single misstep can result in an Internet missive that spreads across the globe. "Between blogs and YouTube, we live in an environment where the perception of your company can change radically in five minutes, whether it's because of a product failure or other event," said Howard Brodsky, CEO of CCA Global Partners, who agreed that managing a company's reputation-and therefore all the risks that affect it-ultimately falls to the CEO.

CEOs are not alone in giving greater weight to potential crises when making strategic decisions. A growing number of investors consider a company's risk management capabilities when weighing their investment decisions, reported Inge Boets, a partner in Ernst & Young's business risk services division. "Sixty-nine percent of investors we surveyed in a 2006 study claimed that transparency, and particularly transparency about the risk profile and risk management process, was one of the key decision factors in their investment decisions," Boets noted.

Those threats come in a wide array of forms, from the consolidation that is sweeping many industries as companies strive to build scale, to regulatory intervention that can adversely impact companies across industries or take a toll on a specific industry. While individual companies often give greater or less weight to the various categories of risks, most CEOs participating in the discussion had many concerns in common. For example, several concurred with a study on the top strategic risks facing corporations currently being finalized by Ernst & Young (see sidebar, p. 52). Regulatory and compliance risks, global financial shocks, aging consumers and workforce and emerging markets were leading the working list as the top four current concerns at press time.

Talent Trouble

"We are the most highly regulated industry in the world, and we have the most compliance issues in the world," noted Steve Creamer, president and CEO of EnergySolutions. "So those are risks, but our single biggest issue is human capital. We are losing it really fast, and that's really scary." The U.S. government has compounded the problem by limiting the H-1B visas that allow foreign-born graduates of U.S. schools to join the American work force. And the solution du jour of sending work overseas is only a stopgap measure, noted other business leaders. "We have an aging population in the U.S.," agreed Andrew Appel, CEO of Aon Consulting Worldwide. "Then there's a huge shortage of management talent in China, and the same issue in India. You're starting to see wage inflation there. Europe is having succession problems. So the talent issue is going to manifest itself globally, and then we'll be managing a global organization in a world of scarce talent."

Further diminishing the pool of talent is the fact that more and more students are steering clear of fields like engineering and science in favor of high-paying careers in investment banking and law. "I don't need that many more lawyers," noted William Kroll, chairman and CEO of Matheson Tri-Gas. "God knows I've got enough of them. And I don't need any more accountants. I could use a few more good scientists. I could use some good engineers. Without [more graduates] in science and engineering, not only will you not have people to run your businesses, but we won't be able to come up with the killer applications and products that will grow the overall economy." Competing in what is increasingly a global economy is a major concern for CEOs. Several tied the global issue to the U.S.'s stringent regulatory requirements, noting that a more restrictive environment puts U.S. companies at a disadvantage when competing with their foreign-based peers.

At the same time, difficulty protecting intellectual property in developing nations makes manufacturing overseas problematic, particularly for technology firms. And then there's the issue of a growing anti-American sentiment- one increasingly directed at U.S. brands.

"A lot of great global brands, including CNN, Ford and even Microsoft-have taken a real hit," noted Jeffrey Sonnenfeld, chairman and CEO of the Yale School of Management Chief Executive Leadership Institute. "Surveys suggest that one out of five consumers will avoid a brand attached to this country. That isn't happening anywhere else-no matter how ��evil' another country might be viewed. We're the only country in the world with that issue."

Ironically, some of the most pressing concerns for corporations are also their most promising opportunities. Rapidly developing global markets, for example, represent the strongest growth potential for companies that have already mined established markets. But even as CEOs express enthusiasm for the market potential of the rapidly developing middle class in many emerging markets, they note that those opportunities come hand-in-hand with some degree of peril.

"We have a much more diversified emerging market portfolio-$24 billion in exposure," noted Lafley. "Our view is that even though there's a fair amount of political excitement in emerging markets around the world, economically and financially they're more stable today than they were a while ago. But they're still more volatile than developed markets."

It's a Green, Green World

In a similar fashion, growing ardor for all things green, a top 10 enterprise risk dubbed "Radical Greening" by Ernst & Young, also represents an opportunity, pointed out Edward Voboril, board chairman of Great-batch. "Why don't we just marshal the technology and position ourselves as a country to be the best at developing alternative energy sources and take leadership in green technologies rather than reacting to them?" he asked. "We certainly have the technology and human resources to do that."

Companies, too, can look to corner a new market with products or services that address the trend toward sustainability. 3M did just that when passage of the Occupational Health and Safety Act rippled through Corporate America, causing a tidal wave of concern about how the cost of complying with its requirements would impact the bottom line.

"One of our young managers came up with the idea that rather than worrying about it happening, why not come up with a line of products that would be used by other companies to help protect their workers from exposure to chemicals and so on," recounted Moe Nozari, executive vice pre sident, consumer and office business at 3M. "The result is still called the Occupational Health and Safety Products division today, and it's one of the most profitable divisions. Whenever things like 9/11 or the SARS epidemic happen, that division does a tremendous amount of business."

Even the possibility of an industry redefining home run is an opportunity if you're the company behind the batter's plate, noted Alfred Kahn, chairman and CEO of 4Kids Entertainment, which license and market the overnight sensation Cabbage Patch Kids. The gimmick of each doll in the line being unique took hold with such fervor that parents across the country practically stormed toy stores to pony up for the pricey moppets. "Can you imagine the guy who's making the traditional baby doll at that point in time?" asked Kahn. "We killed them. So there's the risk of that-and there's the opportunity."

What can companies do to ensure that they end up on the opportunity side of the risk fallout? First and foremost is the necessity of understanding the various forms that risk takes, noted Inge Boets of Ernst & Young, who says that potential threats come in three forms:

  • Macro threats, such as a pandemic, that affects all business.
  • Sector threats that may not apply to all industry sectors or don't necessarily apply to all industry sectors in the same way.
  • Operational threats considered to have the potential to significantly impact organizations.

"Having a robust risk identification and assessment process is an important first step," said Boets. "Often, many parts of an organization are looking at risk in different ways, using different languages. So it's important to delineate who's responsible for which risk in your organization." P&G's practice of managing risk at the enterprise level is one way of avoiding a major pitfall-the risk of mismanaging risk. "There can be a disconnect between what is on your mind and what's on the minds of the people who are supposed to be thinking about these issues for you," pointed out Andrew Appel of Aon Consulting. "You may be thinking about these [big picture] issues and find out that your risk manager is focusing on how to lower the cost of your casualty insurance."

 "We've found that two things happen if risk management gets buried in the staff," added Lafley. "One is that an issue is not on the radar screen until after you have the problem-when the plant blows up or a major consumer product safety issue arises. And two is that in a company like ours-we're in 20 to 25 different industries, on the ground in 80 countries and have 135,000 people-you just don't know who to call."

Avoiding that scenario requires "bundling" risks and monitoring those bundles at the very top of the organization, asserted Lafley. "One of the things we've been working harder on is understanding integrated risks because we tend to isolate and manage individual risks," he said. "We elevate the responsibility and accountability at the industry level to line leadership and to the enterprise level. We also maintain a small cadre within the company on the mastery and expertise side and build that expertise by using external resources. And we also make it a measure of performance. Risk management and internal controls are part of the performance evaluation process for our 130 general managers."

While companies can never eliminate risks, that organization-wide, integrated approach will go a long way toward ensuring that potential crises are averted whenever possible and handled well when they do arise. But it necessitates defining a process of risk management and communicating the importance of following those practices organization-wide.

Even then the process will break down without a corporate culture that supports that initiative, warned Appel. "When you run a large organization, the only way you're going to find out the risks and the issues is if you have a culture of transparency," he pointed out. "That's hard to do when you have thousands of people spread across hundreds of countries."

 WHO'S WHO

Leigh Abrams is president and CEO of Drew Industries, a manufacturer of components for recreational vehicles and manufactured homes based in White Plains, N.Y.

Andrew Appel is CEO of Chicago, Ill.-based Aon Consulting Worldwide, a global management consulting firm.

Inge Boets is a Belgium-based partner at Ernst & Young, specializing in business risk services.

Howard Brodsky is co-CEO of CCA Global Partners, a cooperative of independent retailers based in Manchester R.I.

Steve Creamer is president and CEO of EnergySolutions, a materials processor based in Salt Lake City, Utah.

Andy Gatto is president and CEO of Russ Berrie and Company, a manufacturer of gift and juvenile products based in Oakland, N.J.

Alfred Kahn is chairman and CEO of 4Kids Entertainment, a provider of children's entertainment and merchandise licensing based in New York City.

Farooq Kathwari is chairman, president and CEO of Ethan Allen Interiors, a home furnishings manufacturer and retailer based in Danbury, Conn.

Edward M. Kopko is chairman, president and CEO of Ft. Lauderdale, Fla.-based Butler International, a global provider of technical, engineering and technology services, and chairman, CEO and publisher of Chief Executive Group, based in Montvale, N.J.

William J. Kroll is chairman and CEO of Matheson Tri-Gas, a provider of specialty gases based in Basking Ridge, N.J.

A.G. Lafley is chairman and CEO of Procter & Gamble, a consumer products company based in Cincinnati, Ohio.

Moe S. Nozari is executive vice president, consumer and office business at 3M, a global manufacturer of office, construction and home improvement products based in St. Paul, Minn.

Steve Shaw is president and CEO of Volt Information Sciences, a New York City-based telecom.

Jeffrey Sonnenfeld is chairman and CEO of the Yale School of Management Chief Executive Leadership Institute, based in New Haven, Conn.

Edward Voboril is chairman and CEO of Clarence, N.Y.-based Greatbatch, a manufacturer of innovative power sources and precision components.

Ippei Wakahara is president of Optrex America, a liquid crystal display company based in Plymouth, Mich.

The New Logic of Offshoring

In its earliest phase, offshoring was driven by cost reduction and limited to non-mission-critical work such as call centers, credit card processing and administrative work. Companies raced to source work in Asia-Pacific, South American and Eastern European countries where workers are plentiful and wages are low. Over time, the level of work being performed abroad began to move up the value chain, en compassing more technical work, including finance and accounting.

The next wave-where companies move work even more essential to competitive success, such as innovation and engineering, overseas-is now upon us. Already, IBM has established an R&D lab in New Delhi and announced intentions to recruit some 14,000 additional "software inventors," according to a recent report by Duke University and Booz Allen Hamilton. Motorola currently operates 16 R&D centers in China, which collectively employ 1,800 engineers, a tenth of the company's total global R&D head count.

These are not anomalies. According to a recent survey by the Economist Intelligence Unit, a research firm headquartered in London, a growing number of companies are outsourcing and/or offshoring aspects of the innovation process. Some 65 percent of companies surveyed said that at least some of their R&D activity is taking place overseas; 64 percent reported currently outsourcing part of the innovation process to outside organizations.

Done well, leveraging the less costly talent pools of foreign shores can clearly offer a huge competitive advantage, noted CEO participants in a roundtable discussion cosponsored by Butler International. In countries like India, China, Mexico and Russia, technical know-how is available at a fraction of what it would cost in the U.S. Companies able to tap this pool effectively can create and roll out prototypes at a fraction of the cost it would take competitors sourcing innovation in the U.S. or Europe.

Strategic Sourcing

At first blush, moving core processes like innovation to foreign shores seems like a huge leap. But it's actually a natural next phase of the offshoring movement, pointed out Joe McGrath, CEO of Unisys. "The global arbitrage of labor, the talent available around the world, and the number of engineers graduating in [developing economies] have led us to move functions you wouldn't have expected offshore," he said."Because of Sarbanes-Oxley, for example, it's hard to get internal auditors in the U.S. So we've sourced all our recent hires in Shanghai. Who would have thought that your core auditing practice would be in Shanghai, Budapest or Hungary? But that's where it is."

Companies are no longer just moving things that are easy to do offshore," agreed Gary Gereffi, a professor in the Department of Sociology and Markets & Management Studies Program at Duke University. "Microsoft's Beijing R&D Center is doing things with character recognition software that they think are as advanced as anything going on with that issue anywhere in the world. And GE's [research] of environmental issues in China is also unique. As capabilities grow, companies are trying to find places around the world that can tackle global problems in the best possible way."

A confluence of factors is driving this trend. In a world where great ideas are quickly assimilated across global markets, continual innovation is crucial to competitive success. At the same time, the development of ever-more-sophisticated technology is driving an increase in both the cost and complexity of R&D activity for most companies.

"Outsourcing is something of a misnomer," noted Ron DeFeo, chairman and CEO of Terex, who says the word often has undeserved negative connotations among the general public. "The term tends to politicize the practice, when in reality we are not giving something up, we're looking for the best answer," he adds. "If that best answer sits next door to me and is affordable, I would be foolish not to go there. If it sits halfway across the globe and is difficult to achieve but is my best solution, I'd be stupid not to go after that."

And even companies with the deepest of pockets find themselves grappling with shortages of specialist talent in their local marketplaces. A recent study by Duke University suggests that the long-lamented decline in the number of Americans graduating with engineering degrees is not as significant as early statistics suggested (see chart p. 40). But U.S. CEOs still report facing a shortage of workers capable of developing next-generation technologies and managing R&D teams.

Why the dearth of qualified candidates? "One issue is that we have a hard time getting the best and brightest U.S. undergraduates to go into engineering and science," said Gereffi. "They have lots of other attractive options."

"When parents look at what they want to encourage their children to do, they almost always consider where the money is," agreed Leif O'Leary, senior vice president of Parametric Technology. "The most lucrative opportunities in America are almost always investment banking, financial services and consulting."

In the past, the domestic talent pool was augmented by foreign-born U.S. undergraduates who opted to stay in the country after graduation. In fact, more than 60 percent of engineering Ph.D.s awarded in the 2005- 2006 academic year in the U.S. were earned by foreign nationals, according to Engineering Trends, a Houghton, Mich.-based educational consulting firm. But with overseas markets booming, many more of these students choose to return and pursue a career in their home countries. And those who do wish to stay often find that they cannot get around the more stringent requirements of post-9/11 immigration regulations.

"We are educating the world," said Jack Manning, vice president of engineering and offshore services at Butler International. "But the U.S. government cap on H1B visas is denying access to some of the best and the brightest graduates-and in turn, putting a stranglehold on U.S. competitiveness. Policies that re strict smart people from all over from coming here and being able to work are actually helping to spur the rush offshore."

Outside Innovation

Even as the trend toward offshoring and outsourcing innovation gains momentum, CEOs are well aware that the practice comes with a host of challenges and concerns, chief among them issues of control, intellectual property theft, internal resistance, cultural differences and communications.

"Engineering is such a primal part of companies that they need to have control," said Manning, who noted that when it comes to offshoring arrangements it's far better to wish you were married than to wish you weren't. "It's not like IT, which is often a support function. Engineering is the family jewels, so you have to be very careful about how you tie up."

Manning, who has worked with hundreds of companies on offshoring initiatives, outlined three prerequisites for successful global sourcing: a compelling business reason, good domain matching and the right culture and leadership within the company. "You can't expect a middle manager to move a mountain," he asserted, likening the process to that of integrating an acquisition. "You need to have top-down leadership and a culture that will make it happen.

" A clear business imperative is one of the most critical pieces of the puzzle, added Ed Kopko, CEO of Butler International, who noted that often even components of the most mission-critical innovation process can be done more effectively through outsourcing. "Most companies, for example, have cycles where they spend a lot of money on innovation to get the product to market," he said, pointing to the aviation industry as an example. "When you design a new aircraft, you spend a huge amount of money during a short period of time. It doesn't make sense to have all the people and functions involved internal to your company because after the three- to five-year cycle you'll be left with tons of cost." 

"Something can be mission-critical and not strategic," agreed McGrath. "There may be no way to differentiate in that particular area of expertise, so you make a choice to outsource that."

Ideally, shifting key areas of R&D offshore enables a company to augment its innovative capabilities while simultaneously cutting costs. But in practice, it doesn't always work that way. Joint ventures fizzle, costs spiral out of control or intellectual property finds its way to the homegrown factory down the street. Where do some companies go wrong?

"Most people are tactical as opposed to strategic," answered McGrath, who notes that all too often it's the sight of competitors nipping at a company's heels that prompts a move toward offshoring. "They feel forced to act because they're disadvantaged from a cost perspective, so they become reactionary as opposed to developing a strategy."

The People Picture

Choosing the right approach is also critical. Companies face a difficult choice-to create their own offshore operation or to work with a specialized provider. The dilemma has even bred an interim measure-the build, operate and transfer model, where the offshoring company has the option to buy the independent facility after a specified number of years. 

Finding the right people within the organization to manage the process and giving them both the tools and the incentives they need to drive the effort is also key, noted Iehab Hawatmeh, CEO of CirTran. "It's really about picking the people who you feel are open-minded and who have great in ter personal skills," he said. "Those are the ones who can adapt to the environment, gain respect and smooth out the operation."

 

Overcoming internal resistance to outsourcing and offshoring can add to the challenge. While support from the top about the strategic imperative and the right incentives can go a long way toward building consensus around an initiative, many companies find that having a defined process and methodology eases the transition for employees.

"We blueprint a process so that it can be replicated in other regions and business units," McGrath explained. "We're passionate about that because it's the only way to eliminate variation in execution. You've got to bring everyone in line with this common process."

Finally, disseminating that process across the value chain is paramount. Without open lines of communication between and among engineers, collaboration will sputter and die. "If you don't have a pathway to share information, then it's the old story of ��Was there a noise in the forest when the tree fell or not?' " said DeFeo. "Communication is key. A lot of it comes down to a leadership structure that allows knowledge to flow readily and openly be tween your organizations." 

"Knowledge transfer is probably the No. 1 issue," agreed Manning. "Because no matter how good your sources are, they have to learn the way you want to do it. That's why the most successful engagements have people managing the project who are really good at offshoring and at cultural adaptation, and who really know the organization.

"Success has more to do with who you put on the leadership teams than virtually anything else," continued Manning. "You need people who have the ability to think big and think flat."

Tom Ryder Gets Grilled

To say that Tom Ryder takes barbecue seriously is an understatement. Our first conversation on the topic began with him cautioning me against tossing the terms "grilling" and "barbecuing" about indiscriminately when they are actually two very different things. Grilling, explains the former chairman of Reader's Digest Association, "is cooking directly over a hot fire for a brief period of time; while barbecuing involves cooking over indirect heat for a long period of time by using smoke as both a cooking and flavoring agent."

He would know. This is a man who once spent a good chunk of a holiday weekend rigging up a contraption capable of slow-cooking an Easter ham at 150 degrees overnight. He has sampled barbecue in China and trekked through Texas in search of the state's best BBQ (his firsthand report is posted on RDLiving.com). If those chops alone don't qualify him as a grill-and-BBQ guru, other creds in the culinary circuit include serving as a judge at the famous Memphis in May barbecue competition and as chief food critic for The Cookhouse, a chain of four Connecticut restaurants owned and operated by Ryder's wife and son.

My plan was to draw upon this formidable BBQ background to provide would-be summer chefs a guide to the best gear for backyard cooking. That idea went up in smoke the very moment I attempted to grill Ryder about high-end grills featuring infrared technology. There was dead silence. "I don't know anything about that," he said finally. "To me, the most important gear is intelligence."

Bad backyard cooking, it turns out, has more to do with mental missteps than inadequate equipment-which brings us back to the difference between grilling and barbecuing. "The most common mistake in cooking over a fire is cooking over direct heat when you should not," says Ryder. "It burns the meat on the outside and leaves the inside raw."

Meat size and thickness are the determining factors in the direct vs. indirect question. Thick hamburgers, steaks, pork chops or even chicken should be placed away from the fire to cook, then browned over flames at the very end of the cooking period. "Some chefs prefer to brown on each side at the beginning," notes Ryder. "But that may seal in the juice and seal out the smoke, so I do it at the end."

Another bad move novices make is slathering the meat with sauce before slapping it on the grill-a surefire path to charred meat that's raw inside. "It's okay to cook a little bit in the sauce, but only if you brush it on at the very end and watch it closely," says Ryder, who says adding wet hickory chips to the fire, putting the meat off to the side away from the fire, and closing the grill for 10 or 15 minutes is a better bet for adding flavor. "Then grill it quickly the way you normally would because the meat will not have cooked very much."

The Ryder clan forgoes charcoal altogether and cooks over wood logs-hickory and oak-in a simple, non-gas grill, which is the set-up Tom Ryder heartily recommends. But for those of us who have already invested in gas grills, he suggests a workaround. "You can create some smoke in a gas grill by taking a double thickness of aluminum foil, putting some wet hickory chips in it, and placing that over the fire," he says.

"They will begin to smolder and create smoke in your gas grill so that you can achieve part of the effect of cooking over wood." And, of course, you would cook over indirect heat by lighting only one burner of a two-burner grill and placing the meat on the unlit burner.

Better yet, you can dispense with your chef's apron altogether and head for The Cookhouse, where pork shoulders are smoked over oak and hickory for 14 hours until "they're transformed into something truly magical." Now that's advice even this novice can handle.                          

Starbucks CEO Jim Donald: Lessons from Brand Leaders

Spot that distinctive mermaid-in-green-circle logo above a doorway and you know exactly what to expect. Inside you'll be greeted by the heady aroma of freshly brewed java with a subtle hint of cinnamon, or maybe mocha. You'll pass patrons perusing newspapers, checking email on laptops or deep in conversation at warmly lit caf© tables as you approach a counter behind which baristas bustle brewing customized concoctions. Ray Charles, Joni Mitchell, Antigone Rising or any number of decidedly non- Muzak tunes might be playing softly in the background. Depending on the season and the locale, the menu might feature a pumpkin spice latte or plum pudding. But other than these insignificant variations, your Starbucks experience will be roughly similar whether you're stateside anywhere from New York to California or in one of the coffee colossus's 3,518 overseas locations from Sydney, Australia, to Beijing, China. And that is precisely the point, says CEO Jim Donald. "Our advertising budget is very, very small," he says. "In fact, my chief marketing officer would say there is no budget. And the reason is that we let our stores and partners create the message that other companies have to put out in television, radio and print advertising." That the Starbucks approach is not the exception that proves the rule, but rather a cornerstone of a whole new set of rules is underscored by franchises like Google, eBay and even Harley-Davidson. All four companies eschewed traditional mediums to build formidable brand power through grass roots and guerrilla marketing tactics. And it's no accident that their CEOs ranked among the top 10 in the 2006 CEO Brand Leadership Survey. Conducted by Chief Executive in conjunction with brand consultancy firm Lippincott Mercer, the third annual brand leadership study asked 480- plus CEOs and CMOs to weigh in on which CEOs do best at brand management (see Top 25 CEO Table, ).                            

TOP 25 BRAND LEADERS

 RANK

 CEO

 COMPANY

 1

 Steve Jobs

 Apple Computers

 2

 Jim Donald

Starbucks 

 3

 Eric Schmidt

 Google

 4

 Jim Parker

 Southwest Airlines

 5

 James Ziemer

 Harley-Davidson

 6

 Robert Ulrich

 Target

 7

 Neville Isdell

 Coca-Cola

 8

 Richard Branson

 Virgin

 9

 Meg Whitman

 eBay

 10

 Mark Parker

 Nike

 11

 Fred Smith

 FedEx

 12

 Bob Iger

 Walt Disney

 13

 Jeff Bezos

 Amazon.com

 14

 Helmut Panke

 BWS

 15

 Ralph Lauren

 Polo Ralph Lauren

 16

 Steve Ballmer

 Microsoft

 17

 Kenneth Chenault

 American Express

 18

 Patrick Stokes

 Anheusen-Busch

 19

 Jeff Immelt

 General-Electric

 20

 H. Lee Scott Jr.

 Wal-Mart

 21

 Jim Skinner

 McDonalds

 22

 John Mackey

 Whole Foods

 23

 Fujio Cho

 Toyota

 24

 A.G Lafley

 Procter & Gamble

 25

 Kevin Rollins

Dell 

Methodology - Lippincott Mercer developed a short list of 100 CEO candidates, each of whom had earned recognition in areas such as being a most admired company, being defined as a company with high brand value, being selected for strong leadership and/or included as a brand leader or up-and-coming brand leader in the previous year's survey. A web-based survey was completed by 480 corporate and marketing executive respondents who selected their top 10 choices for CEO brand leaders from the list of candidates, ranked their top three choices and identified the most important characteristics that led to those choices. Lippincott Mercer analyzed the results to develop the 2006 Top 25 Brand Leaders list.

  "Apple and Starbucks held steady at first and second place, respectively," says Suzanne Hogan, chief operating officer at Lippincott Mercer. "And some of the biggest advances this year were made by Google (from No. 11 to No. 3), Southwest Air (from No. 8 to No. 4) and Target (from No. 12 to No. 6). What these brands have in common is investing in their brand in new and interesting ways, which suggests recognition of the importance of taking a more holistic approach to brand image management. It's about marketing and the customer experience, but it's also about happy employees, reinvention through new products and services and a concerted effort to deliver an experience or product in a different, distinctive way." How do the best companies deliver that distinction? Begin at the beginning -with the product, suggests Karen Benezra, editor of Brandweek magazine. Product First Of course, a good product- even an awesome product- does not a brand make. But build a brand without a great product and what you have is a four-star flop. "Look at Vonage," notes Benezra. "They blanketed the airwaves with orange-theme ads, but over promised and under delivered-and now everyone is questioning their model." "Without exception, these 25 companies all have great products," agrees Keith Ferrazzi, the founder of marketing consulting group Ferrazzi Greenlight and former CMO of Starwood Hotels, who sees a "generous" product as the bedrock of any great brand. "I love my Starbucks experience. I love that they are everywhere and all I have to do is find the closest one. When I got a Nano, I felt like saying, ��Thank you, Apple, for changing my life by giving me this cool thing that I wear in taxis on the way to meetings and on the beach during my vacation. It gives me a way to enjoy life in a more rich way than before.'" Beyond Broadcast Brand management today means figuring out how to reach out to surprise and delight your customers wherever they may be-the Internet, a retail store, a bar, a street corner-rather than just through media advertising. For Starbucks, that translates to devoting zero dollars to national television or print campaigns, and a "very small amount for a company of our size" to local marketing efforts, says Donald. Instead, the company's retail outlets serve as its ads. It's an extreme version of a philosophy followed by many grassrootsgrown giants: When people are rabid about a brand, advertising is superfluous. Take eBay. The online auction house's success was founded upon diehard flea market fans who found their way to the web site, loved the buying experience and created eBay nation. "Soon we were seeing headlines in Newsweek about people selling their Barbie doll collections for a fortune," notes Benezra. "It wasn't until eBay wanted to add new areas like automotive sales that they did a big ad campaign. And it seems to be working; someone at my company just bought a Jaguar on eBay." The vast majority of megabrands, however, still rely heavily on traditional broadcast campaigns, augmenting -rather than replacing-them with viral components. Anheuser- Busch, for example, just inked a six year multi-sport agreement with NBC that media experts tag at a whopping $300 million. But the beer company is also in the midst of launching a web-based video network named Bud.tv. "We're creating a site where people will be able to choose from a variety of video options, from finishing our commercial to content we're developing in partnership with Kevin Spacey and Trigger Street Productions," explains CEO Patrick Stokes. "The media mix is gravitating toward more interactive ways to communicate with consumers. But the way people try to get their names before consumers on the Internet by bombarding them with pop-up ads and so forth tends to be irritating. So we're trying to draw consumers to the site with content they're interested in." In an effort to combat declining beer sales as the market drifts toward cocktails and hard liquor, Anheuser- Busch also upped dollars devoted to on-premise marketing to a hefty $30 million. "People's impressions of brands will be formed in their first five years using our products," says Stokes. "We are very interested in reaching that 21-year-old consumer, so we have to be on-premise with a strong presence."                                                 

Anheuser-Busch CEO Patrick Stokes demonstrates the finer points of cooking with beer at  the  company's sales convention.

Anoint Ambassadors Avid fans and devoted employees can do more to boost a brand than the best of marketing programs. Harley-Davidson devotees are so enthralled that they routinely tattoo the company's logo on their skin. Apple fans pay a premium for the company's sleek, userfriendly versions of standard gear like MP3 players and computers and wait patiently-or advocate assertively- for Mac-compatible versions of popular software programs. Starbucks regulars debate the merits of new menu offerings on Starbucksgossip.com and happily and routinely fork over $4- plus per cup for a beverage that, until recently, was widely available for less than $1. All three companies have spectacularly succeeded at an elusive goal-building an intimate community, almost a cult, around a brand so that customers take ownership of and feel an affinity for it. Their brands became a reflection of their customers' values, and those customers, in turn, became ambassadors for the brands. How do you win that kind of loyalty? "The strongest brands develop a myth around themselves," says Dick Martin, a former EVP of brand management at AT&T and author of Rebuilding Brand America. "Apple has had great ads, but its brand prominence stems more from the design of their products, both physically in their look and functionally in terms of simplicity for their customers. With Virgin it's about being an iconoclast, carefree and fun loving, which is embodied by CEO Richard Branson. Whole Foods has a story that connects with people's values-they're seen as a company that treats the world, their suppliers and their employees well. Heck, they even treat lobsters well." Done well, the myth or story takes on a life of its own-one that the constituents it reaches perpetuate. "We don't even like to use the word brand," says Donald. "Starbucks is an experience. And once that environment is created in a store, it becomes a community that is meaningful to the people who go there. We hear people refer to my Starbucks' all the time and that's what they mean." Incessant Innovation Decades ago, theory held that brands inevitably moved through life cycle stages- introduction, growth, maturity and decline. No more. "We don't believe that," says A.G. Lafley, CEO of the master brand builder P&G. "We think brands can last forever if they are properly managed." For Lafley that means continually tweaking household names like Tide, Crest and the relatively recently acquired Clairol to develop new iterations of favorite products. That thinking led to line extensions like Tide to Go, an instant stain remover in stick form; SpinBrush, a toothbrush with a battery-powered rotating head; and Pampers Feel n' Learn Advanced Trainers, diapers designed to stay wet for two minutes to prompt toddlers to tinkle in the toilet. "We have a very disciplined process to collect fragile ideas on the front end; prototype, develop and qualify them; and then to pre market test and commercialize them," says Lafley. "We look at innovation as a portfolio that is in various stages of development, and we are quite happy to weed and feed every step of the way to make them more relevant to today's consumers." Anheuser-Busch, too, focuses on innovation as a way to retain and even refine its brand glory. In addition to the celebrated launch of Bud Select, a premium version of the brand that has historically been synonymous with beer, the company has developed and acquired offerings ranging from a caffeinated beer called Tilt and the fruit-laced Peels beverage to Stone Mill and Wild Hop, two organic beers now being rolled out. "In the last five years, we have seen a need to offer a broader portfolio," says Stokes. "We've signed distribution agreements with top import and specialty brands, including Tiger and Grolsch, and acquired the Rolling Rock brand. We've also introduced products, including seasonal draft beers." That legacy companies like P&G and Anheuser-Busch, 170 and 154 years old respectively, continually work to stay fresh is no surprise. But relative newbie Starbucks is equally committed to continual evolution. Already, its retail locations have the capability of producing approximately 73,000 variations of its menu beverages. But line extensions are where innovation is truly brewing. Launched on the strength of its success with CD retail, the company's entertainment arm recently backed its firstfilm, Akeelah and the Bee, and is now marketing its first book, For One More Day, a novel by best selling author Mitch Albom. "Our goal is to continue to stay on point for new areas of focus we can convert into beverage and food offerings and other forms of keeping the Starbucks experience out in front of everyone," says Donald, who notes that the company vets each potential extension for appropriateness and practicality. "We have invisible guardrails that we stay between by making sure that what we put out is core to the coffeehouse experience and that it works for our partners [store employees]. A new food offering, for example, has to be something our partners can deploy without reducing the speed of service." Of course, it is possible to take innovation too far. "Brand extensions run amok aren't good for any brand," says Benezra, who notes that recent flops included a Harley-Davidson's cake decorating kit, Sony PlayStation wine glasses and an Adidas deodorant. Ultimately, however, debuting a debacle is perfectly fine, as long as the company in question reacts- and rebounds-swiftly. Starbucks, points out Donald, has stepped back from numerous new introductions. "We've had food and beverage offerings that just tanked, including carbonated coffee 10 years ago," he says. "But we're okay with that. What we can never stop doing is innovating and taking risks."
  The Dark Side of Big Brands In the aftermath of exploding batteries and a subsequent 4.1-millionunit recall, it's little surprise that Dell dropped from No. 3 in 2005 to No. 25 on this year's list. A major catastrophe can temporarily derail the best of brands-just ask Exxon, Andersen or Audi. Remember the "sudden acceleration" that later, too much later to be of solace, turned out to be driver error? "It's possible to maim or even kill a strong brand," notes Dick Martin, author of Rebuilding Brand America. "Those emotional attachments fray easily if people feel they've been misled or double-crossed." In fact, a brand's very strength can become a liability, particularly in a crisis. Expectations can rise to the point where disappointment or "brand backlash" is inevitable. In some cases, tragedy hits and prominence suddenly becomes a pitfall. But the following minor missteps are by far the more common brand crises. The Product Flop: The New Coke saga is the poster child for the kind of resistance a bad introduction can inspire. "If a company isn't careful, it can wander into areas that are either irrelevant to its principal phenomenon or that contradict it outright," says Martin. "And when that happens, things get ugly." Can't Live Up to the Hype: The dot-com era was particularly notable for brands that rose grandly and rapidly only to go into freefall when expectations weren't met. Beware of being the media's darling; instant stardom may simply set you up for brand backlash. The Gradual Fade: Often, it's not about what a company does wrong, but rather what it fails to do right- namely stay true to its values and retain the luster of its brand relative to competitors in the market. Jet Blue, which dropped from No. 14 in 2005 off of this year's list, is an example. "Jet Blue built its brand by hooking customers with low prices and then keeping them with unusual service," notes Martin. "But the combination of high fuel prices and higher maintenance costs took a toll on the company so it cut back on price discounts and service, which were the foundation of its brand." The lesson? Rest on your laurels and a newcomer will soon grab the limelight.
  NEW GROUNDS FOR STARBUCKS Chief Executive talked with CEO Jim Donald about what's brewing at the coffee colossus.                                                       What are your goals for Starbucks going forward? More stores, more positions in the supermarkets, more licensing operations and more innovation. No. 1 would be more stores. We're averaging five stores per day, and our long-term goal is 30,000 stores, 15,000 in the U.S. and 15,000 internationally. We're also looking at increasing our licensing operations and the number of countries we are in. Brazil, Russia and India are three international markets we're currently working on. Our product pipeline of food and beverages is probably 18 months deep, and we are always looking at other forms of keeping the Starbucks experience out in front of everyone. Marketing gurus say you don't advertise. Is that true? There is an ad budget. It's not the budget a company our size would typically allocate and those dollars are not allocated in a typical way. The bulk of it goes toward things like promoting the film Akeelah and the Bee and toward the Make Your Mark programs we run at the store level, where we grant cash donations to nonprofit organizations based on partner and customer volunteer hours. Starbucks has been well-received in foreign markets. What hurdles did you hit and how did you overcome them? On a country-by-country basis, the largest hurdle we had to overcome was thinking we had to be different. There are regional differences in every market, but the main reason we are successful in the U.S. is the same as why we are successful internationally. It's based on great beverage lineups, from coffee to frappuccinos; connections customers in Japan, the UK and Thailand have with their baristas; and great experiences. I was in a Starbucks in Kuwait a year ago and other than the language spoken, I could have been in Tacoma. There were university students with their laptops, senior citizens reading the newspaper and a hip hop back-and-forth jive with the baristas. It was a wonderful thing. What kind of regional differences have you found? The peak time in China is not 7 to 10 in the morning, it is 4 to 8 in the afternoon. And there are also food preferences we had to adapt to. There is the holiday Yorkshire pudding that is big in the UK but does not work in New York. Breakfast sandwiches in Germany, for example, are made up with a hard roll with sausage and tomato and served cold. So we listen hard to what our partners in a region say works.

Realizing the High Performance Enterprise

Mention high performance enterprise and the usual suspects come to mind. Microsoft, for its culture of innovation; Wal-Mart, for its revolutionary distribution system; Toyota, for its production system; and Dell, for continually streamlining its supply chain, are among them. But the continuing success of these behemoths goes beyond any single defining achievement. In short, success that endures for decades rather than years is indicative of a deeply instilled and carefully refined mix of competencies and skills that allows an organization to unleash its full potential.

That there is no silver bullet to sustainable success won't come as a news flash to CEOs. Nor will the fact that the specific solutions most widely credited for delivering consistent top-line growth and shareholder return are often sophisticated processes tailored to a company's industry and competitive position within that industry. And yet most high performing enterprises share common characteristics and behaviors that predispose them to success. In fact, those characteristics and behaviors translate across industries, as well as across the globe, agreed CEOs gathered for a recent roundtable cosponsored by Chief Executive and Accenture.

After a three-year study of data from hundreds of companies, the consulting firm Accenture dubbed this predisposition "competitive essence," a quality exhibited by the one company out of 10 that outperforms its competitors for a decade or more. "Competitive essence has three components: market focus and positioning, distinctive capabilities, and performance anatomy," said Vernon Ellis, international chairman of Accenture. Distinctive capabilities refer to mastering various functions, while performance anatomy refers to the organizational characteristics that support that capability, explained Ellis. "Each is important, but even more important is that they're kept in balance, aligned with one another, and constantly renewed."

Procter & Gamble CEO A.G. Lafley agreed. "What I think about all of the time is whether our goals, strategies, structure, systems, culture and leadership are all on the same page and growing in the same direction," he said. "It sounds easy, but over the past 30 years I've found it difficult -difficult at the country operating unit level, difficult at the category operating unit level, and very difficult at the company global strategy and operating level. But if you can achieve it, you have a much better chance of delivering consistent, sustainable growth."

For P&G, alignment is reinforced by a customer-centric theme that runs through every aspect of the company's operations. Where once the company relied upon its muscle as a major player to jam store shelves with dizzying array of popular brand like Crest or Tide, today emphasis has shifted to getting close enough to consumers to create brand new products. "We spend an inordinate amount of time, money and resources on truly understanding consumers of everyday household and personal care products," Lafley noted. "The most valuable stakeholder at P&G is a loyal consumer of one of our brands or product lines."

Beating Back Commoditization

In a business environment increasingly characterized by rapid commoditization, commitment to innovation is ever more critical-and P&G evidences that in spades. The company's R&D spending tops that of the next five competitors combined. But equally intrinsic to its success is its ability to monitor competition and maintain a competitive edge.

"When I joined the company in the mid-'70s, we looked at branded competition from the Unilevers, Nestles, Colgate-Palmolives, and Kimberly- Clarks of the world," explained Lafley. "But that's just one layer of competition today. Now we have other layers in retailer brands and private labels and in the entrepreneurial companies rising in Brazil, India, Mexico, Eastern Europe, and China."

P&G has responded to the influx of competition by weeding the products most vulnerable to commoditization from its product portfolio. The result was a dramatic evolution from a predominately food, cleaning and paper company to a beauty, health and personal care orientation. "We chose to get out of most of the food businesses because they are more commodity-like," explained Lafley, who noted that with the exception of coffee in North America and Pringles worldwide, P&G has exited food. "It's a lot harder to build differentiation into a food product than into a household or personal care product."

Assessing and responding to vulnerability to commoditization is now crucial for a widening array of companies. The same global forces that undermined automakers, electronic companies and manufacturing in general are now spreading across industries-and it's proactive companies that survive the influx of competition. New York Life, for example, declined to join its insurance industry peers in shifting to a financial services focus for fear of moving into a soon-to-be commoditizing sector, said Sy Sternberg, chairman and CEO of the insurer. "Many insurers were moving toward mutual funds and annuities and trying to redefine themselves as financial services companies," he said. "We chose not to do that specifically because the life insurance product is less vulnerable to commoditization."

New York Life fights commoditization by working hard to maintain and build on the strength of its brand in the insurance market. "We spend a lot of time defining the brand in a simple way: ��We have been around 160 years; you can count on us,'" said Sternberg. "It's a simple concept, but it takes a complex product that is hard to differentiate and gives it differentiation through brand equity."

P&G, too, focuses intensely on brand value. "We have a $200 billion market cap, but if you look at hard assets on the balance sheet, it's probably closer to $50 billion to $60 billion," said Lafley. "So we are a company of two intangible assets: our brands and our people-and we invest heavily in both."

                      

The Human Element

P&G holds two- to three-day leadership council meetings every quarter where each and every top development employee is evaluated. Lafley, who personally tracks 500 employees, likens the process to the depth chart used by a World Cup soccer team. "For each individual we look at everything- how they're doing in their current assignment, what their next assignment should be, what training they should have and who their sponsor is-every year," said Lafley.

All too aware that today's employees are portable knowledge workers, P&G works hard at inspiring rather than controlling its workers, he adds. "Every day our people get calls and offers for better positions at 30 to 50 percent more than what they're making now," Lafley said. "In a mercenary game, the other employer can always hire your people. But I think that once people make a certain amount of money, they're motivated by other things-accomplishment, connection, self-fulfillment. We look to be exciting and inspirational."

Does a global marketplace bring greater complexity to the challenge of developing talent? Not necessarily, noted William Mitchell, CEO of Arrow Electronics, whose plan to instill a leadership program worldwide met with criticism from naysayers.

"People said it wouldn't work, particularly that it wouldn't work in Asia, and that Germans are different from Brazilians and so on," he reported. "But we found that the commonalities-in terms of how you share best practices, how you collaborate and how you develop people-are much more striking than the differences. We tend to focus on the differences when the commonalities are huge."

P&G also met with criticism for management choices in far-flung locales. When the company appointed an Indian national to a top post in Japan, critics pointed out that in the pecking order of Asian cultures, Japanese look down at Indians. But the company stood firm, and the appointment proved a success.

That's just one example of P&G's commitment to developing leaders in emerging markets and fostering diversity and cross-cultural experience among its leadership team, Lafley noted. "Fifty percent of our leadership team-the top 30-are not U.S. born or raised," he said. "They grew up in developing markets. We are much more diverse than other companies in our industry and that's because we move people around. We won't let you run Brazil out of Miami; you will run Brazil out of Sao Paulo. If you don't want to move every three years, you're at the wrong company."

While cycling managers through posts and geographic locations has become common practice, not all CEOs see it as beneficial. In fact, George David, CEO of United Technologies, looks askance at the practice.

"I spent many years racing large sailboats," he recounted. "I found that when you drop a new crew member into a crew of 12, you end up getting an elbow in the face-usually during a high agility maneuver. That's because you haven't learned to adapt to each other's moves. You don't know what that person is going to do in the dark."

David argued that tenure and continuity are key elements of building and sustaining good teamwork-particularly in a business centered on complex products with long lifespans. "It's not atypical for us to launch a product that will still be in service 40 years later," he said. "Our people need to learn the product and develop personal relationships with customers. You can't do that with a new assignment every three years."

The issue, pointed out Clarke Murphy, managing director of Russell Reynolds Associates, is about developing a specific expertise vs. broad managerial skills. "Customers want expertise that is deep, but long tenures don't produce as successful broad general managers," he said.

 In the CEO seat, however, short tenures are far from ideal, argued Ed Kopko, CEO of Butler International, who pointed out that the average tenure of CEOs has been on the decline. "It seems to be a new, media-driven theology of boards-they throw the sitting guy out and bring a new guy in," he said. "It's almost as if the board has lost its developmental role with the CEO. And that can't be good for American business."

Consistency, Clarity and Communication

Clear communication as to the company's mission, values and operating disciplines, backed by metrics, is an equally crucial element of strong performance, agreed business leaders. "CEOs need to project clear metrics that define success, or exactly what it is that we want the organization to do," David said. "And that has to be consistent over time. You need to have strong convictions and beliefs. Too much of corporate America operates by group mentality, a kind of floating consensus where you never know where anyone stands. An organization needs to know where the CEO stands."

"If you're going to sustain the metrics, values and beliefs, the CEO has a responsibility to really be an effective and continuing communicator," agreed Ellis. "CEOs should never worry about being redundant. Sending a consistent message-once, twice, five times-on values, beliefs and operating disciplines is a major role of the CEO."

Yet many companies focus exclusively on communicating with customers, rather than employees. "We all tend to spend time on advertising programs for consumers, rather than communicating to our own people," noted Farooq Kathwari, chairman of Ethan Allen. "We need to communicate on a proactive basis-not only during crises-with our people. An internal marketing program is just as critical as an external one."

A realistic point of view also helps, added Larry Mason, president and COO of Goodyear, who said CEOs need to be realistic about the capabilities of their organizations. "Often, when you see organizations stall, it's because they didn't have the capability that the CEO believed they should and were unable to bridge that gap," he pointed out.

CEOs no longer have the luxury of isolation. "When I think about what I spend time on beyond strategy, leadership development and customers, it's learning," said Lafley, who studies biology and physics with a biotech mentor for a few hours each month. "One of the risks of being CEO is that you can get consumed with everything going on inside and lose touch with the external world. External connections are important."

WHO'S WHO

David Carey is president, business media, of New York City-based Cond�© Nast Publications.

George David is chairman and chief executive of United Technologies in Hartford, Conn.

J.P. Donlon is editor-in-chief of Montvale, N.J.-based Chief Executive magazine.

Vernon Ellis is international chairman of Accenture in London.

Robey Estes is president of Estes Express Lines in Richmond, Va.

Sherrill W. Hudson is chairman and chief executive of Tampa, Fla.- based TECO Energy.

Farooq Kathwari is chairman of Ethan Allen Interiors in Danbury, Conn.

Edward M. Kopko is chairman, president and chief executive of Ft. Lauderdale, Fla.-based Butler International and chairman and chief executive of Chief Executive Group.

A.G. Lafley is chairman, president and chief executive of The Procter & Gamble Company in Cincinnati, Ohio.

Lawrence D. Mason is president, consumer tires, of The Goodyear Tire & Rubber Company in Akron, Ohio.

William Mitchell is chief executive of Melville, N.Y.-based Arrow Electronics.

Clarke Murphy is managing director of Russell Reynolds Associates in New York.

Seymour Sternberg is chief executive of New York-based New York Life Insurance.

Charles Tribbett is co-leader EO/ board services of Russell Reynolds Associates in Chicago.

Gary G. Winterhalter is president of Sally Beauty Co. in Denton, Tex.

Philip R. Yates is chairman and chief executive of York, Pa.-based Graham Packaging Holdings Co.

P&G: Delivering On Innovation

Surprisingly, customers aren't always able to articulate their needs-or even accurately predict their responses to a new idea. As a result, experienced innovators like P&G shun some of the typical methods of testing product concepts, such as focus groups.

Instead, P&G takes a collaborative approach to research and development, tapping the resources of customers, partners and stakeholders to develop new products. "We decided that what we're really good at is not necessarily creating and inventing, but developing and qualifying or commercializing innovations," explained A.G. Lafley, chief executive of the company, whose brands include Pampers, Tide, Gillette and Crest. "We have development and testing methods that we feel are more predictive of success. So we decided to focus on continuing to improve on those and partner on all the rest of it."

Today, P&G's scientists share labs and work side by side with the scientists of some of its largest suppliers. "We've also hired 150 designers from outside the company to mix with our biologists, chemists and chemical engineers," added Lafley. "We used to view the distribution channel as a pipe, not as a partner. But when you work as partners you create an even bigger pie, as opposed to carving up the pie that's been sitting there."

The program is paying off. In 2005, 35 percent of P&G's new products were developed in collaboration with at least one external partner; and the company plans to bring that figure to 45 percent by the end of the decade. But better still, the success rate of new introductions is on the rise.

"In our industry, between 15 and 20 percent of new brand and product introductions are successful in the sense that they return the cost of capital," said Lafley. "We were running at a 15 to 20 percent success rate from 1998 through 2000. Today, we run at about a 50 percent success rate."

And that's as high as it will likely go. "If we try to push it much higher, we won't be taking the necessary risk, betting on enough of the new space," explained Lafley, who likens P&G's process to the way a venture capitalist manages a portfolio. The company has a very disciplined process of collecting "fragile ideas" on the front end and then prototyping and developing them. Potential products are then assessed-or "qualified"-for further development, premarket tested and, finally, commercialized.

"We look at our innovation as a portfolio that is in various stages of development," said Lafley. "And we are quite happy to weed and feed it every step of the way."

Pursuing High Performance

Chief executives can, in fact stay ahead of global competitors

Reaping the Rewards Of a Diverse Company

There's no doubt that a company's tone is set at the top.

Driving Diversity

CEOs get it: Diverse work forces make for better companies. The question is, how do you get there?
- Advertisement -
- Advertisement -

FEATURED CONTENT

New Poll: CEOs Find Challenges In Using Customer Data To Drive Innovation

Ability to harness and sort through data for meaningful insights remains a hurdle, many say. “The key is...finding what is actually relevant.”

SUBSCRIBE TO CHIEF EXECUTIVE

Sign Up to Receive Chief Executive Magazine

Chief Executive’s publications are designed to help CEOs do their jobs better and run their businesses more effectively. Subscribe here.

CEO CONFIDENCE INDEX

CEO Optimism Falls To 12-Month Low In October

Chief Executive’s latest reading of CEO sentiment shows growing number of CEOs disillusioned with short-term economic recovery, as list of issues disrupting business continues to grow.