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The Massive
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CEO Succession
Summer 2015
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editors letter
editors letter
Sharp-Edged Professionals
Many business leaders resist the idea
that management, like medicine,
law, or education, is a profession.
They regard professionals as insular
academics, and businesspeople as
freewheeling entrepreneurs who do
whatever it takes to attract and hold
customers. Nonetheless, management expertise doesnt come easily.
As an executive, you may be naturally sharp-edged, pragmatic, and
down to earth. But like any pro you
have to learn your counterintuitive
skills through years of apprenticeship and practice.
For evidence that management
is a profession, see the cover story on
succession planning, by Ken Favaro,
Per-Ola Karlsson, and Gary L. Neilson (The $112 Billion CEO Succession Problem, page 42). Companies that pay attention to developing
their top executive talent achieve
better nancial performance, on
average, than other companies, and
they avoid the messy, expensive re
drill of a sudden, forced chief executive departure.
Frances Hesselbein, the ageless
leader of the eponymous institute
she cofounded with Peter Drucker,
also clearly understands the value
of management professionalism. In
leading ideas
6
18
12
14
58
18
20
essays
TECHNOLOGY
22
Lets Megadeal
Rob Fisher, Gregg Nahass, and J. Neely
Seven strategies for managing the unique challenges of
large technology acquisitions.
28
GLOBAL PERSPECTIVE
34
54
features
42
INTERVIEW
82
Mark Bertolini
BOOKS IN BRIEF
90
54
92
Edward H. Baker
94
GLOBAL PERSPECTIVE
58
96
97
Multinational
Pankaj Ghemawat
ORGANIZATIONS & PEOPLE
72
Frances Hesselbeins
Merit Badge in
Leadership
100
Sally Helgesen
The former CEO of the Girl Scouts has spent
decades bringing professional management
to nonprots.
www.strategy-business.com
strategy+business
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leading ideas
Leading
Ideas
The Right
Track for
Connected
Cars
Five ways automakers
can design for safety
and protability.
by Evan Hirsh, Marian H. Mueller,
and Kumar Krishnamurthy
strategy+business issue 79
leading ideas
Evan Hirsh
[email protected]
is a partner with Strategy& based in
Chicago. He leads the rms North
American automotive practice.
Marian H. Mueller
[email protected]
is a partner with Strategy&s automotive
practice, and is based in Florham Park,
N.J.
Kumar Krishnamurthy
kumar.krishnamurthy@
strategyand.pwc.com
is a partner with Strategy&s digital
business technology practice, and is based
in Chicago.
Also contributing to this article were
Strategy& senior associates Arjun Gupta
and Akshay Singh.
strategy+business issue 79
leading ideas
8
Kristin Behfar
leading ideas
Kristin Behfar on
How We Fight at Work,
and Why It Matters
Debating
Straightforward exchanges
between disputing parties the
most likely scenario to lead to
resolution
Arguing
Fights in which parties are clearly
angry and entrenched, and
typically refuse to budge
Disguising
Vague expressions that indicate a
degree of opposition, but cover up
the reasons
Undermining
Passive-aggressive or dismissive
behavior, such as teasing and
backstabbing
LOW
10
LOW
Intensity
Degree of Expression
HIGH
Source: Adapted from Laurie Weingart, Kristin Behfar, et al., The Directness and Oppositional Intensity of Conflict
Expression, Academy of Management Review, Apr. 22, 2014
two dimensions, you get telling patterns, or spirals [see exhibit]. We believe our categorizations of conict
expression apply across cultures.
People everywhere use degrees of
directness and intensity to communicate opposition. But for this study,
we focused on U.S. organizations.
This enabled us to assume that peo-
strategy+business issue 79
HIGH
Directness
Clarity of Expression
leading ideas
ideas
Laura W. Geller
[email protected]
is senior editor of strategy+business.
leading ideas
11
strategy+business issue 79
leading ideas
ideas
Boost Your
Innovation
Condence
Internet of Things promises to simplify our lives by providing connectivity between us and the machines
we use on a daily basis. The sharing
economy has leveraged technology
to create ride sharing, task outsourcing, peer-to-peer lending, and cooperative business management. The
disruptions to traditional employment, expertise, and pricing will
have a ripple effect for many years to
come. Well also see the line between
human and machine continue to
blur: 3D printing is already being
used to create prosthetics and
leading ideas
13
14
no innovation without experimentation, and there can be no experimentation without failure. That
goes against the grain of many corporate cultures. Nevertheless, I have
found that part of what gives corporate leaders condence is the accumulated wisdom of a lifetime of failures experiments that just didnt
pan out. It gives them an ever-clearer
vision of what will work.
Again, I look to my own career.
When I rst joined Citi in 1997, I
was part of a team that launched an
Brands and
Retailers
Should
Team Up in
Emerging
Markets
When companies
share the shelf,
everyone wins.
by Nikhil Bhandare, Pali Tripathi, and
Aparajita Kapoor
these opportunities are within everyones reach. You know your customers. And when you combine
what they want with a new technology that can enable it, and encourage your employees to go all in,
you can cultivate the kind of judgment that lets you make the right
leaps. Remember that you are playing the long game you may not
see immediate results. Trust your
newfound condence to pay off in
the end. +
Reprint No. 00320
Catherine Palmieri
[email protected]
spent years launching online and mobile
business platforms for various corporations, and now speaks and writes on innovation and marketing in the digital world.
strategy+business issue 79
leading ideas
ideas
EXECUTIVE
EDUCATION
YOURE READY
for the Next Challenge.
Success comes to those who crave challenges and seek growth.
Its time to make your next move.
Wharton Executive Education Programs drive success through
experiential learning. Our top-ranked faculty will lead you through
an intellectually charged experience, and youll learn alongside
international peers wholike youare the best at what they do.
2015 OPEN-ENROLLMENT PROGRAM
The Leadership Journey September 1318, 2015
Executive Development Program September 1325, 2015
Integrating Finance and
Strategy for Value Creation September 1418, 2015
Strategic Thinking and Management September 1418, 2015
Advanced Management Program September 27October 30, 2015
execed.wharton.upenn.edu/READY
leading ideas
ideas
16
Through its Panasonic Partners program, the electronics company Panasonic introduces intermediaries to
new products, business opportunities, and special commercial offers.
These intermediaries use that knowledge to push sales independently
with retailers, enabling Panasonic to
build its channel community.
Finally, remember that trust in
your relationship is something you
will need to continually maintain.
The importance of transparency
with your partner company and
adherence to agreed-on processes
should be clear to everyone involved.
Building trust should begin with
your own organizations behavior,
not just what you expect from others.
In fact, knowing yourself is a critical
part of this process. Many companies are tempted to use collaboration
to make up for gaps in their own capabilities. In practice, however, the
most successful partnerships build
on strengths rather than compensating for weaknesses. The best way to
view collaboration is as a joint
growth opportunity a chance to
develop more distinctive, stronger
capabilities together. +
Reprint No. 00326
Nikhil Bhandare
[email protected]
is a principal at Strategy& in Mumbai, and
co-leads the rms consumer and retail
practice in India.
Pali Tripathi
[email protected]
is a senior engagement manager at
Strategy& in Mumbai, and a member of the
consumer and retail practice in India.
Aparajita Kapoor
[email protected]
is a senior consultant at Strategy& in
Delhi, and a member of the consumer and
retail practice in India.
This article is adapted from the authors
Strategy& white paper, CPG and Retail:
Natural Allies in Emerging Economies,
Mar. 2015.
leading ideas
17
leading ideas
Agility Is
Within
Reach
leading ideas
Strategic Responsiveness
19
LOW
LOW
Organizational Flexibility
HIGH
but not both. In what we call fauxagile companies, where strategic responsiveness is high but organizational exibility is low, leadership is
visibly committed to agility, and
takes on ambitious initiatives. But
the company does not have all the
capabilities it needs to deliver results, especially when the strategy
changes. It may be that leaders are
detached enough from day-to-day
operations that they perceive the
company to be addressing customer
needs more effectively than it actually does. Functions and business
units are siloed: They dont communicate effectively, and they resist
working together. Processes and IT
infrastructure are not aligned with
strategy and may be out of date.
Those rms we refer to as almost-agile companies, in contrast,
have low strategic responsiveness
but high organizational exibility.
These organizations are known for
operational competence and skill
at continuous improvement. They
make and sell everything well, but
dont always make and sell the right
things. Strategy is bound up with
existing customers. However, com-
Kayvan Shahabi
[email protected]
is the U.S. technology industry advisory
leader at PwC, and is based in San Jose,
Calif.
Antonia Cusumano
[email protected]
is the U.S. technology industry people and
change leader at PwC, and is based in San
Jose, Calif.
Sid Sohonie
[email protected]
is a director in PwCs technology industry
advisory practice, and is based in Seattle.
Also contributing to this article were
PwC principal Chris Curran and director
James Saliba.
2.0%
1.0%
2006
$250
2007
2008
2009
2010
2011
2012
2013
2014
Stock prices
150
100
50
2005
2008
2011
2015
Drilling activity
surges in the
Marcellus Shale
Oil reaches
US$110 per
barrel
Global oversupply
pushes oil prices
below $50 per barrel
2006
2007
2008
2009
2010
2011
2012
2013
2014
Note: R&D spending was calculated using a small but indicative sample of leading segment players.
Source: Surviving the Worst: Its Time for Oil Services to Address Shortcomings and Find Strategic Solutions,
by Viren Doshi, John Corrigan, Shawn Maxson, and Adrian del Maestro, Strategy& white paper, Feb. 2015,
strategyand.pwc.com/OFS; Bloomberg; University of Michigan Center for Local, State, and Urban Policy
strategy+business issue 79
leading ideas
20
Upcoming Programs
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22
Lets Megadeal
Seven strategies for managing the unique
challenges of large technology acquisitions.
by Rob Fisher, Gregg Nahass,
and J. Neely
essay technology
TECHNOLOGY
Technology-driven
market
$80
Consolidation
$60
$40
$20
$0
Hardware
Software
Internet
Semiconductor
IT Services
Capabilities
Extension
40.1%
essay technology
Going Private
23.5%
$388 Billion
Total Value
Source: Strategy&
is addressing the unique considerations for strategic acquirers evaluating megadeals, we will discuss only
the rst three categories.
Avoiding the Megadeal Pitfalls
23
more, the BU leader may take ownership of the integration and the
combined performance plan. Consolidation-oriented deals tend naturally to include strong BU accountability because of the high degree of
operational overlap.
However, in capabilities extension megadeals, almost by denition,
BU accountability doesnt exist. In
this vacuum, the chief executive ofcer often becomes solely accountable for the deals business success.
And that presents signicant chal-
In general, each of these approaches distributes focus and accountability, augments capabilities,
or provides for greater objectivity
and transparency to guard against
deal biases.
2. Relying on acquired management. This is particularly important
strategy+business issue 79
essay technology
24
purchasers ahead of their competition by creating formidable capability platforms, realizing signicant
operational efciencies, and opening up new avenues for growth. To
succeed, experienced leaders need to
make adjustments and address certain challenges.
Weve identied seven critical
challenges to megadeals, and have
developed strategies to cope with
them. All seven apply to the three
technology deal types under consideration consolidation, capabilities
extension, and technology-driven
market transformation although
the degree of the challenge varies by
deal type.
1. Assigning accountability. In
a best-case acquisition scenario, a
business unit (BU) leader is charged
with driving the transaction because
the acquired operations fall within
his or her current scope. The BU
leader evaluates the technology, the
customers, the marketplace, and
core business functions. Whats
essay technology
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diligence, and leaders can be uncertain about the depth of due diligence
that is legally permitted.
The net result is that companies involved in megadeals may
know surprisingly little about each
other. A lack of due diligence may
not matter too much in the case of
a technology-driven market transformation deal, because the target
company is small and the potential
for due diligence is limited. But a
lack of due diligence can be quite
damaging for capabilities extension
deals if cost and revenue assumptions are not properly vetted.
Indeed, many of the megadeals
completed over the past several
years are unraveling today for the
simple reason that the original due
diligence did not uncover the barriers to success it should have. As a
strategy+business issue 79
essay technology
26
7. Managing
the
transaction
WhiteWalls
Magnetic Whiteboard
Steel Wall Panels
WhiteWalls.com
essay technology
upset by a very high price tag. Facebook CEO Mark Zuckerberg used
a statement to explain the WhatsApp deal to investors. WhatsApp
is a simple, fast, and reliable mobile
messaging service that is used by
over 450 million people on every
major mobile platform, he noted.
More than 1 million people sign
up for WhatsApp every day and it
is on its way to connecting 1 billion
people. More and more people rely
on WhatsApp to communicate with
all of their contacts every day.
Rob Fisher
[email protected]
is a partner and U.S. and global technology
industry deals leader at PwC. He is based
in Silicon Valley.
Gregg Nahass
[email protected]
is a partner and U.S. and global leader of
the M&A integration practice at PwC. He is
based in Los Angeles.
J. Neely
[email protected]
is a partner with Strategy& based in
Cleveland. He is the global leader of the
rms deals platform and part of the
consumer and retail practice.
27
28
10 Principles of
Organization Design
These fundamental guidelines can help
you reshape your organization to t your
business strategy.
by Gary L. Neilson, Jaime Estupin,
and Bhushan Sethi
That meant yet another reorganization, but this one would be different. It had to go beyond shifting the
lines and boxes in an org chart. It
would have to change the companys
most fundamental building blocks:
how people in the company made
decisions, adopted new behaviors,
rewarded performance, agreed on
commitments, managed information, made sense of that information, allocated responsibility, and
connected with one another. Not
only did the leadership team lack a
full-edged blueprint they didnt
know where to begin.
This situation is becoming more
typical. In the 18th annual PwC
survey of chief executive ofcers,
conducted in 2014, many CEOs
anticipated signicant disruptions
to their businesses during the next
ve years as a result of global trends.
FORMAL
INFORMAL
Decisions
How decisions are made
Norms
How people instinctively act or take action
on
Governance forums
Decision rights
Decision processes
Decision analytics
Motivators
How people are compelled to perform
Commitments
How people are inspired to contribute
Monetary rewards
Career models
Talent processes
Information
How the organization formally processes data and knowledge
Key performance indicators and metrics
Information flows
Knowledge management systems
Structure
How work and responsibilities get divided
Hierarchy and reporting relationships
Role and responsibilities
Roles
Business processes
pro
Source: Strategy&
Mind-Sets
How people make sense of their work
Identity, shared language, and beliefs
Assumptions and biases
Mental models
Networks
How people connect beyond the lines and boxes
Conversations and collaboration
Teams and other working
g units
Organizational influence
uence
29
their current org chart doesnt necessarily capture the way things get
strategy+business issue 79
5. Focus on what you can control. Make a list of the things that
hold your organization back: the
scarcities (things you consistently
nd in short supply) and constraints
(things that consistently slow you
down). Taking stock of real-world
limitations helps ensure that you can
execute and sustain the new organization design.
For example, consider the impact you might face if 20 percent
of the people who had the most
knowledge and expertise in making and marketing your core products your product launch talent
were drawn away for three years
on a regulatory project. How would
that talent shortage affect your product launch capability, especially if
it involved identifying and acting
on customer insights? How might
you compensate for this scarcity?
Doubling down on addressing typical scarcities, or what is not good
enough, helps prioritize the changes
to your organization model. For
example, you may build a product
launch center of excellence to address
the typical scarcity of never having
enough of the people who know how
to execute effective launches.
Constraints on your business
such as regulations, supply shortages, and changes in customer demand
Information
54
Decision rights
Motivators
Structure
50
26
25
31
cause the work is routine and heavily automated. An enterprise software implementation team, made
up of specialized knowledge workers, would require a narrower span
of control, such as six to eight employees. If people regularly take on
stretch assignments and broadly
participate in decision making, you
might have a narrower hierarchy
more managers directing only a few
people each instead of setting up
managers with a large number of direct reports.
9. Accentuate
the
informal.
strategy+business issue 79
Gary L. Neilson
[email protected]
is a senior partner with Strategy& based in
Chicago. He focuses on operating models
and organizational transformation.
Jaime Estupin
[email protected]
is a partner with Strategy& based in New
York. He focuses on consumer strategic
transformation and organization for the
healthcare industry.
Bhushan Sethi
[email protected]
is a partner with PwC Advisory Services.
Based in New York, he leads the PwC
networks nancial-services people and
change practice.
utppublishing.com
34
GLOBAL PERSPECTIVE
35
Given the complexity and everchanging nature of the intervention required, it is not surprising
that so few countries have been able
to transition successfully from one
economic development stage to another. Although a comprehensive
theoretical framework has yet to be
developed, examples of successful
initiatives from various emerging
markets most recently those in
East Asia suggest a preliminary
set of guiding principles for each of
the four major phases of an emerging markets economic development
journey. A country can evolve this
way from relying primarily on country-based comparative advantages
(for example, ultra-low labor costs)
to developing a sufcient number
of domestic companies that possess
world-class differentiated capabilities of their own.
Phase 1: Breaking free. Many
emerging countries remain poor (a
GNI of $1,025 or lower) indenitely
not because local policymakers dont
understand the basics, but rather because their economies are stuck in
subsistence growth traps. In these
traps, market forces alone are insufcient catalysts for the industrialization and development process. Such
growth traps result from structural
impediments that differ from country to country, but typically include
some combination of economic constraints (such as inadequate access to
affordable nancing), political constraints (such as excessive bureaucracy), and rm strategy constraints
(such as the absence of a skilled
workforce).
For example, in emerging
economies where the vast major-
strategy+business issue 79
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39
and location of their business activities with the highest added value.
Timing Is Everything
John Jullens
[email protected]
is a partner with Strategy& based in
Shanghai. He co-leads the rms
engineered products and services
practice in Greater China.
strategy+business issue 79
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strategy+business issue 79
42
The
$112 Billion
CEO Succession
Problem
by Ken Favaro, Per-Ola Karlsson, and Gary L. Neilson
43
Per-Ola Karlsson
per-ola.karlsson@
strategyand.pwc.com
is a senior partner with
Strategy& based in Dubai. He
serves clients across Europe
and the Middle East on
issues related to organization,
change, and leadership.
Gary L. Neilson
gary.neilson@
strategyand.pwc.com
is a senior partner with
Strategy& based in
Chicago. He focuses on
operating models and
organizational transformation.
4.0%
Planned
13.5%
Forced
Source: Strategy&
strategy+business issue 79
Ken Favaro
ken.favaro@
strategyand.pwc.com
is a senior partner with
Strategy& based in New York.
He leads the rms work in
enterprise strategy and
nance.
VIDEO FEATURE
CEO Succession: Why It Pays to Have a Plan
Large companies can lose billions of dollars when they
dont plan for changes in leadership.
80%
Planned
60%
40%
Forced
20%
M&A
0%
2000
Source: Strategy&
2005
2010
2014
1.
features title
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& article
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45
ow do we know that
we have tracked.
CEOs of companies with the poorestperforming stocks are often forced out.
Percentage of CEO turnovers in each
performance quartile that were forced,
200014
45%
26%
21%
19%
Lowest
quartile
Second
Third
Highest
ate awkwardness or raise sensitivities. Indeed, circulating an agenda for a board meeting with a new item
labeled CEO Succession might set off alarm bells
throughout the company. For that reason, the board
should nd ways to make CEO succession planning
a routine, recurring, and candid topic of discussion.
strategy+business issue 79
SUCCESSION
PLANNING AND
FINANCIAL
PERFORMANCE
100%
through 2014. Companies in the lowest quartile also turn over their CEOs
80%
more quickly. CEOs in these companies have a median tenure of 3.4 years,
Low-performing
companies
60%
20%
2nd
TURNOVER
features title
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& article
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47
2.
strategy+business issue 79
3.
features title
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& article
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son, in turn, was let go within weeks as activist investors questioned his academic credentials and his suitability for the job. In this instance, the failure to plan
adequately led to apparent chaos. When a board of directors announces the departure of a CEO and the hiring of an executive search rm to identify a successor,
the board members are also announcing that they have
failed at succession planning.
49
continued improvement in
92 percent.
nancial results.
strategy+business issue 79
THE
INCOMING CLASS
OF 2014:
NO SURPRISES
careers.
5.2%
4.3%
Western Europe
53%
47%
50%
50%
47%
53%
4.0%
51
Utilities
83%
Consumer staples
67%
56%
Consumer discretionary
Materials
3.1%
52%
Information technology
50%
2.6%
38%
62%
Industrials
Telecommunications
services
U.S., Canada
24%
76%
Japan
17%
83%
Healthcare
47%
43%
27%
Financials
16%
2010
2011
Source: Strategy&
2012
2013
2014
China
100%
features title
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& article
leadership
Energy
11%
Note: Excludes turnover events resulting from M&A,
interims, and events with incomplete turnover information.
Source: Strategy&
their region.
executives).
Company-provided informa-
Bloomberg.
strategy+business issue 79
Methodology
Is your succession planning backward-looking or forward-looking? The boards overall approach to choos-
features title
feature
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of the
& article
leadership
4.
Resources
Strategy&s 2014 Chief Executive Study (strategyand.pwc.com/
chiefexecutivestudy): The full report and data analysis of this years study.
PwCs 18th Annual Global CEO Survey: The Marketplace without
Boundaries, Jan. 2015: The latest PwC Annual Global CEO Survey
shows that the changes CEOs are making within their organizations now
have less to do with sheltering from economic headwinds and more to do
with preparing for the future.
Jon Katzenbach and DeAnne Aguirre, Culture and the Chief
Executive, s+b, Summer 2013: CEOs are stepping up to a new role, as
leaders of their companys thinking and behavior.
Matt Palmquist, The Value of the CEO Variety Pack, s+b, Jan. 15,
2015: A chief executive with a diverse background usually brings
innovation and new ideas to a company, but the shake-up doesnt
necessarily pay off.
Matt Palmquist, The Right Time to Separate the CEO and Chairman
Roles, s+b, Apr. 12, 2013: When performance is agging, splitting the
top jobs could well make sense otherwise, dont rock the boat.
More thought leadership on this topic:
strategy-business.com/strategy_and_leadership
53
54
strategy+business issue 79
The
Decline
of the
COO
nizations, and a shift in the nature of succession planning. Although we expect these factors to remain in
place and even to grow stronger, we shouldnt count the
COO out just yet. There are still circumstances when
having a COO contributes real value.
55
Gary L. Neilson
gary.neilson@
strategyand.pwc.com
is a senior partner with
Strategy& based in
Chicago. He focuses on
operating models and
organizational transformation.
The third reason we see fewer COOs in major corporations relates to succession planning. As the perceived
CEO-in-waiting, the chief operating ofcer position
can inhibit executive recruiting and development.
For companies looking to cultivate a broad and
deep bench of executive talent, the presence of a COO
can be demotivating. Crist Kolder Associates president
Tom Kolder puts it this way: We dont see many oneover-one situations anymore where you have a COO
between the CEO and the rest of the executive team.
Its hard to attract a world-class chief nancial ofcer,
for example, who is not going to report directly to the
CEO. The same holds true for the general counsel, the
head of HR, and most staff functions.
Like organizations themselves, executive development is becoming more horizontal. When rms set up
lateral executive development opportunities and rotate
promising talent through operational and functional
assignments around the world, they develop a robust
cadre of executives who can handle the integration role
previously relegated to the COO. This approach works
well for companies that compete with distinctive capabilities. These companies, which often span the globe
with their products, services, and capabilities, need
many executives with integration skills. They cant rely
on just a COO.
To extend their reach without a COO, CEOs are
strategy+business issue 79
to stay closer to the business. Many boards have begun to demand conrmation that CEOs are on top of
the companys operations and have rsthand knowledge
of their inner workings. The CEO can no longer delegate that sort of detailed insight and responsibility to
the COO.
The advancing
sophistication of IT extends
the CEOs ability to be
everywhere at once.
Resources
Crist Kolder Associates, Volatility Report 2014: Trends in CEO recruiting
and succession, based on a survey of 669 Fortune 500 and S&P 500
companies.
Matthew Daneman, Companies Do Away with Chief Operating Ofcers, USA Today, Aug. 26, 2014: One source of references to McDonalds
and Twitter eliminating the COO role.
Thomas N. Hubbard, Paul Leinwand, and Cesare Mainardi, The New
Supercompetitors, s+b, Autumn 2014: Explains the trend toward greater
focus by leading companies in each industry.
Gary L. Neilson and Julie Wulf, How Many Direct Reports? Harvard
Business Review, Apr. 2012: Research-based guide to the appropriate span
of control for CEOs, COOs, and other top executives.
More thought leadership on this topic:
strategy-business.com/strategy_and_leadership
57
strategy+business issue 79
58
CEMEXs
Strategic
Mix
59
Thomas A. Stewart
[email protected]
is the executive director
of the National Center for
the Middle Market at Ohio
State University, and the
former chief marketing
and knowledge ofcer of
Booz & Company (now
Strategy&).
strategy+business issue 79
60
PARTICIPANTS
Jaime Elizondo
is president of
CEMEX South,
Central America,
and the Caribbean.
Luis Farias
is CEMEXs senior
vice president
of energy and
sustainability.
Luis Hernandez
is CEMEXs
executive vice
president of
organization and
human resources.
Ignacio Madridejos
is president of
CEMEX Northern
Europe.
Juan Pablo
San Agustin
is the executive
vice president of
strategic planning
and new business
development.
features title
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of the
perspective
article
61
strategy+business issue 79
INTERACTIVE FEATURE
The Foundation of CEMEXs SuccessIn Pictures
How the Mexican company developed the global capabilities needed to support its international business strategy.
ELIZONDO:
SAN AGUSTIN:
are key. Thats when you have your best chance and
I mean this in the most positive sense of getting into
peoples heads. Thats your window to make them realize they should change how they think.
features title
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63
LUIS HERNANDEZ:
The CEMEX Way, which we developed to address all this, was a collaborative effort. It was
all about nding what worked best and then enforcing
those standards.
Enforcing is really the right word. A good
example is the emphasis we put on closing the books on
the rst or second day of every month. A lot of managers initially wondered why it was so important to do
this. They thought nothing would be lost if they did
their closings on the seventh or eighth day. But we believed that having that information readily available
would increase the likelihood that managers would
make the right decisions. And the practice had a very
high-level overseer: Mr. Zambrano himself, into whose
email inbox all of these reports owed. This was not
subject to negotiation.
HERNANDEZ:
64
ELIZONDO:
ELIZONDO:
HERNANDEZ:
strategy+business issue 79
SAN AGUSTIN:
IGNACIO MADRIDEJOS: Patrimonio Hoy, which we started in Mexico in 1998, was one of our rst moves in
this direction. It was a program we set up to help lowincome families overcome the obstacles that made it difcult for them to build their homes. We provided them
with access to building materials such as cement, concrete blocks, and steel; we also provided access to credit
through micronance; and we offered technical and architectural guidance. This was a way for us to grow the
pie and create more value for CEMEX at the same time
that we were doing something benecial for society.
ELIZONDO:
We redened our vision for CEMEX Mexico. We would create innovative solutions for the construction industry that improve the well-being of the
people. We began to say we want a country with the
kind of infrastructure that makes it competitive: highways, ports, airports, anything that reduces the costs of
transport and production. We had a lot of experience
transporting materials over long distances in trucks,
railroads, and ships, so we knew the problems of having poor infrastructure, and we had years of experience
helping to build ready-mix concrete roads. We knew
that, compared with building asphalt roads, the initial
investment was almost the same and the cost of maintenance was much lower.
For CEMEX to play that kind of role, the company
needed new capabilities. We needed a new kind of executive, connected with the environment, who understood the real needs of any given locality. We changed
old habits; for instance, in the past our people were not
prepared to interact with our communities or with the
media. We had become an efcient company with an
inward-looking culture. But our operational guys realized that they needed to be able to talk to the media,
and to local communities and their leaders. The operational guys had to recognize that it wasnt enough to
lower costs; they also had to connect with local people
and address their concerns for example, about the
dust generated by trucks picking up materials. The
sales guys had to learn not to wait for people to come
in with orders; if markets were soft, they had to go out
and propose solutions to problems that had not yet been
brought to public attention. We dont just mend holes
in your street we can prevent those holes from recurring for the next 30 years.
Partly its a matter of how we talk about these
things with customers. Were not just selling cement or
ready-mix; were helping you build a street. Were helping you build a home. We arent selling a product to
you; were working with you on a solution.
A World of Shared Knowledge: 2005present
MADRIDEJOS:
By the end of 2004, we were an $8 billion company. To keep growing, we needed some larger transactions. Thus, in 2005, we bought the RMC
Group [a British company; RMC originally stood for
ready-mix concrete]. In 2007, we bought the Rinker
Group, an Australian building-materials company.
SAN AGUSTIN:
features title
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65
Cement is a powder made from limestone and other ingredients, used in the production of
concrete and masonry. It is produced in enormous, cap-
MADRIDEJOS:
strategy+business issue 79
66
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67
recipes like the CEMEX Way, which can be disseminated by a corporate center. By contrast, ready-mix and
aggregates are hyperlocal businesses, and a best practice
in one place might not be a best practice in another. We
needed to gure out what the best practices were in different regions, see how broadly they applied, document
them, and implement them where appropriate.
WATSON:
into Europe.
foreign markets.
That is a global best practice. Admittedly, to introduce it in a market unaccustomed to it is difcult because we stand out. So we have said each business must
recapture transport dollars. We wont dictate how you
do it, but we require that you recapture all your freight
somehow.
Pankaj Ghemawat
[email protected]
is a professor at New York Universitys
Stern School of Business and the Anselmo
Rubiralta Professor of Global Strategy at
IESE Business School.
strategy+business issue 79
The Very
Model of an
Emerging Market
Multinational
WATSON:
MADRIDEJOS: We didnt buy RMC because of its understanding of alternative fuels and waste-to-energy
systems. But we quickly saw RMCs energy strategy
as a capability we could adopt. The part of RMC that
was in Germany was particularly advanced; approximately 50 percent of its fuel use came from alternative sources. Despite the experience with pet coke,
CEMEX was far behind.
As a rst step, we extended what RMC was doing in Germany to the rest of Europe. That took some
doing. The German part of RMC was using refusederived fuel a fraction of municipal waste which
is not widely understood. There is often a not in my
backyard mentality on the part of government ofcials. It takes time for people to become comfortable
with the idea. In addition, using refuse-derived fuel is
pretty complicated technically because of variations in
caloric power and other factors. Finally, we wanted to
move quickly to structure long-term contracts for the
energy sources. We knew from our experience with pet
coke that it was only a matter of time before waste-recycling companies would start to peg the price of this
energy source to the price of oil, eroding our advantage.
Today, were at over 28 percent alternative energy use,
the highest among our competitors.
features title
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perspective
article
In 2009, we launched an internal social network called Shift, like a walled-off version of Facebook.
It allows people in different communities of interest at
CEMEX to see detailed information about operations
around the world.
For example, within ready-mix, Shift has a track
for value-added products. You can see how much we sell
in value-added products every month, and how much
more revenue they generate versus standard products.
Each month, we do an hour-long presentation on the
countries that have advanced this sort of product: what
they did, why they did it, how much money they made,
and why others might follow the example. We call it
Concrete Talks.
For most of our products, Shift shows the specications and a video of what the product does. Theres a tutorial in Spanish, German, French, Polish, English, and
Chinese about how its sold, how its positioned, what its
value proposition is, where it should be used, and then
maybe one or two customer testimonials. You could do
all that stuff manually, with an email to a colleague. But
that would require generating a separate internal campaign for each new product.
Mr. Zambrano talked about going from being an
elephant to being a greyhound. Left to their own devices, big companies will continue to act big. Theyll
put in more rules, procedures, and standardization.
When youre running a hyperlocal business like readymix concrete and aggregates, you cant allow that to
happen. You have to ght all the time to be small. Shift
allows us to make the company feel small.
69
FARIAS:
Fifty years from now, the world will be lowcarbon. This will require a lot of cement. Windmills are
a good example. You dont see them, but offshore windmills have huge cement pilings underneath. High-speed
railway systems also require a lot of cement. We also
strategy+business issue 79
SAN AGUSTIN:
features title
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of the
perspective
article
sciously or unconsciously. In human resources, for example, the rst thing we design is the organizational
structure. How is work organized? Who has decision
rights over what, and how is the work done? The second thing has to do with people individual skills,
individual balance, and individual knowledge. And the
third one is incentives: what you measure, what you pay,
and so forth. Over time, together, those things build a
culture that produces the behaviors that reinforce the
capabilities that will make you successful.
You can change organizational structures relatively
easily. You just send out an email that says, Joe, you
now report to Regina, and here are the new guidelines
on decision rights. Likewise, incentives are relatively
easy to deal with. Tomorrow were going to start using
cash value added as a measure of performance, and if
you achieve this level of cash value added, you get this
bonus, and that will set you up to be promoted.
The middle one, which is people, is the most difcult. Especially when youre shifting to a distributed
organization, and asking people to make decisions
material ones that they havent been asked to make
before, it can take a while to get that right.
71
Resources
Donald R. Lessard and Cate Reavis, CEMEX: Globalization The
Cemex Way, Case Study 09-039, Mar. 5, 2009, MIT Sloan
Learning Edge: Describes the capabilities improvement encompassed
by the CEMEX Way.
Pankaj Ghemawat, Redening Global Strategy: Crossing Borders in a World
Where Differences Still Matter (Harvard Business Review Press, 2007):
Describes CEMEXs protable expansion in a semiglobal economy.
Cesare Mainardi and Paul Leinwand, Soundbite: The Secret to Strategy
That Works, Strategy& video series, 2015: Concepts underlying the
Capable Company research project.
More thought leadership on this topic:
strategy-business.com/global_perspective
72
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73
Sally Helgesen
[email protected]
is an author, speaker, and
leadership development
consultant, whose most
recent book is The Female
Vision: Womens Real Power
at Work (with Julie Johnson;
Berrett-Koehler, 2010). Shes
@SallyHelgesen on Twitter.
strategy+business issue 79
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75
made her initial mark in an almost entirely female organization whose mission is to serve girls. Through her
work on leadership, she has formed close associations
with major military and corporate leaders, such as Alan
Mulally, the former CEO of Ford Motor Company,
and General Eric Shinseki. Her emphasis on purpose,
values, and ethics; her pioneering advocacy of diversity
and inclusion; and her focus on serving the changing
needs of the customer are core principles that she has
expressed and embodied for many decades.
Hesselbein does not discuss her age, but it is
known to be around 100 years. Yet she shows up at her
Park Avenue ofce every morning, and until 2013 kept
up a punishing schedule of world travel. More im-
76
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The scope of Hesselbeins ambition was apparent from the start. On the rst day of her board job,
she brought a copy of Druckers The Effective Executive
(Harper & Row, 1967) for each staff member, having decided that his philosophy was exactly what we
needed for our governance and management. She rapidly introduced herself to business leaders throughout
the region. She persuaded the president of the areas
biggest bank to personally sponsor her rst fund drive,
doubling the previous years result. She also engaged the
support of union leaders in the area and enlisted local
congressman John Murtha to chair her rst fundraising dinner; he continued to do so for the next 35 years.
Invited as the rst woman to chair the regional United Way campaign, she recruited a leading executive of
Bethlehem Steel to host the kickoff luncheon and the
United Steelworkers to host the dinner. Bringing leaders
with contrasting interests together in pursuit of a common cause was the kind of audacious, inclusive, resultsoriented networking that would become her hallmark.
Only the Best
strategy+business issue 79
own decisions. People ourish when they take responsibility, Hesselbein observes. Have you ever met a
young person who couldnt wait to be a subordinate?
Convinced that high-level training was required
to sustain the kind of transformation she was putting
in place, she approached learning and development as
if the Girl Scouts were IBM or General Electric, often
persuading people at the top of their eld to donate
their services to her cause. She recruited the president of
MetLife to raise funds for a state-of-the-art conference
center in upstate New York, where she engaged thinkers
such as John Gardner, an education and leadership pioneer; leadership scholar Warren Bennis; and, of course,
Drucker to speak to and work with Girl Scout leaders.
She asked Herzlinger, the rst female tenured professor
at HBS, to create an asset management seminar to improve nancial management in the Girl Scout councils.
The Girl Scouts was a franchise organization,
recalls Herzlinger. As CEO, Frances did not have the
power to choose, re, or promote council leaders. She
had to make the most of what she had, so she asked me
to bring together a group of HBS faculty to develop a
corporate management seminar for local council CEOs
and national staff. It covered everything: strategic planning, nance, negotiation, professional management
skills. We wrote case studies of various councils one
near bankruptcy, one with too much money and
used the case method to teach the program, which we
ran for the Girl Scouts for many years.
Herzlinger sees the ambitious scope of Hesselbeins
development programs as an example of her general
commitment to high-level aspiration for the organization and the girls it served. Its the same reason she got
Bill Blass to redesign the Girl Scout uniform [in 1984]
and then unveiled them at a runway luncheon at the
Four Seasons with all the press invited not the kind
of thing the Girl Scouts had been known for doing in
the past. Or as Hesselbein herself put it: Only the best
is good enough for those who serve girls.
Amid all this change, she also faced personal loss.
Two years into her tenure, her husband died suddenly
after being diagnosed with a brain tumor. At work,
Hesselbein viewed her most essential role as recogniz-
79
Retiring from a demanding job in her mid-70s, Hesselbein claimed her only plans were to write a memoir
and continue serving on a couple of boards. But on her
rst day of unemployment, insurance company Mutual
of America presented her with an ofce on Park Avenue and the half-time use of an administrative assistant
in the expectation that she would do something of
value. Six weeks later, she and two friends Bob
Buford, a television executive, and Dick Schubert, head
of the Points of Light Foundation and former president of the American Red Cross ew to Claremont,
Calif., in order to discuss with Drucker, then in his
90th year but very active, how they might combine
forces to spread his work and philosophy more broadly.
Thus the Peter F. Drucker Foundation for Nonprot
Management was born.
The basic idea was to foster excellence by providing
management and leadership resources to public-service
organizations struggling soup kitchens, domestic
abuse shelters, after-school programs, immigrant assistance centers, and so on connecting them with top
educators, consultants, and thinkers. The organization
would remain tiny, and its currency would be intellec-
strategy+business issue 79
81
Resources
Sally Helgesen, The Female Advantage: Womens Ways of Leadership
(Doubleday/Currency, 1990): Portrays Hesselbein at work, as both an
example and an advocate of inclusive, highly engaged organizational
leadership.
Frances Hesselbein, foreword by Jim Collins, Hesselbein on Leadership
(Jossey-Bass, 2002): Compendium of essays focused on how and why to
develop quality, character, mind-set, values, principles and courage.
Frances Hesselbein and Marshall Goldsmith, eds., The Leader of the
Future 2: Visions, Strategies, and Practices for the New Era (Jossey-Bass,
2006): Incisive anthology of essays on leadership.
Frances Hesselbein, foreword by Jim Collins, My Life in Leadership: The
Journey and Lessons Learned Along the Way (Jossey-Bass, 2011): Autobiography in which Hesselbein recounts her experiences and explains the
sources of her approach.
More thought leadership on this topic:
strategy-business.com/organizations_and_people
81
THOUGHT LEADER
thought leader
82
thought leader
83
Gretchen Anderson
gretchen.anderson@
strategyand.pwc.com
is a principal with Strategy&
and a director of the
Katzenbach Center.
thought leader
84
Art Kleiner
kleiner_art@
strategy-business.com
is editor-in-chief of
strategy+business.
and our net promoter scores [a measure of survey respondents enthusiasm] in recruiting new employees.
Incidentally, our industrys general
net promoter scores are below those
of airlines and cable TV companies.
We gured out that our total
turnover costs were $120 million per
year. By that measure, $10.5 million
looked like a low-risk investment.
We [had] also recently hired a new
head of human resources to partner
with me on doing the right thing.
strategy+business issue 79
Jon R. Katzenbach
jon.katzenbach@
strategyand.pwc.com
is a senior executive
advisor with Strategy& based
in New York, and co-leads the
Katzenbach Centers cultural
initiatives.
S+B: This wasnt a cascading measure where youd also raise other
wages through the company.
BERTOLINI: There was a huge gap
A Proud Moment
thought leader
85
thought leader
86
strategy+business issue 79
thought leader
87
A Next-Generation Payor
strategy+business issue 79
thought leader
88
frastructure, so we will need to prepare for that. But well also need new
kinds of roles. For example, well
need to nd roles for people in case
management, marketing, and other
elds where we havent needed many
people before. Our budget in 2018
for consumer advertising might be
10 times what it is today.
S+B: Does everybody at the
company understand the need for
change?
BERTOLINI: Were talking about a
thought leader
89
E
books in brief
90
quately connects subprime mortgage loans in Phoenix and Philadelphia with bank failures in Madrid
and Munich, the bankruptcies of
Chrysler and General Motors, and
Irelands sudden transformation
from beacon to basket case. When
Queen Elizabeth asked British economists in November 2008, Why
did nobody notice it? she was not
referring to the dodgy lending,
which had been noticed far and
wide. Rather, QE2 was referring to
the interconnections that transformed a provincial banking problem into a global economic crisis.
The best answer the experts could
come up with, after eight months of
debate, was that there had been a
failure of the collective imagination
of many bright people.
Of the scores of books that have
examined aspects of this neverending crisis, none may be better
than Barry Eichengreens Hall of
Mirrors. Eichengreen, who teaches
at the University of California at
Berkeley, is one of the most prolic
economic historians writing today.
He is also among the most astute.
The author of books on the gold
standard, European unication, and
the international monetary system,
Eichengreen approaches his subject
Books in Brief
books in brief
91
strategy+business issue 79
books in brief
92
books in brief
Edward H. Baker
[email protected]
is a longtime business journalist and a
contributing editor at strategy+business.
93
by Daniel Gross
Act Like a Leader, Think Like a
Leader, by Herminia Ibarra,
Harvard Business Review, 2015
books in brief
94
strategy+business issue 79
Daniel Gross
[email protected]
is executive editor of strategy+business.
books in brief
s+b
thought
leaders
by Tom Brown
Return on Character: The
Real Reason Leaders and Their
Companies Win, by Fred Kiel,
Harvard Business Review Press,
2015
books in brief
96
strategy+business issue 79
Everyone Prots
from the Return on
Character
Tom Brown
[email protected]
is a leadership development consultant
and coach, lecturer, and business writer.
He is a founding columnist for NPRs
Marketplace, and editor-at-large for
IndustryWeek. His books include The
Anatomy of Fire and Fiscal Fairy Tales.
or connoisseurs of madness
and madmen, Zac Bissonnettes The Great Beanie
Baby Bubble comes at an opportune
time. The Beanie Babies story is 20
years old, and might well have been
lost to history if Ty Warner, the billionaire creator of Beanie Babies,
had not been sentenced last year in
federal court for tax evasion.
The photos of Warner, his architect glasses highlighting a face
worn creepily smooth by decades
of plastic surgery, have to invite
some curiosity about how this reclusive, litigious man could have once
been the most successful toy seller
in history.
Its a question Bissonnette, a
journalist who has previously written two books about personal nance, answers with mixed success.
The Great Beanie Baby Bubble can
usefully be read in two separate
ways: as a book about how to create
a wildly successful product, and as a
book about what turns the successful product into a mania.
The rst of these may be the
more fully realized narrative. Its
tempting to see a product like the
Beanie Baby and approach it in a
gee, wish Id thought of it way because, well, how much experience in
the business does it really take to
come up with the idea of stufng
loose beans in plush animals? A lot,
it turns out. Warner, born in Illinois
books in brief
97
strategy+business issue 79
books in brief
98
MEET
THE NEXT
GENERATION
OF BUSINESS
THOUGHT
LEADERS
strategy-business.com/youngprofs
end page
100
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