Management Minds: What Makes a Great Leader?

Management Minds: What Makes a Great Leader?

We locked two of the smartest management thinkers on earth in a room with each other (and 275 readers) and asked them this question. Here’s how they answered.

These have not been the best of times for executives whose titles start with C. One after another, the alpha dogs of the late 1990s have been paraded before Congress, their reputations shot, their shareholders all but wiped out, and the corporations they led revealed as figments of creative accounting or empty exercises in empire building. For the first time in two decades, our image of a great business leader is entirely up for grabs.

Which is why we invited Jim Collins and Clayton Christensen, two of the most lucid and original management thinkers of our day, to address the subject in a recent Business Management Live! event in Dallas. The question we put to them: Why do some management teams soar to greatness while others fail miserably? Collins, an independent writer, and researcher believes he has found the answer among companies that rose from mediocrity to excellence. In his recent book Good to Great, he identifies common patterns among 11 middling companies that turned themselves into outstanding performers. Christensen, a Harvard Business School professor and author of The Innovator’s Dilemma, takes a different tack. He seizes upon the failures in the steel and disc-drive industries — among others — to illustrate how new technologies rise seemingly from nowhere to capsize established players.

Together, Collins and Christensen form a sort of hopeful yin and admonitory yang of management gurudom. Their differences made for spellbinding conversation, which we’ve distilled and organized by topic in the pages that follow. If you are looking to unlock innovation in your organization and to build a business that lasts, you are listening to the right guys.

Assume That Nothing Lasts Forever

There is no more difficult and dangerous decision than to ditch a proven business model for an unfamiliar alternative. But leaders have to do that. As Christensen notes, the business landscape is littered with the wreckage of companies that clung to what used to work, failing to embrace the change that would ultimately destroy them.

Christensen: No one ever says, “Let’s go out and miss the biggest innovation in our industry.” But the way some companies are organized, they might as well. My work has been to understand why companies fail, to see the changes that are overtaking them, so we can preempt it in the future.

Collins: Clay’s work is sort of like horror flicks for businesspeople. The steel industry wakes up one morning and finds it’s been wiped out by mini-mills. My research is different: I’m looking to find love stories with happy endings. How does something that once looked bleak become great?

DLandroid24: Why are so many companies blindsided by the changes that will put them out of business?

Christensen: Part of the trouble is that managers don’t think of themselves as theoreticians; they think of themselves as practical men and women. But to make accurate predictions about where business is going, managers have to go on gut. When innovations are looming, what’s worked in the past is a dangerous guide.

Collins: That point is pretty evident when you look back at what happened to A&P; and Kroger (KR). Both saw the superstore threat coming and devised plans to counterattack. But here’s the difference: The A&P; managers — even after they saw good results with their superstore plan — killed the plan.

Christensen: A&P;’s leaders had a different model in their heads of what was going to happen — and they were wrong.

Collins: Dead wrong. In the 1950s, A&P; was one of the largest companies in the nation. Today it’s worse than irrelevant. Kroger, on the other hand, transformed its chain of grocery stores into superstores.

DLandroid24: Of course, it took them more than 25 years to do it.

Collins: That’s probably one reason they succeeded. Kroger managers weren’t just managing for the short term. They felt responsible for a hundred-year time frame. As one insider told us, “There was the sense that we were Kroger, and by God if it took us a hundred years to get this right, we would take a hundred years to get it right.”

Ask the Right Questions

A Harvard MBA and a dogmatic style might not be the surest path up the ladder anymore. Collins found that the CEOs who best-handled innovation were often the least likely candidates.

Collins: Of all the persistently good companies we studied in Good to Great, only one was led by a CEO who had an MBA. The most common academic background, oddly enough, was law. I asked one of the CEOs how law school helped prepare him to be a business leader, and he replied, “It taught me to ask the right questions rather than come up with the right answers.”

Christensen: So if Korn/Ferry or Heidrick & Struggles asked you to help them pick CEOs that can take them from good to great, what would you tell them to look for, besides a law degree?

Collins: I’d tell them to look inside the company. Over 90 percent of the Good to Great CEOs came up within the organization. Then I’d tell them to stop assuming that the fix-all solution was a charismatic change-agent CEO. Almost none of the great CEOs that we studied were like that. In fact, most of them had to have a charisma bypass.

DLandroid24: What’s wrong with charisma?

Collins: A charismatic CEO can win every argument regardless of the facts. A non-charismatic CEO has to win on the merits of the argument.

Follow Your Gut

Ken Iverson of Nucor (NUE) is one of the most admired executives in history. Just about any management speaker wanting to make a point about innovation — Collins and Christensen included — uses Iverson as a poster child.

Christensen: We’re both great admirers of everything that Nucor accomplished. But suppose Iverson had run U.S. Steel. Would he have been so successful?

Collins: I actually asked Iverson what he would have done at U.S. Steel. And his answer was “My first instinct is, I’d put a bullet in my head.”

Christensen: I ask the question because being in a growth phase, as Nucor was with mini-mills, can make decisions a lot easier. It’s tougher to look smart if your industry is slowing. Everyone thinks that American steel companies were myopic, compared with the Japanese. But if you compare U.S. mills to those built in Japan prior to 1964, you find that Americans were actually twice as aggressive at adopting new technology. The problem was that the Japanese still had a growing steel industry long after the American market had begun to slow. And so they were building more modern plants.

The point is if you’re growing, management’s easy. You can give people greater responsibilities, and it’s easy to invest in new technology because you have to expand capacity rapidly. When growth stops, all that becomes far more difficult.

Collins: That may be true, but Ken Iverson wasn’t just more successful than the traditional steel mills. He beat the other mini mills as well.

DLandroid24: What was his secret?

Collins: Well, Iverson never even wanted to be a steel company. What he wanted to do was to build a certain kind of culture, defined by him as “the farmer work ethic” — a place where people get up early in the morning and work really hard with other similar folks. Iverson went so far as to hire farmers and teach them how to make steel. And he wanted it to be a triumph of an egalitarian culture.

Christensen: Just as important as having people who work really hard is having people who are willing to take risks. As I said before, you sometimes have to go on a theory of how the world will look, even when the data is inconclusive.

At U.S. Steel the CEO had pen in hand and was ready to sign an investment proposal to build a mini-mill. Instead, he decided to get a second opinion from the finance department. The finance guys said that “if we build a new mini-mill, the average cost per ton is going to be $280. We have 35 percent excess capacity in our existing sheet mills. The marginal cost of running one more ton through that is $7.” The choice looked perfectly clear on paper. But it turned out to be wrong.

DLandroid24: You can’t just ignore ROI (return on investment).

Christensen: Of course not. But my point is, breaking an old business model is always going to require leaders to follow their instinct. There will always be persuasive reasons not to take a risk. But if you only do what worked in the past, you will wake up one day and find that you’ve been passed by.

The Five-Minute Christensen

Clayton Christensen’s research at Harvard Business School, crystallized in his 1997 book The Innovator’s Dilemma, warns that doing everything by the numbers is, in the long run, the path to obsolescence. Innovators have to know when to abide by standard business principles and when to overrule them.

The customer isn’t always right.

Christensen says that good companies often get trapped in a feedback loop of suppliers and customers — what he calls a “value network.” The network can help its members grow, but it also tends to reinforce the status quo. This is exactly what happened to companies like Seagate Technology; they were making 5.25-inch disc drives for desktop computer manufacturers who had no use for the new 3.5-inch drives. It was only when different players began mass-producing laptops that the smaller drive became the standard. But by that time, it was far too late for many of the established makers of the larger drives to migrate to the new technology and retain their leadership.

Seek smaller profits. (Sort of.)

Yes, this sounds heretical. But Christensen points out that when a new technology appears on the scene, it typically makes its impact in an undesirable market segment. That’s part of the dilemma. For example, the steel mini-mill technology was originally good only for making low-margin reinforcing bars. The big steel companies considered it a pointless distraction from making high-margin sheet steel for General Motors and the like. Eventually, of course, the technology evolved, and mini-mills like Nucor could create high-quality steel as well — and do so far more efficiently than dinosaurs like Bethlehem. — J.M.

The Five-Minute Collins

Independent researcher Jim Collins’s 2001 book Good to Great has ridden the current wave of revulsion against grasping business leaders. But that’s not what he set out to do. Only after considerable research into the top-performing companies of the past three decades did he realize that the best CEOs had nothing in common with the larger-than-life egos that boards fell in love with during the 1990s. His self-effacing “Level 5” leaders were guided by a different set of rules.

Charisma is a liability.

It has long been taken as given that charisma is a necessary attribute of any great leader. Jack Kennedy had it. Franklin Roosevelt too. But Collins found that often the most effective leaders come off as almost lackluster. Part of the problem is that charismatic leaders tend to squelch debate simply by force of personality. Collins found that the management teams at the best companies shared a predilection for heated dialogue. Teams need to challenge assumptions, even the bosses, to keep innovation on track.

Technology is not a driver of growth.

Nucor would seem to be the perfect example of a company where a new technology sparked the growth of a business. Mini-mills, which melt scrap steel in electric furnaces, were far more efficient than the traditional iron-ore and blast furnaces used by companies like U.S. Steel and Bethlehem. But when asked to list the top five drivers of Nucor’s success, CEO Ken Iverson failed to mention technology at all. That’s true throughout Good to Great. The top companies, again and again, see technology as merely a way to become more efficient, not as the key driver of the business. — J.M.

Posted by on August 25, 2002