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Nightly Business ReportPresents

Lasting Leadership

What You Can Learn from the Top 25 Business

People of Our Times

Mukul Pandya and Robbie Shell

Written by Knowledge@Wharton Editor Mukul Pandya andManaging Editor Robbie Shell, with help in reporting and writing

from Susan Warner, Sandeep Junnarkar, and Jeff Brown.

Library of Congress Publication in Data: 0131531182

Hardcover EditionPublisher: Tim MooreWharton Editor: Yoram (Jerry) WindEditorial Assistant: Richard WinklerDevelopment Editor: Russ HallMarketing Manager: Martin LitkowskiInternational Marketing Manager: Tim GalliganCover Designer: Sandra SchroederManaging Editor: Gina KanouseProject Editor: Lori LyonsCopy Editor: Sarah CiscoSenior Indexer: Cheryl LenserInterior Designer: Gloria Schurick Senior Compositor: Gloria SchurickManufacturing Buyer: Dan Uhrig

Paperback EditionVice President, Editor-in-Chief: Tim MooreWharton Editor: Yoram (Jerry) WindEditorial Assistant: Susie AbrahamAssociate Editor-in-Chief and Director Marketing: Amy NeidlingerCover Designer: Chuti PrasertsithManaging Editor: Gina KanouseSenior Project Editor: Lori LyonsSenior Compositor: Gloria SchurickManufacturing Buyer: Dan Uhrig

© 2006 by Pearson Education, Inc.Publishing as Wharton School PublishingUpper Saddle River, New Jersey 07458

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Printed in the United States of America

First Printing February 2006

ISBN 0-13-187730-5

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Bernard BaumohlTHE SECRETS OF ECONOMIC INDICATORSHidden Clues to Future Economic Trends and Investment Opportunities

Randall BillingsleyUNDERSTANDING ARBITRAGEAn Intuitive Approach to Investment Analysis

Sayan ChatterjeeFAILSAFE STRATEGIESProfi t and Grow from Risks That Others Avoid

Tony Davila, Marc Epstein, and Robert SheltonMAKING INNOVATION WORKHow to Manage It, Measure It, and Profi t from It

Sunil Gupta, Donald R. LehmannMANAGING CUSTOMERS AS INVESTMENTSThe Strategic Value of Customers in the Long Run

Stuart L. HartCAPITALISM AT THE CROSSROADSThe Unlimited Business Opportunities in Solving the World’s Most Diffi cult Problems

Lawrence G. HrebiniakMAKING STRATEGY WORKLeading Effective Execution and Change

Jon M. HuntsmanWINNERS NEVER CHEATEveryday Values We Learned as Children (But May Have Forgotten)

Eamonn KellyPOWERFUL TIMESRising to the Challenge of Our Uncertain World

Doug Lennick, Fred KielMORAL INTELLIGENCEEnhancing Business Performance and Leadership Success

Vijay Mahajan, Kamini BangaTHE 86 PERCENT SOLUTIONHow to Succeed in the Biggest Market Opportunity of the Next 50 Years

Alfred A. MarcusBIG WINNERS AND BIG LOSERSThe 4 Secrets of Long-Term Business Success and Failure

Robert MittelstaedtWILL YOUR NEXT MISTAKE BE FATAL?Avoiding the Chain of Mistakes That Can Destroy Your Organization

Peter NavarroTHE WELL-TIMED STRATEGYManaging the Business Cycle for Competitive Advantage

WHARTON SCHOOL PUBLISHING

Kenichi OhmaeTHE NEXT GLOBAL STAGEChallenges and Opportunities in Our Borderless World

Mukul Pandya, Robbie Shell, Susan Warner, Sandeep Junnarkar, Jeffrey BrownNIGHTLY BUSINESS REPORT PRESENTS LASTING LEADERSHIPWhat You Can Learn from the Top 25 Business People of Our Times

C. K. PrahaladTHE FORTUNE AT THE BOTTOM OF THE PYRAMIDEradicating Poverty Through Profi ts

Michael A. RobertoWHY GREAT LEADERS DON’T TAKE YES FOR AN ANSWERManaging for Confl ict and Consensus

Arthur Rubinfeld, Collins HemingwayBUILT FOR GROWTHExpanding Your Business Around the Corner or Across the Globe

Scott A. ShaneFINDING FERTILE GROUNDIdentifying Extraordinary Opportunities for New Ventures

Oded ShenkarTHE CHINESE CENTURYThe Rising Chinese Economy and Its Impact on the Global Economy, the Balance of Power, and Your Job

David Sirota, Louis A. Mischkind, and Michael Irwin MeltzerTHE ENTHUSIASTIC EMPLOYEEHow Companies Profi t by Giving Workers What They Want

Thomas T. StallkampSCORE!A Better Way to Do Busine$$: Moving from Confl ict to Collaboration

Glen UrbanDON’T JUST RELATE — ADVOCATE!A Blueprint for Profi t in the Era of Customer Power

Craig M. Vogel, Jonathan Cagan, and Peter BoatwrightTHE DESIGN OF THINGS TO COMEHow Ordinary People Create Extraordinary Products

Yoram (Jerry) Wind, Colin Crook, with Robert GuntherTHE POWER OF IMPOSSIBLE THINKINGTransform the Business of Your Life and the Life of Your Business

WHARTON SCHOOL PUBLISHINGEditorial Board

The Editorial Board of Wharton School Publishing is comprised of the following members from thesenior faculty of the Wharton School. The Editorial Board ensures all manuscripts and materials meetWharton’s standard by addressing important topics with ideas and insights that are

• Relevant • Empirically based• Timely • Conceptually sound• Implementable in real decision settings

■ Dr. David C. SchmittleinIra A. Lipman ProfessorProfessor of MarketingDeputy Dean, The Wharton SchoolChair of the Editorial Board

■ Dr. Yoram (Jerry) WindThe Lauder Professor, Professor of MarketingDirector, The Wharton FellowsDirector, SEI Center for Advanced Studies inManagement

■ Dr. Franklin AllenNippon Life Professor of FinanceProfessor of EconomicsCo-Director, Financial Institutions Center

■ Dr. Peter CappelliGeorge W. Taylor Professor of Management Director, Center for Human Resources

■ Dr. Thomas DonaldsonMark O. Winkelman Professor

■ Dr. Richard J. HerringJacob Safra Professor of International BankingProfessor of FinanceCo-Director, Financial Institutions Center

■ Dr. John C. HersheyDaniel H. Silberberg ProfessorProfessor of Operations and InformationManagement

■ Dr. Paul R. KleindorferAnheuser-Busch Professor of Management ScienceProfessor of Business and Public PolicyCo-Director, Risk Management and DecisionProcesses Center

■ Dr. Ian C. MacMillanFred R. Sullivan ProfessorProfessor of ManagementDirector, Sol C. Snider Entrepreneurial Research Center

■ Dr. Andrew MetrickAssociate Professor of Finance

■ Dr. Olivia S. MitchellInternational Foundation of Employee BenefitPlans ProfessorProfessor of Insurance and Risk Management andBusiness and Public PolicyExecutive Director, Pension Research CouncilDirector, Boettner Center for Pensions andRetirement Research

■ Dr. David J. ReibsteinWilliam Stewart Woodside ProfessorProfessor of Marketing

■ Kenneth L. ShropshireDavid W. Hauck ProfessorProfessor of Legal Studies

■ Dr. Harbir SinghEdward H. Bowman Professor ofManagementCo-Director, Mack Center for Technological Innovation

■ Dr. Michael UseemThe William and Jacalyn Egan ProfessorProfessor of ManagementDirector, Center for Leadership and ChangeManagement

Management Committee

■ Barbara Gydé Managing Director, Wharton School PublishingDirector of Advertising Strategy, The Wharton School

■ Mukul PandyaContributing Editor, Wharton School Publishing Editor and Director, Knowledge@Wharton

■ John PierceVice President, Director of MarketingWharton School Publishing, Financial Times PrenticeHall, and Prentice Hall Business

■ Timothy C. MooreVice President, Editor-in-ChiefWharton School Publishing, Financial Times PrenticeHall, and Prentice Hall Business

■ Dr. Yoram (Jerry) WindWharton Editor

Contents

A Conversation with Jack Welch xiii

Introduction xxiii

Chapter 1: Best of the Best: Inside Andy Grove’s Leadership at Intel 1

Chapter 2: Leadership and Corporate Culture 21

Chapter 3: Truth Tellers 47

Chapter 4: Identifying an Underserved Market 73

Chapter 5: Seeing the Invisible 103

Chapter 6: Using Price to Gain Competitive Advantage 131

Chapter 7: Managing the Brand 159

Chapter 8: Fast Learners 183

Chapter 9: Managing Risk 209

Chapter 10: Conclusion 237

References 243

Index 261

AcknowledgmentsWe are grateful to several people without whom the book you

hold in your hands would not exist. Our thanks go, first, to three journalists who helped us report and

write the book and deserve a substantial part of the credit for anymerits it may possess. Susan Warner, a former business reporter forThe Philadelphia Inquirer, who is now a freelance writer, was respon-sible for seven of the leaders (Herb Kelleher, Jack Welch, SamWalton, Lee Iacocca, Michael Dell, Frederick Smith, and RichardBranson); Sandeep Junnarkar, former New York bureau chief forCNET News.com, who now teaches business and online journalismat Indiana University in Bloomington, was responsible for six of the25 (Jeff Bezos, Peter Drucker, Ted Turner, Lou Gerstner, CharlesSchwab, and William George); and Jeff Brown, who has written thesyndicated personal finance column for The Philadelphia Inquirersince 1995, was responsible for five of the 25 (John Bogle, WarrenBuffett, Alan Greenspan, Oprah Winfrey, and Peter Lynch).Without their reporting and writing, this book would never havebeen completed—especially not on a tight deadline. They werealways responsive, cheerful, and above all, professional in theirwork. Lasting Leadership was the result of a tremendous team effort.We are lucky that Susan, Sandeep, and Jeff were part of that team.

We would also like to acknowledge Ed Voves, a formerresearcher at The Philadelphia Inquirer, who gathered data on theTop 25 leaders and helped us obtain the necessary permissions forour usage of secondary sources. He carried out these sometimesthankless jobs with incredible persistence and good grace.

Before the book could be researched or written, however, it had tobe conceived. For that, we thank our collaborators at Nightly BusinessReport, who first came up with the idea of identifying the Top 25 lead-ers of the past 25 years. Linda O’Brien, Stuart Zuckerman, RodneyWard, Wendie Feinberg, Susie Gharib, and Jack Kahn were enthusias-tic about taking a television program planned to mark NBR’s 25thanniversary to the next stage by turning it into a book. During themonths that the manuscript was being prepared, NBR worked with usas a true partner in matters large and small—from helping open doorsat certain companies to carefully reviewing the manuscript andimproving it with thoughtful suggestions.

We are grateful to Pearson, Wharton’s partner in WhartonSchool Publishing, for publishing the book. Tim Moore, editor-in-chief of Pearson Education, was enthusiastic about the book fromthe time it was just an idea, and he played a patient and encour-aging role all the way through its completion. We also thank RussHall for helping edit the manuscript; Lori Lyons for invaluableassistance in its production; and John Pierce and Martin Litkowskifor their help with marketing and publicity.

At Wharton, several people played a key role in helping this booksee the light of day. Deputy dean David S. Schmittlein, who over-sees Knowledge@Wharton, defined the vision and set the standard forwhat this book could potentially be. He not only helped us avoidpossible missteps, but also deserves credit for shaping the themesreflected in the book. We are grateful to Jerry Wind, editor ofWharton School Publishing, for his guidance and enthusiastic assistance. Robert E. Mittelstaedt, Jr., former vice dean of executiveeducation at the school, played a key role in developing the conceptsfor some chapters, as did Michael Useem, director of the WhartonSchool’s Center for Leadership and Change Management. OtherWharton faculty members who contributed to shaping the ideas inthis book include Peter Cappelli, Barbara Kahn, and Raffi Amit.Barbara Gyde and Teresa Regan of Wharton School Publishing alsocontributed greatly to the project.

We would like to thank our colleagues Jamie Hammond, BruceBrownstein, David Siedell, and Sanjay Modi for their encouragement,support, and good-humored accommodation of our crazy schedules as wejuggled the writing of this book with publishing Knowledge@Whartonevery two weeks. Everyone should be so lucky to have such co-workers.In addition, Michael Baltes, Peter Winicov, Tracy Liebman, MeghanLaska, Phyllis Stevenson, and Joanne Spigonardo in Wharton’s Commun-ications Department deserve thanks for their support throughout.

Last, but not least, we are deeply grateful to our families. A bookis a demanding taskmaster, and during the months when we workedon this project, our families, too, paid the price. Ultimately it is theirlove, patience, and understanding that make such labors worthwhile.

Mukul Pandya and Robbie ShellPhiladelphiaAugust 2004

Acknowledgments xi

About the AuthorsMukul Pandya is editor and director of Knowledge@Wharton, a

web-based journal of research and business analysis published byThe Wharton School of the University of Pennsylvania.

A winner of four awards for investigative journalism, Mr. Pandyahas more than twenty years of experience as a writer and editor. Hisarticles have appeared in The Wall Street Journal, The New York Times,The Economist, Time Magazine, The Philadelphia Inquirer, and manyother publications. He coauthored Knowledge@Wharton on BuildingCorporate Value.

Mr. Pandya, who has an M.A. in economics from the Universityof Bombay, lives in Ewing, NJ, with his wife and daughter.

Robbie Shell, the managing editor of Knowledge@Wharton, hasworked as a business reporter and editor for national news services,newspapers, and magazines throughout her career. She has coveredboth the White House and U.S. Supreme Court and taught journal-ism at the University of Virginia. Her freelance work most recentlyappeared in The Wall Street Journal. A graduate of PrincetonUniversity, she lives in Wynnewood, PA, with her husband and two sons.

What two things do W. James McNerney, Robert L.Nardelli, Larry Bossidy, and Vivek Paul all have in common? Thefirst is obvious: Each is or has been the CEO of a large company.McNerney, who until recently headed 3M, is the CEO of Boeing;Nardelli holds the top job at The Home Depot; Bossidy ledHoneywell; and Paul just stepped down as CEO of Wipro, one ofIndia’s largest IT services firms.

The second thing they all have in common may be less apparentbut is still crucial: Each won his spurs as a leader at GeneralElectric (GE). Nardelli and McNerney were considered possiblesuccessors to GE’s legendary boss, Jack Welch. In 2001, when itbecame clear that Jeff Immelt would succeed Welch, Nardelli(president and CEO of GE Power Systems) and McNerney(president and CEO of GE Aircraft Engines) left to join The HomeDepot and 3M, respectively. Bossidy, former chief operating officerof GE Credit (later GE Capital), left to join AlliedSignal, which

xiii

A Conversation withJack Welch:A Leader’s MostImportant Job is“Building GreatPeople”

merged with Honeywell in 1999. Paul headed global operationsfor GE Medical Systems before he joined Wipro.

The fact that these executives went from leadership positions atGE to successful CEOs at other companies is no accident. In fact,former GE executives lead 30 of the 300 largest U.S. companies,according to Welch. The reason has a lot to do with Welch’s ownphilosophy of leadership. During his 40-year career at GE, Welchoften said that his main job was not to design aircraft engines,CAT scans, or sitcoms, but to build leaders. “People often ask mewhy so many great CEOs come out of GE,” says Welch. “If theydidn’t, we would be in trouble because we seriously screwed up.Our job was to build great people.”

For this paperback edition of Lasting Leadership, Welch—who isamong the 25 most influential business leaders of the past 25 yearsfeatured in this book—spoke with us about the principles he usedto build “great people” at GE. Edited excerpts from thatconversation follow.

How does GE develop leaders?

If you spend all your time determining the characteristics thatmake great leaders and then go at it and train and train and train,you can do it.

When you begin your career, you start by thinking aboutyourself. It’s all about you. You want to stand out; you want to bedistinct from the rest of the pack. But once you become a leader—even if it involves a group of six or 12—your thinking mustchange. Now it must be all about them. Once you become a leader,you will look good only if your people achieve extraordinaryresults. Your challenge will quickly go from getting the best outof yourself to getting the best out of your team. You will succeedas a leader only if you get a kick out of that.

That is why you have to hire the smartest people you can find.You have to always be out trying to find people who are smarterthan you and hire them. I was at a meeting in Chicago and therewere 2,000 people in the room yelling questions. One of themsaid, “Hey Jack, I have a real problem. I have 10 people reportingto me, and two of them are smarter than I am. How can I possiblyappraise somebody who is smarter than me?” I said, “What the

xiv Lasting Leadership

hell went wrong with the other eight? What did you do wrong inhiring them?” That is absolutely critical as you go forward—to getbetter people than you working for you.

Some managers claim to believe in hiring smartpeople and empowering their team. But when theteam members take the initiative, the managers feelthreatened. How can that dynamic be managed?

How can you lead if you don’t have self-confidence? Leadershave to realize that their success will come only if they have astrong set of leaders around them. The idea of being successful andcapable by yourself is nuts. What did I have to do with makingGE’s results so good? It was because of all these great people. AllI did was find them. My contribution was allocating people andmoney to projects. I spent my time searching out the right people,and if I found they weren’t that good, weeding them out. I’m notsaying this is all a rainbow here. You will have some people whomake it, others in the middle, and a few at the bottom.

What role do candor and differentiation play inbuilding leaders?

You have to talk openly and candidly with your people. I get alot of crazy criticism about differentiation. If reporters come byand want to write stories, they often want to write about differen-tiating among people. They say it is so cruel and mean to tell people that they are in the bottom 10, the top 20, or the middle70. Tell me, why should you stop giving grades at the high-schoollevel or the college level? Why is it okay to tell kids where theystand in the classroom but not okay to tell adults where they standin the workplace? It makes no sense at all. The way I look at it, the cruelest leaders are the weaklings who won’t be candid aboutpeople’s performances early in their career. I believe that to mytoes. You are doing no one a favor by carrying someone who isn’tdelivering the goods.

Then a recession comes along, or something else happens.Things get tight, and you have to cut your cost base. So you haveto call someone in, and the typical conversation goes something

A Conversation with Jack Welch xv

like this: The boss says, “I’d like to talk to you. We’ve got to cutour costs by 15%. And I hate to tell you this, but you have to go.”Then the person asks, “Why me?” The boss replies, “You justweren’t that good.” Then the person asks, “I’ve been here 20 years.Why haven’t you told me that?”

That is the cruelest thing you can do, and this happens all thetime. You could have sent these people out at the age of 27 or 28and put them in an environment where they were able to flourish.If you secretly don’t tell people where they stand, it’s a terribleway to treat them.

I’m not trying to lay down a formula for how you do this, butyou have to get differentiation in your game. Business is nodifferent from sports. The team that fields the best players wins.There is nothing else beyond that.

How do you define winning today? Is it the sameway you did at the beginning of your career?

I define winning more broadly today than I did back then. Atthat time I was a kid with my nose against the glass, and I didn’thave two nickels to rub together. And I wanted to make money.Once I got going, I met most of my objectives, and they turnedout far better than I had hoped.

Today I see winning as people defining clearly what theirobjectives are. You have to make your own choices. People talkabout work-life balance; you have to find your own balance. Onceyou have defined it, then you’ve got to decide what your “Aha!” isand what you want to do, and then fulfill your objective. That iswhat winning is all about. It’s about not being a victim, bouncingfrom pillar to post. You define what your objective is, what kindof life you want to have, and then you go for it. That is what Idefine as winning.

Some people make a distinction between leadershipand management. Do you agree with that?

I think that’s academic hogwash. Hopefully we are all managersand all leaders. The idea that the manager is someone with greeneyeshades, who crosses the t’s and dots the i’s, while the leader is

xvi Lasting Leadership

a charismatic person on a white horse who comes charging into theroom and excites everybody—it’s neither of those things. We areall trying to set a vision, and when you have defined it, it is yourjob to excite the team to achieve it. It doesn’t matter whether youcall yourself a leader or a manager.

How can you tell if the work you are doing is rightfor you?

It’s on page 257 of my book (Winning, by Jack Welch with SuzyWelch). I list five things you need to think about when you take ajob. Let me give you a quick synopsis. First, you’ve got to consid-er people contact. You’ve got to go with people who allow you tobe yourself. Don’t ever go to a company where you have to put ona persona to fit in. In other words, if you are a nerd, go hang outwith nerds. If you are somebody else, go hang out with them, butfind “your people.”

Then we have three O’s in a row. The first is opportunity. I wouldsuggest biotechnology over the airline industry. I would look atthe green lights and the red lights of industries, and see where theopportunities are. Always go to places that offer opportunities tolearn, and where you will not be the smartest person in the room.If you sign up to join a place where you are the expert, that canbecome boring pretty quickly. You want to be able to learn a lotfrom the people you are working with, especially early in yourcareer.

The second is options. If you can, go to a place that is a start-up,where you can learn a lot of things, or go to a company with astrong brand. A brand name can help you a lot. If you go to acompany like Johnson & Johnson or Microsoft or GE, even if youfind later that the fit isn’t right for you, you will get a chit—because you worked for a great company. At one time I wasworking for a small chemicals company, and every time we hiredsomebody from DuPont, we thought we were getting a genius.Many of them were not very good, but we thought that if we gota DuPont person, we really had it made. It’s the same thing withMicrosoft. That is why people from GE get hired all the time torun other companies. The badge gets you something.

A Conversation with Jack Welch xvii

The next important issue is ownership. Don’t take a job becauseof someone else—because your mother wanted you to do it, orbecause your spouse didn’t want you to travel. If you do, make thatdeal with yourself going in. Know why you are taking that job.That is a big deal.

And finally, the work content counts a lot. Find a job where thework turns your crank. Don’t tell yourself that the money is good,and you’re only going to stay there two years, or that it’s a goodway-station en route to your next job. The only kind of job wherethat mindset works is consulting; it’s a good place to get a goodscan of the world and then pick the job you like. The mostimportant thing is that you’ve got to love the work and it has toturn your crank.

What do you look for when you hire people so youcan build a great team?

I call this the four E’s and the P. The first thing you want tolook for in people working with you is energy. Second, you needpeople who can energize others around them. The third one is edge.You clearly want someone who can say yes or no and not maybe.Nothing is worse than a boss who says, ”Bring it back in a monthand we’ll look at it again.” Fourth, you need people who can execute—and get things done—who can deliver. The P stands for passion. You want people who really care for others and for theirjob. That is critical.

When you are looking to hire someone from outside yourorganization, what’s the one question you should ask them? I wasonce asked this, and at that time I couldn’t answer it. I’ve thoughtabout it a lot since then, and the one question I would ask is:“Why did you leave your last job? Tell me about it.” And thenshut up and listen. Find out if that person had a lousy boss, or thepay stunk, or it was a rotten job. What you want to listen for is ifthe person is just a plain whiner, or if the work just wasn’texciting enough, and the person was looking for a new challenge.You should keep probing and probing and get under that person’sskin about why he or she left the last job. It’s a very big deal.

xviii Lasting Leadership

Speaking of lousy bosses, if that does happen, howdoes one deal with that?

The first thing you do is go to the mirror. You look at yourselfas you’re putting on your makeup or shaving, and ask yourself ifit’s the boss or you that is the problem. It’s a big, tough job butyou’ve got to do that. Once you’ve satisfied yourself that it reallyis the boss, it’s at that moment that you decide if it’s big enoughfor you to take it on and have the discussion. Before you have thediscussion, though, you check out your options. There’s a chancethat your boss might say it’s time to wrap it up. But face it any-way. Do not become a victim. No one should ever end up a victim.It’s just outrageous.

How can a leader build a company with strong values?

People talk about values. I say, forget about values and focusinstead on behaviors. Find the behaviors that you want to rewardand those you want to punish. You should openly reward behaviorsyou want to encourage and be equally open about punishingbehaviors you don’t want. For example, if you have an ethics vio-lation, do not—despite what your lawyers will tell you—do not letthe person leave for personal reasons to spend more time with thefamily. Hang that person in the square. Do it publicly. It’s the onlyway you can get thousands of people to understand that you takethis seriously. If you are going to let people who have violatedintegrity principles slide out the door quietly, don’t go aroundmaking speeches on integrity. If you do, people will laugh at you.

If you have diversity as one of your behaviors—that you want to hirea diverse workforce—and you end up with all white males in the group,you might as well not give another speech about diversity again.

At GE we rewarded people for building great leaders—peoplegot promoted for that. If people did not do that, we removedthem—and we did not just do it quietly. We told 500 peoplepublicly why some executives were asked to leave. We would say,these are nice people and they will do a great job somewhere else,but they could not stay here because either they were not genderneutral, or they were not open to ideas from anywhere else, or theyhad a not-invented-here syndrome. We always told people whatthe problem was. If you work at creating an open and candid

A Conversation with Jack Welch xix

system, you will get the behavior you want. If you have a culturewhere there are secretive, inside-the-vest deals, you won’t get it.You will just get all kinds of games being played.

There are four kinds of managers. There’s the kind who has thebehaviors and delivers the numbers. That’s easy. Promote them asfast as you can. There’s the kind who doesn’t have the behaviorsand doesn’t make the numbers. That’s easy, too. Get rid of them.Then you have the type who has the behaviors and doesn’t makethe numbers. Give them another chance, because they are helpingyou build the culture you want. The kind who gives you the mosttrouble is the horse’s neck that makes the numbers and doesn’thave any of the values. Those are the people whom the boss holdson to, because they deliver for him.

You have an enormous obligation to match your actions withthe kind of behaviors you say you want. If you do that, you willget the culture you want. And culture counts. Every time we madea bad deal, it wasn’t because we didn’t figure something out or thenumbers weren’t right; it was because the cultures did not matchand we could not put them together.

Acquiring Kidder Peabody was our biggest mistake. It was aninvestment bank. At GE we had a boundary-less culture, witheveryone sharing ideas and all that. At Kidder Peabody, peoplehad one motivation: “My bonus, my bonus, my bonus. I want itbigger and better all the time.” There was no cooperation;everyone was going in a single line for their own deal. When yougo into investment banking, that’s what you are going into—youeat what you kill, so you better go out there and get it. Wecouldn’t deal with that culture at Kidder Peabody. Eventually itblew up. We had to sell it to Paine Webber, and then we got outwhole when they sold it to UBS. Eventually it all worked out, butwe had the hell beat out of us because we couldn’t manage it.

I didn’t buy companies in California in the late 1990s, becauseat that time there were engineers who were getting Cadillacs to behired. It was crazy. Salaries were twice what they were inMilwaukee and Cincinnati. We would have had to explain to ourengineers who were making jet engines and CAT scans why theywere being paid half what the engineers in San Jose were making.We would have had to say that housing costs were higher there.Doing things like that can pollute the hell out of your culture. We

xx Lasting Leadership

didn’t want to do that. Culture really counts. The numbers rarelyblow up in a deal. It’s the culture.

***

Welch’s words about the importance of culture echo those ofleaders such as Herb Kelleher, Mary Kay Ash, and James Burke,who made building a strong, ethical corporate culture part of theirmission at Southwest Airlines, Mary Kay, and Johnson & Johnson,respectively. Kelleher, for example, forged a lively, egalitarianculture that helped the company thrive in an industry that hasgrown increasingly troubled since 9/11. Ash cultivated a culturein which millions of women could gain recognition and financialsuccess as they contributed to the company’s sales performance.Burke nurtured a culture of proactive leadership at all levelswithin J&J, enabling the company to deal with and emerge fromthe Tylenol crisis with its reputation unscathed.

Each of the 25 leaders you will read about here has similarlessons to offer. Our book aims to identify the traits and qualitiesthat enabled these individuals to sustain their leadership over longperiods of time. Our hope is that when you read their stories andidentify which of these qualities you can cultivate and strengthenwithin yourselves, you will become more effective leaders in yourown domains. When that happens, the book’s purpose will havebeen well served. Like Jack Welch, we believe in helping “buildgreat people.”

Mukul Pandya and Robbie ShellPhiladelphiaSeptember 2005

A Conversation with Jack Welch xxi

xxiii

Introduction

I n June 2000, John Bogle, founder and former CEO of theVanguard Group, spoke about leadership at the Wharton Schoolof the University of Pennsylvania. As an avid group of executiveslistened to the man who popularized the principle of index-basedinvesting—and in the process built the Vanguard Group into afirm managing more than $550 billion in assets—Bogle ended hisspeech quoting James Norris, a Vanguard manager, who wrote:“While it is revealing to consider…what constitutes a leader, yoursearch for understanding, for some kind of leadership formula, isapt to end in frustration. It is like studying Michelangelo orShakespeare: You can imitate, emulate, and simulate, but there issimply no connect-the-dots formula to Michelangelo’s David or

Shakespeare’s Hamlet. I suppose, when all is said and done, it really comes down to this: People are leaders because they chooseto lead.”

The heart of leadership is as simple as that: It is a matter ofchoice and determination. It is equally true, however, that no twoleaders are exactly alike. Gandhi and Churchill rallied millionsbehind them, but not quite in the same way or for the same rea-sons. In the business world, John Bogle’s leadership of Vanguardmight have something in common with the way Warren Buffettruns Berkshire Hathaway, but the two also have big differences—although both are involved, broadly, in the “investment” business.Andrew Grove and Bill Gates are chairmen of high-tech compa-nies with commanding positions in their respective markets—butwhile Gates grew up as the privileged son of a wealthy attorney,Grove spent his early years enduring the rigors of StalinistHungary. These vastly different backgrounds are reflected in theirapproaches to leadership.

If this is true, then people who choose and are determined tobecome influential business leaders can benefit from observingother leaders and using their observations to discover and nurturetheir own leadership style. The purpose of studying other businessleaders is not so much to imitate their qualities as to discoverwhich attributes resonate with one’s own and, thus, can be culti-vated to further enhance one’s leadership skills and capabilities.Leaders are made, not born. Discovering the attributes of lastingleadership can help people increase their impact in their ownspheres. Someone who does this might not become another JackWelch or Mary Kay Ash, but he or she might become a betterleader than would otherwise be possible in the absence of thisknowledge.

Our book, Lasting Leadership: What You Can Learn from the Top25 Business People of Our Times, is based on that premise. It is theresult of collaboration between Nightly Business Report (NBR), themost-watched daily business program on U.S. television, andKnowledge@Wharton (http://knowledge.wharton.upenn.edu), theonline research and business analysis journal of the WhartonSchool of the University of Pennsylvania. To celebrate NBR’s 25thanniversary in January 2004, Wharton and NBR worked together

xxiv Lasting Leadership

to identify the 25 most influential business leaders of the past 25years. NBR’s viewers nominated more than 700 business peoplefrom around the world, and a panel of six Wharton judges select-ed the Top 25.

The winners are, in alphabetical order, Mary Kay Ash, founderof Mary Kay Inc.; Jeff Bezos, CEO of Amazon.com; John Bogle,founder of The Vanguard Group; Richard Branson, CEO of VirginGroup; Warren Buffett, CEO of Berkshire Hathaway; JamesBurke, former CEO of Johnson & Johnson; Michael Dell, CEO ofDell Inc.; Peter Drucker, the educator and author; William Gates,chairman of Microsoft; William George, former CEO ofMedtronic; Louis Gerstner, former CEO of IBM; Alan Greenspan,chairman, U.S. Federal Reserve; Andrew Grove, chairman of Intel;Lee Iacocca, former CEO of Chrysler; Steven Jobs, CEO of AppleComputer; Herbert Kelleher, chairman of Southwest Airlines;Peter Lynch, former manager of Fidelity’s Magellan Fund; CharlesSchwab, founder, CEO and chairman of The Charles Schwab Corp.;Frederick Smith, CEO of Federal Express; George Soros, founderand chairman of The Open Society Institute; Ted Turner, founderof CNN; Sam Walton, founder of Wal-Mart; Jack Welch, formerCEO of General Electric; Oprah Winfrey, chairman of the Harpogroup of companies; and Muhammad Yunus, founder of GrameenBank.

To arrive at this list from among hundreds of nominees, theWharton panel searched for business leaders who created new andprofitable ideas. They looked for people who had affected political,civic, or social change in the business/economic world; created newbusiness opportunities or more fully exploited existing ones;caused or influenced dramatic change in a company or industry; orinspired and transformed others. The judges included MichaelUseem, director of the Center for Leadership and ChangeManagement; Peter Cappelli, director of the Center for HumanResources; Raffi Amit, director of the Goergen EntrepreneurialResearch Program; Barbara Kahn, vice dean of the Whartonundergraduate division; Robert E. Mittelstaedt, Jr., former vicedean and director of the Aresty Institute of Executive Education(now dean of the W.P. Carey School of Business at Arizona State University); and Mukul Pandya, editor and director ofKnowledge@Wharton.

Introduction xxv

Andy Grove: Best of the Best

NBR asked the Wharton judges to pick the most influentialleader among these 25. That honor went to Intel’s Andy Grove. Tounderstand why, consider this: When Grove got his Ph.D. fromthe University of California, Berkeley in 1963, he was a corporaterecruiter’s dream candidate. He had a number of job options, per-haps the best of which was with Bell Labs, at the time the Meccaof research in solid-state physics. But Grove made a differentchoice. Rather than head for Bell Labs, he joined FairchildSemiconductor, a West Coast upstart, where he worked under thelegendary Gordon Moore, who led the company’s research opera-tion. That was an early example of out-of-the-box thinking fromGrove, who five years later left Fairchild with Moore and others toco-found Intel.

After he succeeded Moore as Intel’s CEO in 1987, Grove tookother steps that shunned conventional logic—perhaps most visiblyduring the “Intel Inside” campaign of the 1990s. Back then, themost recognized brands in the computer industry were hardwaremakers, such as IBM or software firms like Microsoft. Intel,though it supplied more than 80% of the microprocessors to theworld’s computers, was hardly known outside a small band ofindustry insiders. Determined to change that narrow perception,Grove led Intel into an aggressive branding campaign that madethe company a household name by the end of the decade. Today, asits products play an increasingly critical role in stitching togeth-er a globally networked economy, Intel has emerged as one of theworld’s top technology companies, with 2003 revenues of morethan $30 billion.

Grove’s leadership of Intel—marked as it has been by uncon-ventional thinking, imagination, and integrity—was instrumentalin his being named the most influential business leader of the past25 years. “My life has been intertwined with Intel,” Grove toldNBR co-anchor Susie Gharib. “My proudest accomplishment hasbeen to contribute to the creation of a company that has helpedput a billion PCs into people’s hands.”

xxvi Lasting Leadership

Learning from Leaders

In addition to identifying these individuals as influential lead-ers, the Wharton judges discussed aspects of their character thatcontributed to their success. In Grove’s case, for example, hisopenness to unconventional ideas was a critical factor. In his or herway, however, each of these leaders has traits from which otherscould learn.

Consider Warren Buffett, whom Michael Useem describes as “aman for all seasons.” According to Useem, not only is Buffett “aninvestor extraordinaire” who has delivered enormous returns toinvestors in Berkshire Hathaway, but he was also highly successfulas the hands-on CEO of Salomon Brothers, helping restore confi-dence in the Wall Street firm when it faced a severe managementcrisis. These days, “Buffett has become the conscience of theStreet, offering great wisdom on contentious topics like expensingstock options,” Useem says. In other words, in addition to hisgenius at spotting good investment opportunities, Buffett’s influ-ence derives from his moral stature and integrity. In the aftermathof accounting and governance scandals that have rocked U.S. com-panies in the past few years, it is difficult to overemphasize theimportance of ethics as a factor in leadership.

Bogle, like Buffett, owes his influence to having delivered greatvalue to investors—though his approach was strikingly different.The former CEO of the Vanguard Group has long argued that“owning the entire stock market at very low cost is the ultimateinvestment strategy.” This belief led him to launch the VanguardGroup in 1975. Bogle was a pioneer in introducing and helpingpopularize index funds—which kept fees extremely low forinvestors. Says Peter Cappelli: “One of the reasons why Bogle is onthis list is because of the enormous impact he had on the averageperson.”

Sam Walton’s approach to Wal-Mart’s customers was similar,according to Robert E. Mittelstaedt, Jr. The goal of making a widerange of products available to average people at the lowest possi-ble price enabled him to take the retail company from a singlestore to a megacorp that is now ranked No. 1 on the Fortune 500.“Walton’s legacy is that a single person can make a huge differencein an industry,” says Mittelstaedt. “It doesn’t happen overnight,

Introduction xxvii

especially in an industry like retail, but it can happen over a peri-od of years. Walton believed in delivering great value at low pricesto his customers.”

Jack Welch’s leadership delivered great value to GE’s share-holders. One measure, according to Useem, is that GE’s stockprice saw a 40-fold increase during Welch’s tenure, consistentlyoutpacing the S&P 500. But his greatest strength, says Useem,was spotting and nurturing other leaders. “Welch has written thetextbook on leadership. He has often said that he doesn’t knowhow to make jet engines or produce Tuesday night televisionshows at NBC, the GE subsidiary. But he does know how to pickpeople with leadership potential, give them the resources to meettheir goals, and get rid of them if they cannot. As a result, Welchbuilt one of the best leadership teams anywhere.”

Mittelstaedt notes that team-building also counts among BillGates’s strengths as a leader. Gates saw the potential of the PC totransform the world, and he built Microsoft into a software pow-erhouse. In addition, he is among those rare entrepreneurs whoseabilities have expanded to keep pace with the growth of his enter-prise. “Very few successful people who have started as entrepre-neurs have led their companies until they grew to a very big size,”says Mittelstaedt. In Gates’s case, he has had the vision to bring inpeople and then let them serve the company “in a way that mostentrepreneurs are not capable of doing.”

Each leader on the list offers similar leadership lessons. Whilemost of them are recognizable names, a few are less well known orare simply no longer in the public eye. James Burke, for example,was J&J’s CEO when the company faced its well-known Tylenolcrisis in 1982. Seven people died after taking the pain killer, andit turned out that someone had introduced cyanide in the pills asan act of sabotage. Burke’s handling of that has become a textbookcase for companies facing crises. Bill George, the former CEO ofMedtronic, has recently written a book about Authentic Leadershipthat draws upon his experiences. Yunus, the founder of GrameenBank in Bangladesh, has been a pioneer in the field of micro-finance, providing loans as small as $10 to impoverished people.His great innovation was recognizing that lending could be sepa-rated from collateral and still be the basis for operating a sound

xxviii Lasting Leadership

financing business. Micro-lending programs modeled afterGrameen’s have now spread to more than 100 countries.

Themes and Structure

Of the 25 leaders profiled in this book, two have died—SamWalton in 1992 and Mary Kay Ash in 2001. We were able to getinterviews with 15 of the other 23, including Jeff Bezos, JohnBogle, James Burke, Michael Dell, William George, LouisGerstner, Lee Iacocca, Herb Kelleher, Andrew Grove, Peter Lynch,Charles Schwab, Fred Smith, Ted Turner, Jack Welch, andMuhammad Yunus, in addition to Mary Kay Ash’s son, RichardRogers. We would like to thank all of them for their willingnessto talk to us openly about their companies and themselves. Wewere not able to interview Richard Branson, Warren Buffett, PeterDrucker, Bill Gates, Alan Greenspan, Steve Jobs, George Soros,and Oprah Winfrey. For information on these leaders, we relied onbooks about or by them, speeches and interviews, and newspaperand magazine articles.

Our book explores the theme of lasting leadership in ten chap-ters. The first takes a close look at Grove’s approach to leadershipand discusses the attributes that helped him and Intel succeed. Itincludes a timeline of Grove’s life and discusses the biggest chal-lenge he faced in his career—the Pentium flaw crisis of 1994—andhow he dealt with it. The eight chapters that follow provide briefintroductions to all the leaders through short chronologies thatcover the major tipping points or milestones in their lives. Theseare accompanied by articles that describe a major challenge intheir business careers and how they tackled it.

What is fascinating about these challenges is their enormousvariety. For example, Kelleher’s challenge was getting SouthwestAirlines off the ground—literally. Gates’s challenge was dealingwith regulators on both sides of the Atlantic so Microsoft couldcontinue to grow. Ash had to motivate a sales force of thousands.Walton wielded pricing strategy like a fencer wields a saber tokeep Kmart, his main rival, at bay. Jobs had to contend with alarge rival—IBM—which threatened to put a fledgling AppleComputer out of business.

Introduction xxix

xxx Lasting Leadership

Eight Attributes of Lasting Leadership

In Lasting Leadership, we identify eight attributes or qualitiesthat have enabled the 25 individuals to overcome major chal-lenges as well as to nurture their own leadership styles. Theseattributes—each of which has its own chapter in the book—include

■ Building a strong corporate culture■ Truth telling■ Finding and catering to under-served markets■ “Seeing the invisible”—that is, spotting potential winners or

faint trends before their rivals or customers do■ Using price to build competitive advantage■ Managing and building their organization’s brand (which, in

some cases, may be their own name)■ Being fast learners■ Managing risk

None of the leaders in this book has all these attributes. If thatwere a requirement of lasting leadership, the world would have noleaders at all. At the same time, one attribute alone is not enoughto ensure long-lived leadership. A leader with a single attributemay succeed briefly, but the success will not be sustained unlessother qualities exist to keep the momentum going.

Which combinations of attributes are most effective? Thatquestion has no easy answer: The combinations are as varied as theleaders, which is why all 25 individuals in this book are so unlikeone another. What makes Michael Dell or Jeff Bezos prosper intheir industries is different from what makes Peter Lynch orOprah Winfrey thrive in theirs. In that reality lies great cause foroptimism: If countless combinations of leadership attributes arepossible, each person reading this book should find at least a fewqualities in himself or herself that, properly nurtured, can be cul-tivated into a deeper and more effective leadership style. In short,there is hope for the rest of us.

Yet if there is one trait that each of these leaders shares, it istenacity. Unlike so-called serial entrepreneurs who cash out oftheir companies after a few years and move on to their next ven-ture, these leaders have had a long-term vision. They have beenwilling to ride out the lows with the highs. This willingness toslog it out and stay in the game for the long haul has been reflect-ed in the success of their enterprises and in the endurance of theirown influence as leaders.

Asked why he never left Intel to start another company, Grovereplied: “Intel is like a river. It changes every day and behind everybend there is a new start, a new challenge. I cannot think of anyplace where I would rather have worked.”

Introduction xxxi

W hen Andrew S. Grove was a student of engineering atNew York’s City College in the mid-1950s, he faced a problem.The one-year scholarship he received as a Hungarian refugee wasabout to run out, and to speed up his graduation, he needed to takecourses in the chemical engineering department. The chairman,Professor Al Xavier Schmidt, taught a crucial course—Chem E128. Unable to schedule an appointment with Schmidt, Grove,then a young man of 20, waited outside the classroom one day andseized his chance to present his case to the formidable professor.

As Grove spoke, Schmidt, a short man with a fierce moustache,fixed his eyes on the nervous student and subjected him to aninterrogation. “He cross-examined me on the spot,” Grove recalls.

1

Best of the Best:Inside Andy Grove’sLeadership at Intel

1

“He asked me about my courses, who I took them from, and mygrades.” Schmidt apparently liked Grove’s replies—he had failedone exam in physics but got an A in the subject the next time—and admitted him to his course. “He was testing me, testing mybackground,” says Grove.

That incident was an early example of a pattern that appears fre-quently in Grove’s life—converting a negative situation into a pos-itive one through resourcefulness. As chairman and former CEO ofIntel, a company he co-founded in 1968, Grove has repeatedlyfaced setbacks during the past 35 years but found ways to turnthem into stepping stones. In the process, with Grove at its helm,Intel has grown into the world’s largest chipmaker, with 78,000employees and more than $30 billion in annual revenues in 2003.

That, in itself, is not unusual. Many companies and leaders pro-filed in this book have seen remarkable success during the past 25years. Still, Intel occupies a special place among them. As thecompany that introduced the world’s first microprocessor in 1971,Intel has played a seminal role in the evolution of modern com-puting. It is impossible to conceive of today’s global, networkedeconomy without Intel, or to imagine Intel without Andy Grove.As this chapter shows, Grove’s life and career consistently revealhis imagination, resolution, and integrity. That is why his leader-ship has lasted as long as it has.

This book argues that lasting leadership results from individualspossessing—and cultivating—certain qualities and combinationsof attributes. While all the leaders featured here have some of theseattributes, Grove stands out because he has personified so many ofthem in specific ways over a span of nearly 50 years.

Inspired by Schmidt, Grove developed a leadership style based ontruth-telling. At a time when Intel was facing a crisis of mammothproportions—triggered by Japanese inroads into the company’s coremarket of memory chips in the mid 1980s—he discovered anunderserved market and rejuvenated the business. A decade later,confronted by another severe disaster involving a flaw in itsPentium microprocessors, Grove was forced to recognize how mar-ket conditions had changed. He was able to build the Intel brand(through the famous “Intel Inside” campaign) and used his savvy inmanaging risk to steer the company clear of antitrust regulators.

2 Lasting Leadership

Above all, Grove espoused and upheld values that have given Intelits unique corporate culture, or what he calls its “very strongimmune system.”

A business leader who combines all these attributes and deploysthem consistently over his or her life is not just rare; he or she isunique. That is why Wharton and Nightly Business Report namedAndy Grove “most influential” among the Top 25 leaders profiledin this book. The attributes that make him special, however, arenot unique; they are available to everyone. Learning how to nur-ture these qualities in yourself will not turn you into Andy Grove.It may, however, make you a better leader.

Chapter 1 Best of the Best: Inside Andy Grove’s Leadership at Intel 3


1936: Born inBudapest, Hungary, onSeptember 2 and namedAndris Grof.The secularJewish family is modestlyprosperous; his father,George, is a dairyman;his mother, Maria, abook-keeping clerk.1938: The Grof familymoves to thecommercially vibrantPest section of Budapestwhere George Grofexpands the dairybusiness.1940: An acute attackof scarlet fever nearlykills four-year-old Andris.The illness leaves himalmost completely deaffor years, until surgeryfinally corrects theproblem.1942: George Grof isdrafted into a workbrigade in the Hungarianarmy, and he disappearsfor three years. DuringWorld War II, as Jews in Hungary are beingrounded up, youngAndris and his mothergo into hiding, changingtheir name toMalesevics and movingin with Christianacquaintances.

ANDREWS. GROVEThe Challenge:Dealing with the Pentium Flaw Debacle

Ask Andy Grove, chairman of Intel, about his tough-est business challenge, and a pensive look appearsin his piercing blue eyes.Two situations vie for theposition. One is the time when Intel almost wentunder during the mid-1980s as a result of fiercecompetition from Japanese chipmakers.The secondcrisis—which is highlighted in this section—came adecade later,when the company was slammed by itscustomers and the media for a flaw in its Pentiummicroprocessors. The flaw eventually led to large-scale product replacements and ended with Inteltaking a $475 million write-off. “The net presentvalue of the pain involved is hard to compare,”Grove says in his precise voice.“They both tore meup. It seems that the more recent one tore me upmore, but that may be because it is more recent.”

It happened in the fall of 1994. At that time Intel,which had $10 billion in annual revenues, wasalready the world’s largest chipmaker.The companywas busy preparing for the launch of the Pentium,its latest generation microprocessor—an opera-tion that involved a heavy-duty manufacturingeffort and a massive advertising campaign.As opti-mism about Intel’s prospects increased, the compa-ny’s stock soared. In the last week of November, ittraded in the high 60s after a Merrill Lynch analystpredicted a big increase in fourth-quarter sales.

Under the radar screen, however, trouble wasbrewing. Several weeks earlier, discussions had


begun in various Internet newsgroups about a flawin the Pentium’s floating point unit, the part of thechip that handles advanced number-crunching.Intel executives, including Grove, didn’t pay muchattention.They were aware of the flaw and, after athorough examination, concluded that it wasinsignificant.According to Grove, the design error“caused a rounding error in division once everynine billion times.” This meant “that an averagespreadsheet user would run into the problem onlyonce every 27,000 years of spreadsheet use.”

Soon, however, the online discussion caught theattention of trade publications, which started writ-ing about it. Matters came to a boil on November22, 1994, the Tuesday before Thanksgiving. A CNNcrew showed up at Intel’s headquarters in SantaClara, California, and the next day, the cable newschannel aired a nasty piece about the Pentium flaw.Soon the story began to appear in other publica-tions in the U.S., and then in other parts of theworld. For example, The New York Times ran an arti-cle titled, “Flaw Undermines Accuracy of PentiumChips.” Customers, too, were up in arms, becausenews reports said Intel had already shipped twomillion computers with Pentium chips. Says Grove,“We had a daily monitor of incoming nasty calls, ofcustomer complaints.”

Grove’s reaction, as usual, was to set the recordstraight.On Thanksgiving Day,he wrote a memo andposted it on the Internet, identifying himself as theCEO of Intel, and pointing out that while the float-ing-point unit did have an error, it would only affect“users of the Pentium processor who are engaged inheavy-duty scientific/floating-point calculations.”Much to his amazement, not only did people pooh-pooh his arguments about the Pentium flaw,but theyalso didn’t believe that he had written the memo.

1950: At age 14, heaspires to become ajournalist and is areporter for the youthnewspaper, which isunder the influence ofthe government.After arelative is imprisonedwithout trial, thenewspaper stopspublishing Andris’sarticles.The experienceturns him offjournalism.“I wascrushed as only aslighted adolescent canbe,” he later writes.“Idid not want aprofession in which a totally subjectiveevaluation, easilycolored by politicalconsiderations, coulddecide the merits of mywork.” He turns fromjournalism to science.1956: In December,as Soviet tanks crushHungary’s Octoberrebellion, Andris and a friend escape fromHungary, initiallycrossing the border intoAustria and then sailingto the U.S.TheInternational RescueCommittee, a relieforganization, helps bringhim from Vienna toNew York City. Later heAmericanizes his nameto Andrew Grove.1956: Enters CityCollege of New York to study engineering.Meets Professor AlXavier Schmidt,chairman of theChemical Engineeringdepartment, who givesGrove a job andbecomes his mentor.


1958: Marries EvaKaston in New York;he had met her theprevious year whileworking as a busboy at aholiday resort in NewHampshire where sheworked as a waitress.1960: Graduates fromthe City College of NewYork with a bachelor’sdegree in chemicalengineering. Knowingthat Grove loves Americabut hates New York, aprofessor suggests Grovemight prefer California.1963: Completes hisPh.D. at the University ofCalifornia at Berkeley.1963: Joins the researchand developmentlaboratory of FairchildSemiconductor. Foundedin 1957, the companyinitially started outmaking transistors forIBM and othercustomers, but thecompany became wellknown after researcherRobert Noyce co-invented the integratedchip in 1959.1967: Becomes assistantdirector of R&D atFairchild Semiconductor,working under GordonMoore, one of the topchemists of the century.1967: Publishes his firstbook, Physics andTechnology ofSemiconductor Devices. Itis widely used in schoolsand colleges.1968: Co-founds Intel—short for IntegratedElectronics—with Mooreand Noyce.The companyinitially focuses onmaking integrated chips.

“There was a huge amount of discourse on the webclaiming that it wasn’t I who had written it,” Grovesays.“I typed the f***ing thing with my own two fin-gers [but] nobody believed what it said, and nobodybelieved that I wrote it. Everything I said in it wastrue, and I wrote it. I was shocked.”

Outraged customers began demanding replace-ment chips for their computers. Sticking toGrove’s policy of insisting that the error wasminor, Intel initially resisted replacing the chipsunless the customers could establish that the chipswould be used for advanced math calculations. AsInformation Week wrote in an article titled,“Intel toUsers: ‘Humbug!’,” “Users, upon reaching Intel’s800 number, apparently go through a lengthy inter-view process to see if Intel deems them worthy ofreceiving a corrected chip. If you can’t convinceIntel that you may encounter the bug in daily life,you just don’t make the cut.” Soon, jokes ridiculingIntel were making the rounds on the Internet,including a top-ten list of reasons to buy a Pentiummachine. “Reason number 10.0000001: Your current computer is too accurate.”

By December, the volume of complaintsdeclined a little, and Grove began to feel optimisticthat the worst might be over. Unexpectedly, anoth-er blow fell.Grove arrived at his office one Mondayto find a message with a news flash on his desk. Itsaid, simply, that IBM had stopped shipments of allPentium-based machines.According to Grove, “Allhell broke loose again…The phones started ringingfuriously from all quarters.The call volume to ourhotline skyrocketed. Our other customers wantedto know what was going on. And their tone, whichhad been quite constructive the week before,became confused and anxious. We were back onthe defensive again in a major way.”


1971: Researchers atIntel invent a new kindof integrated chip, themicroprocessor, whichcan be programmed todo calculations.Thisallows microprocessorsto become the “brains”of a computer.The 4004,a four-bit silicon chip,packs as muchcomputing power as theENIAC, the world’s firstelectronic computer—which filled a room—in a chip smaller than athumbnail.1972: Intel develops aneight-bit microprocessor,the 8008, with twice thepower of the 4004.1976: Intel researcherscreate the Multibus, amechanism that makes itpossible to interconnectlarge numbers ofmicroprocessors.Thisinnovation is used todevelop products such as automatic tellermachines.1979: Grove becomespresident of Intel.1983: His book, HighOutput Management, ispublished.The book istranslated into 11 lan-guages.1987: Becomes CEO ofIntel; G.P. Putnam’s Sonspublishes One-on-Onewith Andy Grove. Grove is a “Dear Abby of theWorkplace,” offeringbusiness advice as acolumnist for KnightRidder.

Why did Intel respond to the Pentium flaw cri-sis the way it did, in a manner that one observercalled “a textbook example of how not to handlea delicate situation”? In part, it followed fromGrove’s approach, modeled as it was after his for-mer chemistry professor’s tough, no-nonsensestyle of stating the facts and refusing to bowbefore pressure. In retrospect, says Grove, hethinks he “mishandled the floating-point debacleabout as badly as possible. By the way, Schmidtprobably cheered me on as I mishandled that sit-uation. I stuck with the facts and told our cus-tomers to get with it.” It was apparent, however,that Grove’s “Schmidt approach,” while it mayhave worked in previous situations, was not onlyineffective during the Pentium flaw crisis but wasmaking matters worse. Eventually,“after a numberof days of struggling against the tide of publicopinion, of dealing with the phone calls and theabusive editorials, it became clear that we had tomake a major change,” according to Grove. Whenthis realization sank in, Intel reversed its policy.The company announced it would replace any-one’s chip who wanted it replaced. It set up a hugeoperation to answer customer phone calls—staffing it initially with volunteers who wanted tohelp cope with the disaster. Ultimately, as Intelreplaced hundreds of thousands of chips, the cri-sis passed.When it ended, Intel had to take a $475million bath.“It was the equivalent of half a year’sR&D budget, or five years’ worth of the Pentiumprocessor’s advertising spending,” says Grove.

While Grove’s “Schmidt-style” response may haveaggravated the Pentium flaw crisis, it alone was notresponsible for the way he dealt with it. As heexplained two years later in his book Only the Paranoid


Survive, Intel at that time was going through a “strate-gic inflection point,” or a key turning point, when therules by which the company did business changed.

The rules changed, ironically, because of the suc-cess of another initiative, the “Intel Inside” market-ing campaign. During its relatively brief history, Intelhad pioneered the development of innovativememory chips and microprocessors. It had set thestandards for its products and marketed them tocomputer makers (rather than computer users).“Whatever problems we had in the past, we usedto handle with the computer manufacturers, engi-neer to engineer, in conference rooms with black-boards, based on data analyses.” A few years beforethe Pentium crisis hit, however, Intel had embarkedon an aggressive marketing campaign to build theIntel brand. Its “Intel Inside” slogan was plasteredon billboards, appeared in TV commercials, and, inChina, even on bicycle reflectors. By the time thecampaign ended, Intel had become a world-famousbrand with international name recognition.

As a result, when the Pentium crisis hit, the cus-tomers who were concerned were not just engi-neers (who might have understood why a minordesign flaw was not a big deal) but millions of non-technical folks who didn’t give a hoot about intricatemathematical arguments.They just knew they want-ed an accurate chip to replace a flawed one. Grovewas still trying to communicate about product stan-dards according to the old rules, without realizingthat as a result of its marketing campaign, Intel’s cus-tomer base had fundamentally changed. Intel was nolonger an industrial products company; it hadevolved into a mass consumer products company.

Another factor, Grove realized in retrospect,was also at work. He still thought of Intel as aninnovative start-up, but the external view of the

1994: Controversyexplodes around Intel as it releases flawedPentium chips; afterinitially saying theproblem is minor, Intelchanges direction andagrees to spend $475million to replace theflawed chips.1994: In December,Grove’s doctors diagnosecancer of the prostate.He reads all the researchhe can find on thesubject and decides uponhis own treatment.1996: Only the ParanoidSurvive: How to Survive theCrisis Points That ThreatenEvery Company ispublished byCurrency/Doubleday. Inthis book, Grove explainshis concept of strategicinflection points—make-or-break situations thatbring about a sea changein an industry—withexamples from Intel’sexperience. Forbesmagazine calls it“probably the best bookon business written by abusiness person sinceAlfred Sloan’s My Yearswith General Motors.”1997: Becomeschairman and CEO ofIntel.1997: Time magazinenames Grove “Man ofthe Year.” 1998: Steps down asCEO but remainschairman; named“Distinguished Executiveof the Year” by theAcademy ofManagement.


company was that it had grown into a global ITgiant. As such, when thousands of customersthought Intel was not responding to their com-plaints about the Pentium’s flaw, they lambasted itas they might any insensitive big-business mega-corporation. Here, too, Grove’s perception of Intelwas at odds with that of its customers.

That disconnect was brought home strongly toGrove after Christmas 1994.One Sunday,Grove wasspeaking to Dennis Carter, Intel’s head of marketing,about having survived the crisis.Carter said,“I’m gladyou called, because I have drawn completely theopposite conclusion. We may have survived, but itwas shocking how little public goodwill there wasfor us to tap into. It was as if the public was just wait-ing for us to stumble.” Carter argued that “Intelwould have to change its approach to business dra-matically: It would have to court its public, be sensi-tive to the needs of vast numbers of customers, andbuild equity of goodwill.”

Grove was livid.“I told him to go f*** himself,” hesays. “I didn’t have the patience to listen to bullshitlike this. Again, Schmidt probably cheered me on. Wetalked for hours. I was standing in front of the kitchenphone. And as usually was the case when Dennis andI fought, Dennis won.” Intel had learned its lesson: Itimplemented several actions to win back the public’strust and confidence. Eventually it won a spot onFortune magazine’s list of most admired companies.

Grove’s experience shows that when faced witha challenge of such enormous magnitude, just beinga truth teller may not be enough; it is equally impor-tant to be a fast learner, recognizing how the rulesof the game have changed and adapting to the newrealities. Grove, with some help from his colleagues,was able to do just that. “So, did I learn? Yeah,” hesays.“But did I learn from the incident? Hell, no.”

2001: In November,Swimming Across: AMemoir, is published.Thebook is an account ofthe first 20 years ofGrove’s life, beginningwith his childhood inHungary up until hismove to California.Grove tells media hostCharlie Rose that he didit mainly for hisgrandchildren.2004: Grove is namedthe “most influential”business leader of thepast 25 years byWharton and NightlyBusiness Report.

Leadership LessonsAbout Schmidt:Telling the Truth

Schmidt captivated Grove as a teacher from the very first lec-ture. As Grove remembers, Schmidt came to the class and wrote aproblem on the board. “It seemed very complicated, though in ret-rospect it was very simple,” he says. “He tortured us with it. Aftermaking it more and more complicated, he showed us how to solveit with one long line of conversions. At the end of that class,Professor Schmidt said, ‘Our statistics show that 60% of you willbe unable to finish this course, and that is alright with me. Therest of you will approach problems in the fashion I just showedyou.’ I was just blown away.”

Schmidt soon was to help Grove in another way. When helearned the young man’s scholarship was about to run out,Schmidt called Grove to his office. He asked how much moneyGrove would need, pulled out a long slide rule, did some calcula-tions, and offered Grove a job at $1.79 an hour—estimating thatby working 20 hours a week he could make as much money as thescholarship paid. Almost speechless with surprise, Grove agreed.As he later said, “So I ended up working for crusty ProfessorSchmidt, running his copies and his errands, typing with two fin-gers, filing, whatever—and supported myself through my remain-ing years of college that way.”

The years that Grove worked for Schmidt helped shape his styleas a leader. Schmidt was “down to earth, had no airs, said what hehad on his mind, took no nonsense from anyone, did what he saidhe would do.” Almost everyone who encountered Schmidt was ter-rified of him (except for his secretary, who terrorized the formida-ble professor). Grove, too, was a resolute truth-teller. Years later,in a book that offered management advice, he was to write: “Bestraight with everyone. I hate it when people are not honest withme, and I would hate myself if I weren’t straight with them. Thisisn’t an easy principle to stick to. There are always many reasons(better to call them excuses) to compromise a little here or there.We may reason that people are not ready to hear the truth or thebad news, that the time isn’t right, or whatever. Giving in to thosetempting rationalizations usually leads to conduct that can be eth-ically wrong and will backfire every time.”


Grove and Moore: Teamwork at the Top

After finishing his Ph.D. at the University of Berkeley, Grovejoined Fairchild Semiconductor, where he encountered the secondperson who helped him mold his leadership style. Gordon Moore,the legendary chemist who headed research operations at Fairchild,is now widely known for “Moore’s Law,” which predicted that thenumber of transistors placed on a computer chip would doubleevery two years—the phenomenon that has made it possible for thecomputer industry to produce increasingly powerful computers atdeclining prices. Moore took Grove under his wing. “He guidedme from a freshly minted Ph.D. to a reasonably knowledgeabletechnologist in the semiconductor industry,” says Grove.

Soon Grove left Fairchild with Moore and Robert Noyce, thehighly respected scientist who had invented the integrated circuitin 1959, to co-found Intel. Grove’s leadership qualities, alreadyevident as Moore’s deputy at Fairchild, now gained freer rein.Moore, who became Intel’s chairman and CEO, was very differentfrom Schmidt. Despite Moore’s brilliance, “if I had relied on hisleadership style, I would have been in deep trouble becauseGordon is not an activist,” says Grove. “My role was to be exactlythe opposite of Gordon.”

One example sharply reveals the difference between Moore andGrove. One time, Grove went to Moore to discuss an issue relatedto plastic packaging. Moore delivered a lecture on the history ofplastic packaging, the various problems that had been encounteredin its evolution, and the solutions that were implemented. Grovetook notes. By the time Moore had finished, it was as if Grove hadtaken a course on plastic packaging. “Moore has encyclopedicknowledge of the technologies that are relevant to our business,”says Grove. “But he was not an activist. That was not his thing todo.” As a consequence, acting on knowledge he gained from Mooreto achieve objectives became Grove’s “thing to do.” He did what ittook to get results.

Moore was once asked what Intel would have been like withoutGrove. Moore’s response, says Grove, was, “It would have been amuch more pleasant place and a whole lot smaller.” The corollaryquestion might be what Intel would have been like withoutMoore. Says Grove, “The answer is: It would have been an Intelwithout Andy Grove. Gordon came to the conclusion in the first


half-hour that I interviewed with him at Fairchild that I would bethe person to succeed him there. In a minor detail, that turned outto be wrong, but I did become the person to succeed him at Intel.”Grove says Moore first told him in 1971 (when Grove was just 33)that he had him in mind to run Intel. “It was a compliment thatI didn’t take literally at all,” says Grove. “But he acted on what hesaid. He brought me along and tutored me. If he hadn’t beenthere, I would have been a happy, productive engineer and I mighthave done pretty well, but I don’t think I would have ended uprunning the company.”

Over time, the bond between Grove and Moore grew uncannilydeep. Grove recalls a meeting when some 20 Intel executives weresitting around a table, discussing an issue. From the corner of hiseye, he saw Moore and noticed a subtle change of expression on hisface. Grove knew that Moore would never interrupt or enter a dis-cussion if something bothered him. Grove stopped the discussionat once, and asked, “Gordon, what’s the matter?” and then Moorewent on to explain what was on his mind. “Gordon produced ideasthat he never would have voiced—thoughts that would never havereceived the hearing they deserved—until he expressed them andI amplified them,” says Grove. “I didn’t read his mind; I read hisbody, his face.” Later, Moore told Grove, “You’re getting to bescary. You know me as well as my wife.”

In contrast, Grove and Noyce were essentially friends; Grovedidn’t regard Noyce either as a guide or role model. Asked how he,Moore, and Noyce worked together at Intel, Grove points to PeterDrucker’s 1954 book, The Practice of Management, in whichDrucker argues that the activities that make up a chief executive’sjob are too varied to be performed by a single person but shouldbe divided between three: a “thought man,” a “man of action,” anda “front man.” Grove says that during the 1970s, that descriptionapplied to Intel’s three co-founders. Moore, with his encyclopedicmind, was the “thought man;” Noyce, a charming man who hadenormous standing in the semiconductor industry, was Intel’s pub-lic persona or the “front man”; and Grove, with his Schmidt-inspired, no-nonsense style, was the “man of action” who gotthings done.

By the 1990s, Grove increasingly took on the public role thatNoyce had played in the 1970s, while Craig Barrett, now Intel’s


CEO, became the “man of action.” In other words, these rolesaren’t static; they change over time.

From Chips to Microprocessors:Targeting anUnderserved Market

Intel’s core business, which initially focused on memory chips,also changed over time. The way in which that change came aboutis now a well-documented part of Intel’s history. As Grove tells thestory in Only the Paranoid Survive, Intel went through a “crisis ofmammoth proportions” as it “got out of the business it was found-ed on and built a new identity in a totally different business.”Grove says that although this experience was unique to Intel, thelessons it teaches are universal.

The episode also offers an excellent instance in which Grove, asIntel’s leader, rescued the company from potential extinction bydiscovering an underserved market and turning the companyaround by catering to it.

When Moore, Grove, and Noyce first started Intel, their goalwas to produce memory chips. Its first product was a chip with a64-bit memory. Over time, the company developed chips withincreasing numbers of transistors packed in closer proximity.Initially, Intel owned 100% of the market because it had inventedthese products. In the early 1970s, some U.S. competitors, such asUnisem and Mostek, made their appearance. “If you don’t recog-nize the names, it’s because these companies are long gone,” notesGrove. By the end of the decade, the U.S. had about a dozen mem-ory chip companies that competed with one another, but Intel stillwas a dominant player in the memory game.

By the time the 1980s came, the nature of the business changed.Japanese chip makers entered the market in a big way—Grovedescribes it as “overwhelming force”—offering better quality andbeating the U.S. chip makers on price. In an effort to beat backthis competition, Intel tried to ramp up its manufacturing efforts.“During the 1970s, we were parallel to our competition,” saysGrove. “In the 1980s, the competition became better than us, butwe didn’t respond until Craig [Barrett] took charge of it.” As Intelkept improving its manufacturing and laboratory operations tokeep pace with the competition, Grove adds, it went from being



an “okay manufacturer” to a “superb manufacturer, though it didn’t happen overnight.”

Despite Intel’s efforts, the Japanese producers kept gainingground. “Their principal weapon was the availability of high-quality product priced astonishingly low,” Grove wrote. By themid-1980s, Intel’s memory chip business continued to headsouth, with steadily declining sales and rising inventories. Grovefelt that he and his colleagues at Intel had lost their bearings andwere floundering for direction.

In the middle of 1985 came a watershed moment. As Groveexplains in a frequently quoted passage from Only the ParanoidSurvive, he was sitting in his office with Moore, then Intel’s chair-man and CEO, discussing their situation. “Our mood was down-beat. I looked out the window at the Ferris wheel of the GreatAmerica amusement park revolving in the distance, then I turnedback to Gordon and I asked, ‘If we got kicked out and the boardbrought in a new CEO, what do you think he would do?’ Gordonanswered without hesitation, ‘He would get us out of memories.’I stared at him, numb, then said, ‘Why shouldn’t you and I walkout the door, come back, and do it ourselves?’”

As Grove discovered, getting Intel out of memory chips waseasier said than done. The more difficult question was, whenMoore and Grove walked back through the door again, on whatmarket should they focus? Most of Intel’s organization—includ-ing its manufacturing and R&D facilities—was geared towardproducing memory chips. More importantly, the mindset of everyIntel employee had long been focused on trying to beat the com-pany’s rivals. Turning that around and getting Intel to focusinstead on a different line of business was hardly easy. And yet,such an opportunity did exist. It was an underserved market:microprocessors.

Since 1981, Intel had been supplying microprocessors for IBMPCs. As demand for personal computers exploded, demand forIntel microprocessors grew as well. In addition, its next genera-tion microprocessor, the 386, was about to go into production.Grove made the case—resisted at first by employees and thengradually accepted—that Intel should leave the declining memo-ry business and concentrate R&D and manufacturing efforts onproducing better microprocessors. As a result, Intel’s fortunesgradually swung up again.


Grove’s leadership in turning Intel away from memory chips andtoward microprocessors helped Intel retain its lead. It might oth-erwise have gone the way of Mostek, Unisem, and other chipmak-ers whose names no one now remembers.

Intel Inside: Building a Brand

While Intel continued on its growth path, it faced a uniqueproblem on the branding front. Most of its customers were com-puter makers, who used Intel’s increasingly powerful microproces-sors—286, 386, and so on—but the average computer user was nomore aware of Intel than an average car driver is of the companythat made the engine for his or her automobile. Consumers knewthat Compaq or IBM had made their computers, but few wereaware of Intel’s role in producing the chip inside them.

Intel also faced a related problem: Its products were identifiedby numbers rather than names. When other chip makers offeredproducts identified by similar numbers, Intel had a difficult timedifferentiating its products from those of its rivals. For example,other microprocessor manufacturers wanted to produce their own“386” product, and Intel was powerless to stop them because thenumbers could not be trademarked. Again, Intel was vulnerablebecause its brand was not as strong as it could be.

Determined to change this situation, Intel embarked at the endof the 1980s on its Intel Inside campaign. As Grove observes, it“was the biggest campaign the industry had ever seen—in fact, itranks up there with big-time consumer merchandising campaigns.Its aim was to suggest to the computer user that the microproces-sor that’s inside his or her computer is the computer.”

Intel spent massive amounts of advertising dollars on its cam-paign, consciously targeting a new customer base. Rather thanselling to computer companies, as it had in the past, the messagestargeted the emerging mass market of computer users. (As previ-ously noted, this shift in Intel’s customer base came back to hauntthe company a few years later when it faced the Pentium floating-point unit crisis.) In addition, Intel partnered with computer man-ufacturers to display Intel’s logo in their advertising campaigns.This met with some resistance among manufacturers who thoughtIntel’s emerging brand identity might reduce their ability to dis-tinguish their own brands from that of their competitors.

All in all, the campaign was a huge success. Grove believes thatby 1994, “our research showed that our logo had become one ofthe most recognized logos in consumer merchandising, up therewith names like Coca-Cola or Nike.”

Push, but Mitigate: Managing Risk

As Intel’s brand recognition spread, the combination of itshigher profile with its growing clout prompted some to wonderwhether it might face pressure from antitrust regulators. In manyways, its market dominance resembled that of another IT giantthat had prospered with the proliferation of personal computers—Microsoft. To be sure, from time to time Intel did face antitrustinquiries, but these never assumed the enormous proportions facedby Microsoft.

Grove was acutely aware of this potential danger. When thecompany was getting ready to introduce the 386 microprocessor,executives in Intel’s legal department turned to him to say thatIntel might potentially be heading into a monopoly situation. AsGrove remembers, they asked, “We need to decide how we aregoing to play this. Do you want to play this aggressively, or wouldyou rather stay on the safe side of the line?”

Grove and his colleagues had two examples before them of theconsequences of antitrust actions. “The first example was AT&T—and this was two or three years after the modified final judgment[that mandated the breakup of the company],” says Grove. “Thesecond was IBM, which had been in litigation forever.” Grovedecided the way Intel would approach the issue was “not pushingit to the line. That meant that even though we may be in trouble,we could avoid going down the AT&T path.”

So, where did Grove draw the line? “There are certain rules thatyou can make combinations of products more attractive,” he says.“You can be aggressive about the conditions under which you dothat.” For example, one reason why Microsoft in 2004 facedantitrust problems in Europe was because of its decision to bundlesoftware for audio and video formats with its Windows operatingsystem. Intel, however, under Grove’s direction, resisted goingdown that path. “We left a lot of money on the table,” Grove says.“Generally, we are very conservative in our business philosophy.We never push it to that last ounce. That philosophy continues.”


Grove’s guarded approach to the antitrust issue explains in partwhy Intel, while it was blasted in the media during the Pentiumcrisis, still has generally not faced the kind of hostility that hashounded Microsoft. It also says a lot about Grove’s attitude towardmanaging risk. “I am a very cautious risk taker,” Grove says. “AndI mitigate. I push, but I mitigate the risk by over-preparation.Push, but mitigate. It’s like trust, but verify. I am comfortablewith risks that I am prepared for.”

Beyond the Signing Sheet: Building Intel’s CorporateCulture

As Grove emphasized his values through repeated actions anddecisions, these became part of Intel’s DNA. The company devel-oped a unique corporate culture. Nowhere is this clearer than inGrove’s answer to a question about mistakes he has made duringhis career. His response: “Every attempt I ever made to hire a sen-ior person for the company failed. No exceptions.”

Grove doesn’t know if the mistake lay in trying to hire outsiders“because there was a systemic problem: Intel has a very strongimmune system, and only autologous transplants work. Or I did-n’t understand the criteria by which we could identify people whofooled the immune system.” A related error, Grove believes, wasthat he did not fire people sometimes a year or two years after herealized he should get rid of them. “About people I had hired, Iwas a ridiculous wimp,” he says. “I would rationalize and say, ‘Ihaven’t tried X.’ That is not my general image—but my generalimage is wrong in this regard. Every single time it caused pain andsuffering to the organization. It led to a lot of wasted time on mypart. But the same kind of attitude also allowed a lot of people tobecome successful. It gave them time to find their footing and suc-ceed. So, on balance, it was probably good—but I wish I knewwhere to cut my losses earlier.”

Hard as he found it to fire people he hired, Grove long believedin setting fair standards of discipline at Intel. One of his mostunpopular actions was instituting a so-called signing sheet thatpeople had to sign if they were more than five minutes late forwork. “It was one of my more controversial management moves,”he recalls. “Absolutely nothing was done with those sheets,” butthe engineers were furious. “It was as if we had seduced their


sisters. What really got me going was watching people drift in andout. This was during the 1970s, with hippies and flower children.That was the kind of environment in which we were trying tobuild an organization. We had Hispanic women who were paid adollar above minimum wage to work in our factories. If they werefive minutes late, they got a tardy mark. If they had three ‘tardies’in a month, they faced disciplinary action. These people who madeproducts that paid our salaries had to be at their workstations ontime, no matter what the traffic or the situation with their chil-dren. But these highly paid engineers could do what they wanted.It seemed the height of unfairness.”

Intel’s corporate culture also played a role when it came time forGrove to choose his successor as Intel’s CEO. Barrett got the job,says Grove, because of his “knowledge, integrity, and leadership.”Grove’s tongue-in-cheek definition of leadership is someone whompeople follow. “I tried teaching leadership,” he says. “It is such ahokey bunch of psychobabble. I tried to substitute the psychoba-bble with something useful—such as the definition of a leader assomeone whom people follow. People followed Craig. He alwayshad his act together. Every job he had, he exceeded everyone’sexpectations.”

An important attribute Grove saw in Barrett is that he has the“right kind of ambition.” That, Grove explains, is crucial. “Anindividual’s productivity depends on ambition. If you plot pro-ductivity on a vertical axis and the degree of ambition on a hori-zontal axis, the curve goes through a peak. If you have too littleambition, you don’t push or work hard. If you have too muchambition, you put yourself ahead of others, elbow them out of yourway, people stop trusting you, and your output drops. You needjust the right amount of ambition. Craig was always ambitious,but in a healthy fashion. He had ambition for his team to win. Hewouldn’t put himself ahead of anyone else. He has his headscrewed on right; he was never political, never competed with hispeers. He’s just a very competent, well-put-together guy.”

Fifty years from now, how would Grove like people at Intel toremember him? “People will probably remember me for the sign-ing sheet,” he says with a laugh. “Inasmuch as I’m remembered, itwill be for all the mythical good things—the turkey was big, thepopcorn was fresh, the trains ran on time…except for the signing


sheet, he was a good guy. That is probably how I will be remem-bered by people who think they know me.”

Then the twinkle in Grove’s eyes gives way to a quiet thought-fulness. “What I would like to be remembered for is helping buildan organization that sustains itself long afterward,” he says slowly.“A bit like Sloan. He did pretty damn well.”


21

Leadership andCorporate Culture

2

A strong corporate culture, like charisma, is hard to define.But we know one when we see one, and nowhere is that moreapparent than at Southwest Airlines. Chairman and former CEOHerb Kelleher, who founded the Dallas, Texas-based airline morethan 30 years ago, injected two core values into the firm rightfrom the beginning: a light-hearted irreverence for bureaucracyand an emphasis on teamwork. He came to company eventsdressed as Elvis Presley and rode into headquarters on his Harley.He encouraged employees to learn one another’s jobs and makecommon-sense decisions without concern for channels, and he alsoexpected them to dress up for Halloween. “One of the things thatpromotes our approach is a disinterest in titles, hierarchy, andbureaucracy. You say the heck with all that stuff. It just slows youdown,” says Kelleher.

Kelleher suggests that Southwest’s culture is its best defenseagainst other low-fare carriers that continually pop up with an eyetoward duplicating his success. “It’s the intangibles that are thehardest for your competitor to imitate,” he notes. “You can buy anairplane and a terminal, but you can’t buy the spirit of the people.”

That “spirit of the people” is a big part of what managementexperts mean when they talk about corporate culture. The beliefsand values that guide employee behavior can improve performanceby motivating workers toward a common goal and instilling inthem a sense of purpose. They become loyal not to the CEO ortheir immediate boss, but to the company’s vision.

Many of the Top 25 business leaders in this book successfullydefined a culture for their organizations, either by creating onefrom the ground up—as did Kelleher and Mary Kay Ash—or bytransforming one they inherited, as was the case with Johnson &Johnson’s Burke. In some instances, the culture reflected boththeir own personalities and the needs of their organization. Forexample, Burke, a self-professed gambler by nature, inspiredJohnson & Johnson employees to be risk-takers when it came toidentifying and championing new products. Ash, a victim ofworkplace discrimination against women, opened the doors of hercompany to anyone willing to work hard and help others. Kelleherbuilt a culture at Southwest Airlines by constantly remindingemployees that they were the company’s most valued asset.

“Most companies achieve a culture by accident,” says Whartonmanagement professor Peter Cappelli. “I think at Southwest it wasmore purposeful. Kelleher has been quite masterful in the role ofmanager of the corporate culture, creating a competency driven inpart by the motivation and attitudes of employees. He’s playedthis role of chief morale officer extraordinarily well.” Doing thatrequires “not only skill,” Cappelli adds, “but a certain amount ofself-effacement to make the culture go. And that’s something yourarely see CEOs able to do.”


Chapter 2 Leadership and Corporate Culture 23

HERBKELLEHERThe Challenge:Giving Southwest Airlines Its Wings

Getting Southwest Airlines off the ground at allwas Herb Kelleher’s greatest feat.

The upstart Texas airline, catering to low-fare,no-frills flyers, was blocked at the gate for morethan three years as established carriers filed law-suits to protect their turf. Kelleher, who wasSouthwest’s lawyer in those early days, fought allthe way to the U.S. Supreme Court, clearing theway for Southwest’s first flights in 1971. Later,Kelleher was back in court fighting to keep the air-line at Love Field in Dallas.“It was a long and diffi-cult battle. It even continued after Southwest beganoperations,” says Kelleher. “The other carriersexerted a massive effort to get us out of business.”

Ultimately, executives at two competing air-lines were indicted on antitrust charges.Southwest grew to become one of the nation’slargest carriers, with planes painted like killerwhales, flight attendants popping out of overheadbins, and in-flight meals consisting of a simple bagof peanuts.Those initial battles gave Southwest itswings, but they also helped shape Southwest’s cel-ebrated culture, one marked by humor, loyalty,and a fierce resistance to corporate bureaucracy.

During the early courtroom struggles, beforethe airline was flying, Southwest was just Kelleher,a small group of investors, and a plan sketched outon a cocktail napkin. “It was only a couple of us

1931: Born March 12 inHaddon Heights, NewJersey, son of a CampbellSoup executive and amother who was ahomemaker.1953: Completes Englishdegree at Wesleyan;considers becoming ajournalist.1956: Graduates fromNYU Law School andclerks for a New JerseySupreme Court Justice.1960: After working fora Newark law firm, movesto San Antonio,Texas, hiswife’s hometown, with aneye out for entre-preneurial opportunities.1966: Hired as outsidecounsel by Texasbusinessman Rollin King,who plans to launch anintrastate airline. Businessplan is drawn up betweenthe two men on a cock-tail napkin in a local bar.1967: Files applicationwith the Texas Aero-nautics Commission to flyAir Southwest Co., laterrenamed SouthwestAirlines, between Dallas,Houston, and San Antonio.1968: Commissionapproves Southwest’sapplication, but thefollowing day Braniff,TransTexas, and Continentalseek a restraining orderarguing that Dallas,Houston, and San Antonioare adequately served.1969: After losing thetrial and an appeal,Kelleher asks the South-west board to “go onemore round.” Postponeslegal fees and takes thecase to the Texas SupremeCourt, which overturnsthe lower court rulings.


fighting the legal battles, day in and day out, againsta whole cadre of lawyers from the other carri-ers,” Kelleher recalls. “Persistence was veryimportant. The other thing that was importantwas not accepting the conventional wisdom thatit wouldn’t work. I think probably only one in fourpeople in Texas thought Southwest had a chanceof flying, much less of being successful. I say, ‘If it’sconventional, it ain’t wisdom, and if it’s wisdom, it’snot conventional.’”

In 1973, when competitors again took legalaction against Southwest, this time to make itleave Dallas’s Love Field, flight attendants, baggagehandlers, and reservations clerks rallied aroundthe company. “Our people were stimulated andchallenged and responded with warrior-like spir-it,” says Kelleher. “I think that inculcated in themthe idea that survival in the airline industry is agame of inches, and by golly, we’ve got to pitch in.The company became a crusade that they enlist-ed in. It’s been pretty much the same ever since.”

Kelleher rejected the conventional notion ofputting the customer first. At Southwest, employ-ees come first, in the belief that a company withhappy and productive workers will have happy,paying customers. He loves to tell the story of anexecutive who complained it was easier for a bag-gage handler to get in to see the chief executivethan it was for him. Kelleher told the executivethat was because the baggage handler was moreimportant.

As it was attempting to get off the ground,Southwest’s management team was made up ofrefugees from other airlines who had lost jobs inthe recession of the early 1970s. Some were freespirits who did not fit in at other carriers. Many

1970: U.S. SupremeCourt refuses to hearappeal by competingairlines to overturn TexasSupreme Court decision.1971: After yet anotherlast-minute trip to theTexas Supreme Court toblock another restrainingorder, Southwest beginsflights.1972: Southwest refusesto vacate Love Field inDallas and move to anew airport farther fromtown. Competing airlinesand airport officials filesuit, arguing Southwestmust comply with anagreement signed byother airlines as part of a bond issue to financeconstruction of theairport. Southwest arguesit was not at Love Fieldwhen the agreement wasmade, so it should nothave to comply.1973: Southwest fendsoff Braniff in a fare warby offering customers afifth of scotch, whiskey, orvodka, making it thelargest distributor ofliquor in Texas for twomonths. Southwest turnsa profit and has not lostmoney since.1974: Southwestexpands beyond itsoriginal three cities—Houston, Dallas, and SanAntonio—to the RioGrande Valley, proving toitself that markets insmaller cities exist andopening the way toexpansion to other cities,such as El Paso,Austin,Lubbock, Corpus Christi,and Midland-Odessa.


had a lot of experience and became known insideSouthwest as the Over-the-Hill-Gang. “The origi-nal employees were not young, but they werelooking for new opportunities.They were lookingfor ways to do things differently,” says Kelleher.“When they came to Southwest, they wereunleashed.They could begin to say what they real-ly thought.That group was seminal to turning thecorner at Southwest Airlines, making it profitableand creating the blueprint for how we operated.”

From the start, Southwest resisted traditionalhierarchies and built flexibility into its operations.Kelleher says his days playing high school footballand basketball taught him how a team shouldwork. “If you play football, you don’t say to thetackle, ‘That’s your territory, I’m not going tomake that tackle.’ Teams don’t function effectivelyunder those circumstances…Team play is a fun-damental concept, and playing team sports bringsthat home to you very strongly. If you want tosucceed, if you want to win, you have to play as ateam.”

As the young airline developed its operations,Southwest focused on substance, not process,says Kelleher. Southwest made use of every sec-ond to keep its planes in the air. Pilots, flight atten-dants, and ticket agents helped clean planes toturn them around within 10 minutes for the nextflight. To fill every seat, the company pioneeredlow, off-peak fares.

With little capital for advertising—the compa-ny spent half its first year’s marketing budget of$700,000 in the first month—Kelleher relied onword-of-mouth to generate interest. Southwestflight attendants dressed in orange hot pants andwhite go-go boots for the 8 a.m. flight from Dallas

1975: Braniff and TexasInternational officialsindicted on U.S. antitrustcharges for conspiringagainst Southwest.Theyplead “no contest” andare fined $100,000.TheFifth Circuit Court ofAppeals allowsSouthwest to remain atLove Field.The U.S.Supreme Court refusesto hear the case.1978: After havingbacked the airline as aninvestor, Kelleher joinsSouthwest as chairmanand hires HowardPutnam from United asCEO.1979: Following airlinederegulation, Southwestbegins first interstateflights to New Orleans.1981: Putnam resigns tobecome President andchief operating officer atBraniff International.1982: Appointed CEO of Southwest, Kelleher isconfronted by a recessionand an air-trafficcontrollers’ strike.1985: Southwest buysairline started by firstSouthwest CEO, LamarMuse, triggering fare warwith Frank Lorenzo,CEO of Texas Air.Southwest eventuallysells the airline toLorenzo.1992: Loses arm-wrestling contest to thechairman of a SouthCarolina-based aviationsales and maintenancefirm over rights to theadvertising slogan,“PlaneSmart.” The contestraises $15,000 forcharity.


1993: Southwestexpands to East coastwith service toBaltimore/WashingtonInternational Airport.1994: Employees takeout an ad in USA Todayhonoring Kelleher onBoss’s Day, thanking himfor running the onlyprofitable major airline,for singing at the holidayparty, and for singing onlyonce a year.1995: Southwest offersticketless travel system-wide.1996: Florida added toSouthwest’s routes.2001: Relinquishes CEOtitle in June and turnsduties over to JamesParker and ColleenBarrett. Parker jokes thetwo will divide the work,with Parker in charge ofdrinking and Barrettoverseeing smoking.2004: Southwest entersmarket in Philadelphia,faces competitionnationally from newgeneration of low-costairlines including JetBlue,AirTran, and Delta’s Songsubsidiary—all modeledon Southwest. Gary Kelly,formerly Southwest’sCFO, is named CEO. Hereplaces Parker, whoannounces his retirement.

to Houston, dubbed the “Love Bird” flight by thecompany.

Despite all the fun and games at Southwest,the company has maintained a disciplined busi-ness strategy, says Kelleher.When airline deregu-lation took place in 1978, Southwest had theopportunity to become a larger interstate airlinecompeting for more lucrative, longer routes.“Wesaid, ‘We have a particular niche in the airlineindustry, and we’re basically going to continue asan intrastate airline within Texas.’ That took agreat deal of discipline when the other alterna-tives were available,” says Kelleher. Gradually,carefully, Southwest did expand, but only withenough cushion to ride out an emergency with-out having to cut people or profits.

Kelleher figures the airline industry is good fortwo major crises every 10 years, such as an oil-price hike, a war, an air-controllers’ strike—evenanother 9/11. Each crisis leads to massive layoffsand bitterness. But Southwest has never fur-loughed an employee. “It’s very important if youare going to be successful that people’s jobs aresecure, so they don’t have all the haunts and wor-ries about whether they are going to [be jobless]next week. That’s how people at airlines havealways felt.”

Leadership LessonFlying High, Coming In Low

Kelleher talked openly of leading an organization based on soulrather than systems. (Southwest’s ticker symbol is LUV, a referencethat harks back to Love Field in Dallas but one that also sums upthe company’s cultural mindset.) “Things happen naturally, notprogrammatically. It’s as much a matter of spirit and soul as themind. The way you deal with people has to emanate from theheart. That’s what gives it meaning and sincerity and providesmotivation. We didn’t sit down and say, ‘We’re going to be funnybecause it’s good for business.’” Yet, if a CEO instills the rightkind of culture, employees will work hard at keeping costs low,says Kelleher, who once held a 2 a.m. barbeque—with himself andthe pilots as chefs—after hearing that mechanics on the graveyardshift had trouble attending company picnics.

While the company pays salaries that are lower than competi-tors’ salaries, it also offers stock options to everyone, not just exec-utives. In addition, Southwest’s compensation system states thatits officers receive pay increases that are no larger, proportionally,than what other employees receive. “And in bad times, we takereductions,” Kelleher says. But no matter how bad the times get,the company refuses to lay off employees—a policy that has pro-moted financial discipline by discouraging managers from hiringtoo many people when the industry is thriving. Good employeerelations also has, for the most part, prevented labor strife atSouthwest and encourages sometimes extraordinary customer serv-ice. On a Southwest flight to Oklahoma City for a court hearing, apassenger who had forgotten to bring along a tie looked up to seea flight attendant presenting him with one she had borrowed fromanother traveler, along with the traveler’s address so that the tiecould be returned.

In a culture that encourages informality, pilots crack jokes overthe loudspeaker system during flights, Kelleher once arm-wrestledwith a manager at another airline during a trademark dispute, andprospective pilots are asked to trade their suits for Bermuda shortsduring job interviews.

Kelleher’s efforts to build Southwest’s culture complemented hisoverall strategy for the airline, which focused on travelers forwhom air travel was financially just out of reach; he gave them an



alternative, no-frills option. While Southwest was engaged in bit-ter fare wars and legal battles with other airlines, its true compe-tition was the automobile—one reason why Kelleher always resis-ted suggestions to raise ticket prices. Once, when Braniff wascharging $62 to fly between Dallas and San Antonio andSouthwest’s fare was only $15, a shareholder asked Kelleher if thecompany couldn’t charge an additional $2 or $3. Kelleher said no.“You don’t understand,” Kelleher told him, “We’re not competingwith other airlines. We’re competing with ground transporta-tion.”

According to Kelleher, when Southwest started out in 1971,only 15% of U.S. residents had flown in an airplane. It’s now85%. To keep that 85% coming back, Southwest has had to runfast and lean. While the best symbol of this is the standardSouthwest in-flight meal—a bag of peanuts—real cost savingscame from Kelleher’s approach of taking the simplest, most directroute. For example, he avoided the vogue of establishing hubs andstuck to Southwest’s original point-to-point system. Southwestalso bypassed travel agents, instead selling directly to consumers(and along the way pioneering the concept of ticketless travel).Kelleher balked at participating in computer reservation systemsthat charged airlines a fee. In addition, he kept his fleet simple.By training pilots and mechanics only on Boeing 737s—and hav-ing access to interchangeable parts—Southwest was able to cuttraining and maintenance costs.

An eye for thrift is an essential part of Southwest’s culture anda key ingredient of its success. The company keeps its planes inthe air more than its competitors, driving down the cost of carry-ing the equipment and other overhead expenses. In 1972,Southwest had four planes and 70 employees. When it could notmeet payroll, Kelleher contemplated selling a plane, which wouldhave resulted in layoffs and a breach of the company’s commit-ment to its workforce. Instead, employees cut turnaround time atthe gate to squeeze more revenue out of the planes it already had.The company also “hedges” its fuel costs by buying most of it inadvance, and it saves on fuel usage by flying light, “flying athigher altitudes…and coasting into landings at a slower descentspeed.”

In 2004, Southwest announced it would begin flights out ofPhiladelphia where US Airways has dominated the market with68% of daily flights. Southwest offered fares as low as $29 oneway, with a ceiling price of $299 each way. US Airways had beencharging last-minute fares of up to $1,000, but began addingflights and cutting prices to cities targeted by Southwest. The twoairlines had already gone head-on at Baltimore-WashingtonInternational Airport where Southwest has now displaced USAirways as the lead carrier.

“They beat us on the West Coast, they beat us in Baltimore, andif they beat us in Philadelphia, they’re going to kill us,” former USAirways Chief Executive David Siegel told workers in Philadelphiain early 2004. “It’s going to be a battle for our lives.” Siegel direct-ed workers’ attention to a screen showing Kelleher dressed asUncle Sam, pointing his finger at the viewer, next to the words, “Iwant your job!” It was Siegel’s attempt to get employees to agreeto more labor concessions. Within a few months, Siegel himselfwas dismissed by the US Airways board, in part for alienating theairline’s labor force.

Maintaining a strong balance sheet and expanding cautiously isthe best way to avoid layoffs during times of turbulence, saysKelleher. “On September 11, when the airline industry as a wholeexperienced the greatest crisis in its history, Southwest did notcancel a flight or lay off any people. Why? Were we lucky or wasit because we had the lowest costs for available seat-mile and hadthe greatest liquidity and access to capital?” asks Kelleher.

A vigilant approach to costs, in good times and in bad, is partof his “corporate wellness plan” for Southwest. “If you’re fit,” hesays, “you’re ready to encounter anything. You’re ready to take onany competition.”



MARYKAY ASHThe Challenge:Motivating a Sales Force of Thousands

“Most companies create a sales force to enhancetheir products,” says Richard Rogers, Chairmanand CEO of Mary Kay Inc., and the son of MaryKay Ash. “But Mary Kay created a product toenhance the work of her sales force.”

And what a sales force it has turned out to be.Mary Kay Inc., the direct seller of beauty productsfounded in 1963 by Mary Kay Ash, currently has1.1 million independent sales reps in more than 30markets worldwide. Every summer, thousands ofthese reps convene in Dallas for a three-day,action-packed “seminar” that includes loving trib-utes to Ash (who died in 2001), testimonials, andpresentations on new sales techniques. But thehighlight is awards night, when top performers arecrowned, seated on thrones, and given prizesranging from furs and vacations to diamonds andthe famous pink Cadillacs. These lucky womenhave earned the ultimate reward—the approval ofthe company and the admiration of their peers.

How was Ash, who started Mary Kay Inc. atage 45 with $5,000 in savings, able to motivate asales force of mostly unskilled, unemployed orunderemployed women over a span of nearlythree decades?

She didn’t rely on bonuses, stock options, orother financial incentives, as many companies do.Instead, she treated her beauty consultants like

May 12, 1918: BornMary Kathlyn Wagner inHot Wells,Texas, outsideof Houston.At age 7,starts taking care of herfather, a tuberculosis vic-tim, while her motherworks full-time managinga restaurant.1935: Marries BenRogers with whom shehas three children.Marriage dissolves uponhis return from WorldWar II.Early 1940s: JoinsStanley Home Productsselling household goodsat parties in women’shomes.Attends annualsales meeting in Dallaswhere top salesperson iscrowned Queen of Salesand given an alligatorhandbag.The next year,inspired by previousyear’s sales meeting,Ashherself wins Queen ofSales award. Instead ofthe coveted handbag, shereceives a “flounderlight,” a device pinnedonto hip boots for nightfishers.1953: Joins anotherdirect-sales company,World Gifts.1957: Receives promo-tion to National TrainingDirector.1963: Resigns fromWorld Gifts when a maleemployee she trained ispromoted over her attwice her salary.1963: A month beforethe opening of Mary KayCosmetics, second hus-band George Hallenbackdies after suffering aheart attack at thekitchen table.


celebrities, and along with small and large gifts, shegave them constant support and encouragement.“Mary Kay Cosmetics is known for ‘praising peo-ple to success,’” she wrote in her autobiography,Mary Kay: You Can Have It All. “We think this is soimportant, we base our entire marketing plan onit.” According to Ash, the last time many womenare acknowledged for achievement is when theygraduate from high school or college. “Womenneed praise,” she states. “It’s been my experiencethat a woman will often work for recognitionwhen she won’t work for money.”

Ash realized this early on. At her first annualawards night in 1964, she treated 200 sales repsto Jell-O salad and home-cooked chicken in thecompany’s small Dallas warehouse. Two yearslater she set up the Golden Goblet Club, whichhanded out gold-plated goblets to every salesconsultant who sold $1,000 worth of wholesalemerchandise in a month. She initiated the “ladderof success,” a gold brooch “on which each rungand each jewel represented a different personalplateau.” And in 1968, Ash started awarding dia-mond pins in the shape of bumblebees—a symbolfor women who have “flown to the top.” The pinswere “badges of merit,” instantly recognizable byany other salesperson at a Mary Kay function.

But ultimately, it didn’t matter what the prizeswere.They could be ribbons, gold-colored stars, aspecial red jacket, a designer suit, praise in thecompany’s monthly magazine, or a Go-Give Awardfor an act of kindness.They could be an invitationto Mary Kay Ash’s 30-room Dallas mansion for teaand cookies or a personally signed letter of con-gratulations for meeting a sales or recruitment

1963: Launches MaryKay Cosmetics—latercalled Mary Kay Inc.—onFriday, Sept. 13, with$5,000 of savings, the helpof her youngest child, 20-year-old Richard Rogers,and a skin cream formulashe purchased from thefamily of J.W. Heath, anArkansas leather tanner.Mary Kay Cosmetics,which has nine independ-ent beauty consultantsand revenues of $200,000its first year, is located ina 500-square-foot Dallasstorefront.1964: Holds first annualstaff meeting for 200sales people.1966: Marries third hus-band, Mel Ash, who diesin 1980.1968: Company goespublic.1969: Settles lawsuitwith former employeeswho claim they own therights to the Arkansastanner’s original formulafor beauty cream.Employees use that for-mula to start their ownrival company,BeautiControl, which islater sold to a New Jerseydirect-sales firm.1969: Company awardsfirst pink Cadillacs to itsfive top sellers.1971: First internationalsubsidiary opens inAustralia.1976: Company is listedon the New York StockExchange.


goal. “Anything can be a symbol for recognition,”Ash said.“We applaud each little success one afteranother, and the first thing you know, [these sales-people] actually become successful.”

By the 1980s, according to Rogers, Ash washead of a “massive sales force grounded in thephilosophy of…leaders creating leaders.”Supporting that philosophy was a carefullydefined career path based on promotions to dif-ferent levels within the sales force, ranging fromdirector to independent sales director to themost coveted spot of all, independent nationalsales director—a status earned by only 300 peo-ple in the company’s history.

Mixed in with Ash’s praise was always anemphasis on raising the bar—recruiting moresales reps, selling more products, getting the nextpromotion. She didn’t just tell women to supporteach other’s efforts; she also made sure they sawhow well the other sales reps were doing. Onenational sales director remembers being on stageat the Dallas Seminar, thinking she had done agreat job and then looking over at Ash, whosecomment was “Yes, but next year, we’ll see you asthe queen.”

In 1985, 17 years after Mary Kay Inc. had gonepublic, the company bought back all outstandingshares and once again operated as a privately heldfamily company.That year also marked a decisionby corporate headquarters to update its imageand refocus on its closest “customers”—its salesforce. One of Ash’s favorite sayings was: “When Imeet someone, I imagine her wearing an invisiblesign that says, ‘Make me feel important.’” Ash did.In Mary Kay:You Can Have It All, she wrote: “The

1979: Mary Kay Inc. sur-passes $100 million insales and first beauty con-sultant makes more than$1 million in commissions.Ash is profiled on CBS’s60 Minutes, during whichMorley Safer asks herwhether she is “usingGod” to promote hercompany. She replies,“I liketo think God is using me.”1981: Writes first ofthree books: an autobiog-raphy called Mary Kay, asecond book called MaryKay on People Managementin 1984, and a third bookcalled Mary Kay: You CanHave It All in 1995.Allmake best-seller lists.1982: Long-running fightbegins with BeautiControl,which has been boughtfrom the New Jersey com-pany by former employeeRichard Heath.With hiswife Jinger, Heath re-launches the company tocompete with Mary Kay.1984: First edition of the“100 Best Companies toWork For” features MaryKay Inc.1985: An investmentgroup led by Ash and sonRichard Rogers takes thecompany private in lever-aged buyout.1987: Mary Kay Ashbecomes chairman emeri-tus of the company; herson Richard becomeschairman.1992: Mary Kay Inc.makes the list of Fortune500 companies.1993: Subsidiary opensin Russia.1993: Mary Kay Ash setsup museum to archive thestories of its sales forceleaders and the companyhistory.


1994: Operations expandinto 22 markets, includingJapan,Argentina, Canada,and Germany.1996: Mary Kay AshCharitable Foundation isestablished to fundresearch on cancers affect-ing women; expands fouryears later to help victimsof domestic violence.1996: Mary Kay Ash suf-fers debilitating stroke.1997: Operations open inUkraine, Czech Republic,and the DominicanRepublic.2000: Establishes sub-sidiaries in Kazakhstan,Slovakia, and the Philippines.2000-2002: Companyoverhauls its cosmeticsbusiness with new packag-ing, formulations, and product forms.2001: Richard Rogersresumes role as CEO ofMary Kay Inc. Rogers hadbeen on sabbatical from day-to-day operations since theearly 1990s, while retainingposition of chairman of theboard of directors of MaryKay Holding Corp.2001: Mary Kay Ash dies onThanksgiving Day at age 83.2002: CBS premieresmovie entitled “The Battleof Mary Kay,” depicting thewell-publicized rivalrybetween Mary Kay Ash andJinger Heath, co-founder ofBeautiControl Cosmetics.2004: Mary Kay Inc. is oneof the largest direct sellersof skin care and color cos-metics in the world, with200 products and 1.1 mil-lion independent consult-ants worldwide in morethan 30 markets. Sales for2003 totaled a record $1.8billion at wholesale level.

media have described our seminars held at theDallas Convention Center as the ‘ultimate form ofpraise,’ and they’re right. Because that’s exactly ourpurpose in holding them…When our top beautyconsultants and directors are recognized for theiraccomplishments in front of an appreciative audi-ence of their peers, the applause ranks among themost meaningful praise anyone can receive.”

Leadership LessonMembers of a Very Large Family

A focus on employees is at the heart of every successful compa-ny, but creating a distinctive culture for those who work there ishighly individualized. For example, shortly after Mary Kay Ashstarted up her cosmetics and skin care company, she solved a crit-ical incentive problem for her employees by emphasizing the joysof adopting. She was referring, in this case, to her sales force.

Mary Kay beauty consultants, as they are called, operate underan elaborate system in which consultants receive commissions onthe sales of people they recruit into the company. This encouragesan incentive-based mentoring program, but it leaves a gap when aconsultant moves away from the home base—and her originalmentor—into a new area. That is where Ash’s “adoptee program”comes in. The program requires an established director to “take[the newcomer] under her wing and treat [her] as one of her own,”although commissions still go to the person who initially recruit-ed her. The metaphor explicitly appeals to Mary Kay’s largelyfemale workforce.

Anticipating the criticism that some established reps might nothelp a newly arrived transplant since they won’t receive any com-missions on her sales, Ash responded: “If you adopted a child, youwould not say to her, ‘No, you can’t have steak tonight. Only myown children can have steak.’ No decent mother would treat heradopted child like this, and neither would our directors with theiradoptees.”

The family analogy was quintessential Mary Kay Ash, who setup a corporate culture that emphasized, among other things, theimportance of relationships and a sense of inclusion. Unlike mostcompanies in the beauty industry, which traditionally sell theirheavily advertised product lines in department stores and drugstores, direct sales companies sell their products wholesale towomen who work as independent contractors. These women thenresell the products directly to consumers at marked-up prices.Mary Kay’s rewards for those who do well under this systeminclude the famous pink Cadillacs, which even today remain syn-onymous with a highly motivated, top-performing sales force



whose devotion to Ash was legendary. (The pink color eventuallysoftened into a pearlized white.)

According to Richard Rogers, CEO of Mary Kay Inc. and Ash’sson, “relationship-building is engrained in our sales force as abusiness model.” At the company’s annual seminar in 2003,Rogers told the 50,000 sales reps in attendance that “forgingbonds and establishing high levels of trust are essential. The abil-ity to get along with people is the Mary Kay connection…”Although the company currently has sales of $1.8 billion at thewholesale level, Rogers said they operate “the same way we didwith mother and a handful of consultants and directors…We arestill an extended family. We are just worldly now. A relationship-based culture is at the core of all that we do.”

In Mary Kay: You Can Have It All, Ash stressed over and over theimportance of forging relationships with customers and other salesreps. Her chapters include subheads like “P&L Means People andLove,” “Respect for Others,” and “Do the Right Thing.” When adirector is promoted to national sales director, she wrote at onepoint, “she takes an oath before a packed audience of Mary Kaypeople at the Dallas convention center” in which she “vows toabide by the Golden Rule. These vows are not idle words. At MaryKay, they are how we live.”

The same system exists today. As Rogers says, “Somebody isalways coaching, encouraging, and advising someone else in orderto get to the next level.” Mary Kay Inc. just opened an operationin Poland, Rogers adds. “We send in sales directors to teach [thereps] about motivating, caring, and helping one another…Theyfeel like they are part of a structure that will help them succeed.”

This sense of inclusion is constantly reinforced as part of theMary Kay Inc. corporate culture. In 1993, the company set up amuseum to archive the success stories of its top sales leaders as wellas the history of Mary Kay Ash and the company. In 2000, it pub-lished a book called Paychecks of the Heart, a compilation of person-al stories by 113 Mary Kay independent national sales directorswho grew up in the company under Ash’s tutelage. The storieswere recorded by Yvonne Pendleton, the company’s director of cor-porate heritage. Every year since 1978, the company has bestoweda Go-Give Award recognizing those “who unselfishly inspire andmotivate others with no thought of personal gain.” And in 2002,

the company opened its Keeper of the Dream Gallery to honor topsalespeople. The 300 women who have achieved independentnational sales director status have their portraits hanging in thegallery alongside Ash’s. There is space for more.

As Rogers told the sales reps at the Dallas Seminar in 2002:“Let me assure you, there will always be room at the top of thiscompany for you.”

No Ceilings, No Boss

The genius of Mary Kay was not that she created a particularlyunique product, but that she so brilliantly created a culture thatnurtured two very important markets: the women she recruited tosell Mary Kay products, and the millions of consumers whobought them.

When Ash started her company in 1963, she knew from experi-ence that few jobs existed for under-skilled women who werebrought up to believe that family, not career, was their first prior-ity. What Ash offered was a job they could do part-time, beforethe kids came home from school or after dinner, and a clearlydefined career path. By selling more cosmetics and recruitingmore sales reps, these women could earn commissions that rivaledthe salaries of some chief executives. Just as importantly, theygained status within the Mary Kay organization as top producers.

Mary Kay Inc., one newspaper said, offered women “the ulti-mate opportunity with no ceilings, no boss.”

The offer has had enduring appeal. Tom Whatley, president,Global Sales and Marketing, at Mary Kay Inc., suggests that“what made working for a direct seller interesting to women yearsago—enabling them to get out of the house—offers the oppositeattraction today. Now, it allows women to stay home.” A recentnewspaper article put it this way: “Through bra burning and,decades later, the dominance of black clothing and grunge chic,Mary Kay remains. It’s not hard to figure out why. This is notabout the people of high fashion so much as it’s about everyoneelse. Mary Kay is about the suburbs and, beyond that, the smalltowns.” Ash, the article said, “liberated hundreds of thousands ofwomen…who had not yet seen themselves in an entrepreneuriallight. She taught them certain truths about beauty, equality, success, and the color pink…”


When Ash died in 2001, tributes to her company and her lead-ership came from all over the world. Angela Stoker, a Mary Kaybeauty consultant for 21 years, made $2.5 million in commissionsand earned the use of 13 Cadillacs. Ash, she said, “understoodwomen. She created a company so women could really have acareer, a home life, a family, and be involved in [their] communi-ty.” Ash herself told countless stories of how women like Stokerwere inspired by her company, and how she herself was inspired bytheir life stories. One of her books, Mary Kay, is “dedicated to thethousands of women who DARED to step out of their ‘comfortzones’ and use their God-given talents and abilities….” Many ofAsh’s beauty consultants could have written a similar dedication toher.

His mother, says Rogers, didn’t care as much about the businessside of running the company as she did the human side. “Everymonth I would get an envelope from her with her checkbook in it,and I would balance it and send it back. If she had given a lot ofmoney away to charities and so forth during that month, then Iwould make a wire transfer to her account. All she cared about wasmotivating and encouraging people. She always understood that itwas easier to be successful when you could look around you and seepeople just like you succeeding.”

The aspirations of the company’s beauty consultants and theneeds of its customer base coincided with Ash’s remarkable abilityto identify and serve both: She gave a career to one group and cos-metics to the other. For Ash, it was all part of her life’s plan. Asshe wrote in Mary Kay: You Can Have It All, “My prime motivationfor going into business was to help women. I wanted to provideopportunities for them to create better lives…and to realize theirdreams.”


JAMESBURKEThe Challenge:The Tylenol Crisis

On the wall of an executive’s office at Johnson &Johnson’s headquarters in New Brunswick, NewJersey, hangs a quote from the year 1982. It reads:“A flat prediction I’ll make is that you will not seethe name Tylenol in any form within a year. I don’tthink they can ever sell another product underthat name. There may be an advertising personwho thinks he can solve this, and if they find him,I want to hire him, because then I want him toturn our water cooler into a wine cooler.” Thequote is from Jerry Della Femina, chairman of thead agency Della Femina Travisano Partners, and itrefers to one of the most notorious producttampering cases ever recorded. Seven people inthe Chicago area died that fall after takingcyanide-laced, extra-strength Tylenol capsules, apain reliever sold by J&J subsidiary McNeilConsumer Products Co.

Anyone given a list of defective product inci-dents occurring over the past 25 years would seethat there is clearly a wrong way to handle suchcrises. Consider Coca-Cola’s mismanagement ofthe “contaminated can” incident in Europe in1999, Intel’s initial failure to respond quickly tothe calculation errors imbedded in its Pentiumchip in 1994, and Firestone’s initial failure toaccept responsibility for SUV roll-overs caused bypoorly manufactured tires in 2000.

1925: Born February 28in Rutland,Vermont.Father was a marblecompany salesman andthen a life insurancesalesman; mother was ahomemaker.As a youngboy, Burke sold daffodilsfrom a field near hishome outside Albany,New York because, hesays,“they were beautifuland they were going towaste.” He offered tosplit the profits with theowner of the field, butshe never accepted anymoney. He also soldChristmas trees andstrawberries door todoor.“I was a marketingperson beginning infourth grade,” he says.1942: Enters Holy CrossCollege; during that timeHoly Cross participates inthe Navy’s V-112 program,which requires studentsto enlist in the service.Burke is commissioned asan ensign and spends oneyear as a skipper on alanding craft tank (LCT)in the South Pacific.Returns to college whenthe war is over.1947: Graduates fromHoly Cross College withB.S. in Economics.1949: Earns MBA fromHarvard Business School;joins Procter & Gamble.1953: Joins J&J as aproduct director; chafesunder company’s lack ofemphasis on new productdevelopment; makes plansto leave but is persuadedto stay with assurances ofmore tolerance for risk-taking.



The most prominent—and by now legendary—example of good crisis management remainsJohnson & Johnson’s handling of the Tylenol disas-ter.That incident was clearly the biggest challengeof his career, says James Burke, chairman and CEOof Johnson & Johnson from 1976 until his retire-ment from J&J in 1989. His actions in the weeksafter the first death, which was reported onSeptember 30, 1982, have been the subject of casestudies in numerous business schools and manage-ment texts, not to mention the impetus for a newsub-specialty in public relations.

Burke not only preserved the reputation of hishighly respected consumer goods company, but hesaved the Tylenol brand.At no point did he try toback off from the company’s responsibility in theincident, even though it was later proven that thetampering had occurred at the retail level. “Whenthose seven people died,” Burke says, “I realizedthere were some things we hadn’t done right.Responsibility for that incident had to be, in part,ours. It wasn’t easy to take that responsibility…butit was clear to us, to me especially, that whether wecould be blamed for the deaths or not, we certain-ly could have helped to prevent them. How?Through packaging.The fact is that the package waseasily invaded.You could take the capsule out, openit up, put the poison in and then put the capsuleback together. It was easy to do. I felt, and still feel,that it was our responsibility to fix it.”

Burke’s conviction, and his total commitmentto the safety of the customer, led the company tospend $100 million on a recall of 31 million bot-tles of Tylenol, which before the tampering, hadbeen the country’s best-selling over-the-counterpain reliever.

1954: Launches severalover-the-countermedicines for children, allof which fail.1955: Moves up todirector of new products.1962: Becomes generalmanager of Baby &Proprietary Products.1964: Appointed execu-tive vice president ofmarketing for ConsumerProducts Division.1965: Promoted to general manager of J&JDomestic OperatingCompany; becomes president in 1966.1971: Promoted to vicechairman of the J&JExecutive Committee.1973: Named presidentof the corporation andchairman of the ExecutiveCommittee.1976: Elected chairmanof the board and CEO of J&J.1979: Meets with topmanagement team toreconfirm commitment to J&J credo.1982: Seven people diein September and earlyOctober after takingcyanide-laced extra-strength Tylenol capsulesin five Chicago stores.Tylenol, sold by McNeilConsumer Products, adivision of J&J, had 35% ofthe $1.2 billion analgesicmarket before the deaths.Market share suddenlyfalls to 7%. J&J spends$100 million to recall 31million bottles of Tylenoland then re-launches theproduct two months laterin tamper-proof packaging.

The recall decision, Burke says, “was a highlycontroversial one because it was so expensive.There were plenty of people within the companywho felt there was no possible way to save thebrand, that it was the end of Tylenol. Many of thepress reports said the same thing, that we wouldnever survive this incident. But the fact is, I hadconfidence in J&J and its reputation, and also con-fidence in the public to respond to what wasright. It helped turn Tylenol into a billion dollarbusiness.” Indeed, within eight months of therecall, Tylenol had regained 85% of its originalmarket share and a year later, 100%.

But during the days immediately following thedeaths, Burke’s clearest and most pressing chal-lenge was dealing with the public hysteria.According to media reports, the Tylenol crisis ledthe news every night on every station for sixweeks. In an action that proved to be typical ofBurke’s willingness to meet the crisis directly, hecontacted the head of each network’s news divi-sion in order to keep lines of information openand assure them of his accessibility. “We werestraight with them,” Burke says. “There weretimes I wasn’t too pleased with what some mem-bers of the media were doing, but by and largethey were very sensible.”

Burke also met with the heads of the FBI and theFDA and, against their advice, decided on the recall.Johnson & Johnson immediately asked the countryto stop taking any type of Tylenol, and offered cus-tomers free replacements and coupons. In addition,J&J stopped all advertisements, examined its pro-duction and distribution facilities for possible con-tamination, and cooperated with law-enforcementagencies to identify possible suspects. Within twomonths, the company reintroduced the product in


1983: By mid-yearTylenol’s share of theanalgesic market climbsup to 30%, reaching itspre-tampering level of35% by year-end.1984: Tylenol comes outin caplet form.1986: Woman in NewYork dies in second prod-uct tampering case. J&Jhalts production andoffers consumers optionof swapping their capsulesfor tablets. Companymakes decision to stopmarketing Tylenol in cap-sule form.1988: J&J introduces gelcaps, which look like cap-sules but cannot be takenapart.1989: Burke retires fromJ&J, after staying on fouryears longer than heexpected due to Tylenolcrisis.1989: Becomes chairmanof the Partnership for aDrug-Free America(PDFA), a non-profitorganization founded in1985 by the AmericanAssociation of AdvertisingAgencies and best knownfor its national anti-drugmedia campaign.1989: Agrees to chairthe Business EnterpriseTrust, a group founded byNorman Lear and com-mitted to fostering cor-porate ethics and socialresponsibility. Lear willdisband the Trust in 2000due to lack of funding.


a triple-sealed tamper-resistant package. Surveysdone at the time showed that J&J’s quick responseto the tragedy helped to reestablish consumer con-fidence in both the brand and the company.

The person who tampered with the Tylenolwas never found. Nor was anyone caught when asimilar incident involving cyanide-laced Tylenolcaused the death of a New York woman in 1986.In 1984, J&J replaced capsules with caplets, and in1988, the company introduced gel caps, whichlook like capsules but can’t be taken apart.

Burke had one other tool at his disposal thatwas and is unique to J&J: the company credo,whichgoes back to the founding of J&J in 1887.The credoclearly states that the company is responsible firstto its customers, then to its employees, the com-munity and the stockholders, in that order. “Thecredo is all about the consumer,” Burke says.

Burke had first addressed the credo in the late1970s by initiating discussion in J&J offices aroundthe world as to whether it should be kept, modi-fied, or scrapped altogether. “The credo camealive because of those debates,” says Burke.“Somepeople asked why we needed it. Others said itwasn’t necessary to have a credo to confirm whatwe already knew.” Still others suggested that ofcourse when issues arose, the consumer wouldcome first, not the shareholders. “So that allsounded pretty simple, but in a business environ-ment it wasn’t that simple at all,” Burke says.

For Burke, though, it was. When those sevendeaths occurred,“the credo made it very clear atthat point exactly what we were all about. It gaveme the ammunition I needed to persuade share-holders and others to spend the $100 million onthe recall.The credo helped sell it.”

1990-92: Under Burke,PDFA achieves mediagoal of $1 million per dayin donated time andspace—reaching over90% of American house-holds with an anti-drugmessage every other day.Research studies confirmsignificant declines in useof illegal drugs.1992-1997: Is a found-ing member, and servesas director of, theNational Center onAddiction and SubstanceAbuse at ColumbiaUniversity, whose missionis to study and combatsubstance abuse.1993-94: PDFA launch-es Inner City Program,specifically targeting anti-drug attitudes of NewYork City’s low-incomeyoung people.1994-96: Drug useincreases among youngpeople, remains stableamong adults.1997-98: Burke workswith director of Office ofNational Drug ControlPolicy to develop con-cept of “public-privatepartnership” to use fed-eral money to buy mediatime and space for PDFA.1999-2000: Earlyresults of National YouthAnti-Drug MediaCampaign are encourag-ing. Media donations formatch of paid time andspace exceed expecta-tions. Independentresearch supports effec-tiveness of PDFA mediamessages.


2000: Burke is awardedthe Presidential Medal ofFreedom by PresidentBill Clinton for his out-standing achievementsand contributions tosociety as chairman ofPDFA and J&J.2002: Becomes chair-man emeritus of thePartnership.2003: Named the sixthgreatest CEO of all timeby Forbes magazine.2004: In a study oncorporate reputationsconducted by HarrisInteractive and theReputation Institute,Johnson & Johnson ranksnumber one (out of 60)for the fifth consecutiveyear. Report also showsthat the average reputa-tion score for all compa-nies falls, indicating adeeper distrust of cor-porate America than inthe recent past.2004: McNeilConsumer and SpecialtyPharmaceuticals, the unitof J&J that makesTylenol, announces anew $100 million adcampaign for Tylenol inan effort to repositionthe brand.The ad cam-paign’s theme is “Stop.Think.Tylenol.”

Leadership LessonA Credo Culture

In the lobby of Johnson & Johnson’sheadquarters in New Brunswick, NewJersey, corporate culture is literally chis-eled in limestone. As noted earlier, thecompany’s credo states that J&J’s responsi-bility is first to its customers, then to itsemployees, then to the community andfinally, to its shareholders. Of course,many companies have codes and missionstatements. But the best corporate leadershave a gift for giving those words mean-ing, especially in a time of crisis.

James Burke displayed that gift duringhis handling of the Tylenol crisis in 1982.Brian Perkins, worldwide chairman of J&J’sconsumer pharmaceuticals and nutritionalsgroup, was then a 28-year-old productdirector with J&J subsidiary McNeilConsumer Products, the maker of Tylenol.He remembers Burke as a man “who had aclear vision and could galvanize an organi-zation around what seemed like doing theimpossible. Right after the first death wasreported, he came to a McNeil meeting, gotup in front of our sales and marketing peo-ple and said, ‘Look, I have a challenge foryou. I will give you an extra week’s pay ifyou can do this. I don’t know that you can,but I want you to know that the challengeis there.’”

What Burke wanted, and got, was animmediate plan of action that includedrecalling 31 million bottles of Tylenolworth $100 million, setting up a toll-freehotline for consumers, and working closelywith the media, health-care community,

FBI, and FDA to share information and keep the public informed.“He was so much in command of the situation, connecting the dotsof what was important every single hour during those days,”saysPerkins. Four years later, on February 10, 1986, when another per-son died from taking a cyanide-laced Tylenol, the company knewexactly what to do: Within two weeks, the entire sales force hadcreated and set in motion a series of actions to control the damage.

Burke’s adherence to the credo defined the culture at J&J through-out his tenure as CEO from 1976 to 1989. As Perkins says, “when-ever we were faced with a really hard decision, he would always pointto the credo for guidance. He had a way of making a very difficultand complex situation pretty simple when you think about doingwhat is right for your customer. It was a powerful message.”

Burke also read the credo to include something that had fallenby the wayside—an emphasis on risk taking. After graduatingfrom Harvard Business School in 1949 and spending three years atProcter & Gamble, Burke joined J&J, “because that was the placeeveryone who was interested in marketing wanted to go.” Withinthe first few months, he let it be known that he was looking for anew job because, he said, the company wasn’t willing to take risksin the consumer products field.

“I felt they had a huge opportunity in consumer products, but Icouldn’t sell it to anybody so I decided to look around,” Burkeremembers. “Then I got a call from General Robert Wood Johnson’soffice. I assumed I was going to be fired, because I had introducedfour new products and all but one had been failures (including achildren’s aspirin and chest rub). I was stumbling and I knew it. Ithought they had every right to fire me. But I felt cocky enough thatI decided I would explain why it was a bad idea to do that.”

General Johnson, Burke says, “listed my failures—he had all thedetails in front of him—then he stood up and shook my hand andsaid he wanted to congratulate me. He understood that businessinvolved risk taking and that consumer products was a high-riskbusiness. So at the end of the meeting, he said I would now reportto his son, and we would be responsible for new products world-wide. Then he sat down and got back to work.”

Burke continually emphasized a customer-focused culture whererisk taking was rewarded. “It was always about the consumer,” hesays. “The closer you were to the consumer, the more power you


had to decide what should be done, and to take risks doing it. Ibelieved strongly in decentralization. The name of the game wasbottom up and not top down, as it was in most other companies.The consumer business more than any other had to be that waybecause you had to have people close to the consumer. That meantdecentralizing decision-making downward.”

Annual reports from J&J during the years that Burke was chair-man and CEO list the “most important products and introduc-tions” of each year. During Burke’s tenure, those lists includedapproximately 175 new products; in addition, about 15 acquisi-tions were completed or new units set up. Just before his retire-ment, Burke was described in a (1988) BusinessWeek article as a manwith “a passion for urging people to take risks. A demanding bosswho can shout his way through a rowdy staff meeting, he has spentyears encouraging his managers to be daring…he continually energize[d] the system.”

Working with Addiction

After retiring from J&J, Burke extended his ideas about risk-taking to the world of non-profits—specifically, the Partnershipfor a Drug-Free America. Burke, who started smoking on his 12th

birthday and gave it up when he turned 42, says he was up to twopacks a day and had clearly become addicted. “It was an addictionI struggled with over and over again. Finally I decided I had onelast chance to stop, and I did. As a result of quitting, I came to theconclusion that I should be able to help others with addictions. Irealized that with the right attitude, you can do almost anything.That’s how I got interested in the idea of the Partnership for aDrug-Free America.”

Burke became chairman of the PDFA in 1989 when he retiredfrom J&J, and held the position for 13 years. The Partnership wasfounded in 1985 by the American Association of AdvertisingAgencies, a group that had a strong belief in the power of adver-tising to change behavior. Under Burke, the partnership grew tobecome the single largest public-service media campaign in adver-tising history. From the beginning, he was able to gather togeth-er other people from the media and advertising industries to makePDFA into “a big deal. The more we talked, the more excited we


got and the more people we were able to involve. I was totally con-vinced this was the right thing to do,” he remembers.

As PDFA chairman, Burke took marketing risks once again, justas he had done with Tylenol. In the late 1990s, the group ran anedgy TV ad showing a teenage girl smashing up dishes, windowsand other appliances in her kitchen to illustrate how heroin smash-es up relationships. Another ad zeroed in on a person holding anegg and telling the audience that the egg is their brain. He pointsto a hot frying pan and says the pan represents drugs. Then hecracks the egg into the frying pan, where it immediately sizzlesand burns. The message: This is your brain on drugs. A third adshows a young man revving up a car so high that the engineexplodes. This is how it feels to your heart to be on meth, he tellsthe audience, referring to methamphetamine. “The difference isyou can’t rebuild a heart.”

What’s interesting, says Burke, is that “drug use, cigarette use,and alcohol use are all joined at the hip and all are going down atthe same time. We believed this was going to happen. We all fun-damentally believed that attitudes can in fact change behavior, andthat you can change attitudes with advertising. My whole life wasspent in marketing. I believe in it intensely. I believe you canapply the lessons that you learn in business to social issues.”

Burke is still speaking out on lessons he learned during a longcareer in both public and private service. For example, before itbecame fashionable to talk about truth and trust as core values, hedid. In a 1996 interview with the American ManagementAssociation during which he was asked what advice he would giveto others, he responded, “I have found that by trusting peopleuntil they prove themselves unworthy of that trust, a lot morehappens.” In an interview with the Harvard Business School alum-ni magazine, he noted that the business community has “corrupt-ed the system by hiring boards of directors that feel beholden tothe CEO.” Not only should an independent board and lead direc-tor govern companies, but business executives also need to “recre-ate a trust agenda. Nothing good happens without trust. With ityou can overcome all sorts of obstacles. You can build companiesthat everyone can be proud of.”

In his interview for this book, he also spoke about trust. “Trusthas been an operative word in my life. The word trust embodies


almost everything you can strive for that will help you to succeed.You tell me any human relationship that works without trust,whether it is a marriage or a friendship or a social interaction; inthe long run, the same thing is true about business, especiallybusinesses that deal with the public.” The accounting scandal atEnron, he adds, has brought that truth home.

As for the current scandals in the brokerage houses and invest-ment banks, “there is a big difference in how some people look atthe word trust. There are still a lot of people who are abusing theirprivileges and their right to make money properly. But a lot ofthem are paying the price for that…Everyone who influenced mebeat into me the importance of being trustworthy. And I thinkthose influences are still out there. Trust is gaining. I can’t proveit and most people would call me an optimist, but I honestly thinkit’s happening.”


47

Truth Tellers

3

Truth lies at the heart of all true leadership. To understandhow the two relate to one another, consider Mohandas(“Mahatma”) Gandhi, whom more than a billion Indians call thefather of their nation. Confronted by unjust laws imposed by theBritish Empire in the last century, he developed a doctrine ofpeaceful non-cooperation that he called Satyagraha, or insistenceon truth, whose aim was to “wean opponents from error bypatience and sympathy” rather than by subjecting them to vio-lence. After early successes in South Africa, Gandhi’s principlesspread like wildfire in India, where they helped unite millions inthe subcontinent against British rule. “Satyagraha is a relentlesssearch for truth and a determination to reach truth,” Gandhi

wrote. “It is a force that works silently and apparently slowly. Inreality, there is no force in the world that is so direct or so swift inworking.”

If this principle applies to political leadership, it applies evenmore to the world of business. In these times of corporate scandalsat Enron, WorldCom, and Parmalat, truth-telling is as critical asvision when it comes to lasting leadership. Just as leaders needsensitive antennae to spot opportunities that aren’t obvious to oth-ers, they also need the ability to communicate their vision in a waythat wins the trust of their constituents. Integrity builds trust;dishonesty—while it may succeed temporarily—ultimatelyundermines it. It is only when constituents—whether they aremembers of a board of directors, employees, or Wall Street ana-lysts—are convinced the leader is a straight-shooter who isexpressing a complete and credible view of reality that they willaccept it. Once that happens, constituents often become followers,which is the litmus test of leadership.

In their own ways, all Top 25 leaders in this book are truthtellers. Warren Buffett famously helped re-establish the credibili-ty of Salomon Inc. after John Gutfreund, its chairman and CEO,led the Wall Street investment bank into a bond-trading scandalin the early 1990s. Wharton’s Michael Useem, who wrote aboutthe issue in his book The Leadership Moment, says this helpedBuffett become known as “the conscience of the Street.” JackWelch, former CEO of General Electric, made a clear statementabout truth telling when he titled his recent autobiography, Jack:Straight from the Gut. Welch’s penchant for plain speaking playeda key role in his rise to the top at GE and in his ability to elevatethe company to new heights as its CEO.

Peter Drucker, the perennial outsider who studied companiesbut never joined them, also built his reputation by writing aboutmanagement issues without fear or favor. In articles and booksproduced over a lifetime, Drucker, Marie Rank Clarke Professor ofSocial Science and Management at Claremont Graduate Universityin California, brought a sharp, skeptical eye and a trenchant pen.In an article about leadership, for example, he noted that the mosteffective leaders he had encountered subjected themselves to a“mirror test”—by making sure that the person they saw in the


mirror in the morning was the kind of person he or she wanted tobe, respected, and believed in, thus protecting themselves from thetemptation of taking popular but wrong actions.

William George, the former CEO of Medtronic, has made truth-telling the cornerstone of his philosophy of authentic leadership.Asked what he would tell a young and ambitious manager aboutbecoming a successful leader, George responds: “Be yourself, fol-low your own style, be what you really are, and think about why itis that you want to be a leader. Don’t just try to get a title or poweror money because in the end, these are not fulfilling.”

Truth-telling as an attribute of lasting leadership works at twolevels. First, the leader must be able to perceive and express anaccurate understanding of reality, which goes hand in hand with anintolerance of humbug.

Second, leaders must be able to communicate the truth as theysee it without being afraid it might alienate their constituents.The ability to speak the unalloyed truth calls for courage.Temptations to hide or distort facts are often rooted in fear of theconsequences if the truth were to be revealed. Why do companiescook their books or sales managers pad their sales figures? Fear ofthe consequences. Why do executives praise their CEOs’ half-baked ideas instead of speaking up about the emperor’s palpablenakedness? Fear of the consequences. In the business world, somany factors militate against truth-telling that those who tell thetruth consistently and fearlessly (though not tactlessly) earn cred-ibility. People who are ruthlessly honest may not be wildly popu-lar, but they are usually respected and believed. And inspiringbelief, as the experiences of Welch, Drucker, and George show, isindispensable to lasting leadership.

Chapter 3 Truth Tellers 49


The Challenge:Eliminating the Weak Links

Jack Welch, former chairman and chief executiveofficer of General Electric, had to look no furtherthan Syracuse, New York, where General Electricwas manufacturing television sets, to see the glob-al future. It cost GE more to make a television inSyracuse than it cost to buy a Japanese-made set.“You didn’t need to be a genius to see it,” saysWelch.“We were in businesses that had no tech-nological advantage—housewares, hairdryers,irons.The barriers to entry were low and foreigncompetitors could quickly come at it.”

In 1981, when Welch became the youngestCEO in GE history, he began a crusade to elimi-nate the company’s weak links before they coulddrag down the entire organization. His goal was aradical restructuring that would get rid of prob-lem products and focus on profitable businessesimmune to foreign competition, particularly in thefinancial, high-tech, and service sectors.The strat-egy would earn Welch the nickname “NeutronJack” because it eliminated tens of thousands ofworkers but left plants and office buildings intact.

“My biggest challenge, without question, waschanging a company—which the outside worldand the inside world thought was perfect—toface the realities of global competition in the1980s and 1990s,” says Welch. Everything, he said,

JACKWELCH

1935: John FrancesWelch Jr. born in Salem,Massachusetts, the onlychild of a railway con-ductor and a motherwho pushes him toexcel and fostered self-confidence. She famous-ly explains Welch’s stut-ter as the simple inabili-ty of her son’s tongueto keep up with hisquick mind.1957: Graduates fromUniversity ofMassachusetts with aB.S. in chemical engi-neering, entersUniversity of Illinois andearns M.S. and Ph.D.degrees in chemicalengineering.1960: Joins GE as ajunior engineer inPittsfield, Mass., at asalary of $10,500 andbegins to question thecompany’s bureaucracy.1961: Feeling slightedby a standard $1,000raise, announces he’squitting. Boss talks himinto staying.1963: Explosion in atank at a pilot plasticsfactory under his super-vision tears a hole inthe roof. No one ishurt.1965: Helps developNoryl, a plastic productthat grew to become a$1 billion business.1968: Appointed gener-al manager of GE’s plas-tics business.1970: Plastics divisionsales doubled in threeyears.


appeared to be “running well.There was no burn-ing bridge. It was not a turnaround. I had to cre-ate a sense of urgency and desire for radicalchange in the face of what appeared to be smoothsailing.”

Welch himself was a product of GE, a companyfounded in 1892 with a long reputation for pro-gressive and effective management. Independent,scrappy, and opinionated,Welch often went againstthe GE grain. Still, after an elaborate selectionprocess, he was named CEO in 1981 and tookcontrol of the company’s mixed bag of businessesas well as its entrenched interests, traditions, andbureaucracy.

Almost immediately he launched his contro-versial restructuring. GE managers were orderedto fix, sell, or close down businesses that were notfirst or second in their markets. In all, GE made1,700 acquisitions and divested 408 businesseswhile Welch was CEO.

Among the first units to go was central air-conditioning in 1982, followed by Utah Inter-national, a $2 billion natural resources business.Those sales proceeded smoothly, but GE employ-ees and the public were roiled when Welch soldthe $300 million housewares business.These low-tech products, like the television sets in Syracuse,were sitting ducks for low-cost foreign competi-tors, Welch argued.

Another deal driven by concern about foreigncompetition was GE’s 1985 acquisition of RCA,including its NBC television network.Welch sayshe went after NBC because he felt foreign ownership rules governing television networkswould give him some cover from rival companiesabroad. “We had to convince people of the

1971: Promoted to headof chemical andmetallurgical divisionmanaging a wide portfo-lio of materials beyondplastics, such as industrialdiamonds and insulation.Restructures manage-ment.1973: Writes in a per-formance review that hislong-range career objec-tive is to become CEOof the company.1974: After another promotion that addsmedical systems andappliance and electronicscomponents to hisresponsibilities, gets spe-cial permission to remainin Pittsfield, Mass., andrun the businesses fromthere instead of movingto corporate headquar-ters in Fairfield, Conn.1977: Promoted to sec-tor executive for GE’sconsumer product busi-ness and finally moves toFairfield.1979: GE chairmanReginald Jones beginssearch for a successor,asking Welch who shouldbe the next chairman ofthe company if bothWelch and Jones arekilled while traveling onthe company jet.1981: Becomes GE’syoungest and eighthchairman and CEO.1982: NicknamedNeutron Jack byNewsweek magazinebecause of his restructur-ing strategies.


foreign competitive threat,” he says. “IBM andothers did turnarounds, but they did that afterthey were almost gone. We changed before wehad to.”

Even though Welch was a tough CEO, thesechanges were painful. “You have to know whoyou are and what you’re doing and be comfort-able in your own shoes. It’s an awful thing to belabeled something [Neutron Jack] because youare making an organization more competi-tive…The only thing that counts is a winningcompany. Broke dot-com companies can’t domuch for society. Companies that go bankruptdon’t do much for society.”

As Welch sold off industrial businesses, hebegan to focus on developing the company’sfinancial arm, GE Capital, figuring that it would bemore profitable than “grinding metal. So I put alot of resources and time and effort into [that].After 20 years in manufacturing businesses, Icouldn’t believe how easy it was to make money,relatively speaking.”

For Welch, GE became a giant managementlaboratory where he could experiment withideas and strategies.When something worked inone division, he would transfer it to another.“One of the nice things about a big company isyou can try a lot of that stuff. It’s a great hot-house,” he says.“A small company can make a bigmistake. Shame on a big company that doesn’ttake a lot of small risks.”

1983: Sells GE’s house-wares business to Black& Decker, a move thatcauses an uproar amonghis critics because theproducts were so famil-iar to GE’s traditionalcustomers.1985: Acquires RCAand the NBC televisionnetwork.1987: Eight monthsafter acquiring KidderPeabody, federal officialsraid the Wall Street firmand find ties to IvanBoesky, who pleadedguilty to insider tradingcharges. GE pays $26million in fines.1993: Attempts toincrease financial hold-ings by buying Primericafrom Sandy Weill, butnegotiations stall.1994: Joseph Jett, atrader at KidderPeabody, fabricates $350million in trades. Later inthe year, Kidder Peabodyis sold to PaineWebber.1996: Launches SixSigma initiative toimprove quality byreducing defects to99.99966% of perfection.1998: After a lifetimeplaying golf, which fed hislove of competition anddrive for perfection,Welch has his ultimategame, shoots a 69 offthe back tees at theFloridian in a match withpro golfer Greg Normanwho shot 70 from thepro tees.


Welch acknowledges that there is an elementof luck and timing in business and that even thegreatest corporate leaders cannot control exter-nal circumstances. “Being a CEO in the 1990s,with the wind at your back in the markets andgiving out options, sure helped make the case fora winning company. I took over in a very roughperiod. Unemployment was high.The prime ratewas at 21%. President Carter said we were in amalaise. It wasn’t hard to go up from there.”

Welch says that despite his long tenure asCEO he was always able to keep himself ener-gized by launching new company initiatives, suchas his Six Sigma push, designed to bring GE qual-ity to near-perfection. Each year Welch unveiledhis latest strategic bent to managers at theirannual meeting in Florida after New Year’s, untilhe retired at the company-mandated age of 65.“Ihad one job title for all those years, but I wasmany people,” he says of his ongoing personalrestructuring.“You reinvent yourself all the time.”

It was a process that Welch seemed to enjoy.“You get hooked on these different new things.There was India. Find out all you can about India.Then find out all you can about China. There’salways a new [opportunity].You’re the same coreperson, but your eyes are constantly beingopened to new worlds.”

1999: Admits to beinglate in recognizing theimportance of theInternet and launches a company-wide e-business initiative.2000: Offers to buyHoneywell, but Europeanantitrust regulatorsthwart the merger.2001: Retires after 20years as CEO duringwhich GE’s market valuerose.Writes best-sellingbusiness book, Jack:Straight from the Gut,published in September2001.2003: Surrenders lavishGE retirement perks,including a Manhattanapartment, golf coursememberships, and a heli-copter after the packageis made public in divorcepapers. Maintains $9 million annual pension.2004: Signs reported $4 million book deal towrite Winning, a businesshow-to book due out in2005.


Leadership LessonBitter Truths

In 1998, Jim McCann, CEO of 1-800-Flowers.com, wrote ashort piece for Fast Company magazine about having to fire a sen-ior executive at his company. McCann knew, as did his colleagues,that the person was not right for the job, but he could not bringhimself to let him go. McCann was friends with the person inquestion, and firing him, McCann felt, was not only difficult, itwas almost brutal.

As he was agonizing over this dilemma, McCann happened tomeet Jack Welch at a dinner party and told him about the prob-lem. Welch asked McCann, “When was the last time anyone said,‘I wish I had waited six months longer to fire that guy?’ Alwayserr on the side of speed.” Encouraged by Welch’s advice, McCanndealt with the situation. It initially hurt, then it brought relief,and eventually McCann made up with his friend. The lessonMcCann learned from Welch was clear: The truth can be more bit-ter than a sweet illusion, and making the right decision caninvolve unpleasant confrontations. Firing someone is never easy,especially for managers who cherish loyalty and are as loyal totheir colleagues as they expect their colleagues to be to them.Still, doing the right thing—which usually involves truth-telling—tends to work out well for everyone in the end.

Welch himself learned this lesson the hard way. When he cameto GE in 1981 as newly appointed chairman and CEO, he under-took a massive restructuring, a process that involved not onlyrecasting General Electric’s product portfolio, but also significantstaff layoffs as he attempted to stamp out bureaucracy. Althoughthe layoffs didn’t go down well, Welch’s gut instinct about themerits of streamlining the company eventually paid off. As hetold a group of Wharton students in a speech in 1999, GE tookfive years to break through its lumbering bureaucracy. “An organ-ization is like a building,” Welch said. “Every floor is a layer, andevery layer is a nuisance. Every wall is a functional wall. Thinkabout detonating that building.”

Traditionally, GE had been organized by industry, with man-agers reporting up through sectors to the chief executive’s office.The restructuring that Welch engineered led to the idea of a

“boundaryless” company in which the values and culture of GEwere more binding than a particular business or geographic mar-ket. “The boundaryless company I saw would remove all the barri-ers among the functions: engineering, manufacturing, marketing,and the rest. It would recognize no distinctions between domesticand foreign operations. It meant we’d be as comfortable doingbusiness in Budapest and Seoul as we were in Louisville andSchenectady,” Welch writes in his autobiography.

Welch’s straightforward truth-telling was also in evidence at thecompany’s training facility in Crotonville, New York, whereWelch regularly lectured from “The Pit” in the center’s main class-room. In June 1983, when the manager of Crotonville was prepar-ing a presentation for the GE board requesting $46 million forrenovations, Welch looked at the payback analysis on his lastchart, and then drew an “X” over the executive’s transparency andscribbled “infinite” across the page. It was a telling gesture: Welchwas totally committed to overhauling the company, investing mil-lions in some divisions even as he was laying off thousands ofworkers in others.

At Crotonville, Welch was upfront with rising executives abouthis own management problems; in the late 1980s, he extended thegive-and-take throughout the company in a program called “work-out.” During these sessions, patterned after a New England townmeeting, management and workers in a GE business held two- tothree-day meetings to brainstorm ways to increase efficiency. At a1990 work-out session in GE’s appliance business, as a unionworker was making a presentation on improving refrigerator doorproduction, the chief steward of the plant jumped out of his seatto interrupt. “You don’t know what the hell you’re talking about.You’ve never been up there,” the steward shouted, then snatchedthe magic marker from the presenter and quickly sketched out asolution that was endorsed by all those in the meeting. “It wasabsolutely mind-blowing to see two union guys arguing over amanufacturing process improvement,” writes Welch in his autobi-ography. “Here were the guys with experience, helping us fixthings.”

In a letter to shareholders in 1992, Welch quantified four typesof leaders at GE. Type One, the star, delivers on commitments andshares in the values of the company’s management. Type Two


neither delivers results nor shares values and should be working elsewhere. Type Three misses commitments, but shares the com-pany’s values and should get a second chance. Welch was mostconcerned about Type Four, the leader who delivers on commit-ments but does not share the company’s values. He described TypeFours as tyrants, overly concerned with short-term performance,and having the potential to destroy morale. “In an environmentwhere we must have every good idea from every man and womanin the organization, we cannot afford management styles that sup-press and intimidate,” wrote Welch.

Welch’s analysis shows the important relationship betweentruth-telling and corporate culture. When a leader insists ontruth-telling to a fault, integrity becomes integrated into corpo-rate practice. Wharton’s Peter Cappelli says that unlike manyother executives who preach simplicity, Welch, whose own per-sonal style was direct and simple, was able to actually change thecompany’s culture. “He understood management at a fundamentallevel and he had the enormous willingness to persevere and changean organization to take simple principles seriously.”

Welch blames himself for not picking up on problems that ledto what he considers GE’s greatest failure during his watch, theKidder Peabody scandal that centered on rogue trader Joseph Jett.Welch said he allowed Kidder to operate outside the integrity-based culture he had fostered at GE and behave like its counter-parts on Wall Street, with their emphasis on superstars and hugebonuses. After the fraud was uncovered, GE managers from otherdivisions offered to kick in funds from their businesses to keep thecompany from missing its quarterly numbers. Not the Kiddermanagers. “Instead of pitching in, they complained about how thisdisaster was going to affect their incomes,” Welch writes in hisautobiography. “The two cultures and their differences never stoodout so clearly in my mind.”

When Welch retired, he was asked to name the single achieve-ment at GE of which he was most proud. His response was:Building a company where everyone feels important, where newideas are welcome and where every person benefits from the orga-nization’s successes.



PETERDRUCKERThe Challenge:Inventing the Discipline ofManagement Studies

Peter Drucker, Marie Rank Clarke Professor ofSocial Science and Management at ClaremontGraduate University in California, single-handedlykicked off an expedition to map, as he put it, the“dark continent of management.” Up through the1940s, the prevalent practice at most U.S. corpo-rations was to drive employee productivity high-er through intimidation and fear. During thoseyears, Drucker came across just two companies—Sears Roebuck and the British retailer Marks &Spencer—that saw any value in developing man-agers, according to biographer Jack Beatty. And instark contrast to the present, only three universi-ties listed continuing education programs aimedat managers.The union-busting, hard-nosed man-ager was held as the ideal.

Drucker was eager to understand how theworld of business was changing, but not as aninsider. Despite his study of human nature and hisuncanny ability to draw lessons from businesstrends, he was never tempted to enter the cor-porate world. Some companies tried to lure himin, but Drucker quietly declined each offer, choos-ing to retain the objectivity—and credibility—ofthe perceptive outsider. In the process, he unin-tentionally became the world’s preeminent andearliest management guru. “An observer, not a

1909: Born in Vienna,Austria, to Adolph andCaroline Drucker. Hisfather is an economistand lawyer whobecomes a senior civilservant in the Austro-Hungarian Ministry ofEconomics; his mother is one of the earliestwomen medical doctorsof the era. During hisformative years, Druckeris surrounded by richcultural and intellectualdiscussions that takeplace during his parents’weekly soirees.1929: Writes articlethat appears on October15 in a prestigiousEuropean economicjournal published by theFrankfurter Zeitung.Argues that stocks onthe New York StockExchange could onlyclimb higher. U.S. stockmarket collapses a fewweeks later. Forswearsmaking predictions aboutthe stock market,although he builds a reputation for being prescient in spottingbusiness trends.1929: Becomes a senioreditor for finance at theFrankfurter General-Anzeiger newspaper.Duties include writingsix to eight editorials perweek and managing allforeign and economicnews. Realizing that ajournalist has to coverdiverse subjects, disci-plines himself to readabout as many topics as possible at the end of his work hours.


participant—making him, for his refusal to partic-ipate, all the keener as an observer,” Forbes maga-zine said of him.

Drucker has filled shelves with books on everyaspect of management from leadership and cor-porate governance to decision-making and non-profit management. He has published more than30 books since 1939.The challenge that launchedhis nearly 80-year career as a management theo-rist (he sees himself as a “social ecologist”) cameafter he published his second work, The Future ofIndustrial Man, in 1942. At the time, Drucker wasa professor of politics and philosophy atBennington College in Vermont, but academicssoundly criticized his book for mixing economicswith social science. Still, it caught the attention oflegendary General Motors chief Alfred P. Sloan,who invited Drucker to study the automaker.

The president of Bennington College, LewisJones, urged Drucker to forego the GM project,warning him that it would derail his academiccareer in both economics and political science.Even trying to fit the project into an academicarea wouldn’t work because there was no estab-lished discipline that studied corporations andhow they functioned. “I am ashamed to admithow little I knew about management,” saidDrucker. “It was amazing, not because I was soignorant, but because nobody knew anything.” Andit seemed, also, that nobody cared. Drucker’s publisher questioned the value of such a book,asking, “Who the hell wants to know how a bigcompany is organized?”

It was a daunting challenge to venture into afield where little work had been done before—and in the face of discouragement from his peers.

1931: Earns his doctor-ate in international andpublic law at FrankfurtUniversity while workingfull-time as a journalist atthe General-Anzeiger from6 a.m. to 2 p.m. Creditshis editor, ErichDombrowski, with instill-ing in him an intensesense of discipline.1933: Moves to Londonafter declining to enroll inthe Nazi Party and alsoturning down a job withthe Nazi Intelligenceoffice. In London, analyzesdistressed securities butis thoroughly bored withfinance. Realizes his inter-ests increasingly lie instudying and writingabout human nature.1937: Marries DorisSchmitz, a former studentat the London School ofEconomics, whereDrucker substitutes occa-sionally for a professor.1937: Leaves London forthe United States wherehe begins to write for theAmerican press.1939: Publishes his firstbook, The End of EconomicMan:The Origins ofTotalitarianism, whichexplores the intense irra-tionality and nihilism offascism and draws a paral-lel between fascism andcommunism. Book is readby Henry Luce, thefounder of Time Inc., whoasks Drucker to join hisstaff as the foreign newseditor. Drucker turnsdown the job, a life-longpattern of never workingfor a single employer.


1939: Becomes a part-time teacher of economicsat Sarah Lawrence Collegein Bronxville, New York,but is fired shortly afterfor refusing to sign a facul-ty petition in support ofcommunism. States that heis unwilling to give in tothe same kind of intoler-ance and close-minded-ness he witnessed inGermany. Quickly finds anew position as professorof Politics and Philosophyat Bennington College inVermont.1942: Publishes his sec-ond book, The Future ofIndustrial Man, which ispanned by academics.However, it captures theattention of Alfred Sloan,the legendary chief ofGeneral Motors (at thetime the world’s largestcorporation), who invitesDrucker to study GM, astudy that forever changesDrucker’s life.1945: Publishes the seminal Concept of theCorporation, which draws aportrait of GM as both asocial system and an eco-nomic organization. Booksets Drucker on a pathfrom which he neverstrays—that of studyingthe insides of companiesand organizations from theoutside.While GM dis-tances itself from the find-ings in the book, HenryFord II reorganizes FordMotor Company on thetemplate Drucker createdfor GM. Book seals hisreputation as a prescientthinker and consultant tomajor corporations.

Still, Drucker followed his own beliefs, and ulti-mately, his decision to study GM paid off. Theresulting book, Concept of a Corporation, becamehis landmark work and remained in print until1993. Over the long term, it also established amarket for business books, with more than 2,000published annually today. For the project, Druckervisited every GM division and many plants east ofthe Mississippi; he was a fly on the wall at GMboard meetings and had unfettered access tomanagers, executives, and workers. After 18months of research and writing, he published thebook in 1945.

Drucker developed two major themes inConcept of a Corporation. One was the elegance ofGM’s decentralized structure, which allowed it toturn on a dime to respond to the vagaries ofdemand.The other was a thinly veiled appeal forthe automaker to begin treating its workers morehumanely. While these themes appear obviousnow, his findings resonated at the time as theycontinue to today. “[Drucker] puts the sensibili-ties of good management practices in words thatmake other people say, ‘That really does makesense. I can do that,’” notes Wharton’s MichaelUseem. “His ideas are grounded in an exception-al grasp of the realities of daily managers.”

When Sloan assumed control of GM in the1920s, he decentralized the company’s far-flungoperations. Each division was granted significantautonomy from central management, which tend-ed to deal with the larger issues, like negotiatinglabor contracts, providing capital, and setting carprices. This structure allowed the company,the world’s largest at the time, to switch from

building cars during peace time to building tanks,guns, and planes during the war economybetween 1941 and 1945.

While a decentralized structure createdgreater efficiencies at GM, Drucker concludedthat the way the automaker treated workersreduced its effectiveness. GM was the paragon ofassembly-line manufacturing. Drucker argued thatthe monotony of assembling only a small part ofthe finished product put a drag on the workers.Not only did the assembly line adopt the pace ofthe slowest member, but workers also had nosense of pride in the final product.

The book became an instant bestseller in theUnited States and Japan. While GM was slow tochange its labor practices, many other companiesbegan to implement the reforms that Druckerprescribed. Japanese automakers, especially, tookto the team approach in their manufacturingprocesses. Over the next several decades, theybecame renowned for building less expensive butmore reliable cars. Henry Ford II also acknowl-edged his debt to Concept of a Corporation as hereorganized Ford Motor Company on the decen-tralized model. By the 1980s, Drucker was cred-ited for single-handedly moving the majority ofthe world’s largest companies to “radical decen-tralization.”

1950: Druckerbecomes professor ofmanagement at theGraduate BusinessSchool at New YorkUniversity and remainson the faculty until 1971.During this decade, heconsults for industrygiants like GeneralElectric and SearsRoebuck. GE leans heavily on the insights of Concept of theCorporation during itsreorganization.1950s: During the earlypart of the decade, isamong the first to real-ize how computer tech-nology will revolutionizebusiness processes.1954: Publishes ThePractice of Management.The timing of the bookis impeccable; it providesa text that explains howmanagers should runcompanies just as a fas-cination with manage-ment is about toexplode.With the book’spublication, Drucker iscredited by many withtransforming manage-ment into a discipline.



Not everyone, however, has been impressed byDrucker’s decades-long track record. Many in theacademic world see his work as the broad gener-alizations of a glib journalist rather than truescholarship. An academic discipline, they note,should be based on empirical studies and statis-tics. “This is an underestimation of [Drucker’s]method,” says Useem.“He doesn’t just conjure upabstractly what he writes about but draws fromexperience.He has been looking inside companiesand talking to managers. It is not statistics thatcommunicate what management is about, butrather the ability to give a hands-on feel for thereality of managing.”

Over the course of nearly a century, Druckerhas succeeded in elevating management from theunknown to an art that has the potential to trans-form “a mob into an organization, and humaneffort into performance.”

1966: Publishes TheEffective Executive.1975 to 1995: Writesmonthly column for TheWall Street Journal.1971 to present:Drucker is the MarieClarke Professor ofSocial Science andManagement atClaremont GraduateUniversity in California.The university’sGraduate ManagementSchool is renamed in1984 as the Peter F.Drucker GraduateSchool of Management

Leadership LessonAdventures of a Bystander

Peter Drucker has made a nearly century-long career of articu-lating truths about business processes and customs that eithereluded others or simply did not occur to them. His unique gift isthat once he has expressed an idea, it makes others wonder whythey did not think of it themselves. That may help explain whyFortune magazine dubbed him “the most prescient business-trendspotter of our time.”

Since the early 1950s, Drucker has predicted how computertechnology would someday transform the way businesses are run,and coined such terms as “privatization,” “knowledge workers,”and “management by objective.” In 1999, The Wall Street Journalsaid that Drucker “has remained consistently fresh and ahead ofthe times.”

Drucker is often viewed as the person who established the studyof management as a discipline in the 1950s, though some arguethat Marvin Bower, the legendary consultant who helped buildMcKinsey & Co. into a consulting powerhouse, shares at least partof the honor. Over the past decade, however, Drucker has focusedon the emergence of the so-called knowledge worker—employeeswho create products and services based primarily on informationand knowledge. The term,which he first used in the 1950s, is stillin vogue today because it captures a major concern for companiesstruggling to work globally with a workforce that is designingproducts, conducting research, and processing data.

Drucker now teaches a course on increasing the productivity ofknowledge workers. Here, he says, the emphasis is on managingrelationships in “which you are not in command—alliances, part-nerships, contracts, outsourcing. Such relationships are the waythe world economy is going.” Another course he teaches isdesigned to let executives harness the information they need tomake their businesses succeed. He asserts that the way computersand data processing are used in the enterprise today means thatexecutives have less information to work with than they used to.The course therefore concentrates “on the information they needand how to get it,” says Drucker. “It focuses especially on how to


organize the supply of a type of information that is totally absenttoday for executives—information about the world outside thecompany.”

Drucker has fine-tuned his theories to address issues that hehimself brought to light. Drucker says that today he teaches hismanagement students subjects that he barely addressed 10 yearsago, but barely touches the subjects he taught a decade ago. “I nolonger teach the management of people at work, which was one ofmy most important courses, because I no longer think that learn-ing how to manage other people, especially subordinates, is themost important thing for executives to learn,” Drucker says. “I amteaching, above all, how to manage oneself.”

At this stage, Drucker believes that as a business person youhave to “know about yourself—how you have to learn, how toplace yourself, how to take charge of your own work and your owncareer, how to make yourself productive, and so on.”

Drucker was among the first to establish a connection betweenemployees’ productivity and the culture of their corporation.Concept of a Corporation, published in 1946, looked at the way peo-ple worked together rather than how a corporation makes a profit.

“All managers do the same things, whatever the purpose of theorganization,” wrote Drucker in an Atlantic Monthly article in 1994.“All of them have to bring people—each possessing different knowl-edge—together for joint performance. All of them have to makehuman strengths productive in performance and human weaknessesirrelevant. All of them have to think through what results are want-ed in the organization—and have then to define objectives.”

This humanistic approach laid the foundations for his manage-ment theory called “management by objective” which calls foremployees to work with management to develop “meaningfulobjectives based on a thorough understanding of the work.” Thesemeaningful objectives underscore the need for the company tohave a mission and to see what each employee can contribute tothat mission.

Nearly all businesses today pay lip service to being customer-centric, while making a profit remains their highest goal. Drucker,on the other hand, has long held that businesses do not exist to“make and sell things” but rather to “meet human needs.” Many ofthe most successful companies have taken his advice to heart.


WILLIAMGEORGEThe Challenge:Managing a Critical Growth Stage

Most business executives might envy the chal-lenge William George, former CEO and chairmanof Medtronic, says was the biggest one he con-fronted in his 30-year career.

With George at the helm, Medtronic—at thetime a $7.7 billion Minneapolis-based maker ofimplantable biomedical devices—was on a wildlysuccessful run; its market capitalization had risennearly 2000% in seven years. But in 1998, thecompany had reached a critical plateau. George’sdecisions over the next three months wouldeither carry the company to the next level orsend it into a tailspin for the foreseeable future.“On the surface, people might look back and saythings were fine, that the company was just kindof all up, up and away,” says George. “But in fact,things were really turning sour.”

After seven years of explosive growth in thestock market, Medtronic had few prospects insight for short-term growth. Even worse, some ofits business units were in deep trouble. For exam-ple, Medtronic had acquired California-basedMicro Interventional Systems (MIS) for $73 mil-lion in stock in 1995, but was now suing itsfounders for securities fraud, charging that thecompany had misled Medtronic about its financialhealth. George moved aggressively to close the


1942: Born Sept. 14 inMuskegon, Michigan. Hisfather was a managementconsultant; his mothertaught home economicsbefore having children.1964: Graduates fromGeorgia Institute ofTechnology with BS inIndustrial Engineering.1966: Earns MBA fromHarvard Business School.1966: Serves as specialassistant to the Secretaryof the Navy in the U.S.Department ofDefense/Assistant to theComptroller.1969: Joins the privatesector as director oflong-range planning forLitton MicrowaveCooking Products.1973-1978: Serves aspresident of LittonMicrowave CookingProducts.1978: Joins Honeywellas vice president of cor-porate development.1980: Promoted topresident of HoneywellEurope.1983: Promoted toHoneywell’s executive VPof control systems.1987: In January, namedHoneywell’s EVP ofIndustrial Automationand Control; in May,named president ofHoneywell’s IndustrialAutomation and Control;in December, namedpresident of Space andAviation Systems.


operation and absorb its 100 employees. In addi-tion, Medtronic’s vascular business was showingdisappointing results, forcing the company to layoff 600 workers. Altogether, Medtronic took apretax $170 million restructuring charge for clos-ing six vascular plants and shutting down thetroubled MIS unit—the first time the companyhad taken a charge since 1985. Results for thequarter were a penny below analysts’ expecta-tions. The management team—built by Georgeover nine years—was increasingly dispirited, bat-tered by unrelenting pressure from Wall Streetand investors to keep up the outstanding earningsgrowth.

To bring Medtronic out of its funk, Georgeproposed making a series of acquisitions that hethought would transform the predominantlypacemaker company into the world’s leadingmedical technology company with a diverse port-folio. Several board members disagreed with hisassessment and challenged his leadership. Citingthe MIS debacle, they believed that Medtronicshould focus on effectively integrating the eightcompanies it had acquired since 1994. Somedirectors believed the solution was to pull backand hunker down to ride out the decline andannounce Medtronic would not meet WallStreet’s growth expectations.

“I could see years of good work going up inflames if we did that because people would loseconfidence in us as a company,” says George,adding that the retrenching would have also sentthe share price tumbling. “People didn’t realizethat…you could lock the company in a boxbecause you would lose the financial instrumentof the stock to make acquisitions.”

1988: As head of Spaceand Aviation, Georgeuncovers accountingproblems with a unit thatpredated Honeywell’sacquisition in 1986.Theaccounting problems aretagged as the primarycause for Honeywell’s$435 million loss thatyear.1989: Despite beingconsidered a leading can-didate to succeedHoneywell CEO JamesRenier, George joinsMedtronic as presidentand COO.1991: Named CEO ofMedtronic.1996: Becomes chair-man of the board ofMedtronic.1999: Joins the board of Novartis, a Swiss company that, beforeGeorge’s appointment,had directors only fromSwitzerland, Germany,and Austria.2001: Retires as CEOof Medtronic butremains chairman of theboard.2001: Named“Executive of the Year—2001” by the Academy ofManagement.2002: Named “Directorof the Year—2001–02”by the National Associ-ation of CorporateDirectors.

Clearly, the decision to expand by buying morecompanies at this crucial time—given the failuresof recent acquisitions—ran counter to expecta-tions. “We had to strengthen our position withfaster growth markets.” After poring over analyt-ical data and reevaluating his business strategy,George concluded that expanding the companyinto new markets was the right move.“I think, likeall major decisions, it was intuitive,” George says,stressing, however, the distinction between intu-ition and the old “gut feeling.” Intuition, he says, isbuilt on a vast base of knowledge and experiencewhile a gut feeling may involve greater emotionsor passion.

Before he could implement his plan, he had toweather some stiff opposition. Four members ofthe executive committee “were very opposed” tomaking these acquisitions. So over the course ofthree months, George lobbied those on the man-agement team and the board who disagreed withhis strategy and rallied those who stood by him.As the chief executive officer, he decided he notonly had the duty to make the tough decisionsbut also the power and resolve to push throughhis agenda.The team slowly gave him its support.

With one battle behind him, George under-stood his leadership was at a critical juncture.“Leadership is about getting people to follow even though they have their own doubts anduncertainties,” he says. “Military leaders dothat…it’s no different in business.” But unlike thepersuasive power of fear, such as the dread ofbeing court-martialed in the military for disobey-ing orders, George used a softer touch to win theconfidence of those who had questioned his strat-egy. “I did it by being open and straightforward,


2002: Retires as chair-man of Medtronic.Continues to serve onthe boards of Novartis,Target, Goldman Sachs,and several non-profitsand educational systems,including HarvardBusiness School,American Red Cross,Carnegie Endowment forInternational Peace, andMinneapolis Institute ofArts.2003: Publishes bookcalled AuthenticLeadership.Writes anarticle in Fortune maga-zine, which begins:“Thank you, Enron andArthur Andersen andWorldCom andHealthSouth.You wokeus up.The business worldhas run off the rails, mis-taking wealth for successand image for leadership.We’re in danger ofwrecking the very con-cept of the corpora-tion…My generation ofCEOs…began listeningto the wrong people:Wall Street analysts,media pundits, econo-mists, compensation con-sultants, public relationsstaffs, hedge funds, fellowCEOs—all the players in what I call the Game.The Game has stoppedtoday’s chief executivesfrom focusing their ener-gies on their company’scustomers, employees,and—ironically, since theGame is supposed to be all about them—shareholders.”


understanding their issues and concerns and expressing mine,” he says.“Thisis where it is most difficult to be a leader. During those times when you areunder the most pressure, you have to show a sincerity and commitment toget things done with a positive attitude.”

And with that attitude, the plan was set in motion. Over the course of thenext two years, Medtronic went on a buying spree, snapping up six companiesfor about $8 billion, mostly with Medtronic stock. Medtronic acquired Physio-Control International, a maker of cardiac defibrillators, for $500 million;Midas Rex, a powered surgical instruments maker, for $230 million; SofamorDanek Group, which makes computer-assisted visualization products, for $3.6billion;Arterial Vascular Engineering, a maker of vascular technology, for $3.7billion; AVECOR Cardiovascular, which makes cardiopulmonary devices, for$91 million, and Xomed Surgical Products for $800 million.

George did not escape unscathed.Within weeks of closing the ArterialVascular Engineering acquisition, Medtronic realized its new company’smarket share had dropped from the top spot to a distant third and wassuffering from dwindling returns. George was forced to make a pre-announcement—the only one in 13 years with Medtronic. “I listened to 300people beat me up on the phone, some of them even calling me a liar.Thatwas very painful because I have always prided myself on my integrity.”

The episode turned out to be a mere bump in the road. Over the nextfew years, the series of acquisitions helped transform the company, laying thegroundwork for growth in the next decade. Medtronic’s revenues doubledand its market capitalization surged from about $22 billion to $60 billion.Thecompany that started in 1949 as a pacemaker manufacturer now included adiverse portfolio of businesses—from spinal surgery technology to externaldefibrillators and a greater presence in angioplasty.

Asked if he would have handled the challenge any differently, Georgenoted that he would have been more aggressive about tempering WallStreet’s expectations.He would have told them point blank that “not all thesedeals are going to work out. So just face it.”

Looking back, the challenge also allowed George to examine his own lead-ership abilities. He discovered he possessed one particular quality that canbe both an asset and a liability.“I learned that people would follow me if I hadthe courage to go forward with confidence,” he says. “People realized I wasdecisive and strong-willed and if need be, I would make the decision and

carry them with me.” He added, however, that the same quality can also leadto trouble.“It’s called hubris.There is that risk of having too much confidencein your ability, and going forward in spite of the wisdom of people telling youotherwise. So you have to make those tradeoffs.”

In addition, lessons learned from one situation often don’t transfer to oth-ers, yet there is that temptation to keep applying the same solution. “Thebiggest danger for leaders is they remember that they had great success andthey try to replicate it,” says George. “And it doesn’t replicate well becauseconditions are never the same.”

Leadership LessonIn Search of Authentic Leadership

A crucial trait of successful leaders, as we noted earlier in this chap-ter, is their ability to detect humbug, or the absence of truth-telling.One occasion when William George demonstrated this ability was in1998, when he met with a so-called superstar CEO to discussMedtronic’s possible acquisition of a medical equipment company.When the meeting began, the high-profile, charismatic CEO boastedabout how his company paid no taxes in the U.S. because its head-quarters were offshore, how he shut down all projects and investmentsthat didn’t pay back in one year, and so on. As George listened to thebragging, he realized something was wrong. At Medtronic, no proj-ect had ever paid back in a single year. After some 20 minutes, Georgeleft the meeting and walked away from the deal. “That’s it,” he saidto himself. “We’re not going to do any business with these peoplebecause we can’t trust them.” George’s instinct was spot on: Thatsuperstar CEO was later indicted for fraud.

George, who retired from Medtronic in 2002, sees such incidentsas part of a wider malaise that felled companies such as Enron,WorldCom, and Tyco. The remedy, he argues, lies in the develop-ment of authentic leadership, a concept that is closely related totruth-telling. Authentic leaders, says George, are “those who arecommitted to a purpose or a mission; people who live by their val-ues every day and who know the true north of their moral compass.They lead with their heart, not just with their heads, and have com-passion for the people they serve. They do so with the discipline



and commitment to get great results, not just for their sharehold-ers, but for all their stakeholders, including their customers, theiremployees, and the communities they serve. This sounds old fash-ioned and yet almost revolutionary.” So strongly does Georgebelieve in the importance of these principles that he literally wrotethe book on the subject, titled Authentic Leadership.

The need for authentic leadership has arisen, says George, becauseduring the past few years both the values of corporations and theincentives by which CEOs are rewarded have gone awry. More andmore companies have been focusing on shareholder returns as theyardstick for success, rather than considering the broader needs ofother stakeholders, including customers and employees.

As George writes in the introduction to his book, in recent years“Instead of traditional measures such as growth, cash flow, and return on investment, the criterion for success became meeting theexpectations of the security analysts. Investments were cut back toreach earnings targets, limiting the company’s growth potential.Driven by speculators and security analysts, expectations kept rising,just as companies were struggling to make their numbers. Companiesthat met or exceeded the “magic” earnings number were handsomelyrewarded with ever-rising stock prices. Those that fell short, even ifthey recorded substantial increases, were inordinately punished, andshareholders demanded replacement of the CEO. No wonder manyCEOs went to extreme measures to satisfy shareholders!”

George argues that authentic leaders have character rather thancharisma. Moreover, they breathe and live the five dimensions thatendow leadership with authenticity. First, they are committed to apurpose. In his own case, George says, he knew from the time heleft high school that he had to use his abilities to make a differencein the world, but “it took me 20 years to find out where and how.It wasn’t until I got to Medtronic that I felt, ‘Okay, I’m here.’ Thisis the place I am meant to be.” Second, authenticity requires thatleaders live by their values—and not just pay lip-service to them.For example, former Tyco CEO Dennis Kozlowski, who has beencharged with some associates of looting his company of $600 mil-lion, was once asked after a business-school speech what the sourceof his success was. “Integrity,” he replied. “Almost every leader willsay, ‘We have really good values,’” George states. “But if you are

going to proclaim a certain set of values, you better be darn wellprepared to practice them. Above all, always be consistent withwhat you say you can do, even if sometimes you fall short or fail.”

There have been times, George says, when he himself has fallenshort of his values. For example, when he was at Medtronic, he onceappointed a person to head the company’s European operation. “Ifelt he was a really good businessman,” George says, “and I didn’tcheck out his values closely.” Despite his colleagues’ misgivings,George was adamant and went ahead with the appointment.“About four months later, I had the head of internal audit and gen-eral legal counsel in my office telling me this person was runninga secret promotion fund on behalf of Italian doctors through a Swissbank account. It became a very, very painful situation. I had to firehim the next day, but then we had a lot of recovery to do in Europe.It was all because I promoted the wrong person for the wrong reasons. I didn’t check out his values closely enough.”

Leading with the heart is the third dimension of authentic lead-ership, George says. “Too many leaders think they can lead strictlywith their head.” Their response to problems is to try and thinkthem through. “They don’t open themselves up to other people,and so they don’t engender a sense of passion and response in otherpeople. And because they are too cerebral, though they are reallyengaged, they don’t express compassion for their employees, theircolleagues or their customers. They are just too hardened. They losea lot in their employees because they cannot express themselves.”Leaders who lead from the heart, in contrast, engage with theirconstituents’ hearts and minds, though they also make themselvesmore vulnerable by opening themselves up to their colleagues.

Fourth, George maintains that authentic leaders build deeprelationships—not just casual, superficial ones but strong, long-lasting bonds. In his own case, he cites his relationship with thehead of Medtronic’s pacemaker business. “He called me one dayfrom the hospital and told me that his estranged son, whom hehadn’t seen for three years, had just shown up. He was at the hos-pital because his son had terminal stomach cancer. And so I wentdown to the hospital. I didn’t tell him I was coming, I just got inmy car and drove down there and met him. It was an extremelytraumatic time in his life, but the interaction was a very intimateone. We hugged, and we talked about it. The fact that I did that


when I had to be very demanding of him in the business carried alot more weight than anything else I might have done.”

The impact of all these attributes can be dashed unless leaderspractice the fifth dimension of authentic leadership—self-discipline. “None of this matters unless we take our beliefs andphilosophies and put them into action with discipline,” saysGeorge. “That places a lot of pressure on us as leaders because weare always up on a pedestal. We have to demonstrate self-disciplinein all our actions. If we don’t, it becomes hypocritical. We end upsaying one thing and doing another. Self discipline is about takingall these ideas and translating them into tangible results. If youdon’t do that, what good is it all?”


73

Identifying anUnderserved Market

4

The most successful companies of the last 25 years haven’talways been based on radically new products or technologies.Some have sprung from their leaders’ ability to identify and caterto markets that were emerging but whose needs had not yet beenidentified. Vanguard Group founder Jack Bogle sold index fundsdirectly to shareholders who previously had been charged highsales commissions and management fees; Charles Schwab, throughhis San Francisco-based discount brokerage, gave “Main Streetaccess to Wall Street;” and Muhammad Yunus, founder ofGrameen Bank, set out to “break the cycle of poverty” in hisnative Bangladesh by making loans to very poor villagers, therebyenabling them to become self-supporting entrepreneurs.

These leaders succeeded because the new markets they identi-fied sustained demand for their product or service. Customerswhose needs had never been met began to thrive and prosper, asdid the companies serving them. The lesson that aspiring leaderscan learn from their example is not to focus just on the dominantor most profitable markets of the day; these are obvious to all andare likely to attract enormous competition. By identifying under-served markets (or niches) and customers (or segments) that no one else is targeting, companies can enter new areas and developsuccessful businesses long before their competitors.


Chapter 4 Identifying an Underserved Market 75

JOHNBOGLEThe Challenge:Setting Up a New Kind of MutualFund Company

During the stock market’s go-go era in the 1960s,it seemed that investment managers could do nowrong. But the bubble popped in 1973 and stockprices fell by nearly 50%.Wellington ManagementCompany, a mutual fund manager in Philadelphia,saw frightened investors withdraw $300 million as Wellington’s share price plummeted. Early in 1974, the firm’s board terminated its CEO,John Bogle.

“I think it’s pretty clear that the biggest busi-ness challenge you can face is what to do whenyou are fired,” Bogle says three decades later.His response: Use common sense and—as heputs it—a touch of “disingenuousness” to con-vince the board to form a new type of mutualfund company and to hand over control.

Bogle, who joined Wellington fresh out ofPrinceton in 1951, was named CEO in 1967. Tobroaden the company’s offerings, he had engi-neered a 1966 merger with Thorndike, Doran,Paine and Lewis Inc., a Boston equities manage-ment firm. Now these partners had pushed himout. But Bogle was not entirely unemployed. Inaddition to running the management company, hewas chairman of the Wellington Funds, the familyof mutual funds run by Wellington Management.This job he kept.

1929: Born in Montclair,New Jersey. His father,William, was an execu-tive with American CanCo., which had been co-founded by William’sfather, who also foundedAmerican Brick Corp.Bogle’s mother,Josephine, was a home-maker.The 1929 crashdestroyed the family’sinheritance and Boglerelied on scholarshipsfor prep school and college.1949: As a Princetonstudent, Bogle becomesaware of the mutual fundindustry after stumblingacross an article inFortune magazine.1951: Bogle completes140-page senior thesis,The Economic Role of theInvestment Company,arguing fund companiesmust operate solely forthe benefit of theirinvestors, not the invest-ment managers. Heexamines the benefits ofindex-style investing andkeeping fund manage-ment costs low.1951: Walter L. Morgan,founder of TheWellington Fund in 1928,reads Bogle’s thesis andhires him upon gradua-tion. Bogle rises in mar-keting and administration,not money management.1956: A federal courtruling permits fund man-agement firms to bebought, sold, or takenpublic. Bogle sees this asthe beginning of the fundindustry’s decline from a customer-orientedprofession to a profit-oriented business.


Since his college days, Bogle had been both-ered by the conflict of interest inherent in manyfund operations. Mutual funds are corporationsowned by the ordinary people who buy fundshares to invest for retirement or college. Butfunds typically use outside money managers toselect the stocks and bonds held by the fund.Those management companies also handle theadministrative, marketing, and distribution func-tions for the funds they serve.Though the fundsand their management companies are legally sep-arate entities, in most cases, the fund company’sboard is dominated by executives from the man-agement company. Income for the managementcompanies comes from fees charged as a per-centage of each fund’s assets; the bigger the fee,the more it hurts investors’ returns.

Bogle had long argued that funds and theirmanagement companies should have ethical stan-dards like those of the legal and medical profes-sions, based on an obligation to put the investors’interests first. Funds should constantly look forways to reduce fees, not excuses to raise them.“All things considered, it is undesirable for pro-fessional enterprises to have public shareholders,”he told the board in the early 1970s.

The day after being fired, Bogle formally pro-posed a change to the fund board that he had firstsuggested several years earlier. The funds should“mutualize” by purchasing the management com-pany from the group of investors that owned it,he says. Because the funds themselves are ownedby the people who invest in them, the manage-ment company would be owned by the funds’ordinary investors, eliminating the manager-investor conflict. Fund investors would be ownersas well as customers.

1960: WellingtonGroup goes public at$18 a share.1965: At 35, Boglebecomes executive vicepresident of Wellingtonand heir apparent toMorgan.1966: Bogle engineersmerger of WellingtonManagement Companywith Thorndike, Doran,Paine and Lewis, anaggressive stock man-agement firm in Boston.The goal is to endWellington’s over-reliance on a single fund, find a way to offeran aggressive stock fund, and bring the firmgreater investment management talent.1967: Bogle becomespresident and CEO ofWellington ManagementCompany, which man-ages the WellingtonFunds.1971: Arguing that “aman cannot serve twomasters,” Bogle suggestsWellington Funds con-sider acquiringWellington Management.Fund managers have afinancial stake in seeingmanagement fees rise,while fund investorsbenefit when they arelow.The “mutualization”Bogle proposed wouldput managers under thefund investors’ control.No action is taken onthe proposal.1973-1974: The go-goera ends and stockprices fall nearly 50%.


The Wellington Funds board was less thanenthusiastic about the proposal, but six monthslater, it gave Bogle part of what he wanted. A newcompany, The Vanguard Group, was formed as awholly owned subsidiary of the Wellington Funds.Vanguard’s only role, however, was mundaneadministrative chores, such as keeping records ofcustomers’ accounts. Asset management—thebuying and selling of stocks and bonds for thefunds—was forbidden. Vanguard was also barredfrom distribution—the selling of fund shares toinvestors. Those more essential duties remainedwith Wellington Management. “So I had lost,”Bogle says.“I called it a Pyrrhic victory.”

He didn’t give up. “It was clear to me thatwhat you need to build a fund company is con-trol over how the funds invest—what kinds offunds you have, how they invest, and how theyare distributed.”

For more than two decades, Bogle had beenintrigued by the idea of index funds. Instead ofemploying teams of expensive analysts and stock-pickers, an index fund would simply buy and holdthe issues in a market gauge, such as the Standard& Poor’s 500. Over time, the law of averagesmeant that few actively managed funds could out-perform the indexes. Indeed, the high fees andexpenses incurred by managed funds typicallycaused them to trail the passively managed indexby 2 to 3 percentage points a year. So a fund mod-eled on the index, and charging very low fees,could beat most managed competitors most ofthe time. It could offer investors far superiorreturns when that annual edge was compoundedover many years.

1973: Wellington fundssuffer cash outflows of$300 million, comparedto $280 million inflow in1967.WellingtonManagement’s sharepriceplummets.1974: Bogle urges thefunds board of directorsto mutualize the fundsby purchasing WellingtonManagement Company,which has a separateboard. Fund directorsask for details. Bogle isfired as CEO ofWellington ManagementCompany. Remainschairman of theWellington Funds, whichhas a separate board.Bogle convinces funds toform Vanguard Group,but directors limit itsrole to administration,barring fund manage-ment and distribution.1975: After receivingSEC approval,Vanguardbegins operation aswholly owned subsidiaryof Wellington Funds.1976: Initial publicoffering completed forVanguard’s first indexfund, which tracks theStandard & Poor’s 500stock index. Only $11million is raised. Sinceindex funds are notmanaged, the fund doesnot violate Vanguard’smanagement prohibition,Bogle claims.


1977: Fund boardaccepts Bogle’s recom-mendation to convert toa no-load system by end-ing distribution agree-ment with WellingtonManagement, eliminatingsales charges and ceasingfund sales through brokers. Henceforth,investors can deal directly with Vanguard.1980: Vanguard assetsunder management reach$3 billion.1981: The SEC formallyrules Vanguard canengage in distribution,ending four years of dis-tribution under tempo-rary permission.Vanguardtakes over managementof the bond and moneymarket funds.1985: Vanguard assetsreach $15 billion.1993: Vanguard assetsreach $121 billion.1996: Bogle steps downas Vanguard CEO. Amonth later receives aheart transplant.1997: Vanguard assetsreach $300 billion.1999: Bogle retires fromVanguard’s board ofdirectors. After retiring,founds the BogleFinancial MarketsResearch Center. Boglebecomes a public speak-er and writer, promotinglow-cost, index investingand often criticizing fund-industry practices.2000: The Vanguard 500 index fund, the company’s first indexer,becomes the largest fund in the world.

Soon after Vanguard was formed, Bogle wasback before the board asking it to create an S&P500 index fund. “It seemed to me that would bea great entrée into investment management,”Bogle says. “When the directors said I wasn’tallowed to get into investment management, Iargued the fund wouldn’t be ‘managed.’” Managedfunds constantly seek new investments, and theytypically change their entire portfolios every year.An index fund, he said, would just buy the stocksin the underlying index and hold them for thelong term.

“This was a way to basically sneak into thefield of investment management…They approvedit. They didn’t really want to, but they did becauseI persuaded them that it was not ‘management,’”Bogle recalls.

Next, he went after the distribution operation.Ever since the Wellington Fund’s founding in1928, the funds had been sold to investorsthrough stock brokers, often with “loads,” orcommissions, as high as 8%. After paying anupfront load, the investor started out in the redand had to earn that much just to break even.Thealternative, still rare in the 1970s, was to bypassthe brokers and sell directly to the public, charg-ing no commission.

“I argued that we should go no-load, andWellington Management didn’t want to go no-load,” Bogle says. Unfortunately, WellingtonManagement was still controlling distribution ofthe funds, and Vanguard was prohibited from thatrole. “I argued we weren’t going into distribution,we were eliminating distribution,” Bogle says.Again, the board acquiesced, and by the end ofthe summer in 1977, Vanguard had control of the


2002: Vanguard’s weight-ed expense ratio—theportion of fund assetsspent on managementand other fees—falls to0.26%, from 0.67% in1975. Expense ratios formanaged funds averageabout 1.3% throughoutthe industry.2004: Vanguard fundsassets total $700 billion,up from $1.4 billion in1974.Vanguard is thesecond largest fund complex, behind FidelityInvestments of Boston.Vanguard’s market shareis 9.2%, up from 3.5% in 1974.

fund management and the no-load distribution.“We were the full-fledged complex we aretoday,” he notes.

Vanguard’s S&P 500 index fund grew tobecome the largest fund in the world, with assetsof about $96 billion early in 2004, and it inspireddozens of imitators.Vanguard and other compa-nies also created a host of funds tracking otherindexes. By 2004, Vanguard was the country’ssecond largest fund complex, with some $700 bil-lion under management in 161 funds and about10,000 employees.

After retiring in 1999, Bogle devoted himselffull-time to writing and speaking about conflictsof interest and excessive fees in the fund indus-try. “There’s a tendency as we get older to loseour idealism,” he says, “Don’t do it. It’s the mostvaluable characteristic you have…I think minegets stronger all the time.”


Leadership LessonAn Index for Successful Investing

Ever since his undergraduate days at Princeton, Jack Bogle hadbeen interested in research that showed the average money man-ager could not compile a portfolio that would consistently beatthe overall market. If this were the case, the best mutual fundswould be those that charged customers the lowest fees, becausefees deducted from fund assets undermined performance. At thetime Bogle formed the Vanguard Group in the mid-1970s, mostfunds were sold through stockbrokers who charged hefty upfront“loads” or sales commissions. In addition, the funds themselvescharged substantial fees to pay their analysts and other employees,and to provide profit for the management company.

Bogle saw an underserved market: cost-conscious investors whomight welcome the opportunity to buy index funds that wouldtrack the overall market and charge very low fees. To eliminateloads, Vanguard would sell funds directly to shareholders. Insteadof outsourcing fund management to an expensive external man-agement company, Vanguard would take over this role itself. Mostfund companies are privately held or run as public companiesbeholden to shareholders. Vanguard would be owned by the peo-ple who invested in its funds, eliminating the conflict of interestbetween customers and owners. By making Vanguard a mutualcompany, owned by its investors, Bogle would be puttinginvestors’ interests first. “You can say that was callow college ide-alism. Or you can say it was vision that created Vanguard,” saysBogle. “It’s probably more of the former—idealism that just stuckwith me all those years. It’s also common sense.”

To cater to underserved markets, Bogle had to come up with aninnovative pricing strategy. Long before the Internet changed theway people shop, Bogle was thinking about price, value, and cus-tomer service. In the 1950s, ‘60s, and early ‘70s, experience and a study of the academic research confirmed his view that very few money managers were good enough to pick stocks that couldconsistently outperform the broad market. This fact formed thecornerstone of Bogle’s low-price strategy at his mutual fund com-pany, The Vanguard Group. “None of it required any particularbrains,” Bogle says. His approach, he adds, “took a little common

sense, knowing that in the financial markets gross return minuscost is net return. Therefore, the lower your cost, the higher yournet return.”

In part, Bogle’s strategy depended on his educating investorsabout the poor performance of the average, actively managedfund—then selling to this more knowledgeable class of buyers. Itis a never-ending process because traditional, high-expense fundsare always tempting customers with ads based on high, short-termperformance. “Investors seem largely unaware of the substantialgap by which stock, bond, and money market funds lag the returnsof the markets in which they invest,” Bogle wrote in a July 8,2003 op-ed piece for The Wall Street Journal. “While the Standard& Poor’s 500 stock index has risen at a 12.2% average annual ratesince 1984, for example, the average equity fund has grown at a9.3% rate, only three-quarters of the stock market’s return…Whataccounts for these shortfalls? They are largely created by the costsincurred by mutual funds.”

“In 2002, the average expense ratio for equity funds reached anall-time high of 1.6% of fund assets,” he wrote in the same article.Trading commissions and other costs related to the high level ofbuying and selling in actively managed funds increased expensesanother 0.8 percentage points. With miscellaneous expensesincluded, total costs averaged nearly 3% of assets. However, atVanguard’s flagship S&P 500 index fund, the expense ratio was0.18%—just over one-tenth that of the average stock fund indus-try-wide. Because index funds operate, essentially, on autopilot,with very little change in holdings, commissions and other expens-es are low as well. Such funds also enjoy a tax advantage becausethere is little of the turnover that triggers capital gains taxes. Tofurther minimize costs, Bogle decided the funds would be solddirectly to investors without the “loads” or sales commissions,often as high as 5% of an investment, charged by funds soldthrough stockbrokers.

For Bogle, credibility is a big reason for Vanguard’s success.“Create an identity, a company that stands for something…Andwhen you make promises to the crew [Vanguard’s term for itsemployees], deliver. When you make promises to investors, deliver.If people can trust you…you’re never going to have trouble,” he says.


Speaking at Vanguard’s 25th anniversary ceremony onSeptember 24, 1999, Bogle summarized the company’s identity ina single word: “Stewardship: The one great idea that explains whatVanguard is, who it is, and what it does. Serving the shareholderfirst; acting as trustee, in a fiduciary capacity. Mutual funds of theinvestor, by the investor, for the investor.” The same themes char-acterize Bogle’s many public speeches, articles, and letters tonewspaper editors—earning him the nickname “Saint Jack,”which is not always used admiringly by his competitors. In retire-ment, he has carved out a role as fund industry gadfly. Most of hiscriticisms of the industry—that fees are too high, for example—serve to enhance Vanguard’s brand as the low-cost leader.

“Bogle had this incredibly compelling vision that made suchperfect sense in an industry that was so resistant to it,” saysWharton’s Peter Cappelli. What’s astonishing, he adds, is that“nobody had tried this index approach before.” Bogle pulled it offbecause he was “enough of an insider to be able to start an invest-ment company and yet willing to be an outsider in his approach.”In addition, Bogle brought science to this industry, Cappelli says,referring to research studies that show managed funds rarely beatindex funds over long periods, and also to analyses of the corrosiveeffect of high fees on returns.

All of these cost savings are possible, Bogle says, becauseVanguard is a mutual company owned by the people who invest inthe Vanguard funds. “I guess the lesson would be to capitalize onyour innate advantage,” he suggests. “Make your product propri-etary. Stake out some ground that other people can’t afford to dealwith. That’s been a big part of Vanguard’s success—we don’t havelow-cost competitors.”

Bogle’s strategy of long-term investing based on low costshelped the Vanguard Group build an image as the mutual fundindustry’s good guy—an image that can be especially valuable inperiods of turmoil and scandal in the financial services industry.He constantly reminded his employees of the Vanguard mission,pounded away at the basic message in every public forum he couldfind, and reaffirmed the company’s commitment to core principlesin annual letters to investors. And when he felt that his peers hadlet him down, he didn’t hesitate to castigate the offenders. “By our


failure to act as good corporate citizens, this industry shares muchof the responsibility for the great stock market bubble,” Boglewrote in a July 8, 2003 piece in The Wall Street Journal. “In thelong run, this industry will grow only as fund shareholders aregiven a fair shake, not only in costs and disclosure, but also in hav-ing truly independent directors who place [investors’] interestsfirst. Truth [be] told, this industry needs a change of heart.”



CHARLESSCHWABThe Challenge:Getting Out from Under All the Paper

By the mid-1970s, Charles Schwab was best-known for chipping away at the dominance ofbutton-down Wall Street investment houses withhis discount brokerage firm. But it seemed thatCharles Schwab & Co. would remain a small-time,regional broker, more of a nuisance than a chal-lenge to the full-service brokerages.The problem?The company was getting buried—not by thecompetition—but by paper.

All brokerages faced a similar situation, althoughthe established houses had legions of clerks sortingand managing transaction and order receipts. Thehighly regulated securities industry needed to fillout a form for every small or big trade order ortransaction. The Securities and ExchangeCommission (SEC) and the New York StockExchange (NYSE) mandated specific standards onhow to record, manage, and archive the paper trail.

To keep up with trading volume, the Schwaboffices were rigged with a three-track conveyorbelt over which orders moved in one directionand confirmations moved in another.When tradeorders poured in, the volume of paper sometimesclogged the belt and brought the office to astandstill. Schwab employees used something akinto a plunger to unplug the jam.

“We were just getting buried in paper,” saysSchwab, who hired Bill Pearson, a technologywhiz, in 1975 to help overhaul how the company

1937: Born inSacramento, California.His father was the dis-trict attorney in a smallfarming community out-side Sacramento; hismother was a housewife.1949: At age 12, startsraising chickens, which helater describes as his“first fully integrated ven-ture.” He sells the chick-ens’ eggs, then sells theirmanure as fertilizer andthen, after a chicken nolonger lays eggs, sells thebirds as food.1950-51: Becomesinterested in the stockmarket and begins toread The Wall StreetJournal.1959: Graduates fromStanford University witha bachelor’s degree inEconomics. Because ofdyslexia, almost flunksout during the first twoyears, struggling in cours-es that require reading,like English and history,but excelling in subjectsthat involve numbers, likemath and economics.1961: Earns an MBA atStanford Business School.1963: With two part-ners, launches “InvestmentIndicator,” an investmentadvisory newsletter. Itreaches about 3,000 sub-scribers at an annual sub-scription cost of $84.1971: Schwab borrows$100,000 from an uncleto launch First Com-mander Corp., a tradition-al brokerage.The ventureruns into trouble with theSecurities and ExchangeCommission over a tech-nicality involving registra-tion requirements.


1973: Schwab renamesthe venture CharlesSchwab & Co. after buyingout his partners and con-cluding that old banks andbrokerage houses on WallStreet have widespreadinefficiencies that theyexploit to charge evenhigher commissions totheir customers.1974: Gets his big breakwhen the SEC mandates a13-month trial period forderegulating some broker-age transactions. Seizesthe chance to build a newtype of investment house:the discount brokerage.1975: After 13-monthtrial period, the SECapproves a new commis-sion structure, markingthe official birth of the dis-count brokerage industry.Schwab awarded seat onThe Pacific Coast StockExchange.1976: Schwab becomeshis own pitchman, posingin shirt and tie to repre-sent the face of the dis-count broker. Begins toexperiment with techno-logy to smooth awaysome of the traditionalinefficiencies. Implementsthe Bunker Ramo System7 to deliver stock quotesdirectly to customers.1979: Invests in the BETAmainframe system.Theeventual success of thisautomated transaction andrecord-keeping systemshows Schwab that tech-nology will be the keygrowth driver.

conducted its paper-intense business. “I realizedwe could never progress beyond that limitationwithout adopting a technology solution.”

Against this backdrop, Schwab made a “bet-the-company” move to computerize the transactionorder process—a step that helped grow the dis-count brokerage into a real threat to Wall Streetand laid the foundation for the company’s repeat-ed success in harnessing new forms of technolo-gy.The move, however, was fraught with growingpains as glitches and technical problems made thecompany even more vulnerable.

Pearson “scoured the earth,” says Schwab, tofind a computer system that would allow a brokerto make trades without generating the piles ofpaper needed to satisfy the SEC and the NYSE.Pearson found a software outfit in Milwaukee,Wisconsin, that had developed trading softwarethat could be customized to fit Schwab’s needs.This early back-office software, however, ran onmainframe computers, the giant systems that tookup an entire room and cost a small fortune to buy.Schwab purchased a used IBM 360 mainframecomputer and software for $500,000—“my entirenet worth” at the time, says Schwab. “It was agiant step and a huge risk.”

The new technology allowed Schwab’s brokersto take orders over the phone and enter themdirectly into the computer using desktop termi-nals.The order would go off electronically to thestock exchange where it would be executed,eventually returning a confirmation to the brokerwho then relayed it to the client.The technologywas revolutionary, allowing Schwab to brokerhigher and higher transaction volumes at a frac-tion of the paper-based cost. “Most firms didn’tget there until 10 years later,” he says.

But the company didn’t immediately realizeany benefits from the purchase. The used IBMmainframe, for example, did not integrate wellwith the brokerage back-office software. “It wasa mistake,” says Schwab, who turned to IBM forassistance. The computing giant offered to leaseSchwab a brand new IBM 370 mainframe com-puter and help integrate the software.The resultwas a more reliable system.

The company’s difficulties in shifting to technol-ogy, however,were far from resolved.“We had a lotof hiccups,” remembers Schwab.“It was a little likecell phones are today—the way they go downevery few blocks.” Schwab says his initiative mayhave been just a little ahead of its time because theexisting telecommunications network was not builtfor this particular use. The glitches and customercomplaints kept mounting.Whatever savings weregenerated by reducing paperwork were lost inreimbursing delayed trades and transactions.

The technology initiative even doomed CharlesSchwab’s chances of going public in the early ’80s.At the time, the company was the largest discountbroker in the country, with 20 branches and near-ly 100,000 customers. Schwab was hoping to raiseabout $4.8 million for capital expansion by floating1.2 million shares.When the company registeredwith the SEC in 1980, Wall Street became privyto the extent of trouble the discount brokeragehad to put up with during its technology upgrade.The prospectus showed that in the first sixmonths of 1980, the company had to fork overnearly 11%, or $1.1 million, of its total commissionincome of $10.4 million to cover bad debt andexecution errors at a time when the average errorrate for New York Stock Exchange members wasa low 1.4% in comparison.

1980: Schwab touts hiscompany as “America’slargest discount broker-age” with a “state of theart computer system.”Now has 23 branchesbut still has trouble rais-ing capital from banksand venture capital firmswho see the company asa threat.1981: Opens first officein Manhattan andbecomes a member ofthe New York StockExchange.1983: Still hard pressedfor capital, agrees to sellto Bank of America,which pays $57 millionfor the company and its500,000 accounts.1984: Introduces theEqualizer, a DOS-basedapplication online trading.1985: With one milliondiscount brokerageaccounts, begins to chal-lenge Wall Street closerto home by introducingVIP Services andInstitutional Brokerage.1987: Unhappy withBank of America’sbureaucracy, Schwab pays$280 million to buy backthe company he started.1987: Takes the compa-ny public, selling 8 millionshares at $16.50 pershare.



Charles Schwab’s own books provided the full-service brokerages with the firepower to dispar-age discount services and warn clients to stick toWall Street’s reliability. In its prospectus, the com-pany blamed its woes on the new electronicorder processing system, which was constantlybreaking down during periods of heavy trading.The error rate was pegged at 3.4% in 1978, risingto 5.4% in 1979 and soaring to 10.5% in the firsthalf of 1980.

“It was a pretty painful three or four months.We had some bad publicity at the time,” saysSchwab, who traveled from office to office tryingto instill a sense of confidence in his employees.“Ibecame a cheerleader, assuring people that thingswould get better—and it did get better.”

Having grown up on the West Coast, Schwab—a graduate of Stanford University, located in theheart of Silicon Valley—had an affinity for tech-nology and sensed its immense possibilities.As anearly adopter of technology, he knew he would berequired to surmount obstacles not faced by oth-ers. “You’re never going to introduce a perfectsoftware solution. Any software or system youinstall will have setbacks and glitches,” saysSchwab.“You just get in and fix them.”

Indeed the outlook began to improve as thecompany worked the kinks out of its BrokerageExecution and Transaction Analysis (BETA)system. Suddenly, each Schwab broker could han-dle a greater number of trade orders while thesystem did much of the background work, includ-ing checking open orders, calculating margintrades, and moving cash from trading accounts tomoney market funds. The company’s costs fellwhile its efficiency and accuracy in processingtrades rose.

1987: In October, stockmarket crashes.Customers struggle todump stock through thecompany’s trading systembut fail to get through.Company survey findsthat customers had cometo think of the brokerageas a “cold transaction”company rather than theoriginal friendly neighbor-hood brokerage. Schwabinstitutes a policy of sur-veying customers aftereach trade to determinetheir satisfaction, basingbonuses for brokers onthe findings.1993: Continues toexperiment with the electronic world,replacing the Equalizerwith StreetSmart onlinetrading.1995: LaunchesSchwab.com, pegging thecompany’s future toonline trading. Establishesa dedicated ElectronicBrokerage EnterpriseGroup inside the company.1997: Forms allianceswith former competitorsCS/First Boston, J.P.Morgan, and Chase H&Qto give Schwab customersaccess to IPOs.The company increasinglyresembles its Wall Streetcompetitors in marketvalue and services.1997: Forbes magazinenames Schwab “King ofOnline Brokers.”


Wall Street nervously took notice and slappedthe upstart with yet another major hurdle to itspaper-less trade system.This time, the NYSE saidBETA’s paperless order tickets violated theexchange’s rule requiring its member organiza-tions to save paper tickets for seven years. Sincethere were no paper tickets generated by BETA,the NYSE refused to certify Schwab’s system.

Schwab fought back by exploiting the wordingof the regulation. The company insisted that therules required the member firms to only savepaper tickets but did not require them to writepaper tickets.The NYSE had taken it for grantedthat brokers would have to write paper ticketswhile Schwab leapfrogged over the entireprocess.The exchange acquiesced and the ordersbegan to flow into Charles Schwab’s mainframe.

Sensing the inevitable—and watching asSchwab’s trading volume soared while costsplummeted—other brokerage houses in the early1980s also began migrating from their paper-based procedure to computerized systems. ButSchwab had taken an early gamble that positionedhis discount brokerage years ahead of his dis-count brokerage competitors as well as WallStreet. The move also established a technologyparadigm—a comfort level with technology—within the company as well as for its clients.Schwab continued to seek ways of using existingand emerging technologies to revolutionize thesecurities industry. In the years ahead, he wasamong the first to give his clients the ability tobypass a broker completely by connecting direct-ly to Schwab’s systems to place trades—a precursor to Internet trading.

1998: Schwab reaches amilestone.The discountbroker’s market capital-ization exceeds that ofMerrill Lynch at the endof trading on December28, standing at $25.5 bil-lion compared to MerrillLynch’s $25.4 billion.1999: The companyintroduces SchwabSignature Services foractive and affluent traders.It hopes to stop individu-als from jumping to asset-management firms astheir wealth grows and to attract wealthy clients,Schwab acquires U.S.Trust. Schwab now com-peting on two fronts,against the high-end assetmanagement Wall Streetfirms and against thegrowing number of onlinetrading firms that haveslashed commissions tonew lows.2000: Company reaches$1 trillion in assets.Atthe height of the technol-ogy boom, Schwab intro-duces PocketBroker, awireless investing service,hoping to capture traderswhen they are away fromtheir desks. Companyalso acquiresCyberTrader (formerlyCyBerCorp) to serve itshigh volume onlinetraders more effectively.2001: When the stockmarket meltdown occurs,Schwab succeeds in han-dling the trading volume,but earnings begin to suffer as investors steerclear of the stock market.Company lays off 6,505employees and re-evaluates its low commis-sion, transaction-basedmodel.


“This was the major stepping stone in the earlydays of the company,” says Schwab. “If I had nottaken a chance on technology, we would neverhave been able to create all the other technology-driven opportunities for our clients.”

2003: Schwab resignshis post as co-CEO butremains chairman.2004: During the firsthalf of the year, companyreports that net incomerose 33% in 2003 to$472 million. Clientassets rose to one trillion in February.However, trading volume, a barometer of overall well-being,continues to fall.2004: By July, tumblingtrading volume andintense competition fromnimbler Internet-basedrivals exacerbate compa-ny’s financial outlook.Stock price continues toslip, dropping 27% for theyear by mid-summer.Chief executive DavidPottruck is ousted andCharles Schwab is draft-ed to rejuvenate thecompany he founded.With Schwab as CEO,company announcesdecision to close 53branches (16% of total339 branches) in effortto cut $150 million–$200million in expenses.

Leadership LessonThe Best at Fair Value

Charles Schwab, like Jack Bogle, was also out to shake up thefinancial services sector. Until the mid-1970s, there was really justone way to invest in the stock market: a broker at a full-servicebrokerage firm would recommend a stock to buy and would chargeabout $225 for the transaction as a commission. “Fundamentally,at that time, most people thought that individual investors weresold stocks; they didn’t buy them,” recalls Schwab. Wall Street, headds, was in the business of generating commissions by “creatingstories” to convince people to make these purchases.

In 1975, the Securities and Exchange Commission changed along-standing law that had required Wall Street to charge fixedbrokerage fees. Yet, while the revised law now allowed firms tooffer discount fees, the securities industry had no intention ofreducing commissions just because the law permitted it. Schwab,however, saw an opportunity to revolutionize the system by allow-ing investors themselves to choose stocks and buy them at a frac-tion of the cost charged by traditional brokers. Although he wasnot certain how much demand there would be for such a service,he speculated that there would be a “small sliver” of independentinvestors who based their decision to buy a stock on their ownresearch and analysis. “I thought probably 3–4% of investors werein this category,” including himself, he says. “I had deep empathyfor what these people were looking for because I had grown up asa financial analyst and not as a stock salesman.”

What Schwab could see was the “need for a very pure transac-tional firm that [would operate at] a much lower price” without“any so-called help or intimidation from the sales guys.” SoCharles Schwab & Co. charged $70 per trade. To his surprise, indi-vidual investors—about 10–15% of the individual investor popu-lation—took to the concept of discount investing immediately.Says Schwab: “I underestimated the size of the market.”

Like Bogle, Schwab made sure that the organization he built tocater to this underserved market bought into his values. “When Istarted the company all those years ago as a pure discount broker,I weighed what I wanted to eliminate,” says Schwab. He decidedit was imperative to scrap the conflict of interest inherent in a


broker receiving a commission for making a sale. “Imagine howyou would feel if you knew your doctor was getting a commissionfor each drug he prescribed to you. You wouldn’t feel too comfort-able with that.” Even as the company has added a multitude offinancial products and services—like investment advisors, mutualfunds, and instruments for high net worth individuals—Schwabsays he has always “maintained its heart and soul.” His employees,he adds, many of whom have come from traditional brokeragefirms, express a sense of relief that they are not under a mandate tosell “the stock of the month,” “make their commission quota,” or“call clients to build book.” “Yes, of course, we make money someplace in the process from our clients, but our employees aren’tincentivized to convince clients to be active,” says Schwab. “It’s adifferent culture here.”

Price also plays an important part in the Schwab culture. Thecompany never tried to position itself as the lowest priced service,he says. There were always discount brokers, and later, online trad-ing firms that could undercut even his company. “That was not ourmantra. I always tried to be what I considered the best at fairvalue. I wanted the best people working for me; I wanted the bestcomputers, the best innovation. I didn’t want our service to be‘cheapest’ in any way…It’s a ticklish balance and we certainly leadthe conversation with price, but we finish it up with…superiorservice.”

“King of Online Brokers”

Part of Schwab’s vision hinged on discovering innovative uses oftechnology to introduce his clients to financial products. In 1979,he was among the first to harness the power of computers to scalehis trading volume higher. Though the decision led to some earlyrough spots—trades that failed to be completed, a high error rate,and customer complaints—Schwab instilled in his company theimportance of always being on the lookout for fresh opportunities.

In the 1980s, for example, new legislation had created a finan-cial savings instrument called Individual Retirement Accounts(IRAs)—basically retirement mutual funds that grew on a tax-freebasis. Schwab sensed that the demand for mutual funds was aboutto increase and quickly adapted his discount brokerage service tocater to the needs of individual investors hoping to take advantage


of tax-free growth. “I decided that we needed to make it easier forpeople to buy a variety of no-load funds through a centralaccount,” says Schwab. The company created a mutual fund mar-ketplace that revolutionized the mutual fund industry and helpedcompanies like Vanguard and Fidelity gain greater traction.

Meanwhile, a part of Charles Schwab & Co. had morphed into adistribution vehicle. “Smaller, very effective money managersknew how to manage money. They didn’t know much about dis-tribution,” says Schwab. “We essentially became their distributorsby giving them a marketplace.” By the mid-80s, this mutual fundmarketplace allowed investors to buy and sell hundreds of differ-ent mutual funds in a single account. By 2000, Charles Schwab &Co. was pulling in about 10% of the net new money flowing intomutual funds.

During the 1990s, the company was again at the forefront byjumping onto the Internet before rivals even considered using theemerging networking technology. The company forged aheaddespite the realization that online trading would cannibalize itsbroker-based transactions. David Pottruck, who later became co-CEO of Charles Schwab & Co., spearheaded the effort. While com-missions on broker-assisted trades started at $39, Schwab charged$29.95. The company believed, correctly, that the growing num-ber of online trades would make up for the revenue lost from itsestablished business.

Again, Schwab had merged his readiness to innovate with hisdesire to offer more opportunities to average investors. The com-pany’s online trading system was considered the paragon for themedium. Forbes magazine even named Schwab the “King of OnlineBrokers.” While the company’s online trading business has slowedsince the Internet bubble burst in 2001, at the height of theonline trading frenzy between 1997 and 2000, the firm’s profitrose 112%, driven by a 183% increase in daily trades.



My Greatest Challenge:Using Microcredit to Lead Beggarsinto Business

Muhammad Yunus, founder and managing directorof Bangladesh’s Grameen Bank, has long focusedon lending to the poor. As an innovator who rec-ognized that lending need not be linked to collat-eral, he built Grameen by offering minuscule loansto very poor people, giving them the means togenerate incomes and work their way out ofpoverty. Since its inception in 1976, Grameen hasprovided more than $4 billion in loans to some 3million borrowers, the vast majority of whom arewomen.

Most observers have recognized Yunus’s achieve-ment in finding an innovative solution to perennialpoverty—one that relies on the enterprise of thepoor rather than on government aid or other kindsof charitable handouts. Lately, however, Grameen—and microcredit in general—have faced criticism forhelping just the top tier of the poor, those who areable to use credit. The poorest of the poor, theargument goes, have no need for credit—they needwater and food, and that can only be provided bycharity.

A case in point: A recent report in The New YorkTimes cited the example of Firuza Akhter, a youngwoman in the village of Gorma in Bangladesh, whoborrowed small sums to invest in everything fromcows and land to tutors for her children.The reportsaid that while borrowers like Akhter may come

1940: Born on June 29 inChittagong, Bangladesh,the third of nine survivingchildren. Five other sib-lings died at early ages.His father owned a jewel-ry store selling ornamentsto Muslim customers; hismother occasionallyworked on jewelry sold in the shop.1953: Takes a train tripacross India to the FirstPakistan National BoyScout Jamboree. Latercredits the Boy Scoutprogram with teachinghim compassion and carefor other people.1965: Receives aFulbright Scholarship andgoes to the U.S. to studyeconomics.1969: Receives his Ph.D.in Economics fromVanderbilt University inNashville,Tennessee.Becomes assistant profes-sor of economics atMiddle Tennessee StateUniversity.1971: Bangladesh winsits independence fromPakistan.1972: Returns toBangladesh to become amember of the govern-ment planning commis-sion. Finding the job “abore, [with] nothing to doall day but read newspa-pers,” he resigns tobecome head of theEconomics department atChittagong University.1974: Devastating floodshit Bangladesh, causingwidespread destruction ofproperty and 1.5 milliondeaths.Worldwide presscoverage inspires thefamous Bangladesh con-certs with late formerBeatle George Harrison.

MUHAMMADYUNUS


from “humble backgrounds,” they “hovered at theupper fringe of poverty.” Based in part on sucharguments, the U.S. Congress has approved rulesrequiring that half of $2 billion in aid for such pro-grams go to people earning less than $1 a day.

Yunus disagrees with this view, and he has oftenargued that microcredit benefits all layers of poorpeople, including those at the very bottom.Moreover, he is used to pushing forward in the faceof opposition. He points out that skeptics abound-ed even when he was trying to get Grameen off theground in the 1970s. “Things were always difficultfor us, but I knew they would be because I was try-ing to do something that no one else believed in,”he said in an interview from his office in Dhaka.Yunus had to develop Grameen’s initial programsdespite considerable opposition from bankers, whodoubted that the initiative would work. In addition,he faced criticism from academic economists, whoargued that microcredit could not foster true eco-nomic growth. Some religious leaders also opposedGrameen because its programs advocated givingloans to women.“There was opposition all around,”Yunus says.“And it continues. Even today, there arelots of naysayers. I treat it as part of life.You justhave to move on.”

Moving on, for Yunus,means demonstrating whathe believes is true, rather than just arguing his case.Faced with criticism that Grameen only reachedthe relatively better-off among the poor, Yunus wasdetermined to show that microcredit could workfor the poorest. To establish that, Yunus andGrameen launched a program in 2004 targeted at10,000 beggars around Bangladesh. “We went tothe beggars and told them, ‘Look, when you gofrom house to house for begging, would you

1976: Visits the village ofJobra, near his home ofChittagong. Lends $27 to42 bamboo furnituremakers in the village at arate that allows them tomake a profit and payhim back.This transactionsignifies the informalbeginning of theGrameen Bank projectfor the purpose ofextending microcredit tothe country’s poorest cit-izens. Loans—as low as$1, at 20% interestrate—are made to vil-lagers engaged in suchenterprises as fish ponds,basket weaving, livestockrearing, and paddy culti-vation. Grameen, whichmeans “rural” in Bengali,will become the world’spioneer in microlending,and Yunus will becomeknown as “banker to the poor.”1977: After studyinghow other loan programsare run, decides to do“exactly the opposite” of traditional banks withregards to setting up acredit program.1979: Takes two-yearleave of absence fromUniversity of Chittagongto officially join theGrameen Bank Project.


consider carrying some merchandise with you? Takesome bangles, candles, cookies, or other kinds offood. Now you have a choice; you can beg, or youcan sell. Maybe at some houses you could sell andat others you could beg.”

Grameen Bank set up special rules to encouragebeggars to join its program. For example, it clarifiedthat the bank’s rules would not apply to beggarmembers; they could make up their own rules. Inaddition, all loans would be interest-free, long-term,and have low repayment installments. (For a loan tobuy a blanket, for instance, the repayment ratewould be 3.4 cents a week.) All beggars are alsocovered by life insurance and loan insurance pro-grams without having to pay premiums.The bank’swebsite says, “The objective of the program is toprovide financial services to the beggars to helpthem find a dignified livelihood, send their childrento school, and graduate into becoming regularGrameen Bank members. We wish to make surethat no one in the Grameen Bank villages has to begfor survival.”

Attracted by these terms, thousands of beggarsin Bangladesh responded to Grameen’s program.Following a modest beginning in January 2004, theprogram by April had signed on 8,000 beggars tosell simple products from house to house. Plans areafoot to increase the target to 25,000. Beggars whoonce sat under trees to beg could be seen sellingCoke or Pepsi to thirsty customers.“As the beggarsbecome successful, they remove their beggingbowls and replace them with cash boxes,” saysYunus. “The beggars become businesspeople. Thenext step is to put roofs over their heads and makethem shopkeepers. It is working very well.We hopethat in a year or so,many of them will stop begging.”

1981: Ford Foundationprovides Grameen with$800,000 as a guaranteefund for commercialbankers supportingGrameen. Rome-basedInternational Fund forAgriculturalDevelopment provides a$3.4 million loan, whichis matched by theBangladesh Central Bankand is used to fundGrameen’s expansioninto five districts.1983: Grameen Bankgets formal approvalfrom government as afull-fledged private inde-pendent bank. Has59,000 clients in 86branches.Yunus tells hisstaff that anyone whoasks for a loan is “a fakepoor person.The personyou are looking for willnever come to you.When you find her, shewill say, ‘Oh, I don’t needmoney.’ When you hearthat, you have foundyour person.’”Approximately 95% ofthe bank’s borrowersare women, becausethey are more likely tospend profits on theirfamilies.The repaymentrate is in the 90th per-centile.Yunus states thatthe bank does not vio-late Islam’s ban oncharging interestbecause its borrowersown the bank.


1984: Applies for helpintroducing housing pro-gram to its borrowersunder new Central Bankrefinancing plan for hous-ing loans in rural areas.Bank rejects applicationbecause size of loans thatGrameen seeks is ‘toosmall’ to support realhouses. Grameen resub-mits application, this timefor “shelter loans.”Application rejectedbecause such loans wouldbe for “consumptionitems” (that is, shelter)rather than “productiveactivities.” Grameenresubmits application for“factory loan,” becausethe majority of its bor-rowers are women whowork from the home.Application rejectedagain, but is eventuallyapproved by Central Bankgovernor. Five years later,Grameen’s housing pro-gram receives the AgaKhan International Awardfor Architecture.Thehouses are designed bythe villagers themselves.1985: Grameen pilotproject—called GoodFaith Fund—launched inPine Bluff,Ark, with thesupport of then-governorBill Clinton and wifeHillary. Other Grameen-style microcredit pro-grams start in such placesas Chicago, IL;Tulsa, OK;Dallas,TX; and Harlem,New York City.1987: A Grameen pilotprogram is established in Malaysia.Three otherpilot programs arelaunched in thePhilippines, followed byprograms in India, Nepal,Vietnam, China, LatinAmerica, and Africa.

As such transformations occur,Yunus hopes theywill help prove that programs motivated by charity,however well-intentioned, are less effective in reduc-ing poverty than those that unleash the creativity andenergy of the poor. In this regard, he believes thatknowledge can play a critical role in ending poverty.“Knowledge is at the core of everything,” he says. Asa professor, he sometimes doubts whether tradition-al instruction helps students or merely molds them intheir teachers’ image. “Education shouldn’t destroythe students’ creativity and freshness,” Yunus says.“Students are always imitating their professors, andimitation is dangerous.” Knowledge should help stu-dents while allowing them to remain themselves.

Yunus believes the same approach should apply toanti-poverty programs. “People believe that a poorperson can be helped through aid,” he says. “He orshe is not considered a creative person. This iswrong. A poor person is just as good a human beingas anyone else in the world,but she is a victim of cir-cumstances; the way in which she lives is only areflection of the way in which society has rejectedher. Instead of looking at her like a different kind ofhuman being, we should be treating her as an equal,and extend to her the kinds of services that othersenjoy. Once we do that, we will get out of the ‘char-itable’ mode of thinking.We will get out of ‘welfaresystem’ mode.” That, according to Yunus, is what willstimulate the creation of institutions that allow thepoor themselves to develop their capabilities.

His ultimate vision is to build a world free of pov-erty.“We have created a slavery-free world, a small-pox-free world, an apartheid-free world,” he wrotein Banker to the Poor.“Creating a poverty-free worldwould be greater than all these accomplishmentswhile at the same time reinforcing them.This wouldbe a world that we could all be proud to live in.”


Leadership LessonThe Poorest of the Poor

“Poverty,” says Muhammad Yunus,“is…like a bonsai tree. You get only this lit-tle base to grow from. You are a stunted littlething. Maybe you could be a giant thing, butyou never find out. That’s poverty.”

Thirty years ago, when Yunus was justbeginning the journey that would lead tohis founding of Grameen Bank, the ruralpoor in Bangladesh were a market that noone had clearly defined, let alone targetedas a constituency that could make a profitfor a bank.

In 1974, a prolonged famine had devastat-ed the residents of many of the country’ssmall villages. Yunus, at that time an eco-nomics professor at Bangladesh’s ChittagongUniversity, first decided to enlist the media’shelp in calling attention to the rising num-ber of starvation deaths, and then deter-mined that he would focus his own efforts ontrying to increase food production in onesmall village called Jobra, close to his home.Over the course of a year, he succeeded inhelping farmers improve an irrigation sys-tem that would allow rice production on previously unused land.

That experience taught Yunus some-thing that would prove instrumental to thefuture of microlending. He recognized thatnot all poor people are alike, that there aredifferent levels of poverty depending on aperson’s individual circumstances. And yet,he said, government officials, economists,and social scientists failed to make thesedistinctions when they created programs toease poverty. For these officials, the term

1990: Military govern-ment that ruledBangladesh for nearly 10years is toppled.Threemonths later, peacefulelections result in a vic-tory for the BangladeshNationalist Party.1990: Grameen andYunus are subject ofpiece on CBS’s 60Minutes.1993: Grameen Uddog,a subsidiary, launched tohelp hand-loom weaversparticipate in the exportmarket. New line of fabrics created calledGrameen Check. Sales inthree years reach $15million. Eight years later,8,000 hand-loomweavers produceGrameen Check fabricsfor sale in Italy, France,the UK, and Germany.1994: Grameen Trustreceives close to $20million from MacArthurFoundation, RockefellerFoundation,World Bank,the U.S. government, theUnited Nations, and theGerman government tosupport 65 Grameenreplication projects in27 countries. Over thenext eight years, theseprojects grant morethan $444 million inloans to 1.14 millionpoor people.1995: Grameen Bankfor the first time makesenough profit to operateon a fully commercialbasis without the needfor preferential loans orgrants.1996: Grameenextends its one-billionthdollar in loans.Two yearslater, it lends its two billionth dollar.


“poor person” was a catch-all phrase that“could mean many things,” Yunus wrote.“For some, the term referred to a joblessperson, an illiterate person, a landless per-son, or a homeless person. For others, apoor person was one who could not pro-duce enough food to feed his family. Stillothers thought a poor person was one whoowned a thatched house with a rotten roof,who suffered from malnutrition, or whodid not send his or her children to school.Such conceptual vagueness greatly dam-aged our efforts to alleviate poverty.”Yunus noticed, also, that most definitionsof poor people didn’t include women andchildren.

He set about to establish different clas-sifications of the poor based on such factorsas region, occupation, ethnic background,gender, and age. At the end of this process,he had a definition of “poor” that differen-tiated, for example, between “marginalfarmers” who were often the focus of inter-national development programs, and the“really poor” who “had absolutely nochance of improving their economic base.Each one was stuck in poverty.” This groupof landless poor—who make up about 50million of Bangladesh’s 120 million inhab-itants—would become the market thatGrameen Bank would serve.

Yunus has repeated many times the storyof how he first recognized the potential forgrowth inherent in poverty. On a visit tothe same village of Jobra in 1976, Yunusmet a 21-year-old woman making a bam-boo stool in front of a run-down housewith crumbling mud walls. This woman’sdaily profit, Yunus discovered after talking

1997: GrameenPhoneLtd., a rural cellularphone company that pro-vides telephone serviceto village entrepreneurs,is launched; over the nextseven years, the companymakes loans to morethan 43,000 villagers,allowing them to buymobile phones.This venture is followed byGrameen Cybernet, a for-profit Internet serviceprovider, and GrameenCommunications, a non-profit ISP. Eventually, thereare more than two dozenorganizations within theGrameen family of enterprises.1997: Yunus leads theworld’s first microcreditsummit, held inWashington, D.C. Parti-cipants pledge to getcredit into the hands of100 million of the poor-est families by 2005.1998: Unveils GrameenInvestments where people can invest, ratherthan donate, capital foreconomic-developmentprograms for the world’spoor. First investor is TedTurner.1998: Grameen TextileMills Ltd. starts produc-tion to sell flannel. Plansget underway to sell fab-rics made from jute (anatural fiber) mixed withcotton or silk.1999: Yunus receives theIndira Gandhi peace awardfor his microcredit initia-tive. It is one of numerousinternational awards andhonors given to him.2000: GrameenCommunications estab-lishes Internet kiosks intwo villages.


to her, was two cents, barely enough to feedone person, let alone feed, clothe, and shel-ter her three young children and send themto school. Consequently, these children,Yunus said, “were condemned to a life ofpenury, of hand-to-mouth survival, just as[their mother] had lived it before them,and as her parents did before her. I hadnever heard of anyone suffering” becauseshe didn’t have 22 cents.

Over the course of a week, Yunus and auniversity student made a list of other peo-ple in Jobra who had to depend on middle-men and money lenders for their subsis-tence work. The list had 42 people, whoamong them borrowed 856 taka—less than$27. “All this misery [exists] in all thesefamilies, all for the lack of $27,” Yunuswrote in his book, Banker to the Poor.

With these insights, Yunus started upwhat eventually became the GrameenBank—”an institution that would lend tothose who had nothing,” including no col-lateral and no credit history. The goal wasto turn these villagers into entrepreneursby giving them money to start their ownsmall businesses, such as furniture making,egg production, basket weaving, commer-cial gardening, fish ponds, livestock rear-ing, and paddy cultivation. Loans—rang-ing from $1 to $100—were typically for ayear, first at 16% interest and later at 20%interest. Recipients were required to startmaking payments the second week of theloan. Grameen only lent money to individ-ual borrowers who had formed into groupsof five. The idea was that peer pressure aswell as peer support would help ensure thatthe individual loans were repaid.

2001: Grameen launch-es a program to convertits operational method-ology into a new versioncalled the GrameenGeneralised System,(GGS, or Grameen Bank II).2003: Grameen startsStruggling MembersProgramme, an initiativeaimed at providing verysmall loans to beggars.Members are notrequired to give up beg-ging, but are encouragedto sell small consumeritems door to door, suchas ribbons, fruit, or can-dles to generate income.By mid 2004, the pro-gram has signed up morethan 8,000 beggars.2004: Grameen bankhas 1,195 branches,works in 43,681 villages,and has a staff of 11,855.Total amount of loansdisbursed since inceptionis $4.18 billion, out ofwhich $3.78 billion hasbeen repaid, with arecovery rate of 99%. Ofthe 3.1 million borrow-ers, 95% are women.Borrowers of the bankown 93% of its totalequity; 7% is owned bythe government.Thebank has made a profitevery year since it start-ed, except in 1983, whenoperations began, and1991 and 1992, whenthe country was recov-ering from the effects ofa cyclone that killed150,000 people.Thebank offers three loans:income-generating loansat 20% interest, housingloans at 8% interest, andhigher education loans at5% interest.

Grameen also lent mostly to women, reasoning that they aremore reliable than men and more likely to spend profits on theirfamilies. And because Bangladesh is a country plagued by disas-ters—famines, floods, epidemics, tornadoes, and civil wars—thebank lent villagers new money to start up again if their means ofproduction had been washed away, blown away, burned out, ordestroyed. Old loans were not erased, but were converted into long-term loans that allowed individuals to pay them off more slowly.

When Yunus was asked why he charged these villagers anyinterest at all, his typical response was to challenge anyone tomanage a bank for the poor that offers lower interest rates.Institutions such as his that are not self-sufficient, he added, willrun into trouble because they will be dependent on politicians andgovernment bureaucrats whose support is not always constant.

Indeed, from the beginning, Yunus was very clear what this mar-ket needed and didn’t need. One thing it didn’t need was govern-ment aid. “Our experience, in this region and everywhere else, hasbeen that for the government to give credit—in rural areas, partic-ularly, and credit as a whole—doesn’t work,” Yunus said in aninterview in 1999. “Credit and government don’t have a goodchemistry. Government should distance itself from microcredit or,for that matter, any credit because it very quickly gets politicized.”

Another approach that Yunus resisted was survival training.Yunus disagreed with those who claimed that before you loan poorpeople money, you should first teach them survival skills. ForYunus, the answer was “credit first.” Poor people “do not need usto teach them how to survive; they already know how to dothis…The fact that the poor are alive is clear proof of their abili-ty,” he said. By giving the poor access to credit, you “allow themto immediately put into practice the skills they already know….”Eventually, Grameen Bank made loans to villagers to help thembuild new houses or repair existing ones. The Bank also estab-lished Grameen Phone Ltd., a rural cellular phone company;Grameen Cybernet, a for-profit internet service provider; andGrameen Textile Mills, Ltd., among other ventures.

Yunus’ trust in the creditworthiness of the village people seemsto have paid off. By 2004, the Bank had loaned $4.18 billion, outof which $3.78 billion has been repaid, with a recovery rate of99%. The microlending business that he started has spread farbeyond Bangladesh.


An article in US Banker, written in August 2003, pointed to whatit called “the consistently high profits of microfinance.” Microloanborrowers, the article says, quoting Nancy Barry, president ofWomen’s World Banking, a New York City-based non-governmentalorganization (NGO) with a microcredit arm, “are excellent creditrisks.” Barry pointed to the example of an Indonesian bank that hadto “write off 100% of its corporate portfolio and 50% of its middlemarket loans during the 1988 financial crisis. But on-time repay-ment in its microfinance portfolio slid only 1%, to 97.5%. Theseborrowers are less risky than the Donald Trumps of the world,” Barrysaid. “These borrowers have financial discipline. They know that ifthey screw up, they won’t have access to lending.”

Among our Top 25 leaders, Yunus is probably the only one whosincerely hopes that the market which has made him successfuleventually disappears. His stated goal, he has said, is to halve thenumber of poor people by 2015.


103

Seeing the Invisible

5

When people say that “leadership involves vision,” theygenerally refer to the ability of leaders to look into the future andarticulate what they see in a way that is compelling to thosearound them. But for some leaders, it means something more: Theability to see what lies under everyone’s noses, but what others,including some very smart people, cannot see. Call it seeing theinvisible.

The way that Steve Jobs—co-founder and CEO of AppleComputer and CEO of Pixar—saw the potential of technologythat later became the Macintosh computer offers a useful example.The story has long been part of Silicon Valley lore. It wasNovember 1979, and Apple Computer was growing rapidly. Witha few engineers, Jobs went to visit Xerox’s famed Palo Alto

Research Center, the bastion of high-tech research. Scientists therehad developed a computer called the Alto, and Jobs was veryimpressed—even excited—when he saw it. He later said in aninterview that the “Alto had the world’s first graphical user inter-face. It had windows. It had a crude menu system. It had crudepanels and stuff. It didn’t work right, but it basically was allthere.”

While Xerox researchers failed to recognize the potential of theAlto, Jobs could see it for what it was—technology that couldallow ordinary people to work on computers through the use ofgraphic menus and a mouse rather than through arcane com-mands. This recognition enabled Apple Computer, under Jobs’leadership, initially to develop the Lisa, and then, more success-fully, the Macintosh, one of its most popular and profitable prod-ucts during the 1980s. Microsoft employed a similar graphicinterface with its Windows software, which helped broaden thedistribution of personal computers even further. In effect, thesedevelopments created the mass market for PCs.

Why was Jobs able to “see” what the Xerox researchers hadmissed? After all, they were brilliant scientists—and they hadbeen clever enough to invent the technology in the first place.While endless speculation is possible over this question, part ofthe answer probably lies in the prevailing mindset of those times.During the late 1970s, though personal computers were startingto become popular, most people thought of computers as bulkymainframes. Hardly anyone believed that average people mighthave any use for personal computers; they were huge, lumberingdevices that performed massive number-crunching exercises forbig business or big government. Such impressions—which usual-ly are habit-forming and can include preconceptions and some-times prejudices—often blind observers to the potential value of anew technology. It takes a perceptive, intuitive outsider—likeJobs was at Xerox—to see the value and opportunities that lielatent in a new technology and the impact it can have if it isdeployed.

That intuitive perception—and the corresponding ability to“see the invisible”—is a quality that many leaders have nurturedand used to their advantage during the past 25 years. Just as Jobssaw the value of Xerox’s graphical user interface software for PCs,


cable mogul Ted Turner—founder of Cable News Network andTurner Network Television—recognized the apparently invisiblevalue that resided in old movies and TV programs. FinancierGeorge Soros, chairman of Soros Fund Management and the OpenSociety Institute, discerned economic trends long before theybecame apparent and used his insights to make investment deci-sions that garnered millions of dollars in profits.

What these examples show is that the ability to pierce throughthe superficial, sense-hidden signals and uncover hidden value cantake many different forms. This is good news for those who wantto cultivate their own leadership style and potential; it means theycan choose from among a variety of models and nurture anapproach to seeing the invisible that works best for them. It canalso help them recognize that value can show up in the mostunlikely places.

Chapter 5 Seeing the Invisible 105


STEVEJOBSThe Challenge:Getting Creative in the Face of aGiant Competitor

It is an entrepreneur’s worst nightmare: His orher company launches an innovative new product,it takes the market by storm, and then, drawn bythat success, the industry behemoth decides toenter the fray. As the incumbent’s massive mar-keting and financial muscle forces the David vs.Goliath mismatch towards an inevitable conclu-sion, how can the start-up survive? This scenarioposes a crucial leadership test for new entrepre-neurs. It is a trial by fire that either burns themout of existence or tempers them, like steel, andmakes them stronger.That was the challenge thatSteve Jobs, CEO of Apple and Pixar, faced in theearly 1980s.

In 1976, Jobs, at age 21, had teamed up with hisfriend Steve Wozniak to launch Apple Computerin the family garage. (Some purists debatewhether Apple Computer’s first home was actu-ally in a bedroom in the Jobs’ family home, but byall accounts, the business did migrate to thegarage and, eventually, out of it.)

In the mid 1970s, personal computing, like hamradio, appealed largely to hobbyists and techies.A handful of retailers sold kits with circuit boards and other components that had to beassembled before they could perform rudimentarytasks. Apple Computer’s first products—Apple I

1955: Born in SanFrancisco, California,on February 24 andadopted soon after birthby Paul and Clara Jobs.His father, Paul, was amachinist whom Jobswas to describe as a“genius with his hands.”When young Steve wasfive or six, Paul Jobssawed off a part of hisworkbench and toldhim,“Steve, this is yourworkbench now.” Jobslater credited his fatherfor teaching him therudiments ofelectronics.1960: The family movesto Mountain View,California, a regionwhere apricot andprune orchardsabounded, which laterbecame better known as Silicon Valley.1972: Graduates fromhigh school and enrollsin Reed College inPortland, Oregon. Jobsdrops out after asemester.1974: Returns toCalifornia and joins acomputer hobbyists’club, where he befriendsStephen Wozniak. Jobsand Wozniak get jobs atAtari designingcomputer games.1976: Co-founds Applewith Steve Wozniak in agarage in the Jobs’ familyhome.1977: Jobs and hiscolleagues launch Apple II.


computers—served the same demand; the ByteShop, a retailer, ordered 50. Members of theHomebrew Computer Club in Palo Alto, to whichJobs and Wozniak belonged, also were among theinitial customers. In 1977, along came Apple II, theproduct that put Apple Computer on the map anddramatically altered the shape of the personal com-puter industry.Unlike the Apple I machine,on whichits technology was based, the Apple II had a beigecase and featured colored graphics.Among its mostpopular features was its ability to run VisiCalc, anearly spreadsheet that made it easy to performcomplex calculations. Soon Mike Markkula, a for-mer Intel executive, joined the company and helpedbring in substantial capital. By the end of the 1970s,Apple II computers—priced around $1,200—werebeing sold in electronics stores around the country.The PC revolution had begun.

In its initial years, Apple Computer doubled insize annually, and in 1980, the company went public. Attracted by the potential of this rapidlygrowing market, IBM launched its own personalcomputer—the IBM 5150—in August 1981. Com-pared with puny Apple, IBM was a giant—that yearit had 355,000 employees and $29 billion in rev-enues. IBM had been trying to make computersfor personal use since the early 1970s. For exam-ple, after a six-month effort in 1973, the company’sengineers had produced a prototype called“Special Computer, APL Machine Portable,” orSCAMP, which could be used as a desktop calculator and perform a few other functions.Two years later, it produced the 5100 “portablecomputer,” which weighed 50 lbs. and sold forbetween $9,000 and $20,000—and understand-ably failed to become a mass product. With the

1978–83: Apple has nocompetition, and thecompany grows at acompounded rate of150% a year. In the early1980s, IBM enters thePC market andovertakes Apple in just a couple of years.1979: Visits Xerox’sPalo Alto ResearchCenter where he seesthe Alto, a computerwith a graphic userinterface—includingwindows and arudimentary menusystem—and recognizesits market potential.1980: Apple Computergoes public.1983: Jobs recruitsJohn Sculley, president ofPepsi-Cola USA, tobecome CEO of AppleComputer.1984: Jobs, leading ateam of 100, introducesthe Macintosh. Launchedwith the famed “BigBrother” commercial onSuperbowl Sunday, theMacintosh helps Jobsreinvent Apple as arevolutionary upstartfighting against a goliath-like IBM.The “Mac”helps kick off thephenomenon of desktoppublishing.1985: Jobs is oustedfrom Apple, following aboardroom coup led bySculley. By then, Applehas grown to a $2billion company. Anangry Jobs, aged 30,leaves the company with $150 million.


1986: Jobs buys thecomputer graphicsdivision of Lucasfilm for$10 million andestablishes it as anindependent companynamed Pixar. Ed Catmull,a vice president ofLucasFilm, is the co-founder and becomesPixar’s chief technologyofficer.1989: Jobs launchesNeXT.The companyfocuses on object-oriented programming.Though Jobs struggles forthe next eight years tocreate a secondsuccessful computercompany, NeXT doesn’tachieve that goal. Jobslater explains the reasonfor NeXT’s failure wasthat it tried to copy theApple model withoutrealizing that thecomputer industry andthe world had changed.1993: As Apple’sfortunes slide, the boardlets Sculley go and bringsin Michael Spindler asCEO. Spindler introducesthe successful Power PCbut has setbacks with theNewton, a personaldigital assistant.1995: Pixar goes public,raising $140 million andbeating Netscape tobecome the biggest IPOof that year. Toy Story,which took four years tomake, hits theaters,becoming the first fullycomputer-animated film,earning $342 millionworldwide. It is the topbox-office film that year.

IBM PC, however, Big Blue aimed directly at themass market—and at Apple Computer. The IBMPC was priced at $1,565, and was able to runVisiCalc. In addition to being sold through thecompany’s own product centers, it was distrib-uted through retailers, such as Sears andComputerLand. By 1983—the year John Akersbecame its president—IBM’s PC had elbowedApple aside to surpass it in sales. IBM had $40 bil-lion in revenues and $5.4 billion in profits, and itwasn’t about to let Apple Computer eat its lunch.

Jobs, and Apple, faced a critical question:When a giant forces you out of your game, whatdo you do? His response: Start a different game.

In November 1979, during a visit to Xerox’swell-known Palo Alto Research Center, Jobs hadseen computer technology that fascinated him.Unlike other computers, which ran on softwarethat required users to know some programming,the Xerox machine, called the Alto, had a graphicinterface with pop-up windows and drop-downmenus that could be manipulated by a mouse.When he saw this, Jobs was so excited about the potential of this new technology that hebegan to jump up and down and shout, as OwenLinzmeyer notes in his book, Apple Confidential:The Real Story of Apple Computer. Jobs understoodthat if computers with such software were intro-duced, it would be easy for people to work withthem. By making computing accessible to ordi-nary people, the mass market for personal computers would expand dramatically.

Years later, Jobs used an analogy from historyto explain his thinking. When the telegraph wasfirst introduced in the 19th century, the speedwith which it made communication possible


1995: During a vacationin Hawaii, Jobs and hisfriend Lawrence Ellison,billionaire softwareentrepreneur andchairman of Oracle,ponder taking overApple.1996: Spindler leavesApple and is replaced byGil Amelio, former CEOof NationalSemiconductor.Ameliotries to cut costs andbegins to search for anew operating system.Jobs, who learns of thisopportunity, calls Amelioto pitch NeXT’ssoftware solution.Amelioand Jobs beginnegotiations, and inDecember Amelioannounces Apple will buyNeXT for $400 million.1997: Amelio and Jobscomplete the deal forApple to acquire NeXT,and Jobs returns toApple. In July,Amelioleaves—critics say Jobspersuaded the board tofire him—and Jobsbecomes the actingCEO. Journalist AlanDeutschman, who writesa book about Jobs, callsit The Second Coming ofSteve Jobs.1998: Apple launchesthe iMac, aimed at theeducation market, in aneffort to return thecompany to itsinnovative roots.2001: Pixar releasesMonsters, Inc.The filmrakes in more than $100million in nine days,faster than any animatedfilm had ever done.

between distant places turned it into a truly rev-olutionary technology. Soon demands were beingmade that everyone should be required to learnthe Morse code because someday a telegraphmachine would sit on every desk. But then anoth-er revolutionary, distance-bridging inventioncame along—the telephone—and the rest is his-tory. The fact that anyone who could dial num-bers and speak could use a telephone made it adecisive winner over the telegraph as a personalcommunication device. Jobs was convinced thatcomputers would follow the same path. Personalcomputers that anyone could use almost intu-itively, with little training, would have an advan-tage over those that required specialized knowl-edge.

Fired by this vision, Jobs brought together acore team to create a new computer, theMacintosh. Like the Alto, it had pop-up windowsand menus that could be operated with a mouse.It had two times the memory of the IBM PC.Remembering the experience of developing thefirst “Mac,” Jobs later said: “We worked likemaniacs. The greatest joy was that we felt wewere fashioning collective works of art.”

The January 1984 launch of the Macintosh wasannounced on Superbowl Sunday with the “BigBrother” commercial that has become a legendin the field of advertising. Directed by film makerRidley Scott and produced at a cost of $800,000,it played off themes from George Orwell’s novel1984. Rows upon rows of bald, ashen-faceddrones file into a large hall where a giant face ona screen addresses them. Suddenly a young, ath-letic woman appears and runs down the hall, pur-sued by storm troopers; she carries a sledge


hammer, and wears red shorts and a tee-shirtwith the Macintosh logo. Just before the trooperscatch up with her, she spins around and hurls thehammer at the screen, shattering it as the gianthead is proclaiming,“We shall prevail.” The dronesgasp, and the room is bathed in light. Then themessage: “On January 24, Apple Computer willintroduce the Macintosh.And you’ll see why 1984won’t be like ‘1984.’”

The commercial was constantly played and re-played on news reports during the next few days,garnering millions of dollars in more publicity forthe Macintosh.Although Apple Computer alwaysdenied that “Big Brother” represented IBM, thesubtext was unmistakable in the minds of thosewho saw the commercial. The development andlaunch of the Macintosh allowed Jobs to reinventApple Computer as a revolutionary upstart con-fronting a domineering Goliath.

The Macintosh became one of AppleComputer’s greatest successes during the 1980s,though the company ran into problems laterwhen Microsoft introduced a similar interfacewith Windows. As Jobs said: “In doing theMacintosh, there was a core group of less than100 people, and yet Apple shipped over ten mil-lion [computers]. Of course, everybody’s copiedit and it’s hundreds of millions now.That’s prettylarge amplification, a million to one. It’s not oftenin your life that you get that opportunity toamplify your values a hundred to one, let alone amillion to one. That’s really what we weredoing…The contributions we tried to makeembodied values not only of technical excellenceand innovation—which I think we did our shareof—but innovation of a more humanistic kind.

2001: In January,Applebranches out into themusic business byintroducing iTunes,software that allowsmusic lovers todownload songs andburn their own CDs.Jobs announces that275,000 songs aredownloaded in the firstweek, making it a “hugehit with Mac users.”2001: In October, iPod,a portable music player,is introduced. Initiallycompatible only withApple software, iTunesand iPod have a narrowmarket, but they attractattention because oftheir simplicity andelegance of design—andalso because they offer alegal way to buy onlinemusic.“With iPod,listening to music willnever be the same again,”says Jobs, announcing thelaunch.“With iPod,Applehas invented a musicplayer that lets you putyour entire musiccollection in your pocketand listen to it whereveryou go.”2002: In March,Appleannounces the launch ofthe second generation ofits iPod player, with a 10gigabyte hard drive thatlets users save up to2,000 songs in its library.2003: In May, Pixarreleases Finding Nemo,which makes $70.2million during its openingweekend. It becomes thehighest grossing animatedfilm worldwide, bringingin more than $800million at the box office.


“The things I’m most proud about at Apple iswhere the technical and the humanistic cametogether, as it did in publishing. The Macintoshbasically revolutionized publishing and printing.The typographic artistry coupled with the techni-cal understanding and excellence to implementthat electronically—those two things cametogether and empowered people to use the com-puter without having to understand arcane com-puter commands. It was the combination of thosetwo things that I’m the most proud of.”

2003: In October, aWindows version ofiTunes appears, openingmuch larger markets foriPod and iTunes. In itsfirst week, 1.5 millionsongs are downloadedfrom Apple’s iTunesmusic store. Jobs boaststhat this is five times the300,000 songs thatmusic fans downloadedfrom Napster in its firstweek of operation. ByDecember, downloadsfrom iTunes cross 25million. Time magazinenames it the “CoolestInvention of 2003.”2004: In January,Appleintroduces a lightweightversion of iPod, callediPod Mini. It is half thesize of the iPod, weighs3.6 ounces, and holds upto 1,000 songs. Jobsbelieves it will appeal toyounger music lovers. Inthe same month,Appleannounces a partnershipwith Hewlett-Packard todeliver digital music toHP’s customers.2004: In March,Appledelays the worldwidelaunch of iPod Minis toJuly because ofextremely high demandin the U.S. On August 1,in an email sent to Appleemployees, Jobsannounces that he hademergency surgery for a form of pancreaticcancer, and that his planis to be back at work inSeptember.

Leadership LessonFrom Macs to Music

In Jobs’ case, one of the hallmarks of his leadership style is hisability to see business opportunities in situations where othersobserve little more than chaos and confusion. His success in spot-ting consumer trends in the online music business and use thatunderstanding to carve out a huge market for Apple’s iPod musicplayers and iTunes music store is a case in point.

Pandemonium reigned in the online music business in the late1990s when Jobs decided to take the plunge. Ever since college stu-dents and others on the Internet took to swapping MP3s for freerather than paying for downloading songs, the music industry was inan uproar over piracy. After a bruising battle, the Recording IndustryAssociation of America, which represents major music companies,succeeded in forcing Napster to shut down, but successors such asKazaa, Morpheus, and Grokster were still around—and the industryreckoned it was losing $3.5 billion a year to piracy. The industry’sresponse was two-fold: Erecting technological barriers to download-ing, and filing lawsuits against downloaders and their enablers.

Jobs, however, recognized that both these so-called solutionswere short-sighted and would end up alienating millions of consumers, the very people whose hearts and minds the musicindustry should be trying to win. He chose to pursue a third path:Creating user-friendly software and hand-held players that wouldlet music lovers download their favorite songs for a small fee. Thatinsight inspired Apple’s foray into the iTunes music store and thestylish iPod players, which represent one of the company’s biggestsuccess stories in recent years.

In the spring of 2001, Apple Computer launched its iTunesonline music service, initially just for Apple users. The economicmodel was simple: “Customers pay 99 cents to download eachsong. After that, it’s almost like buying music on a CD, LP, ortape. The user can play it on the computer, burn it to a CD thatcan be played on any device, or transfer it to an MP3 player.” Onelimitation was that each file had an embedded signal aimed at preventing the songs from being shared on Internet file-sharing


services. The fact that Apple allowed customers to own digitalmusic woke up the market.

Large as the market was when iTunes was available only forApple users, it exploded when a Windows version was introducedin the spring of 2003. Jobs was delighted with the way the mar-ket responded to these initiatives. “The iTunes music store ischanging the way people buy music,” he said. “Selling five millionsongs in the first eight weeks has far surpassed our expectationsand clearly illustrates that many customers are hungry for a legalway to acquire their music online.” Commenting on this trend,Wharton Marketing Professor Peter Fader noted inKnowledge@Wharton in July 2003: “I think the success ofApple’s iTunes service isn’t the downloading per se, it’s the inter-face—it’s fun to use.” iPod music players—which could storehours of music and were as small and easy to use as cell phones—added further to Apple’s success in this business. Even people whofound computers intimidating said they liked using iPods.

Jobs was repeating the Macintosh model all over again. By cre-ating an innovative product that was fun and easy to use, heopened up a mass market for digital music. “iTunes sold 20 mil-lion tracks in its first seven months of operation…Between Juneand November 2003, music lovers bought 7.7 million songsonline, but only 4 million single-song CDs at stores,” according toa January 14, 2004, article in Knowledge@Wharton.

By the spring of 2004, Apple had emerged as the clear winneramong online music services, with a reported 70% share of themarket for legal music downloads and a 45% share of the MP3market.

It is unclear how long Apple will be able to sustain its lead, con-sidering that rivals Sony and Microsoft, among others, are plan-ning major assaults on this market. But at the moment, Jobs’transformation of Apple has been impressive. Quoting a culturalhistorian who described Jobs as the “Henry J. Kaiser or WaltDisney of this era,” The New York Times wrote, “Jobs has attained alevel of influence over how life is lived in the digital age that isunmatched by even his most powerful computer industry rivals.”



TEDTURNERThe Challenge:Keeping the Big Picture Clear

“I had to operate with gut feelings because therewasn’t any precedent,” says Ted Turner, founderof Cable News Network and Turner NetworkTelevision.“I was boldly going where no man hadever gone before.”

Turner can be excused for quoting Star Trek, apopular science fiction series that began on net-work television in the 1960s but whose rerunsare now shown on cable. After all,Turner almostsingle-handedly built a communications empire—including numerous cable stations—by recogniz-ing the value of ideas that others criticized as ill-conceived or just plain wacky.

The biggest challenge along the way for Turnerwas figuring out how to capitalize on his insightthat satellite-based broadcasting was the future oftelevision, and to find enough good content to fillthat future. There were “no blueprints” to givehim guidance, he says.“So there wasn’t any way tomeasure what was successful or not. There wasnothing to measure against.” The man known as“Captain Outrageous”—for blurting out off-the-cuff remarks without considering their ramifica-tions—had strategies in place for each acquisitionor entrepreneurial venture, but they were largelyuntested. His main criterion for gauging whethersuch ventures were going to be successful, hesays, was “that I felt good about it.”

1938: Robert Edward“Ted” Turner III bornNov. 19 in Cincinnati,Ohio. Father ran asuccessful billboardadvertising company;mother was ahomemaker1956: Entered BrownUniversity. Started tostudy Classics, a subjecthis father ridiculed asworthless.Was expelledduring his junior year forviolating the rule againsthaving girls in dormrooms.1961: Becomes anaccount executive at hisfather’s company,TurnerAdvertising Co., inAtlanta, Georgia.1962: His father pays $4million for two divisionsof rival General OutdoorAdvertising, makingTurner Advertising thebillboard leader in theSouth.1963: On March 5,Turner’s father commitssuicide at age 53 with asilver pistol. For years,Ted Turner keeps the gunin his office desk drawer.1963: Becomes thecompany’s president andCOO.1968: Purchases WAPO,a Chattanooga,Tennesseeradio station, the firststep in his dream ofbecoming a media mogul.Over the course of thenext year, purchases twomore radio stations inthe South.


Turner’s first step into the media big leaguewas the purchase in 1970 of Channel 17, a mori-bund Atlanta television station with a weak UHFsignal. Industry experts said Turner had beenhoodwinked and predicted that his plans wouldderail even before he got started. The station,however, would eventually benefit from Turner’sembrace of a technology that few had thoughtwould revolutionize the television industry, yetturned out to be the foundation for each ofTurner’s successes.

“I’m best known for CNN—that might havebeen my greatest impact. But the single biggestthing that I happened on was the communicationssatellite,” he says.“The Russians had just [learned]how to put these satellites in a geostationaryorbit. I tried to figure out how I could utilize [thetechnology] with my station in Atlanta.”

His vision ran counter to accepted norms.Television broadcasters, including Turner’sChannel 17, beamed microwave signals that wererelayed beyond their range by bouncing them offtransmission towers.Turner had already investedin a larger tower that extended his station’s signalbeyond its 40-mile broadcast range to five neigh-boring states. But the signal had reached its limit,weakening as it encountered geographic and man-made obstacles.

Satellite technology, however, would allow himto beam Channel 17’s signal nationwide to variouscable system providers that were starting up dur-ing the 1970s.When Turner transformed Atlanta’sChannel 17 into a national cable network, herenamed it TBS, the Superstation. “I was the firstcommercial broadcaster to use satellite,” he says.“Going into the satellite business, distributing our

1970: TurnerCommunications Group(formerly TurnerAdvertising) acquires itsfirst television station,Atlanta’s WJRJ Channel17, a moribund stationwith a weak UHF signal.Renames TCG with loftysounding name of TurnerBroadcasting Systems(TBS).1976: Turner beginstransmitting WTBS viasatellite to cable systemsaround the country.Overnight transforms alocal station into anational one—an initialvolley in the battle tochip away at the nationaldominance of majornetworks ABC, CBS, andNBC.1976: TBS acquiresMajor League Baseball’sAtlanta Braves. Decadesbefore Disney purchasesa major sports franchiseto control moreprogramming content,Turner transmits histeam’s games nationallyover TBS. Cable, starvedfor content, lookstoward TBS and HomeBox Office to provide it.1977: TBS buys theNational BasketballAssociation’s AtlantaHawks.Adds moreprogramming choices toTBS’s growing stable ofcontent.1977: Turner capturesyacht racing’s prestigiousAmerica’s Cup with hissailboat, Courageous.


programming via satellite, was a huge risk at thetime,” especially given that the networks werebusy lobbying federal regulators to squelch whatthey viewed as a threat to their dominance.

It was even riskier than he thought. InDecember 1979, the communications satellitethat was supposed to be the new carrier of cabletelevision programming, including Turner’s CNN,got lost in orbit. RCA, which had launched thesatellite, attempted to wriggle out of its commit-ment to provide Turner with a backup satellite.Turner sued RCA claiming, among other things,that the company was trying to keep CNN offthe air to protect its subsidiary NBC.Turner wonand CNN launched on schedule.

But even as Turner Broadcasting System (TBS)was expanding across the country, cable pro-gramming was proving to be a wasteland of old,second-rate shows.The industry, starved for con-tent, was looking to HBO and TBS to provide it.Turner did his part: He bought the Atlanta Bravesfor $10 million to provide guaranteed baseballcoverage.The team was so bad over the next fewyears that when they were mired in a 17-gamelosing streak, Turner tried his hand at coachingthem. They still lost. “There were times when Iwas apprehensive; there were times when I wasconcerned, and there were times when I wor-ried, but I never really had any serious doubts,”says Turner. “My confidence in what I was doingwas pretty strong.” Turner went on to acquirebasketball and ice hockey teams, and the AtlantaBraves made it to the World Series in 1991.

In 1985, Turner bought the entire library of the MGM movie studio for about $1.5 billion. Atthe time, industry followers believed Turner had

1980: Launches CableNews Network (CNN),the first around-the-clock, all-news televisionstation. Plagued by lowproduction and editorialquality, the station isridiculed by networknews divisions as the“Chicken NoodleNetwork.” Turnerprovides yet anothersource of cheap contentto fill the void in cableprogramming.1982: Starts HeadlineNews offering updatednewscasts on the half-hour. Format creates thetemplate for competitorslike MSNBC and FoxNews, which don’t appearuntil the 1990s.1985: Launches CNNInternational, whichprovides global newsservice to 210 countries.1985: Makesunsuccessful $5 billionbid to acquire CBS.Loews Corporation’sLaurence Tisch gainscontrol of thebroadcaster with thesupport of CBS itself.Loss underscoresTurner’s alienation fromthe networks over pastdecade.1986: First GoodwillGames held in Moscow.The Games, financed byTurner, show hisevolution from anunsophisticatedconservative Southernerto a man of internationalinterests.They alsoprovide cheapprogramming for hiscable properties.


significantly overpaid for the assets. Turner thenacquired the library of the Hanna-Barbera anima-tion studio, which had more than 3,000 half-hourcartoons. While these deals saddled TBS witheven more debt in the short term and almost costTurner control of his company (to a consortiumof investors), he barreled ahead and spun out twomore “crazy” ideas. One was a channel thatshowed nothing but cartoons, the CartoonNetwork; and the other a channel that playednothing but classic movies,Turner Classic Movies.

Even though Turner was succeeding in makingcable a viable threat to the networks, they stillcontinued to ridicule him. As network-news divi-sions were shrinking their news bureaus andfocusing on entertainment, however,Turner choseto take on greater and greater debt by expandingCNN’s bureau presence around the world. “Igambled everything I had and really evenresources that I didn’t have,” he says.

The dismantling of the Berlin Wall in 1989 andthe 1991 Gulf War turned Turner into a legendarymedia figure for recognizing, and acting on, thepublic’s untapped appetite for continuous newscoverage. In reality, the lofty goal of raising the pro-file of news coincided with Turner’s continuingeffort to feed content into the cable system.

He didn’t spend time thinking about his ownstrengths and weaknesses as a business leader, hesays.“I was too busy.Whatever deficiencies I had,I was able to overcome.…I am a generalist ratherthan a specialist,” he adds. If he had spent his timebecoming an expert in only technology or financeor business,“I would never have been able to seethe big picture. Because I was learning a little bitabout lots of different [things], I was able to con-nect the dots.”

1986: TBS acquires theMGM library of film andtelevision properties for$1.5 billion.Turnermakes the decision toacquire the librarywithout consulting hisboard and is criticizedby industry watcherswho claim he overpaidfor the assets.1988: Hoping tomonetize the acquisitionof the MGM properties,Turner launches TNT, atelevision station withan endless supply ofalready-paid-forprogramming.1991: Acquires therights and library ofHanna-BarberaCartoons and itsproduction facilities inyet another move toincrease and ownprogramming.1991: After a decade ofbeing on the brink ofextinction, CNN comesof age during the 1991Gulf War whenAmericans and peoplethe world over are gluedto real-time warfootage.Turner is namedTime magazine’s “Man ofthe Year” for redefiningnews “from somethingthat has happened tosomething that ishappening at the verymoment you are hearingof it.”1991: Marries actressJane Fonda, his thirdmarriage.1992: LaunchesCartoon Network,showcasing the Hanna-Barbera library.


Leadership LessonGold in Them Thar ’Toons

For a person who never watched televi-sion, Ted Turner always had a knack forsavvy programming on his stations, in partbecause he was able to see what others did-n’t: the hidden value in old and well-worntelevision shows and movies. He realizedearly on that they would be a never-endingsource of much-needed content for his bur-geoning satellite-based cable empire.

At WTCG, the shaky precursor to TBS,Turner went against the conventional wis-dom of the 1970s, which was to licensefilms for a few showings. Instead, he choseto buy movies whenever they were avail-able for purchase. He reasoned that insteadof running them a few times on a rentalbasis, he could own them and run them asoften as he liked. He also had the option oflicensing his films and shows to others.Episodes of Leave it to Beaver and I LoveLucy, for example, ran constantly onWTCG. Turner not only promoted theshows themselves, but also the nostalgicfamily values that permeated them.

More than a decade later, Turneremployed the same strategy to acquire evenmore valuable content. In 1985, he boughtthe entire library of the MGM movie studiofor about $1.5 billion. It was an extraordi-narily difficult deal to finance, because Wall Street considered the price too highand because Turner needed to rely on junk bonds to pay for the transaction.Commenting on the deal, Forbes magazinewrote: “It is no secret why Turner wantsMGM. The only consistently profitable part

1994: TurnerBroadcasting acquiresNew Line Cinema,providing more filmprogramming for hisstations.1994: Launches TurnerClassic Movies (TCM)using films from the NewLine Cinema collectionand other properties.1996: Time-Warneracquires TurnerBroadcasting Systems for$7.6 billion.Turnerbecomes the mergedcompany’s vice chairmanoverseeing Time-Warner’s cableproperties, including TBS,CNN, HBO, and NewLine Cinema.1996: Launches CNNSI,a sports news channel.1997: Launches CNNen Espanol.1997: Turner pledges $1billion to the UnitedNations over 10 yearsthrough establishment ofUN Foundation.2000: America Onlineacquires Time-Warner inJanuary.Turner, one ofthe largest individualshareholders in Time-Warner, was notconsulted on how themerged companieswould operate.2000: In May,Turner isofficially named vicechairman and senioradvisor of AOL TimeWarner. Is stripped of hisday-to-day control overTime Warner’s Cablegroup—the company’sfastest growing division,which includes CNN,HBO, and TurnerBroadcasting Systems.


of TBS is the Superstation, WTBS, which isbeamed to 35.6 million TV homes in 205markets, 24 hours a day. Sports fill about25% of its time, and original programminganother 15% or so, while just over 30% ofits programming is syndicated reruns of TVshows and old movies, which Turner mustbuy from third parties. Back in the late1970s, Turner could, and did, buy virtuallyall the programming he needed for peanuts.Today, of course, everyone is on to the game,and prices for old films and television seriesare reaching ridiculous heights. Turner, ineffect, now finds himself in a position anal-ogous to that of an oil refiner short of crudeduring OPEC’s heyday.”

Disregarding such criticism with hischaracteristic devil-may-care attitude,Turner pursued a similar transaction in1991 with the Hanna-Barbera animationstudio. At that time, he already owned 700cartoons, which aired on his cable channels,but the Hanna-Barbera studio, with itsarchive of more than 3,000 half-hour pro-grams of animated films featuring YogiBear, The Flintstones, the Jetsons, andScooby Doo, would dramatically increasehis content base. The acquisition price forHanna-Barbera was in the $250 million to$300 million range, in part because Japan’sMatsushita, the parent company of MCA,was also interested in buying Hanna-Barbera. But Turner teamed up with LeonBlack, a former Drexel Burnham Lambertexecutive who had set up the ApolloInvestment Fund, to finance the purchase.

While these deals saddled TBS witheven more debt in the short term, Turnerspun out two more “crazy” ideas. One was

2001: Turner and Fondafile for divorce.Turnercalls his personalrelationships with hiswives “the biggestfailures” in his life.2002: Starts the first of19 Ted’s Montana Grillswith restaurateurGeorge McKerrow, Jr.Bison selected fromTurner’s ranches is mainfare.2003: Steps down asvice chairman of AOLTime-Warner.Thedecision comes afterthree years of watchinghis power and influencewane as he losesoperationalresponsibilities.2004: Turner asks thegovernment to break upbig media companies,saying they have becometoo powerful, thatprogramming quality hassuffered under them, andthat they leave littleroom for diverseopinions.

a channel that showed nothing but cartoons, the CartoonNetwork; the other was a channel that played nothing but classicmovies, Turner Classic Movies. Cartoons, as Turner knew, are animmensely profitable business because kids will watch the sameshow over and over. By launching a 24-hour cartoon network andanother for classic films, Turner was able to turn these acquisitionsinto money machines. In addition, they provided a launch pad forglobal expansion. In Asia, these days, TV viewers are treated tothe joys of hearing Scooby Doo speak in Tamil.

In his early forays into television, Turner drummed up busi-ness—through the sheer force of his outrageous personality—fromcompletely unlikely sources. When WTCG was struggling forsurvival in the mid-1970s, Turner tried to generate revenue bytelling prospective advertisers that if they wanted their color adsto stand out, they should advertise on his cable channel. Whenasked why the ads would stand out, the reason was that all the“station’s programming was in black and white!” Another gim-mick was to inform advertisers that Turner’s viewers were of aboveaverage intelligence. He had no evidence for this claim apart fromtelling them that it “takes a genius to figure out how to tune aUHF set.”

Despite such antics, Turner slowly built an audience for his television properties on his way to becoming one of the most recognized and successful media moguls of his time.



GEORGESOROSThe Challenge:“It Is Hard to Do Good”

George Soros is the world’s most famous specu-lator—and second most famous investor (afterWarren Buffett). His Quantum Hedge Fund, start-ed in 1969, experienced average returns of 31%over the next 30 years, making billions for himand millions for his investors. His decision toshort the British pound in 1992 and pocket a $1billion profit earned him the title, “The Man WhoBroke the Bank of England.”

But one of his biggest challenges has not beenmaking money; it has been finding meaningful waysto spend it.Unlike many wealthy donors,who directtheir money to a specific medical cause, education-al institution, or arts group, Soros decided long agoto use his wealth to transform social orders. Overthe past 25 years, he has given away close to $5 bil-lion to establish democratic “open societies” pri-marily in Central and Eastern Europe but also inAfrica and Asia. In 1998 and 1999 alone, Sorosreportedly donated $575 million and $570 million,respectively, to his various foundations and causes,solidifying a reputation as “the only U.S. citizen withhis own foreign policy.” Indeed, in some countrieshis donations have single-handedly exceeded theamount of aid given by the U.S. government.

The challenges of structuring donations of thissize—and ensuring that they accomplish what thedonor intends—are enormous. In Soros’s case, heengages in the process with an inherent skepticism

1930: Born inBudapest, Hungary. Hisfather is a lawyer, hismother a homemaker.1936: Soros’s fatherchanges family namefrom Schwartz to Soros.1944: Soros, hisbrother, mother, andfather assume fakeidentities to escapearrest in Nazi-occupiedHungary.1947: Leavescommunist Hungary andhis family to live inEngland.1952: Graduates fromLondon School ofEconomics.1956: Moves to NewYork City, becomesarbitrage trader forbrokerage firm F. M.Mayer.1959: Hired byWertheim & Co. asassistant to head offoreign tradingdepartment.1963: Joins Arnhold &S. Bleichroeder, brokerand asset managementfirm with emphasis onglobal research andtrading.1969: Sets up DoubleEagle fund, a hedge fundlater called theQuantum Fund, with $4 million from wealthyprivate investors.Between 1969 and 2000,Quantum Fund willreturn an average of31% annually.A $1,000investment in theQuantum Fund in 1969will be worth $4 millionin 2000.

1973: Leaves Arnhold &S. Bleichroeder and setsup Soros Fund Manage-ment with $12 million;Quantum is the flagshipfund.1979: Engages in firstsignificant philanthropicventure—providingstipends for 80 blackstudents to attend theUniversity of Cape Townin apartheid South Africa.Unhappy with how themoney is disbursed,Soros discontinues theproject after its first year.1980: Splits withbusiness partner of 12years, Jim Rogers.1981: Cover story inInstitutional Investormagazine calls Soros“The World’s GreatestMoney Manager.” Thatsame year, QuantumFund suffers first majorloss—down 22.9%.1982: Fund recoversfrom previous year’s loss:registers 56.9% growth.1984: Quantum Fundrises 122% to slightlymore than $1 billion;becomes first hedge fundto break billion-dollarbarrier.1984: Establishes theSoros Foundation inHungary, the first of manyOpen Society foundationsdedicated to promotingopen and democraticsocieties throughout theworld. In Hungary, thefoundation providesbooks for libraries andeducational institutions aswell as hundreds ofXerox copiers forcitizens, underscoring theright of citizens to accessand share information.

of large, entrenched charities. During an interviewwith The New Yorker in 1995, he described tradi-tional foundations as “too bureaucratic to respondin a timely way to real need, laden with over-head…and inherently corrupting.” Consequently,during the 1980s, as he was establishing OpenSociety Foundations in places like Hungary, theSoviet Union, Poland, and Czechoslovakia, Sorosset them up to be “short-lived…operated withminimal bureaucracy…and run only by local people,” with Soros himself “maintaining a lowprofile and keeping his ego out of it.”

With a vision this large, it is no surprise that hisinitiatives haven’t always been successful, in partbecause he was dealing with countries in themidst of significant—sometimes revolutionary—transformations. Soros’s legendary skills as a fin-ancier and speculator have been of limited use inhelping him predict the impact that his huge phil-anthropic investments would have on emergingeconomies. As he told biographer Michael T.Kaufman, from 1979 to 1984 his philanthropic ini-tiatives were a series of experiments—some ofwhich failed. “I didn’t know what the hell I wasdoing, and I made some wrong steps.”

His first serious commitment occurred in 1979when Soros provided stipends of $2,500 each for80 black college students at the University ofCapetown in South Africa. Instead of encouragingmultiracial education, the program was met withhostility and the funds were diverted to otheruses. As he notes in his book, Soros on Soros, theapartheid state was “so insidious that whatever Idid made me an accomplice of the system.” Heabandoned the program within a year (althoughhe established an Open Society Foundation inSouth Africa in 1993).



1986: Establishes OpenSociety Foundation inChina; three years later,the Fund shuts downdue to political partyinfighting.1987: Writes TheAlchemy of Finance, thefirst of eight books.1987: Establishes OpenSociety Foundation inthen-Soviet Union, laterRussia.1989: Berlin Wall falls,leading to collapse ofcommunism and majorupheaval in the formerSoviet Union; Sorosgives up day-to-daymanagement ofQuantum to StanleyDruckenmiller in orderto concentrate oninternationalphilanthropy.1990–1992: Establishes16 more foundations informerly Communistcountries, including onein Ukraine in 1991.Number of foundationswill eventually total 50.1992: EstablishesCentral EuropeanUniversity with itsprimary campus inBudapest, the onlyproject for which Soroswill set up a long-termendowment ($250million).1992: Shorts the Britishpound and makes profitof $1 billion whenpound collapses. Earnstitle of “The Man WhoBroke the Bank ofEngland.”

In China, he faced difficult challenges but metwith a similar result. Soros had set up the Fundfor the Reform and Opening of China in 1986 toprovide grants to academics, journalists, scien-tists, and others who would help make China amore open society. But by 1988, he wrote, thefund had become “embroiled in the country’sinternal political struggle…In effect, the founda-tion was run by the secret police.” Soros shut itdown in 1989.

In Hungary, Soros’s money had more impact. Hisfoundation, set up in 1984, was able to supply edu-cational institutions and libraries with 50,000 booksfrom abroad and import hundreds of Xeroxcopiers for use in easily accessible public places.Soros saw the copiers as a “clear metaphor for theentire concept of an open society,” in that theyallowed people to freely gather and distribute infor-mation, and also “signified citizen involvement infinding data and passing it on.” The project becameone of Soros’s greatest philanthropic successes.

In Russia, where Soros set up the SovietFoundation in 1987, the results were mixed.TheMoscow-based Cultural Initiative Foundation, asit was first called,“fell into the hands of a reformclique of Communist Youth League officials,”whom Soros finally removed, and then was run bya man who “turned the foundation into his per-sonal fiefdom.” Soros got rid of him as well. Soroshad to clean house again in 1994 after question-able financial transactions by the foundationadministrators. “I learned from bitter experiencehow difficult it is to run a foundation in a revolu-tionary environment,” he said a year later. ARussian journalist, commissioned to write a history of the Soros foundations, titled his piece,“It Is Hard to Do Good.” Yet the foundation in


1992–93: Gives $50million in aid to UnitedNations refugee agencyto help refugees inBosnia, $100 million tofund scientific research informer Soviet Union, $25million to help Macedon-ian government serviceits debt, and $75 millionto open foundations incentral and EasternEurope and South Africa.1993: Creates OpenSociety Institute tosupport his foundations;OSI becomes head-quarters for the Sorosphilanthropic network.1994: Soros loses $600million by betting wrongon the yen, makes it upby end of year. Quantumhas second worst year of its history with returnof 2.9%.1995: Begins toemphasize philanthropyin U.S.; funds Project onDeath in America topromote discussionabout end-of-life careissues; pushes to allowthe legal use of illegaldrugs to ease suffering;sets up Emma LazarusFund to better the livesof immigrants, amongother projects.1997: Shorts Thailand’scurrency, the baht, andMalaysia’s currency, theringgit.Thailand subse-quently devalues baht,setting off wave ofdevaluations in Malaysiaand elsewhere that kicksoff the Asian crisis;Malaysian Prime MinisterMahathir Mohamadaccuses Soros of being acriminal.

Russia is also credited with a number of successful initiatives, such as funding scientificresearch (one year, Soros gave $500 each to30,000 scientists), supporting the teaching ofhumanities and social sciences, and providingInternet access to regional universities.

In 1989, as the Berlin Wall fell and the SovietUnion was dismantled, Soros’s approach to phi-lanthropy changed dramatically. With hisQuantum Fund now under the stewardship ofStanley Druckenmiller, Soros established 16 foun-dations in formerly communist countries between1990 and 1992, seeing them as a way to helpestablish societies with free markets, free speech,the rule of law, and democratic governments.These years were also marked by the beginning ofa new activism and visibility on Soros’s part.Whilehe preferred to play a low-key, behind-the-scenesrole during the early years of his philanthropy,after 1989, he wanted his voice to be heard. “Hethought he would be a market leader…as he hadbeen so many times in the financial markets.TheWest would follow him…Soros could in someinstances perhaps help decide who would bepowerful—and he could shape these emergingsocieties not from the bottom but from the top.”

Again, it was always more difficult than itseemed. Soros was accused of using his money topush his ideas on developing countries, of med-dling in internal affairs, of blurring the linebetween philanthropy and investing. Respondingto that last charge, Soros says: “To guard against[the accusation that I exploit my political influ-ence for financial gain], I invest only on behalf ofmy foundations and not for profit whenever thispossibility arises.”


1998: Soros funds suffer$2 billion loss in Russia.2000: Quantum Fundloses $3 billion followingsell-off of tech stocks.Druckenmiller resignsand Quantum isrenamed QuantumEndowment Fund, withnew emphasis on saferinvesting to help fundSoros’s philanthropicactivities.2002: French courtfines Soros $2.8 millionfor insider trading,specifically for usingprivileged information tospeculate in shares ofFrench bank SociétéGénérale during failedtakeover bid in 1988.Soros appeals ruling.2003: Gives $12.5million to anti-Bushorganizations, including$10 million to AmericaComing Together—aDemocratic initiativeaimed at get-out-the-vote efforts in 17 keystates—and a web-basedorganization calledMoveOn.org.2003: Publishes TheBubble of AmericanSupremacy: Correcting theMisuse of American Power,his eighth book.2004: Soros FundManagement reported tohave approximately $12billion under manage-ment; Soros’s projectedworth is $7 billion; it isestimated that he hasgiven away $4–$5 billionover the past 25 years.

He has also been accused of playing by his ownrules and changing them when it suits him, acharge he doesn’t refute. “I do not accept therules imposed by others. If I did, I would not bealive today,” he says, referring to his days as ateenager in occupied Hungary when Soros, whois Jewish, and his family had to adopt false identi-ties to escape capture by the Nazis.

Whatever the context, Soros’s extraordinarylevel of philanthropy reflects his own view of him-self as a “financial, philanthropic, and philosophicalspeculator.” Descriptions of his businesssuccesses, for example, often refer to his ability toanalyze huge amounts of information quickly andmake decisive multimillion bets on currency orstock market swings.That same decisiveness hascharacterized his philanthropy. When big projectsarose, Kaufman writes in his biography, Soros wasthe one who decided whether to get involved andhow much to commit. “In philanthropy as in busi-ness, Soros was pulling the trigger.”

As he still is. In a bid to help oust PresidentGeorge W. Bush from office in the 2004 presi-dential election, Soros gave more than $12 millionto Democrats for political ads and other attackstrategies. An article in the Feb. 5, 2004 issue ofThe Wall Street Journal describes Soros as “themost important money man in the DemocraticParty this election year…but he isn’t just writingchecks; he is also imposing a business model onthe notoriously unruly world of politics. Hedemands objective evidence of progress…and heis delivering his money in installments, giving himleverage if performance falters.”

Soros’s attempts to affect today’s “unruly world of politics” appear muchin line with his attempts to alter the course of history after the fall of com-munism. He clearly remains confident in his ability to bring about change,perhaps because his enormous wealth affords him such unusual oppor-tunity. Responding to a question several years ago about why he gave millionsof dollars to Eastern Europe, he replied:“Because I care about the principlesof open society and I can afford it. It is a unique combination.”

Leadership LessonHurricane from a Butterfly’s Wings

George Soros was very much a behind-the-scenes investor dur-ing his early career. This changed in 1992, though, when he madea highly public, and spectacularly correct, bet against the Britishpound. He wagered 10 billion pounds—one and a half times thevalue of all his funds—that the pound would fall against theGerman mark. It did, and Soros made a billion-dollar profit.

In his book Soros on Soros, he says he was alerted to the pound’sweakness by a remark by the German finance minister that “allud-ed to the Italian lira as a currency that was not too sound. I askedhim after the speech whether he liked the ECU (EuropeanCurrency Unit) as a currency, and he said he liked it as a conceptbut he didn’t like the name. He would have preferred it if it werecalled the mark…I got the message. It encouraged us to short theItalian lira, and in fact, the Italian lira was forced out of theexchange rate mechanism shortly thereafter. That was a clear signthat sterling was also vulnerable.”

This was just one example of Soros being able to read the “smallsigns” indicating that a so-called normal situation is turning intoa “bubble, a boom/bust cycle or a crisis. We all know about thehurricane that begins with the flap of a butterfly’s wings, butSoros is the rare person who is habitually willing to follow theimplications. Very often those signs come from politics,” noted aFortune article in 2003.

Soros, by all accounts, has an uncanny ability to predict thefuture on the basis of seemingly random events or even randomremarks that others typically ignore. “George’s genius,” says an


employee of Soros Fund Management, “is in seeing the trend longbefore anyone else does. George realized what was going to happenpractically from the moment the Berlin Wall came down. Becausehe thinks in such broad terms, he saw that German unification wasgoing to be a lot more expensive than [Chancellor Helmut] Kohlwas predicting, than anyone was predicting.”

Getting predictions right has helped Soros’s Quantum Fundmake money by anticipating economic shifts around the world.The January 1995 issue of The New Yorker described Soros asexcelling at “identifying those lacunae where perception laggedbehind reality, leaving room for exploitation.” Soros himself saidthat he was “particularly focusing on changes in the rules of thegame, not in playing by one particular set of rules, but under-standing when new rules came into being—and learning thatbefore others did.”

He explained his ideas further in Soros on Soros, noting, “The pre-vailing wisdom is that markets are always right. I take the oppo-site position. I assume that markets are always wrong. Even if myassumption is occasionally wrong, I use it as a working hypothe-sis…this line of reasoning leads me to look for the flaw in everyinvestment thesis…I am ahead of the curve. I watch out for tell-tale signs that a trend may be exhausted. Then I disengage fromthe herd and look for a different investment thesis.”

Michael T. Kaufman’s biography of Soros, titled Soros: The Lifeand Times of a Messianic Billionaire, offers two examples of how Sorosstayed ahead of the curve by seeing the invisible. During the con-glomerate boom of the late 1960s, companies went on acquisitionbinges to spur growth. Many of these were high-tech firms thatknew they could no longer count on defense contracts won duringthe height of the Cold War. When this strategy seemed successful,other companies also went on acquisition sprees. Imitative behaviorintensified, acquirers became less discerning, and target companieswere no longer judged on their merits. At the same time, “newaccounting techniques enhanced the impact of acquisitions.”Acquisitions had to get larger and larger in order to maintain themomentum. Soros saw what was happening and also where thingswere heading. He “rode the wave as acquisitions grew and then soldshort as prices approached their crest.”



Kaufman cites another instance, in 1972, when Soros began study-ing the banking industry. He decided that it was going to shiftfrom a dull, stodgy business to one with innovation and energy, inpart because business schools were graduating students who weremore interested in profits than their predecessors. So Soros boughta number of bank stocks and “earned about 50% on those shares.”Even more importantly, his involvement helped him better under-stand, and benefit from, international currency markets “when theold system of fixed exchange rates gave way to floating parities ayear later.”

But seeing the invisible is worth little unless it is coupled withthe ability to act on what you see—in other words, to take bigrisks. Much of Soros’s success in the markets depended on his will-ingness to place the kind of bets that would cause ordinaryinvestors to break out in cold sweats. “What makes George so out-standing is his belief that if you like something, you buy it. I can’ttell you the number of times…when I would take a position thatI thought was quite daring and George’s response would be, ‘Whyso little?’ That’s the real key. When he thinks he’s right, he’ll betthe ranch,” said an employee of Soros Fund Management morethan a decade ago.

According to Stanley Druckenmiller, who ran Soros’s QuantumFund for ten years, what gave Soros his competitive edge was “theability to compartmentalize, intelligence, coolness under pressure,insight, a critical and analytical mind.” But Druckenmiller alsorepeatedly cited Soros’s brilliance in ‘pulling the trigger,’ which, hesaid, has little to do with analyzing or predicting trends, but is moreabout “a sort of courage …The ugly way to describe it would be‘balls.’” To Druckenmiller, that meant knowing when to bet it all.“This is not something that can be learned. It is totally intuitive.”

Soros himself thought of risk-taking as a way to clarify his analy-sis of what others might see as an ambiguous situation. “Going tothe brink…serves a purpose,” he writes in Soros on Soros. “There isnothing like danger to focus the mind, and I do need the excite-ment connected with taking risks in order to think clearly.” Whenyou are a serious risk taker, he adds, “you need to be disciplined.The discipline that I used was a profound sense of insecurity, whichhelped alert me to problems before they got out of hand. If I gave

up that discipline, I would have to fall back on due diligence andother forms of routine, and routine is not my strong point…Onceyou take your success for granted, you let down your guard…That’swhen you have lost your ability to get out of trouble.”


131

Using Price to GainCompetitiveAdvantage

6

S am Walton was just plain cheap. He learned the value of adollar early from his parents, who struggled to raise their familyduring the Great Depression. His father worked at a mortgagecompany and foreclosed on farms; his mother set up a family-runmilk business. The two quarreled incessantly, except about onetopic. “One thing my mom and dad shared completely was theirapproach to money: They just didn’t spend it,” Walton writes inhis autobiography, Sam Walton: Made in America.

That devotion to a bargain became the foundation for Wal-Mart. Walton always resisted the temptation to move up profitmargins at the expense of price; he lived by a simple formula: “SayI bought an item for 80 cents. I found that by pricing it at $1.00I could sell three times more of it than by pricing it at $1.20.

I might make only half the profit per item, but because I was sell-ing three times as many, the overall profit was much greater.Simple enough.”

Walton is hardly alone. Many of the Top 25 leaders built endur-ing success for their organizations by managing their costs andprices to gain competitive advantage, though they did so in dif-ferent ways. In Walton’s case, his strategy was to buy low, sell ata discount, and make up for low margins by moving vast amountsof inventory. Wal-Mart, now the world’s biggest company, hascontinued Walton’s tradition by squeezing as much value as pos-sible from its supply chain and passing along those savings to cus-tomers. Michael Dell’s strategy has been similar. He, too, keptcosts low by, in his case, using direct sales as his primary saleschannel and integrating Dell’s supply chain seamlessly with thatof its suppliers. Jeff Bezos, CEO of Amazon.com, used technologyand innovative sales discounting methods to grab market sharefrom traditional bookstores as well as online rivals such asBarnesandnoble.com and Borders.com. In all three cases, balanc-ing the cost-and-price equation was critical to these individuals’ability to build powerful companies.


Chapter 6 Using Price to Gain Competitive Advantage 133

SAMWALTONThe Challenge:Wal-Mart Versus Kmart

The year was 1962. Downtown departmentstores in big cities still employed elevator opera-tors wearing uniforms. In small towns, family vari-ety stores sold everything from Easter finery tofishing rods, with first-name service.

Yet a revolution in retail was brewing as threemerchants with national clout began to discountbrand-name merchandise in big, suburban self-service stores. S. S. Kresge opened its first Kmartin Michigan that year. Dayton’s of Minneapolislaunched its first Target store.The nation’s largestretailer, F.W.Woolworth, started Woolco.

In Rogers, Arkansas, Sam Walton drove fromhis office in nearby Bentonville and opened hisfirst Wal-Mart. Over time, the family-owned dis-counter would eventually overtake the better-capitalized members of the Class of ‘62 with asmall-town strategy that would make it theworld’s largest company. But that ending was farin the future.Walton was to experience a few upsand downs on his way to making a name for him-self in the annals of business history. When thesecond Wal-Mart opened in Harrison, Arkansas,for example,David Glass, a drugstore retailer whowould later succeed Walton as chief executive,attended the grand opening, which featuredwatermelon and donkey rides in the parking lot.“It was 115 degrees, and the watermelon began topop and the donkeys began to do what donkeys

1918: Born inKingfisher, Oklahoma.Father worked for amortgage subsidiary of alarge insurance company,and Sam often traveledwith him as herepossessed hundreds offarms during theDepression. His motherran a milk business.1931: Becomes theyoungest ever EagleScout in Missouri.1936: Graduates highschool in Columbia,Missouri, where heplayed on the statechampionship basketballand football teams.VotedMost Versatile Boy in hisclass.1940: Earns businessdegree from theUniversity of Missouri,moves to Des Moines,Iowa, and works as an$85-a-month manage-ment trainee at J.C. Penney.1942: Drafted into thearmy, but because of aheart ailment is not sentto combat. Supervisessecurity at aircraft plantsand POW camps inCalifornia.1945: Opens a BenFranklin variety store inNewport,Arkansas,financed largely withloans from his father-in-law.1950: Landlord refusesto renew the lease onthe successful BenFranklin store and putshis own son in businessat the location.Waltonrelocates to Bentonville,Arkansas, and opensWalton’s Five and Dime.


do and it all mixed together and ran all over theparking lot,” Glass said. “And when you wentinside the store, the mess just continued.”

Walton eventually cleaned up his opening-daystrategy and got on with the business of expan-sion. As he did, he became fixated on his biggestnational competitor at the time—Kmart. Indeed,he considered his long struggle against the chainto be his company’s greatest outside challenge. Hewould later write in his autobiography, Sam Walton:Made in America, that he “was in their stores con-stantly because they were the laboratory, and bet-ter than we were.” Indeed, Walton went toKmarts to do his own type of reconnaissance. “Ispent a heck of a lot of time wandering throughtheir stores talking to their people and trying tofigure out how they did things. I’ve probably beenin more Kmarts than anybody in the country.”

After 10 years in business,Walton was running50 Wal-Marts and 11 variety stores whose salestotaled $80 million a year. Kmart, which had 500stores and $3 billion a year in sales, was still theleader.With its superior national distribution net-work, the Kmart chain was jumping across thecountry, planting its stores in highly populatedurban centers and growing suburbs. Wal-Martwas plodding ahead with its strategy of saturatingsmall-town America, county-by-county, with dis-tribution centers ringed by stores.

Inevitably, those paths crossed. As Waltonexplained in Made in America, “For a long time, Ihad been itching to try our luck against them, andfinally, in 1972, we saw a perfect opportunity in Hot Springs, Arkansas—a much larger city than we were accustomed to moving into but still close to home and full of customers we

1960: Variety storechain grows to 15stores with sales of $1.4million.1962: Opens first Wal-Mart discount store inRogers,Arkansas.1966: Attends classesheld by IBM on usingcomputers in retailing.1969: Returns toNewport,Arkansas, withWal-Mart’s 18th store.Drives former landlord’sson out of business.1970: Initial publicoffering; opens firstdistribution center inBentonville,Arkansas.1971: Adds associatesto profit-sharing planenacted a year earlierfor managers only.1974: Thinking hewould like more time totravel and play tennis,gives up CEO andchairman jobs butremains chairman of theexecutive committee.1975: After beinginspired by Koreanworkers, introduces aWal-Mart cheer thatbegins,“Give Me a W”and ends,“What’s thatspell? Wal-Mart! Who’snumber one? TheCustomer!”1976: Takes backchairman and CEO jobsafter finding himselfbored with retirementand concerned about asplit developing in thecompany’s management.1977: Nationwideexpansion speeds upwith first acquisition,16 Mohr-Value stores inMichigan and Illinois.


understood.” The way Walton describes it, “Wesaw Kmart sitting there all alone, really havingtheir way with the market.They had no competi-tion, and their prices and margins were so highthat they almost weren’t even discounting.We gotso much better so quickly you couldn’t believe it.”

Kmart retaliated by opening stores in four ofWal-Mart’s better markets, Jefferson City andPoplar Bluff, Missouri and Fayetteville and Rogers,Arkansas. Walton would say later that Kmart’smove into smaller towns led many back then topredict Wal-Mart’s demise. Skirmishes continuedthroughout the South and Midwest into the late1970s. As historian H.W. Brands relates, “Waltongave the order not to yield an inch. No matterhow far Kmart dropped its price,Wal-Mart wouldnot be undersold.” A toothpaste war in NorthLittle Rock, for example, found consumers happi-ly paying just six cents a tube for Crest tooth-paste. “Although Walton recognized that suchextreme price-cutting couldn’t last forever, in gen-eral he adopted the attitude that competition washealthy,” Brand notes.

Wal-Mart’s early underdog status forced it tofind efficient ways to run the business, a disciplinethat eventually made the company stronger. Forexample, it focused on new distribution systemsand cutting-edge technology to polish the opera-tions side, because early on it had no distributorsout in rural America. “Here we were in the boon-docks,” Walton said. “We didn’t have distributorsfalling over themselves to serve us like competitorsin larger towns. Our only alternative was to buildour own warehouse so we could buy in volume atattractive prices and store the merchandise.”

1979: Hits $1 billion inannual sales with 230stores.1983: Opens firstSam’s Club warehousestores; adds PeopleGreeters—employeesdressed in Wal-Martvests smiling andwelcoming customers at store entrance.1984: Puts on grassskirt and dances thehula on the steps ofMerrill Lynch’s WallStreet offices afterlosing a bet that thecompany could notpossibly hit a pre-taxprofit of 8%.1985: NamedAmerica’s richest manby Forbes magazine.1987: On a canoe tripwith a Procter &Gamble vice president,decides the twocompanies should shareinformation to improveinventory managementat both companies,thereby breaking up thetraditional reluctance ofretailers and manufac-turers to trade dataabout their businesses.1988: Steps downagain as CEO.1990: Wal-Martbecomes the nation’slargest retailer.1991: First inter-national store opens inMexico City.


1992: Awarded theMedal of Freedom byPresident Bush on March17. Dies of bone cancerat 74 on April 5. Laterthat year, hisautobiography, SamWalton: Made in America,is published.1999: With 1.14 millionworkers,Wal-Mart is theworld’s largest employer.2003: Wal-Mart topsFortune 500 as both theworld’s largest and most-admired company.2004: Wal-Mart topsFortune 500 again as theworld’s largest company,but continues toencounter increasingresistance to its plans tobuild ‘big box’ shoppingcenters in large metro-politan areas. Opponentscite concerns over thecompany’s laborpractices, pay scales, andthe impact its storeshave on trafficcongestion and localcompetitors. In addition,in the largest private civilrights case ever filed, 1.6million current andformer employees chargeWal-Mart with sexdiscrimination.

By 1981,Wal-Mart had saturated much of thenation’s heartland but had little presence in thedeep South. The company decided to buy thetroubled Kuhn’s Big K chain of 92 stores, eventhough Wal-Mart had only done one other acqui-sition and preferred to grow organically. Theexecutive committee split down the middle onwhether to go ahead with the purchase, reflect-ing Walton’s own indecision over the deal. Heeventually cast the deciding vote to go forward.The acquisition was a turning point.“We explod-ed from that point on,” said Walton. “I think theKuhn’s deal gave us a new confidence that wecould conquer anything.”

In 1990,Wal-Mart at last overtook Kmart withsales of $32.6 billion. Five years later, Kmart’ssales were a third of Wal-Mart’s. “I don’t knowwhat would have happened to Wal-Mart if we hadlaid low and never stirred up the competition. Myguess is that we would have remained a strictlyregional operator,” said Walton, adding that Wal-Mart would probably have ended up under theownership of a national chain “looking for a quickway to expand into the heartland market. Maybethere would have been 100 to 150 Wal-Marts onthe street for a while, but today they would allhave Kmart or Target signs in front ofthem…We’ll never know because we chose theother route.”

In 2002, 40 years after the opening of its firststore and 10 years after Walton’s death,Wal-Martsurpassed Exxon to become the world’s largestcompany. In January of the same year, Kmart filedfor bankruptcy court protection. “If peoplebelieve in themselves,” said Walton, “it’s trulyamazing what they can accomplish.”

Leadership LessonThe Hunt for Bargains

For Sam Walton, one way to keep prices down was by buying ata discount. When Walton was running his first business, a BenFranklin variety store in Newport, Arkansas, he was always look-ing for suppliers that would charge less than distributors workingwith the Ben Franklin chain. He started driving into Tennessee tohunt for bargains. “I’d stuff that car and trailer with whatever Icould get good deals on—usually on softlines [like] ladies’ pantiesand nylons, men’s shirts—and I’d bring them back, price themlow, and just blow that stuff out the store.”

One of the clerks from the first Wal-Mart store that opened inBentonville in 1950 remembers Walton driving to New York topick up a truck load of “zori sandals”—now known as flip-flops—which he tied together, dumped on a table, and sold for 19 cents apair. The clerk, initially skeptical that this strange blister-causingfootwear would sell at all, said that, on the contrary, they “soldlike you wouldn’t believe. I have never seen an item sell as fast, oneafter another, just piles of them. Everybody in town had a pair.”

Walton’s pricing strategy paid off. It helped him gain the loyal-ty of customers in small towns and rural communities, eventhough, ironically, his initial idea had been to go into business ata department store location in St. Louis, Missouri. His wife,Helen, however, balked at the idea of raising a family in a townwith a population over 10,000, so he settled instead forBentonville, Arkansas—population 3,000. Walton, too, believedin the American values embodied by small towns—family, church,and a loyal hunting dog in the back of the pickup. He also believedthat rural communities were underserved by retailers, especially asnational discount chains, including Kmart and Target, began toleapfrog from city to city, bypassing outlying areas when the pop-ulation turned out to be too small to justify the chains’ presence.

To attract attention to his low prices, Walton used some circus-like tricks. Indeed, his first business loan wasn’t for real estate orinventory. He borrowed $1,800 to buy a soft-serve ice creammachine, which he put in front of that first store in Arkansas, nextto the popcorn machine. This led to a strategy of filling his park-ing lots with sidewalk sales, bands, and small circuses—to spread



the word about his business without having to spend money onadvertising. But parking lot parties were also a way to connectwith his customers, to give them something besides cheap motoroil and mattress pads. “Back then, we tried literally to create acarnival atmosphere in our stores,” Walton later wrote. “We wereonly in small towns, and often there wasn’t a whole lot else to dofor entertainment that could beat going to the Wal-Mart.”

Many Wal-Mart employees at Walton’s stores came from thesesame small towns, which cemented even further Walton’s connec-tion to the local communities. Stores sponsored charity events—including kiss-the-pig contests—organized parades, and offeredscholarships to help local kids attend college.

Walton’s success in the execution of his pricing strategy wasbased on his ability to build an organization that acted in syncwith his vision and values, one that emphasized homespun funalong with inexpensive marketing events. Wal-Mart employees inNebraska, for example, formed a precision shopping-cart drillteam to perform in local parades. In Georgia, Wal-Mart workerswon first place in the Irwin County Sweet Potato Parade by dress-ing up as fruits and vegetables grown in the southern part of thestate. In 1987, after losing a bet on a sales target, a Wal-Mart vicepresident put on pink tights and a blond wing and rode a whitehorse around the Bentonville, Arkansas town square.

“We’re constantly doing crazy things to capture the attentionof our folks and lead them to think up surprises of their own,things that are fun for the customers and fun for the [employees],”Walton said. “If you’re committed to the Wal-Mart partnershipand its core values, the culture encourages you to think up allsorts of [ways] to break the mold and fight monotony.” All thatfun, Walton believed, dropped down to the bottom line.

In the early days of the company, Walton admits he was chintzywith his employees. In 1970, when he began a profit-sharing pro-gram at Wal-Mart, he limited it to management only. A yearlater, at the urging of his wife and also because of union organiz-ing at two Missouri stores, Walton reversed what he called his“single biggest business regret” and expanded the profit-sharingprogram to all employees. In another stroke of egalitarianism, he borrowed an idea from his first and only retail employer,

J.C. Penney, and began calling all Wal-Mart’s employees “associ-ates.” “The truth is, once we started to experiment with this ideaof treating our associates as partners, it didn’t take long to realizethe enormous potential it had for improving our business. And itdidn’t take the associates long to figure out how much better offthey would be as the company did better.”

Walton himself filled the role of cheerleader-in-chief, flying into visit stores in the early part of the week and returning toBentonville for managers’ meetings on Fridays and Saturdays.“You gotta get out there. You have to talk to the people. You haveto listen to them, mostly. You have to make them know this is apartnership. That’s our secret. We have been able to motivate ourpeople to a higher degree than most any other retail company.’’

Valuing a Dollar

Walton combined this penchant for discounting—he alwaysinsisted that the markup on any item be kept to 30%, no higher—with low overhead, to the point where some of the company’s firststores were located in old cattle auction yards or former Coca-Colabottling plants. His desire to keep operating costs low shows up inhis book’s first chapter titled, “Learning to Value a Dollar.” In ithe writes: “Every time Wal-Mart spends one dollar foolishly, itcomes right out of our customers’ pockets. Every time we savethem a dollar, that puts us one more step ahead of the competi-tion—which is where we always plan to be.”

The rent Wal-Mart paid as late as the 1970s averaged less thanone dollar per square foot. Walton’s constant pressure to maintainlow prices paid off in the crowds of people that overran Wal-Mart’sstores, thrilled to have the same opportunity to buy discountgoods as shoppers in bigger towns and cities. Heavy sales volumedelivered the money Walton needed to continue expanding, andexpand he did. Between 1976 and 1980 he opened 151 new stores,for a total of 276. During the 1970s and 1980s sales doubled aboutevery three years. By 1990—five years after Walton had beennamed the richest man in America by Forbes magazine—sales rangup at $26 billion and profits totaled $1 billion.

Eventually, Walton would go head to head with chains likeKmart and other traditional retailers. Walton beat them all, not


just through sheer size and relentless discounting, but also by hisadoption of sophisticated technology that brought huge advan-tages in operational efficiency, including better inventory control,automated distribution centers, and satellite systems to collect,exchange, and store data. It’s a competitive advantage the Wal-Mart empire still holds today.

Walton’s timing also helped. Adrian Slywotsky, in his bookValue Migration, writes about a “significant shift in the prioritiesof a large segment of American consumers” between 1970 and1990. Consumers, he says, became increasingly price-sensitive, forgood reason: “With tax, interest, medical, and social security pay-ments growing from 25 percent of personal income in 1970 to 34percent in 1990, the average middle-income family faced a realdecline in its purchasing power.” This was coupled with the shiftof more women into the workforce and longer work weeks, all ofwhich meant less time and money for the average woman to spendshopping.

Wal-Mart met the challenge. By discounting everything andpiling it all into huge 100,000-square-foot stores, Wal-Mart“freed up 30–50% of [many consumers’] discretionaryincome…and trimmed an average of two hours a week off [their]shopping time.” The company also opened the Sam’s Clubs whole-sale chain in 1983, a new business that sold goods in bulk and tar-geted customers who were even more price-conscious than thealready price-conscious Wal-Mart shopper.

Walton never moved his company headquarters away fromBentonville, and he loudly disagreed with critics who suggestedthat by driving local stores out of business, he was destroying thevery small towns he professed to believe in. “Of all the notions I’veheard about Wal-Mart, none has baffled me more than this ideathat we are somehow the enemy of small-town America,” he said.Quite the contrary, Walton felt his stores were the salvation ofmany communities that were losing customers and jobs to largertowns nearby. A lot of these critics, Walton added, are probably“folks who grew up in small towns and then deserted them for thebig cities decades ago. Now when they come home for a visit, itmakes them sad that the old town square isn’t exactly like it was


when they left it back in 1954. It’s almost like they want theirhometown to be stuck in time, an old-fashioned place filled withold-fashioned people doing business the old-fashioned way.”

Through much of the 1980s and into the 1990s, as Wal-Martbegan its national expansion, analysts questioned whether thecompany would continue to flourish without Walton at the top (hedied in 1992). According to William Cody, managing director ofthe Jay H. Baker Retailing Initiative at Wharton, “If you askedWalton, he would always downplay it, but now when you talk toanyone at Wal-Mart who worked for him, they still speak as if he’sin the room. The culture that he gave that organization still per-vades it 12 years after his death, although there are probably a lotmore expensive cars in the parking lot than he would appreciate.”



MICHAELDELLThe Challenge:Managing Extraordinary Growth

Like the processing power of computer chips, forMichael Dell, founder and chairman of Dell Inc.,business has grown at an exponential rate.

In its first year, the company moved four times,starting out in a 1,000 square-foot office and end-ing up in a 30,000-square-foot factory the size of afootball field. Less than two years later, the compa-ny had to move again. In its first eight years, Dell’srevenues grew about 80% a year, then nearly 60%for the next six years.“Our revenues are close to$50 billion and we are only 20 years old,” Dell says.“If you look at most companies with those rev-enues, they have been around 50 or 100 years.Thebiggest challenge, by far, has been developing ourorganization to keep pace with the incrediblegrowth of the business.”

Such phenomenal expansion clearly came withsome painful lessons for its youthful founder, whohad spent his freshman year at the University ofTexas at Austin running a business upgrading PCs.By the end of the year, sales were hitting $50,000to $80,000 a month. His success inspired Dell todrop out of school and officially start DellComputer Corp., the first company in the indus-try to sell custom-built computers directly to endusers—thereby bypassing the then-current strategy of using computer resellers to sell mass-produced units.

1965: Born the secondof three sons in Houston;father is an orthodontist,mother a stockbroker.1980: Buys firstcomputer, an Apple II,then takes it apart to seehow it works.1982: Skips a week ofhigh school to attend theNational ComputerConference, theforerunner to Comdex,at the Astrodome.1983: Starts sellingupgraded PCs andcomponents from hisfreshman dorm at theUniversity of Texas; movesout of the dorm and intoa condominium by theend of the school year.1984: Leaves college,forms Dell ComputerCorp. selling computersdirectly to customers,bypassing dealers.1986: At Comdex unveilsa 12 megahertz PC sellingfor $1,995 compared toIBM’s 6 megahertz modelselling for $3,995.1987: Opens operationsin the United Kingdom.1988: Begins selling tolarge customers, includinggovernment agencies;raises $30 million in initialpublic offering.1989: Gets caught withexcess inventory ofmemory components andcancels overly ambitiousOlympic program thatcombined desktop,workstation, and servers,but was more technologythan consumers wanted.


1990: Begins sellingthrough consumer storessuch as CompUSA andBest Buy; opensmanufacturing plant inIreland to serve Europe.1991: Converts productline to faster Intel 486microprocessors.1992: At 27, becomesyoungest CEO of aFortune 500 company.1993: Posts quarterly lossdue to exit from note-book and retail marketsand restructuring inEurope. Cancels secondpublic offering.1994: Moves back intonotebooks with Latitudeline; opens first Asia-Pacificoperations in Japan andAustralia.1996: Takes direct-orderconcept from telephonesales to the Internet atDell.com.1996: Enters the servermarket, triggering doubtsby analysts that his PCcompany can sell thelarger machines.1997: Launches “The Soulof Dell” campaign todevelop a culture withinthe company as it windsdown from its early phaseof rapid growth.1998: Opens a sales andmanufacturing center inChina.1999: Makes firstacquisition, ConvergeNet,a storage-area equipmentmaker; opens plant inBrazil.2000: Caught in the post-dot.com technology bust,Dell shares sink from $58in March to $16 inDecember.

In the early days, rapid growth fed the compa-ny’s energetic can-do spirit. Engineers helped outon the assembly line. Salesmen stuffed RAM chipsinto tubes while taking orders on the phone. Dellpursued any and all opportunities for growth,including a new Olympic product line that encom-passed desktop, workstation, and servers.

That was the problem. By the late 1980s, thecompany was big enough that when it stumbled,the mistake was obvious. In 1989, the companywas caught with excess inventory in computermemory just as the industry was shifting from256K to 1 megabyte. At the same time, theOlympic line proved itself to be a costly flop, inpart because it overemphasized technology and“provided way more than what the customerwanted…” In short, Dell had taken its eye off theall-important end user.

Not one to touch a hot stove twice, Dell cor-rected those mistakes and enjoyed three years ofgrowth that, looking back on them, once again sethim up for a fall. The company strayed from itsdirect-selling model and entered the retail distri-bution chain in 1990.The move drove up sales, butturned out to be unprofitable.Then in 1992, Dellinitiated price cuts in its assembled computers inorder to head off competition. Sales grew from$890 million to $2 billion, severely straining thecompany’s operations and management. “By theend of 1992, we still had the infrastructure of a$500 million company,” Dell wrote in his book,Direct from Dell: Strategies that Revolutionized anIndustry. “Just about every system we had installeda couple of years before was now unable to sup-port our business,” everything from the financefunction to factory systems to the phone network.

Dell knew he needed help. He brought in out-side managers and introduced a strict profit &loss initiative that soon restored the company toprofitability. By the end of 1993, Upside magazinenamed Dell turnaround CEO of the year, prompt-ing him to comment:“I hope I don’t ever win thataward again.”

For the most part, Dell has grown organically,with no big acquisitions or mergers to add instantemployees, plants, or customers.To cope, Dell hastried to build a culture in which employees areequipped not just for their current job, but fornew jobs ahead. “I see the rational kind of com-mand and control structure—where everything ishierarchical—as working less and less well,” saysDell.“What’s really valued in leadership is not justexecution, but also vision and inspiration anddriving commitment.”

The vision part was especially important. Everytime the company entered a new geographic mar-ket, or offered a new product or service, it wasmet with skepticism, recalls Dell.“When the com-pany was only three years old, we went outsidethe U.S. and all we heard was, ‘It’s not going towork here. Our country is different.You need togo back home. You’re only 22 years old. Don’teven try it here.’”

The same thing happened when the companybegan to offer notebooks and servers. Dell recallsa meeting with analysts in New York in 1996 as thecompany was entering the server market. “Thereaction was, ‘That’s a bad idea.You guys are goodat desktops and notebooks.You’re going to wastea lot of money. We’re not sure you have the tech-nical capability.’” Dell, however, was looking onestep ahead, arguing that if the company did not

2001: First companylayoffs; 1,700 employees,or 4.2% of its globalworkforce, areeliminated in response toslow PC sales.2002: Ships first bladeservers and enters thehandheld market withAxim X5 PDA.2003: Changes companyname to Dell Inc.,reflecting move intoother electronics,including printers andtelevision sets, afterseveral years of slowingPC growth.2004: Relinquishes CEOtitle to Kevin Rollins;remains chairman.



make this move, competitors would be able to charge high prices for theirservers in order to subsidize their PC business and undercut Dell. “I neverthought for a second that we weren’t right. Not even for a nanosecond.”

The doubts, according to Dell, have worked to his advantage.“Competitors believed the skepticism and massively underestimated theimpact we would have on the system. Go back 10 or 15 years and they weresaying, ‘Oh well, Dell is selling to a small niche in the market; only a certainpercentage of people will buy using that method.’ Eventually, the nichebecomes the whole market.”

Meanwhile, with the explosive pace of growth an ongoing challenge, deci-sion-making structures at the company evolved from a strategy of relying onin-house entrepreneurs to one that relied on outside advice, better long-term planning, and shared decision-making among top executives. In addition,while managers in most companies gain increasingly broad responsibilities asthey move up the chain, at Dell, it works in reverse. Jobs continue to be seg-mented, with executives focusing more intensely on fewer aspects of thebusiness at it grows.

Even Dell has phased himself out of a job several times, adding top exec-utives to the “office of chairman.” In 2004, he dropped the CEO title alto-gether to focus on long-range strategy and technology issues and leave day-to-day operations to Kevin Rollins, who had worked with Dell as an outsideconsultant. “We don’t make any big decisions alone,” says Dell. “We makethem all together and our decision quality is far higher.”

Despite the wild ride, Dell believes in rapid growth, even hypergrowth.Young companies, he suggests, need to stretch for seemingly impossible goals,as long as the company holds true to its place in the industry and adopts solidmanagement disciplines.

Even Dell’s youth and inexperience turned out to be assets. “They werehelpful in the sense that I was naïve enough to think I could achieve thesethings,” he says.“It was also helpful in that I was asking different questions andapproaching the problems from a new perspective.That became part of ourculture—to set extraordinary goals and learn by making mistakes.”

Leadership LessonCutting Out the Middleman

Walton believed that a bargain is a bargain anywhere—and thatlow prices are like magnets exerting an increasingly powerful pullon an ever-widening base of customers. At Dell, founder andchairman Michael Dell, too, says a low price translates into anylanguage or culture. “The best value to the customer is an eco-nomic proposition that is valuable in Germany, France, Japan, orNorway. It doesn’t matter. People have a sense of value that goesbeyond a cultural affinity.”

Michael Dell first experienced the PC business from the vantagepoint of a frustrated consumer. Buying a computer involved“incredible inefficiencies. It took way too long and it cost way toomuch money. And the level of service wasn’t very good either,” hesays. Dell’s idea was to cut out the middleman—computer dealerswho sold machines manufactured by IBM and others—and elimi-nate the markups added at each level of distribution. Instead, thecompany would take an order directly from the consumer over thetelephone or Internet, assemble the machine itself, and consolidatethe markups into one ideal low price. Prices could decline even asprofits rose. Manufacturers had relied on this model to sell to largeindustrial customers, but no one had yet seen the advantage of asimilar approach with individual PC owners.

“There were obstacles,” says Dell. “One of the earliest was, ‘Howdo you convince people to buy a computer over the phone?’” Theanswer was to offer a 30-day money-back guarantee and on-siteservice. “We systematically eliminated the need for a store,” saysDell. “We had to break the stereotype that this is a mail-ordercompany. It’s a computer manufacturer selling directly to cus-tomers.”

Today, one of Dell’s chief selling points—and strategic advan-tages—is low price driven by low costs. The company spends verylittle on innovating its own products; its research and develop-ment budget, for example, is less than 2% of revenues. Instead,Dell buys components from a handful of suppliers with whom itmaintains close relationships, thereby guaranteeing continuedhigh quality and reducing inventory throughout the entire chain


through standardization. Dell can not only squeeze its own costsby ordering just the inventory it needs, but it also uses its data oncustomers’ demand patterns to help suppliers better manage theirown production. Taking orders for custom machines directly fromcustomers also allows Dell an advanced look at what these cus-tomers want in the next generation of PCs. “Typically, manufac-turers don’t have a direct relationship with the customer,” saysDell. “They are insulated. They let the dealer take care of that. Wenever had this history and it’s a tremendous resource for us.” Theresult has been “all kinds of efficiencies…and the ability to deliv-er lower prices and better value.” Sharing these efficiencies withthe customers and suppliers also ensures their loyalty in the future.

The Dell build-to-order model relies on other advantages thatcontribute to its ability to maintain low prices. Industry-standardtechnology, for example, is cheap and commoditized, thus addingto the ability to predict component costs and maintain certainprice levels. Referring to what it calls Dell’s “mastery of the com-puter industry’s central dynamic: falling prices,” a May 2004 article in The Wall Street Journal noted that technological advances“continually shrink the cost of disk drives, display screens, andcomputer chips. Each week, those costs fall by roughly 1%, caus-ing PCs to lose value even as they sit in warehouses or showrooms.”Dell’s advantage, the article added, is that its “PCs are built onlyafter a sale is made, with components procured at the cheapestprices available, a cost advantage over rivals of roughly 6% perunit, according to Dell estimates.” Dell translates this cost advan-tage into a permanent price advantage by “adjusting pricesminute-by-minute based on demand, costs, competition, and eventype of customer.”

That type of efficiency, and the price flexibility that it allows,has helped the company reach sales of $41 billion, gross marginsof more than 18%, operating margins of more than 8%, and a rep-utation as the world’s number one direct-sale computer vendor—achieving cost leadership and quality leadership at the same time,something many companies find hard to do.

So when the company wanted to expand its product lines in themid 1990s, it turned to the business sector, selling network serversand entire systems to companies by using the same low-cost,


direct-sales model that was effective in conquering the PC market.In the enterprise market, says David Croson, a former Whartonprofessor who is now at MIT, reliability matters more than any-thing else, so it wasn’t a major jump for Dell to become a servername. “It was precisely the right strategy for Dell to try to lever-age its brand name in the domestic household market to get morecurrency in the business market.” In 2003, 76% of Dell’s saleswere generated by corporate customers.

Dell repeated that strategy again in the next decade when, afterseveral years of anemic corporate spending on technology, thecompany decided that people’s homes were the next frontier for itsproducts. In 2003, Dell began to extend its brand into computerperipherals, most notably printers, whose sales topped one millionthe first year they were offered. Borrowing a play from its PCmodel, Dell partnered with other companies that make printersand printing components—with the exception of Hewlett-Packard and Canon, which have their own brands—and appliedthe Dell name the same way it had slapped its name on IBM cloneswith components made by Intel and Microsoft.

“I think we can save customers a lot of money there and delivera lot of value,” said Dell in a magazine interview, referring to theprinter market. “There are [many] companies that have technolo-gy and intellectual property, but have no brand, no marketing, nodistribution.” Consequently, he predicted, the main players in theindustry will see Dell “as a wonderful path to the market.”

Dellevisions

After carving out space next to the desktop for its printers, Dellbegan to move into home entertainment. It introduced the DellDJ—an MP3 player—and other consumer electronics, including liq-uid crystal display (LCD) televisions that became known asDellevisions. “The PC is becoming more and more the center of theentertainment experience,” Dell said at a conference on emergingtechnology at MIT in 2003. “The PC is not just a computingdevice—it’s entertainment, it’s music, it’s videos, and it’s television.”

LCDs are another product that makes strategic sense, accordingto Dell. “We sell more LCD monitors than anyone in the world, soadding (television) tuners to them is a fairly obvious extension.


We’re seeing a lot of customers use the monitor now. We started itin Japan, but it’s taking off rapidly here. We have broadened [into]17-, 23-, 30- [inch displays]. We will keep pushing those as well.”

Dell has met some of the same resistance to selling its newerproducts over the telephone and Internet that it did when it firstset out to sell computers direct to the public in the 1980s.“Printing is a good example. A lot of people said, ‘Well, you can’tsell printers. People have to see them.’ We have sold way moreprinters than we thought we were going to,” Dell says, adding thatwithin six months the company had 12% of the all-in-one print-er/fax/scanner market in the U.S. Monitors are another example.Again, industry wisdom said that customers had to see thembefore they would commit to a purchase. Again, that turned out tobe untrue. Dell today has 18% market share.

But the move into consumer electronics brings the companyinto competition with an entirely new stable of competitors,including Sony, a consistently top-ranked global brand. Dell isundeterred. He sees competitors with margins that are at least fatenough to support dealers. “Look at the value chains in consumerelectronics,” he says. “They are really inefficient in terms of thedealers, the distributors, the cost structure. Take this 30-inch LCDthat we just introduced for $3,299. It’s at a much, much betterprice than any product out there—certainly than any product witha brand people would recognize.”

Meanwhile, back on the personal computer front, Dell faceshuge competition from Hewlett-Packard which, since it acquiredCompaq Computer in 2002, has been challenging Dell’s domi-nance in the market by selling PCs at prices so low that HP isbarely making any money on the deals. Through its PC subsidiza-tion, HP hopes to attract new customers who will then purchasesome of the company’s higher-margin items, such as printers andconsumer electronics.

According to Croson, Hewlett-Packard has chosen a strategythat would have “worked well when Dell was a PC-only companybut that is suicidal in 2004. It has subsidized basic PCs, which arecomplements to Dell’s entire non-PC product line…I’m sure thatDell would be delighted, on balance, if customers were to buy thezero-margin Compaq PC and then splurge on a $3,300 Dell LCDmonitor. The Dell brand is placed on a dazzling display on the


desktop and the HP/Compaq brand is attached to a piece of com-modity hardware hidden under the desk.”

In addition, Dell will say that while price is key to a brand, it’snot everything. “We figured out a long time ago, if you just havea low price, that doesn’t win. You’ve got to have some great valueand satisfy customers to win over a long period of time.” If the PCmarket is an indicator, Dell’s strategy has built brand loyalty,ranking first among the major brands with a 77% repurchase rate,followed by Apple and Hewlett Packard/Compaq.

Dell is betting the formula will work with music and television.“We took that business model and applied it to adjacent productsand services. Today we are enormous, but we still have only a 5%share in an $800 billion market. We have a long way to go.”



JEFFBEZOSThe Challenge:Raising Capital for Amazon.com

It’s been a rough ride for Amazon.com since itraised $54 million in 1997 in one of the earliestblockbuster Internet initial public offerings.The e-commerce pioneer saw its market capitalizationsoar to $32.1 billion and then plummet to $8.9billion when the Internet bubble burst; it watchedbrick-and-mortar retailers stream online to com-pete on its digital turf; and it lost billions of dollarsover a span of six years, to the point where somedismissed the site as “Amazon.org” because, asthe joke went, it appeared to be a not-for-profitcompany.

Yet according to Jeff Bezos, Amazon.com’s 39-year-old founder and CEO, his biggest challengecame in 1995 when he tried to raise $1 million inseed capital to launch his company and keep itoperating for at least two years.“There was a timethere when the whole enterprise could have beenextinguished before it had even started,” he says.

During the now legendary trek from New Yorkto California in 1994, Bezos’s wife MacKenziedrove while he wrote a business plan on his lap-top for a bookstore that would use the power ofan emerging networking technology—theInternet—to revolutionize retailing.

If it had taken him just another year or two toreach Silicon Valley, he would have found investorsclamoring to fund his idea, Bezos says. But the

1964: Born Jan. 12 inAlbuquerque, NewMexico. His mother,Jacklyn Gise, marriesMiguel Bezos, eventuallyan Exxon executive, whoofficially adopts him. Henever knows hisbiological father.1977: Bezos is profiledin a book, Turning onBright Minds: A ParentLooks at Gifted Educationin Texas. The bookfollows 12-year-old Jeff(renamed Tim to protecthis privacy) through hisschool day in anadvanced program atHouston’s River OaksElementary School.1982: Graduates fromhigh school as the classvaledictorian and entersPrinceton with dreamsof becoming atheoretical physicist.Surrounded by brilliantphysics students, soonrealizes that he has thepotential to be amediocre physicist atbest. Switches majorsand begins studyingelectrical engineering andcomputer science.1986: Graduates summacum laude, Phi BetaKappa from Princetonwith a bachelor ofscience in engineering.Becomes director oftechnology at Fitel, astartup with anambitious plan to createa global equity tradingnetwork.1988: After two years atFitel, joins Bankers Trustlooking for greater jobsecurity. Directs thebank’s IT programs.

investment frenzy that sparked the go-go days ofthe Internet bubble wouldn’t kick in until 1997.Then, he adds, “people were raising $60 millionwith a single phone call.”

Serial entrepreneurs—those who have a trackrecord of starting up several companies—usuallyfind venture capitalists’ doors wide open, butBezos had no such base from which to raise $1million. The amount itself was too low to piqueinvestors’ interest. He did, however, have a$100,000 investment from his parents, the “clas-sic seed round that comes from people who arebetting on the entrepreneur rather than on thestartup idea,” Bezos notes.

Banking on a few contacts he had from hisdays working on Wall Street, Bezos managed toline up meetings with several angel investors inSilicon Valley. “I talked to all the people I knewwho I thought could afford to invest $50,000,” hesays. Over a six-month period in early 1995,Bezos met with about 60 private investors.At thesame time, he was also recruiting programmersto develop the website and working out thedetails of starting a company that, as yet, had noprecedent. Raising the money “was more difficultthan we expected,” he says. “It is hard to get people to invest $50,000 because the worst-caseoutcome is not that unlikely; and the worst-caseoutcome is that you lose your entire investment.”

Although no “capital crunch” existed in 1995,investors were still in the habit of carefully evalu-ating each business plan before opening theircheckbooks.With little understanding or faith inthe Internet’s potential, they were skeptical. “Wegot the normal comments from well-meaningpeople who basically didn’t believe the business


1990: At 26, becomesthe youngest vicepresident in the historyof Bankers Trust. Despitethe honor, Bezos isbored and searches for away to escape financialservices. Decides his realambition is to takeadvantage of the powerof computers andautomation torevolutionize business.1990: Moves toanother financialservices firm, the hedgefund D.E. Shaw. Bezos isimpressed with Shaw’sintellect and creativity indeveloping new tradingstrategies.1994: At D.E. Shaw,Bezos is told to explorenew business oppor-tunities in the suddenlyexploding online world.Quickly realizes thatselling books over theInternet makes the mostsense given that bookcatalogues have beendigitized for the pastdecade. Shaw is notprepared to delve intoselling books overInternet.1994: Quits his job andturns to his parents forseed money.To makesure he will always bewelcome back home, hesets their expectationslow by assuring themthey will lose theirentire $100,000investment.1994: Heads out Westwith his wife, MacKenzieTuttle. Stops in SiliconValley to enlist a handfulof programmers andthen heads to Seattle toset up a virtualbookshop.


plan; they just didn’t think it would work,” Bezossays. During his visits to investors, he recalledbeing told things like: “You can special orderthese books”…“Why would someone buy themonline?”…“If you’re successful, you’re going toneed a warehouse the size of the Library ofCongress.”

What made Bezos’ challenge so difficult wasthat he needed to raise the entire $1 million atone time. He didn’t have the luxury of getting$50,000 one week and then another $50,000 sev-eral weeks later. If somebody puts in $50,000,they worry that an entrepreneur might fritteraway that money “before it could be combinedwith the rest for maximum benefit,” Bezos says.“So toward the end of the process, it has to besynchronized.”

Bezos never considered lowering the amount ofcapital he was seeking. “It wasn’t a practical solu-tion.” If he had suddenly settled for $500,000,investors would have looked askance.“They wouldhave said,‘What has changed so that now you onlyneed $500,000, and is my $50,000 going to be atrisk because you didn’t raise the $1 million?’”

But a few prescient investors sensed that Bezoswas ready to capitalize on a seismic shift thatwould revolutionize nearly every aspect of thebusiness world. Other companies that would laterattain legendary status—like Netscape, which cre-ated the web browser for non-technical Internetusers, and Yahoo, which cataloged the explodingnumber of web sites—were appealing for seedmoney as well. The excitement about the web’spotential was quietly beginning to percolate.

Bezos had more than just his persistence tohelp convince these wary private investors. Using

1995: Amazon.comlaunches in July.TheSeattle yellow pages list atelephone number forAmazon.com resulting ina large number of peopletrying to place orders byphone. Bezos de-lists thecompany from the phonebook, pushing to be anInternet-only retailer.1997: Amazon.combegins trading on theNASDAQ as AMZN atsplit-adjusted price of$1.50.1998: Amazon.comexpands from being onlya bookstore to sellingmusic CDs.1999: Amazon.comstock peaks at $113 pershare, but the companyhas yet to turn a profit.Bezos remains focusedon plowing all revenueback into expanding thecompany and establishingits brand name andreputation as thepremier e-tailer.1999: Expands to sellingtoys, electronics,software, and videogames. Company alsoencroaches on eBay’sterritory by launchingAmazon.com Auctions.1999: Bezos ranks No.19 on Forbes global richlist with a fortune inAmazon stock worthabout $10 billion.1999: Named Time’sPerson of the Year. Timenoted that Bezos “notonly changed the way wedo things but helpedpave the way for thefuture.”


research from John S. Quarterman, one of theearliest people to collect Net usage data, Bezosreported to his investors that the web was grow-ing at 2,300% a year. “Things growing at 2,300%are invisible today and everywhere tomorrow,”he told them.The business plan he had typed onthe cross-country drive envisioned an onlineretailer focused on selling books—a “bookstorewith more than 10 times the selection of even thelargest physical superstores.” He explained thathe was going to build something unique onlinethat could not be replicated in the physical worldor through catalogs.

Investors began to realize that he had plannedwell into the future. Bezos, for example, talkedabout connecting the power of the Internet withthat of databases. He proposed a “personalization”service that could highlight products to a shopperbased on his or her previous purchases. (This serv-ice launched in 2000.) “Ultimately that $1 millionwas raised, $50,000 at a time, with about 20 angelinvestors,” Bezos says.A year later, venture capital-ists began to line up outside Bezos’ door.The bluechip venture capital firm Kleiner Perkins Caufield &Byers was among those that pumped $8 millioninto the company, a move that paid off handsomelywhen the e-tailer went public.

Looking back at the arduous process of raisingseed capital, Bezos says he clearly benefited fromthe experience. “I don’t think it should be easy.One of the things that happened to some of thecompanies who started during the bubble is thatthe money was too easy to raise.” And so, headded,“it was not appropriately valued.”

2001: After losing about $3 billion since itslaunch,Amazon.comfinally turns a profit of$5 million in the 4thquarter.2002: Bezos’ fortunedwindles down to $1.5billion in Amazon stockand he is now rankedNo. 293 on Forbes globalrich list.Amazon stockhas gone from $1.50 pershare at its IPO up to$115 and now sits at$12. Bezos says he hasno interest in pushingthe stock price higher inthe short-term.Tells hisemployees to insteadfocus on customers as along-term strategyrather than oncompetitors or stockprices.2004: In January,Amazon reports its firstfull-year profit—earning$35 million for all of2003—since its launch in 1995.

Leadership LessonDiscount Warfare

What Dell did for PCs—cut costs and prices by eliminating dis-tribution systems—Jeff Bezos, chairman and CEO ofAmazon.com, did for books. He avoided the lavish office furniture,foosball tables, and sushi lunches that marked many dot-com start-ups in the 1990s. Instead, he prided himself on keeping expenseslow. Even employee desktops were simply old doors. “It’s a sym-bol,” Bezos says, “of the fact that we spend money on things thatmatter to customers.”

On the other hand, Amazon.com has never shied away fromspending cash to gain market share. In May 1999, just asBarnesandnoble.com was preparing for its initial public offering,Bezos announced that his company would begin offering best-sellers at 50% off list price, undercutting all his competitors butat the same time guaranteeing that almost no one would make anymoney. “This is not a sale, this is not a promotion, this is everydaylow pricing,” said Bezos in a company statement at the time.Barnesandnoble.com and Borders.com responded by matchingAmazon.com’s prices, but the online retailer—which had alreadyfine-tuned the act of squeezing out inefficiencies by harnessingweb technologies and industrial automation processes—was sever-al steps ahead of them.

In 2001, Borders.com threw in the towel and instead partneredwith Amazon.com, which took on the job of managing and fulfill-ing orders placed on a co-branded site. Bezos had no intention ofgloating over the victory. “The goal here is to provide an even bet-ter customer experience,” he said at the time. The partnershipoffered customers the option of reserving books over the web, andpicking them up or returning them at a Borders store. It also pub-licized invitations to author book readings.

To cut prices even further, Amazon.com in 2001 brought back apromotional stunt that was common during the Internet boom.The company offered free shipping for orders over $99, telling customers they no longer had to factor in shipping charges whenconsidering an online purchase. Less than a week later,Barnesandnoble.com followed suit. The move didn’t go over big on


Wall Street, which expected Internet companies to focus on mak-ing a profit rather than returning to the pre-bust days of offeringfreebies just to attract new customers.

Nevertheless, Bezos charged ahead. In June 2002, he slashed theorder minimum for free shipping to $49, unconcerned over howthe strategy would affect the bottom line over the next few quar-ters. “When you lower prices, it always hurts your results in theshort term, always, because the additional volume that you ulti-mately get from having lower prices does not materialize in theshort term,” says Bezos. “They materialize in the long term. To berelentlessly focused on lowering prices as a part of our DNArequires a long-term focus.”

Despite the burden of offering free shipping, Amazon managed tosteadily increase its revenues. In a filing with the Securities andExchange Commission in 2002, the company cited new efficiencies inlogistics, based in part on the use of “injection shipping”—a process thatsent large quantities of products destined for one area of the country togeographic hubs. Bezos was onto something. During the second quarterof 2002, the company recorded sales of $806 million, an increase of 21%from the same quarter a year earlier.

In August 2002, Amazon.com dropped the minimum orderthreshold to $25 for free shipping. “If we can get more productiv-ity in our business and are able to lower our cost structure, we aredetermined to give that back to the customers in the form of lowerprices,” says Bezos. “Decisions like making shipping free on ordersover $25 are extremely expensive; that one is well in excess of$100 million annually. But we know customers like it; we knowwe can afford it; and we know that in the long term, it will makeour business stronger and more valuable.”

Bezos, however, didn’t think of price as the only way to serve hiscustomers. He was also determined to let them rave or complainabout Amazon.com’s service. To make the point, he recountsreceiving an email from a 80-year-old woman early in the compa-ny’s history who told him she loved the service but had to wait forher son to visit to break open Amazon.com’s packaging. Bezosadmits that the packaging was effective in keeping books andcompact discs in pristine condition, but it was like opening avault. As a result of the woman’s email, Bezos had the packagingredesigned.


“If there’s one thing we’ve figured out,” he says, “it’s thatInternet customers have more power. If we make customers happy,they can evangelize for us and tell 5,000 friends on newsgroupsand so on. Likewise, if we make customers unhappy, in the oldworld they would have told a few friends. Now they can also tell5,000 people how horrible we are.”

This realization also led Amazon.com to cut short an experimentwith television advertising in 2002. “If you use television adver-tising, you are building your brand based on what you say aboutyourself,” says Bezos, who admits the strategy works successfullyfor many companies. Instead, Bezos says Amazon.com will contin-ue to build its reputation by making promises to customers andthen fulfilling them. “In our opinion, every time we make a prom-ise and keep it, we gain brand reputation,” he says. “We built ourbrand by doing things well for our customers and they learn out ofexperience what this means.”


159

Managing the Brand

7

Brand is one of those intangible assets that are vital to acompany but hard to measure, like customer satisfaction and goodwill. Yet a number of the Top 25 leaders have been extraordinari-ly successful in understanding the value of their brands and lever-aging them in creative, profitable ways.

Based on her ability to establish an emotional connection withher audience, Oprah Winfrey, chairman of Harpo Inc. and itsgroup of companies, recognized early on the importance of protecting her brand, which, in her case, is herself. She resistedattempts from outsiders to license her name on a wide variety ofproducts, choosing instead to start up her own magazine and cabletelevision channel, among other initiatives. Richard Branson realized that his success with Virgin Records paved the way to

extending his brand into such non-related areas as discount airtravel, clothing, and cell phones. Branson guessed that hip, youngconsumers already aware of the Virgin name would assume that hisother products offered the same quality and distinction. LeeIacocca, too, instinctively understood the power of personal brand-ing when as CEO, he appeared in Chrysler commercials, reassur-ing potential customers about the quality of his company’s cars.He laid his personal credibility on the line to build Chrysler’sbrand equity.

Depending on a brand for competitive success can, of course, berisky, as Coca-Cola found out when it tried—and failed—to intro-duce New Coke in the 1980s. The emotional loyalty consumersfelt to the Coke brand didn’t extend to the new product. But theeffort can also be successful, as IBM found when it expanded itsproduct line from mainframe computers to PCs and, finally, tocomprehensive business solutions.


Chapter 7 Managing the Brand 161

OPRAHWINFREYThe Challenge:“The Ability to Be Myself”

To understand how hard Oprah Winfrey has hadto work to become one of the most recognizedand beloved celebrities in the U.S., it helps toremember where she came from.

Back in the mid-1970s, when she was 22 andher career as a television journalist was faltering,she moved from her hometown of Nashville,Tennessee to Baltimore, Maryland to be areporter and co-anchor for a newly expandedhour-long evening news broadcast. The problem:Winfrey did not have the emotional distance andobjectivity expected of traditional journalists.

“It was not good for a news reporter to be outcovering a fire and crying with a woman who haslost her home…,” she recalled. “It was very hardfor me to all of a sudden become ‘Ms. BroadcastJournalist’ and not feel things. How do you notworry about a woman who has lost all seven chil-dren and everything she’s owned in a fire? Howdo you not cry about that?”

Co-workers also considered her unprofession-al for straying from her scripts, for not knowingthe town, and for letting viewers see she wasuncomfortable with her co-anchor. Station man-agers criticized her appearance and ordered amakeover that included new clothes and a treat-ment that made her hair fall out. A voice coachhired by the station told Winfrey she was too nicefor TV news and needed to sound tougher. Nine

1954: Born inKosciusko, Mississippi,illegitimate daughter ofVernita Lee, a domesticworker, and VernonWinfrey, a soldier.Winfrey, unaware he hasfathered a child, is notpresent. Her motherintends to name thebaby Orpah, after aBiblical character, but aclerical error transformsthe name to Oprah inthe birth registry.VernitaLee moves to Milwaukeeto find work, leavingOprah on a Mississippipig farm with hergrandmother HattieMae.1960: Winfrey joins hermother and mother’sboyfriend in Milwaukee.1962: When Lee andher boyfriend break up,taking care of twodaughters is too muchfor Lee, who keepsOprah’s younger half-sister Patricia and sendsOprah to Nashville tolive with her father,Vernon, and his new wifeZelma. Now out of theArmy,Vernon has onejob cleaning floors andanother washing dishes.At the end of thesummer, Oprah returnsto her mother inMilwaukee.


months after starting at the station, she wasremoved from the anchor desk.

Then Winfrey got a break. A recently hiredmanager took over and made her co-anchor of anew morning talk show that would compete witha similar and highly rated program hosted by PhilDonahue.The innovative show, People are Talking,had a relaxed, unscripted, conversational formatwith lots of interaction between the co-hosts,their guests, and the audience. Winfrey thrived,and stayed with the show for six years, consis-tently beating Donahue. Her approach was—as itstill is—to forgo the reporter’s standard ques-tions and look for the personal details her audi-ence wants to know.

“When Donahue interviews Dudley Moore, heasks about his next movie,” writes biographerGeorge Mair. “Oprah wants to know how such ashort man can make love to all the very tall girl-friends Moore has had.”

Winfrey, as chairman of her closely held com-pany, Harpo Inc., now runs a sprawling mediaempire, much of it designed to promote her ownbrand of self-help advice. “My message is:You areresponsible for your own life,” she told Fortune.Atits heart is the biggest revenue-generator, TheOprah Winfrey Show, reaching viewers in morethan 100 countries and topping the U.S. ratingsfor nearly two decades. Then there is her maga-zine, O,The Oprah Magazine, with more than twomillion readers. O was widely proclaimed themost successful start-up magazine in history.Other Winfrey companies make movies and tele-vision specials and produce content for her web-site, Oprah.com.

Along the way,Winfrey has adhered to a sim-ple strategy for her career and business: to follow

1968: By 14, she hasbeen raped by onerelative and sexuallyabused by another, andat one point has runaway from home. Oprah,concealing a pregnancy, issent back to Nashville byher mother to live withVernon and Zelma.Oprah has a miscarriage.She will live with Vernonand Zelma until she is22. Later, she credits thecouple’s strong disciplinefor straightening her out.1971: Classmates atEast Nashville HighSchool name her “MostPopular.” While collectinga pledge as a volunteerfor The March of Dimeswalkathon, she meets alocal radio stationmanager who is lookingfor part-timers to readthe news on weekends.Liking her voice, he asksher to audition, thengives the 17-year-old a$100-a-week job.1972: Wins Miss BlackNashville title.1973: Becomesreporter and anchor atWTVF-TV in Nashville.At 19, she is theyoungest person ever toanchor in Nashville, andthe first African-American woman.1976: Moves to Balti-more to co-anchor the 6 p.m. news on WJZ-TV.1977–1983: HostsWJZ’s People Are Talkingwith co-host RichardSher.1984–1985: Moves toChicago’s WLS-TV tohost the morning talkshow AM Chicago.


her instincts. She recognizes that her audience isdrawn to her natural personality, not a packagedproduct. Every cover of her magazine, for exam-ple, features a glossy photo of Winfrey herself, andshe closely oversees all content, even though shehad no magazine experience before launching thepublication in 2000. She continually feeds heraudience’s desire to know her, openly discussingsexual abuse she suffered as a child and her ongo-ing struggle with her weight.Winfrey is not a dis-tant celebrity; she’s the wise, generous, next-doorneighbor.

In one famous scene on her show, she wheeled67 pounds of lard onto the set to proudly demon-strate her recent loss from an all-liquid diet—nota typical act for a CEO. Later, she openlyaddressed the unhappy aftermath.“By sharing herown setbacks, like her confidence-busting weightgain after a drastic liquid diet in 1988, she also sig-naled that it was all right to fail,” Newsweek said.

Ironically,Winfrey doesn’t think of herself as abusinesswoman, according to a 2002 article inFortune, her only extensive interview with a busi-ness publication. She said she could not read a bal-ance sheet, had no business role models, and haddeclined seats on the boards of AT&T, RalphLauren, and Intel.With no squad of MBAs behindher, she claimed her business decisions were seat-of-the-pants “leaps of faith,” adding: “If I called astrategic planning meeting, there would be deadsilence, and then people would fall out of theirchairs laughing.”

And yet Oprah is nothing if not strategic.Recognizing that her identity is her brand, she iscareful not to lose control of it—refusing, forexample, to license her name for use on everydayproducts. In addition, she has steadfastly kept her

1985: Makes her actingdebut as Sofia in StevenSpielberg’s The ColorPurple and receivesAcademy Award andGolden Globenominations for therole. Her televisionprogram is renamed TheOprah Winfrey Show.1986: Incorporates herprivately held company,Harpo, Inc., using hername spelled backwards.1986: Winfrey’s show issyndicated.1987: Establishes theOprah WinfreyFoundation. By the endof 2003, she has givenabout $32 million toAfrican and African-American causes.1988: IncorporatesHarpo Productions Inc.,becoming the first blackwoman to own aproduction studio.1995: Goes online with“Oprah” site onAmerica Online.1996: Begins Oprah’sBook Club segment onthe TV show, quicklygaining the power toturn obscure titles intobestsellers. Receives theGeorge Foster PeabodyIndividual AchievementAward and IRTS GoldMedal Award.1997: EstablishesOprah’s Angel Network,a non-profit organizationfor the needy.


1998: Time magazinenames her one of themost influential people ofthe 20th century.Winfreyreceives the NationalAcademy of TelevisionArts & Sciences LifetimeAchievement Award. Sheco-founds Oxygen Media,which in 2000 launchesOxygen Network, a cableTV channel aimed atwomen that is availablein 48 million U.S. homesby 2004.1999: Receives theNational BookFoundation’s 50thAnniversary Gold Medal.Winfrey removes herselffrom future Emmyconsideration that yearand the next year aswell.Awards are not hergoal, she explains.1999–2000: With herlong-time partnerStedman Graham,teaches a fall semesterleadership course at NorthwesternUniversity’s KelloggSchool of Business.2000: In a partnershipwith Hearst Magazines,launches the bimonthlypublication, O,The OprahMagazine. Hosts the firstof a series of daylong,interactive workshopstitled the “Live Your BestLife Tour,” drawing sell-out crowds.2001: Winfrey andHarpo Productionslaunch the syndicated TVshow Dr. Phil, with Dr.Phil McGraw, a “lifestrategist” who appearedon The Oprah WinfreyShow from 1998 through2002.

companies private, so she does not have toanswer to shareholders or take on projects shewould not feel comfortable with, however prof-itable they might be. She has a hand in everythingher empire does.

“Winfrey is used to ironclad control,”Newsweek said. “A shrewd businesswoman, shestill signs all the checks of more than $1,000 forher Harpo Entertainment Group…She bindsemployees at all levels to strict, lifelong confiden-tiality agreements.And she guards her off-air ven-tures as fiercely.”

“If I lost control of the business, I’d losemyself—or at least the ability to be myself,”Winfrey said. “Owning myself is a way to bemyself.”


Leadership LessonPreaching to the Faithful

Early in her career, Oprah Winfrey real-ized that her business success depended inlarge part on her personality, an appealing,down-to-earth image she carefully presentedto what would become millions of adoringfans. She translated that insight into a deci-sion to maintain complete control of all thatis Oprah. She has kept her companies pri-vate and preserved majority control—eventhough she might have become even richerby going public. Because employees arerequired to sign lifelong confidentialityagreements, there have been no kiss-and-tellbooks or interviews by past or present insid-ers that could tarnish the Oprah brand.

Winfrey is directly involved in planningher TV show and magazine contents. Themagazine always displays a photo ofWinfrey on its cover, making it clear this isher magazine, not just a publicationauthorized to use her name. “Food mar-keters, clothing designers, perfume manu-facturers, book publishers, and innumer-able pie-in-the-sky entrepreneurs havetried to persuade Oprah to license her namefor their products,” noted Fortune magazinein 2002. “…Oprah has steadfastly resistedthese entreaties.”

Winfrey’s brand is a brilliant mix ofspontaneity and careful planning. This ishow Essence magazine described one ofOprah’s four “Live Your Best Life” eventsin 2003: Oprah “bounds onto the stage asthe theme music from her television showcrescendos. ‘Looking good, Philadelphia!’she whoops to the thunderous applause of

2002: Disbands thebook club, saying it hadbecome too hard to finda good new book everymonth.2003: Becomes the firstAfrican-Americanwoman on Forbes list ofbillionaires, ranking as427th richest with a networth estimated at $1billion. Revives the bookclub with an emphasison classics.2004: With a net worthof $1.1 billion, ranks514th on Forbes list ofrichest people. Signsthree-year contractextension—from 2008to 2011—for herdaytime TV show.


the 2,800 faithful who are now standing, rocking to the music,pumping the air, and screaming for their girl, the mighty O. Forthe next several hours, as Oprah preaches and prances, jokes,quotes her favorite self-help sages…and recounts parts of herremarkable life story, her power is palpable and transforming. It’seasy to be a true believer.”

Two years earlier, Newsweek magazine described the typicalWinfrey mix of substance and entertainment: During a businessschool course on leadership at Northwestern University, studentswere discussing the civil rights movement. “The night’s topicis…heavy,” the magazine wrote. “But Winfrey knows how to keepthe three-hour class moving. When guest speaker Coretta ScottKing talks earnestly of her late husband’s belief in service as thekey to leadership, Winfrey raises her hand, stands and asks, “Imean, on your first date was [the Reverend King] just sitting uptalking to you about service?”

Winfrey’s carefully chosen staff works together to create exact-ly the right product mix for her shows. “I surround myself withpeople who are smarter than I am…[then] I feel I can learn some-thing,” Winfrey says. “My whole team watches a lot of TV. Theyare very current and interested in keeping the show’s finger on thepulse of what is happening in pop culture.”

Part of Oprah’s formula is to present something of interest tonearly everyone; in addition, many of her shows focus on success,often as a result of overcoming adversity. The list of topics fromWinfrey’s TV schedule in the first part of 2004 is typical. The lastthree shows in January included Inside the Human Body, Live:Oprah’s 50th Birthday Bash!, and Inside Detox. A week in the mid-dle of January included Lisa Ling Investigates Dowry Deaths,Children Left Home Alone, Automatic Millionaire: How to Become One,and Randy Jackson: Inside Gastric Bypass. Through the winterschedule, viewers could hear discussions about people in prisonfor having sex with teenagers, weight loss success stories, olderwomen having affairs with younger men, what not to wear, andthe gorgeous men of decorating.

In addition to providing a virtual tour of middle-class culture,Winfrey is brilliant at knowing what sells and how to sell it. Backwhen she became host of her own TV show in 1985, the main day-time fare for women was soap operas and talk shows hosted bymen. Winfrey immediately recognized that women wanted their

entertainment to offer both substance and empathy. A chief factorin her brand appeal was, and still is, her willingness to be openabout herself, whether that means discussing weight-loss battles,sexual abuse as a young woman, or career setbacks. She comesacross as honest, straightforward and accessible, not a distantcelebrity. She asks questions she thinks women want answered thatmen are unlikely to ask; she doesn’t tell women how to seek per-fection, and she doesn’t make them feel inadequate.

Having connected with her audience on TV, Winfrey has beenable to find other ways to cement the bond. In 2000, with hermagazine O, the strategy has been to talk frankly about issues thatinterest women and to give customers good value. For example,“O’s table of contents runs on page 2 instead of page 22, unusualin a women’s magazine. Advertisers would prefer that readers wadethrough a bunch of ads as they search for the table of contents, butOprah said, ‘Let’s put the readers first,’ recalls Hearst’s [magazinepresident] Cathleen Black.”

The reviews of O were right on target. “Without a single guideto thin thighs or a saucier sex life, O is a glossy rendering ofWinfrey’s on-air motivational crusade, encouraging readers torevamp their souls…,” gushed Newsweek. “O reflects Oprah’s giftfor balancing preachiness…with practicality. And she knew thatbalance would sell, since it’s exactly what informs her TV shows,where one day she’ll interview [actor] Jim Carrey and the nextshe’ll tackle the troubles of oppressed women in Afghanistan,”trumpeted Fortune. In 2001, Winfrey launched the syndicated TVshow Dr. Phil, with “life strategist” Phil McGraw. Wharton mar-keting professor Barbara Kahn describes these ventures as exam-ples of Winfrey’s ability to identify and “take on causes or businessendeavors that speak to her customers’ needs.”

They speak to her own needs as well. “You’d be hard pressed tofind another American chief executive this disarming, this confes-sional. But it’s oh-so-Oprah,” according to Fortune. “Sitting in anoverstuffed armchair in her office in Harpo Inc.’s Chicago head-quarters…the chairman swears that if she is a businesswoman, it’sin spite of herself.” Oprah addresses, and dismisses, the idea thatunderneath all the empathy, she is the consummate marketer. “Ireally don’t define my happiness by my business decisions,” shesays. “I don’t care about being bigger, because I’m already biggerthan I ever expected to be. My constant focus is on being better.”



LEEIACOCCAThe Challenge:A Big Tune-Up for Chrysler

Lee Iacocca did all he could to turn around thefinancial disaster that was Chrysler.

After firing 33 of Chrysler’s 35 vice presidents,he assembled a new management team, includingdefectors from Ford Motor Co. He convincedChrysler’s unions to cut their hourly wages.Twice. In 1980, the company slashed $500 millionin costs and laid off more than 15,000 salariedworkers. Finally, Iacocca went to Washington,D.C., and subjected himself to harsh Congres-sional hearings before receiving $1.5 billion inU.S. loan guarantees.

Still, the world’s third-largest automaker wasoperating on pocket change. The company wasdown to just $1 million in cash on November 1,1981. “All my life has been managing crisis,” saysIacocca.“That was my defining moment.We werebankrupt. I just didn’t tell anyone.”

Iacocca came to Chrysler in 1978 after astory-book career at Ford. He developed thephenomenally successful 1964 Mustang and hadrisen to become president of the company.Ultimately, he clashed with family heir and chiefexecutive Henry Ford II and was dismissed in ahighly public firing. Months later, Iacocca tookcontrol of deeply troubled Chrysler.

Now a regular speaker on the lecture circuit,Iacocca says that after all his years at Ford andChrysler, he believes business leadership boils

1924: Born Oct. 15 inAllentown, Pennsylvania,to Italian immigrantparents; his father, whoran restaurants and a carrental business, broughtLee’s mother back toPennsylvania from Italy asa 17-year-old bride.1934: At age 10, helpsfamily throughDepression by pullingshoppers’ grocerieshome with a wagon.1945: Graduates fromLehigh University,classified 4F for militaryservice because ofrheumatic fever as achild.1946: Earns M.E. fromPrinceton University,joins Ford Motor Co. asan engineer trainee inDearborn, Michigan.1947: Moves into salesand marketing at thecompany’s district officein Chester, Pennsylvania.1949: Appointed zonemanager in Wilkes-Barreworking with 18 dealers.1953: Promoted toassistant manager in thePhiladelphia district.1956: Devises amarketing campaign “56for ‘56” in which anycustomer who puts 20%down would havepayments of $56 a monthfor three years.Thepromotion moves thePhiladelphia district fromlast in sales to first.1956: Moves back toDearborn as nationaltruck marketing manager.1957: Promoted to carmarketing manager of theFord division.


down to two simple points: Hire good people andset priorities. “It’s that simple,” he says. “I get$75,000 to give speeches saying essentially that.”

At Chrysler, the priorities were all too obvi-ous. Cash, for example. “I was always looking atour cash. I looked at it daily, sometimes hourly,”recalls Iacocca. Meanwhile, each day requiredsweeping decisions. Iacocca says he is all forresearch, and in fact did extensive studies whenpreparing to launch the Mustang. At Chrysler,however, there was rarely time to form a com-mittee and order a research analysis.“Even peoplehigh up the ladder don’t want to take undue risks.They want to know every fact before they makea decision. But sometimes, it’s a leap of faith.Finally, you’ve got to do something.You can’t juststand there.”

To show his commitment to Chrysler, Iacoccaagreed to an annual salary of just $1 plus stockoptions.“You’ve got to get everyone and say, ‘Heyguys and gals, We’re all in this together,’” saysIacocca. “It all turns around once you get themleading with the idea that we’re all going down thechute together.” Iacocca calls it equality of sacri-fice. “If we’re all sacrificing equally, people willmove mountains for you.”

He was always mindful of the world beyond hisown company. Government, in particular, was anoutside force that shaped his work, from safetyand environmental regulations to interest-ratepolicy to trade relations with Japan, Detroit’snemesis at the time. “A lot of CEOs—and suc-cessful ones—don’t want to get involved in poli-tics,” he says.“They want to stay below the radarscreen.They don’t want to go to Washington. ButI had to go. I needed to get a billion dollars.”

1960: Appointed vicepresident and generalmanager of the division,replacing RobertMcNamara who hadbeen promoted topresident.1964: Rolls out theMustang pony car.1965: Becomes vicepresident of car andtruck group overseeingplanning, production, andmarketing of all cars andtrucks in the Ford andLincoln-MercuryDivisions.1967: Overseesdevelopment of MercuryCougar and Marquis.1970: Named presidentof Ford.1978: Fired by HenryFord II with the words,“Sometimes you justdon’t like somebody.”Chrysler hires him aschief operating officer.1979: BecomesChrysler’s CEO andbegins negotiations on a$1.5-billion federal loanguarantee.1982: Heads restorationof the Statue of Libertyand Ellis Island.1983: Chrysler beginspaying back federal loans;launches K-cars.1984: Chrysler minivandebuts; Iacocca: AnAutobiography sells 7million copies.1986: Earns $20.5million at Chrysler and is top-paid executive inAmerica.


The government loan guarantees, and $655million in concessions from 400 banks, onlybought Chrysler time, says Iacocca.The companyhad been betting its turnaround on its new K-cars, the Aries and Reliant, but they debuted tomixed success in 1981.

Chrysler continued to bleed right down tothat last $1 million in cash. Iacocca even proposeda merger with rival Ford, but was rebuffed. Hedug back in. Chrysler went to its suppliers, whowere carrying accounts receivable of about $800million a month, and asked for payment exten-sions. Some refused and quit shipping, brieflycausing the closure of several plants. Other majorsuppliers, including National Steel and GoodyearTire, agreed to extend payment terms.

The company was able to ride out yet anoth-er crisis. “Most people don’t focus and stay withit. To me, it just takes perseverance. Sometimesyou don’t even know your own strength,” saysIacocca. Finally, in 1982, the U.S. economy andChrysler began to recover. Iacocca never misseda payroll, and in 1983, with great fanfare, he repaidthe government early.“In the end, at Chrysler, wefinally turned it around by focusing on buildinggood cars. Prior to that we were just messingaround.”

Even while Iacocca was slashing costs, heinsisted on investing in new products. Withoutthem, he argued, Chrysler would have nothing tosell if it did manage to survive. He spent $700 mil-lion to develop one particular product he hadchampioned at Ford. Henry Ford II had shot theidea down.

And so it was that Chrysler introduced theminivan in 1983. “The Mustang was a great thing,

1987: Chrysler buysAmerican Motors Corp.1988: Decides againstDemocratic presidentialnomination; second book,Talking Straight, becomesNo. 1 bestseller.1992: Turns down U.S.Senate seat inPennsylvania; retires fromChrysler.1993: Selected byPresident Clinton topromote the NorthAmerican Free TradeAgreement.1994: Forms aninvestment bank, withstakes in casino-gaming.1995: Kirk Kerkorian,with Iacocca’s support,launches unsuccessfultakeover bid for Chrysler.1998: Daimler-Benz AGbuys Chrysler.2000–01: Iacocca holdssecret talks with Daimler-Chrysler CEO JuergenSchrempp about apossible return toChrysler. Schremppeventually rejects theidea.2004: Iacocca promotesenvironmentally friendlyvehicles through hisentrepreneurial venture,EV Global Motor Works,which sells electric-powered bikes.


but the homerun, the cash cow, was the minivan,” says Iacocca. By the end ofthat year, the company was making money and Iacocca had become a folk-hero. His commercials for Chrysler, asking consumers to give his brand a try,made him a celebrity.“I didn’t want to go on TV, but again it was a crisis.Whenyou’re dying, you don’t need a celebrity,” he says.“People like underdogs andhere I was.They could see that I was the guy who had to go home and makesure the car didn’t rattle or leak.”

Through it all, Iacocca was driven by a passion for cars and the industry,even though vehicles are so complicated now he can no longer tinker underthe hood.“You’ve got to love what you’re doing, not just like it.You can evenhave some fun in big business if you do.” Chrysler, Iacocca adds, was enoughfun for one lifetime.“I wouldn’t want to do it twice. It was that tough.”

Leadership LessonFollow Your Market

Although Lee Iacocca had trained as an engineer, he soonbecame a marketing whiz at Ford Motor Co. where he developedthe smash-hit Mustang brand. After he moved to Chrysler in1979, he would develop and market another brand: Lee Iacocca.

It was at Ford, however, where Iacocca learned that the successof any brand is rooted in the approval of customers. As he rosethrough the ranks in Detroit, he saw how that seemingly simpleidea was sometimes overlooked as auto executives focused onfinance, operations, and other concerns. “I was a dealer guy,”Iacocca says. “I went to all the dealer meetings to find out if thepublic really liked our cars, and if not, why not.”

In 1960, still at Ford (where he would remain for almost twomore decades until Henry Ford II fired him in 1978), Iacocca hadsensed a new optimism in the country and realized that it wouldcoincide with the growing economic power of a younger genera-tion. To appeal to that market, Iacocca promoted the sporty, inex-pensive Mustang brand. It was an immediate sensation.

At Chrysler, 20 years later, he met that market again. By now,the members of the Mustang generation had married and weretransporting children to soccer games. “I didn’t really plan on soc-cer moms, but I said, ‘Follow your market,’” Iacocca remembers.The original Mustang buyers were now 40 “and they had changed.They had gotten married, had a couple of children, and enteredthe minivan world, a phenomenon that blew me away…I got themwith the Mustang and when they were 40, I got them again.”

Iacocca says Ford was already working on a small car when hewas made general manager of the Ford Division more than 40years ago. “The Mustang was more of a gut feeling. What I didwas get a designer to re-skin it—to get it a new dress.” The mini-van, however, was the result of intense research, first at Ford, thenagain at Chrysler. And what the research showed was that cus-tomers wanted the utility of a van, but wanted to be able to parkit in a garage. “They also wanted to sit high up, especially thewomen, and they wanted access to the kids yelling in the back.They had to be able to walk through to the back.” Iacocca said theminivan was an idea that was “followed up and executed well andwe made a ton of money” on it.


Iacocca also acknowledges that successful branding decisionsaren’t always planned out in advance. In 1987, for example,Chrysler acquired American Motors, primarily because Iacoccaliked the Jeep brand. “I didn’t even know they were selling SUVs,”he says. “If you had told me in 1987 that the market for SUVs inthe U.S. alone would be 4.5 million, I would have said, ‘You’rewacky.’” Sometimes it’s timing, he notes, “and sometimes it’s luck.The minivan is something I can explain intelligently, but not theSUV phenomenon—that people would be driving SUVs, pollutingthe world more than they probably should.”

Meanwhile, somewhere along the road to restoring Chrysler’sreputation, Iacocca himself became a brand.

During the struggle to win approval for government loan guar-antees to Chrysler, the blunt-talking CEO had emerged as anational celebrity. Once that battle was won and the company sta-bilized financially, Iacocca faced the challenge of rebuilding thecompany and its brands. Chrysler’s advertising agency suggestedthat Iacocca had enough credibility to go on the air to promoteChrysler cars. Iacocca was reluctant. “Whenever I’ve seen a CEOpushing his own company, it’s left a bad taste in my mouth,”Iacocca wrote in Iacocca: An Autobiography. “I was concerned thatmy appearing in television commercials would be seen by the pub-lic as a final act of desperation that would cause the entire enter-prise to backfire.”

The agency, Kenyon & Eckhardt, persisted, arguing that Iacoccahad to put himself on the line to convince consumers that Chryslerwas now the brand to buy. Iacocca finally agreed, reasoning that atleast he could get the new spokesman cheap. He eased into it grad-ually, delivering tag lines such as, “I’m not asking you to buy oneof our cars on faith. I’m asking you to compare.” Later, he grewmore aggressive, eventually coming up with his own slogan: “Ifyou can find a better car—buy it.”

Ironically, Iacocca had struggled with public speaking until hetook a Dale Carnegie course while a young executive at Ford. “Iwas not born with [public speaking ability]. I was a shrinking vio-let,” he says. Over time, Iacocca developed a reputation for beingbrutally honest in his opinions—his second best-selling book wastitled Talking Straight—which became the essence of the Iacoccabrand. “I learned to communicate early. I do it in person. I don’t



do it in letter writing. I don’t do it by position paper,” he says.“You can talk to death, but in the end you have to ask the employ-ees to do the job or the customers to try your car. You have to makesure you’re credible.”

In all, he did 61 Chrysler commercials. “Most CEOs want goodPR, but they want it purchased for them by some flack,” saidIacocca in Talking Straight. “If a chief executive delegates the com-pany’s image—how the public perceives it and why—to some PRguy, he must be nuts. Yet most of them do. They issue a command:‘Just make sure everybody says nice things about us, and whenthey don’t, I’ll buzz you.’”

The Iacocca brand became so strong that Iacocca was approachedabout running for president as a Democrat in 1988. He sought theadvice of Thomas “Tip” O’Neill, the speaker of the U.S. House ofRepresentatives, whom he had come to know well during thestruggle for loan guarantees. O’Neill told Iacocca that he didn’thave the temperament to live with the compromises ofWashington.

Iacocca was again approached about a political job, this time in1991 to replace Senator John Heinz of Pennsylvania, who had diedin a helicopter/plane crash. Political strategist James Carville wasworking for the state Democratic party and met with Iacocca to layout the future senator’s stance on certain issues. “I said, ‘You don’teven know if I’m a Democrat or not,’” recalls Iacocca. “He said, ‘ADemocratic governor is appointing you. Here’s what you have todo on jobs, abortion, the death penalty—we’ve done focus groups.”Iacocca asked: “If I’m a senator, don’t I have something to say?”The answer was ‘No’ and Iacocca, true to his strong sense of personal credibility, declined the offer.


RICHARDBRANSONThe Challenge:Choosing Between Music andAir Travel

It was 1992. Richard Branson had spent 20 yearsbuilding Virgin Music into a hip, successful brand,as evidenced by the latest group to sign on, theRolling Stones. Indeed, music was the foundationof all that had gone into the Virgin empire. YetBranson was overextended and bankers werebreathing down his neck.Virgin Atlantic, the trou-bled trans-Atlantic airline he started in 1984, wasfinanced with loans backed by the record compa-ny. He would have to choose between VirginMusic and Virgin Atlantic.

“I was caught in a horrible dilemma,” Bransonwrites in his autobiography, Losing My Virginity. “Isimply couldn’t decide what to do about VirginMusic. If we agreed to sell it, I would be able toinvest sufficient cash in Virgin Atlantic to survivethe winter and see off what I was beginning tosuspect was a concerted British Airways attack.”But if Branson sold Virgin Music, “we would beselling the one thing that we had spent the bestpart of our lives building up.”

With as many as 200 private companies linkedthrough a web of partnerships and complex, tax-driven, cross-collateralizations, Branson hasbecome a billionaire by using one business to fundand build the next venture that captures his fancy.Whether clothing, trains, credit cards, or cola, this

1950: Born RichardCharles NicholasBranson, in Surrey,England, son of a third-generation lawyer and aformer flight attendant.1967: Leaves Stoweboys school at age 16 tofound youth magazineStudent.1968: Living in aLondon commune withStudent staff, opensStudent AdvisoryCentre, a counselingservice for troubledyoung people.1969: Notes thatrecords are selling atpremium prices anddecides to set up adistribution business tosupplement money-losing Student. Namesthe company Virgin.1971: Opens first Virginrecord store in London;buys a country manorto house a recordingstudio.1972: Expands intomusic publishing andrecording.1973: Virgin Recordsreleases Mike Oldfield’sTubular Bells. The albumis used in The Exorcistsoundtrack andbecomes Virgin’s first big hit.1977: After severalyears of missing out oncontracts with bands,including the RollingStones,Virgin Recordssigns The Sex Pistols.1979: Buys NeckerIsland in the BritishVirgin Islands for180,000 pounds.


seemingly eclectic portfolio is backed by theVirgin name and promoted by Branson’s ownoutsized personality and penchant for publicity.From his high-altitude balloon exploits to his bit-ter competition with British Airways, Branson hasmade his business very public.At the same time,he has kept financial control private, allowing him-self the freedom to buy and sell businesses as hepleases. “I have always lived my life by thriving onopportunism and adventure,” Branson writes.“Bynature I am curious about life and this extends tomy business.”

Branson,who spent the early days of his careerworking and living in a London commune, seemsan unlikely tycoon. He dropped out of school tofound a youth-oriented magazine, one that wasconstantly short of money. Early on, he had keyedinto the post-war generation’s passion for itsmusic. Noting that stores in Britain were not dis-counting records, he decided to set up a mail-order record distribution company to raisemoney to support the magazine. Slipped Disc wasthe leading contender for the name of the newcompany, until one of the magazine staffers sug-gested the name Virgin, because the people run-ning it would be virgins in business, if nothing else.

The mail-order company grew into a retailchain as well as a mail-order business, even asBranson had to constantly juggle finances to keepboth businesses going. In 1971, he was arrested ina tax-evasion scheme and agreed to pay fines toavoid going to trial.“Incentives come in all shapesand sizes, ranging from a pat on the back to shareoptions, but avoiding prison was the most per-suasive incentive I’ve ever had,” Branson writes.

1982: Following a nearly1 million pound loss twoyears earlier,Virginrecovers with signing ofsuch names as BoyGeorge, Phil Collins,Simple Minds, and TheHuman League.1984: Over strongobjections of top staff,starts Virgin Atlantic, alow-cost, cross-Atlanticairline.1986: Aboard VirginAtlantic Challenger II,records fastest sea-crossing of the Atlantic in 3 days, 8 hours, and 31minutes after failingearlier attempt whenboat sank with just 60miles to go.1987: Finances and ridesin first hot-air balloonflight across the Atlantic.1988: Takes sharesprivate after they declinein value in 1987 stockcrash.1990: Turns 40,contemplates quittingbusiness to study historyor become a campaignerto tackle social issuessuch as homelessnessand healthcare. Instead,turns back to businesswhen Iraq invadesKuwait, creating crisis atthe airline with soaringfuel prices and reluctantflyers. Negotiates Virginflight into Baghdad tofree British nationals heldby Saddam Husseinbefore war breaks out.1991: Finances, and witha pilot, makes first hot-air balloon flight acrossthe Pacific.


Over the next two decades, he worked obses-sively to build a wide-ranging music business,negotiating deals with artists, opening new retailoutlets, and converting a country manor into arecording studio where famous English rockers,including Paul and Linda McCartney and TheRolling Stones, would record.The company’s firstbig hit was the offbeat instrumental album TubularBells, which became part of the soundtrack of TheExorcist.

The rock-and-roll industry proved to be a wildride, which suited Branson’s adventurous streak.After suffering a loss of one million pounds in1980,Virgin managers argued the company need-ed to rein in expenses.They suggested Virgin cutloose The Human League, an up-and-coming band.

Branson took the completely opposite path. “Ifelt that unless we did something dramatic, whichmeant spending money,we would never get out oftrouble.” The Human League stayed. Soon, theband was among a stable of cutting-edge Virginartists driving strong sales. In 1986, the companywent public and Branson began to think aboutbuying the competing music label, Thorn EMI,three times the size of Virgin Music.

In the meantime, Branson had plunged intoVirgin Atlantic, again over the strong objections ofkey advisors. Why would he bet so much on ahigh-risk business that had no connection to thecompany’s core music business? “Come on,” hetold them.“It’ll be fun.”

Fun, Branson writes in all seriousness, is alwaysa critical requirement for him in any business ven-ture.“From the perspective of wanting to live lifeto the full, I felt that I had to attempt it,” Bransonwrites of the decision to go ahead with Virgin

1992: Just after signingthe Rolling Stones, isforced to sell VirginMusic to Thorn EMI for$1 billion to keep VirginAtlantic in the air.1995: Creates VirginDirect financial servicescompany.1997: Takes over trainroutes from London toScotland creating VirginRail, but is later soembarrassed by his own company’s poormanagement that hedeclines offer ofknighthood in 1999.1998: Launches VirginCola by driving a tankinto New York’s TimesSquare. Leaves Moroccoin an attempt tocircumnavigate theworld in a hot-airballoon and makes it asfar as Hawaii.2000: Virgin Rail turnsaround and Branson isknighted by QueenElizabeth in a MillenniumNew Year’s ceremony.2001: Fails in bid totake over Britain’sNational Lottery.2002: Drops off a craneplatform into TimesSquare wearing only aflesh-colored bodysuitand a mobile phonetaped to his crotch topromote Virgin Mobilecellular service.2003: Unsuccessful inattempts to block BritishAirways from ending itsConcorde flights.2004: Considers a low-fare airline in the UnitedStates.


Atlantic.The airline struggled and Branson engaged in a long and protractedbattle with British Airways over adding additional flights.

By 1992, Branson was faced with the choice of closing the airline or sell-ing the record business for nearly $1 billion in the hope he could turn VirginAtlantic around. In the end, he decided to move on and sold Virgin Music toThorn EMI, reasoning that he could not sell the troubled airline as a goingconcern.The music business would fetch a good price that might keep theairline flying, give Branson a war chest for new ventures, and preserve Virgin’sgood name.

“Selling Virgin Music would save the airline and leave two strong compa-nies,” he said. “Closing down Virgin Atlantic would leave one strong company and one bust company with 2,500 [layoffs] and the Virgin Group’sreputation as a company and a brand name in tatters.” After announcing thesale to employees, Branson walked out of the London offices and ran fornearly a mile through the city streets, tears streaming down his face.

With the cash from that deal as a cushion, Branson was able to ride outa recession and shore up Virgin Atlantic. He has since opened budget airlinesin Europe and Australia, and ventured into clothing, cosmetics, bridal wear,and mobile phones. “Back in the early 1970s, I spent my time juggling differ-ent banks and suppliers and creditors, playing one off against the other tostay solvent,” he writes. “I’m still living the same way, but I’m now juggling bigger deals instead of banks.”

Leadership LessonA Hip Style

Richard Branson forged the Virgin brand identity during hisyouthful days in swinging London when early management of theVirgin record business boiled its image down to a simple formula:No Andy Williams.

Slightly dyslexic, Branson, a high-school dropout at age 16, rec-ognized early the importance of thinking up business ventures thatwould tie in with the persona of his money-losing Studentmagazine. “I didn’t see Student just as an end in itself, a noun,”Branson writes. “I saw it as the beginning of a whole range of serv-ices, effectively an adjective, a word that people would recognizeas having certain key values.” Later, the word would becomeVirgin and the Virgin brand would ultimately be extended to autosales, film production, and clothing, among dozens of other prod-ucts and services.

But back in 1971, Branson saw that young people’s passion formusic wasn’t being served by the dull, formal, and expensiverecord stores peddling the day’s popular artists. “None of that feel-ing of excitement or even vague interest filtered through to theshops that sold the records,” he writes. “The dowdy staff registeredno approval or interest if you bought the new Jefferson Airplane.They just rang it up on the till as if you had bought Mantovani orPerry Como.” Branson proceeded to set up a store on Oxford Streetin London catering to rock aesthetes during the early daysof album rock. Virgin provided headphones, sofas, and beanbagsfor the customers, along with coffee and free copies of undergroundmusic magazines, and refused to sell teenybopper records recordedby the Osmonds or the Sweet, which at that time were big sellers;they didn’t fit in with the store’s seriously hip image.

“We wanted [customers] to stay longer, chat to the staff, andreally get into the records they were going to buy,” Branson writes.People take music far more seriously than many other things inlife. It is part of the way in which they define themselves—like thecar they drive, the films they watch, and the clothes they wear.Virgin’s first record shop had to incorporate all these aspects ofhow music fits into people’s lives. In exploring how to do this, Ithink we created the conceptual framework of what Virgin laterbecame.”


After building a successful music business, Branson used thesame process to make the leap into air travel. In 1984, the onlyairline offering cheap flights across the Atlantic was PeopleExpress. Branson relates how he picked up the phone one day andtried to get through to the airline’s reservation system. The linewas busy and remained busy the entire day. “I reasoned that eitherPeople Express was very poorly managed, in which case theywould be an easy target for new competition, or that they were somuch in demand that there was room for new competition.”Branson started Virgin Airways.

In typical Branson style, the inaugural flight was loaded with 70cases of champagne and passengers danced in the aisles toMadonna’s song “Like a Virgin.” At the beginning of the flight,passengers were told they would get a special view of the cockpiton their movie screens. With the plane hurtling down the runway,however, the three-man crew appeared to be totally unconcernedabout flying the plane. As the nose of the aircraft pulled up, one ofthe crew members pulled out a joint. The passengers grew hushed,until the crew turned toward the camera revealing themselves to bea pair of famous cricket players and Branson. The special view fromthe cockpit had been filmed earlier in a flight simulator.

Branson admits he is not an innovator of new products or serv-ices. He is, however, very astute at identifying a product or service that is overpriced, of poor quality, or lacking competition.He then makes it over in his own hip, forever-young image. Hisstrategy, he explains on the Virgin Group’s website, has alwaysbeen to “look for opportunities where we can offer something bet-ter, fresher, and more valuable, and we seize them. We often moveinto areas where the customer has traditionally received a poordeal, and where the competition is complacent. And with ourgrowing e-commerce activities, we also look to deliver ‘old’ prod-ucts and services in new ways…Contrary to what some people maythink, our constantly expanding and eclectic empire is neitherrandom nor reckless. Each successive venture demonstrates ourskill in picking the right market and the right opportunity.”

Branson has also extended his brands to new geographic markets, taking a formula that has worked well in the UK andexporting it. In 1989, he made his move into Japan, startingVirgin Atlantic flights to Tokyo from London and then striking


several deals to help Japanese retail and consumer-products firmsexpand in Europe. In 1990, he opened the first of what grew intoa 30-store chain of Virgin “megastores” selling music, movies,software, and books in a joint venture with local Japanese retailerMarui. These were followed by a 20-screen cinema chain. He alsooperates low-cost airlines in Australia and Asia.

In 2002, Branson brought his youth-oriented branding to theUnited States with a new cellular phone service. Virgin Mobileoffers phones with names such as the K7 Rave, the Super Model,and Party Animal. When subscribers phone in for help with theiraccounts, a throaty computerized voice “operator” calling itselfAmber asks for the mobile phone number. Then she jokingly asksfor the real number, “not the one you give out in the bar.” Just 18months after starting out, Virgin Mobile USA signed on 1.8 mil-lion subscribers, putting it in the top 10 U.S. mobile providers. Itsreported 50% annual growth rate was, for a time, the fastest in thebusiness.

“Virgin is not a one-product brand, like Nike or Coca-Cola,”Branson said in 2002. “It is different and diverse, so there areopportunities to extend it across a wider range of marketing areas.I want to make Virgin the number-one brand in the world, insteadof around 10th, which is where it is now. There is great scope forthis globally, but I think we’ve probably gone as far as we can inthe UK.’”

Who knows where Branson will land next? “In all ventures,Virgin is ultimately about service, value for money, and simpleproducts,” Branson writes in his autobiography. “The vision I havefor Virgin does not run along the orthodox lines of building up acompany with a vast head office and a pyramid of command froma central board of directors…My mind doesn’t work like that. I amtoo informal, too restless, and I like to move on.”


183

Fast Learners

8

L eadership and learning go hand in hand. This is hardly anew insight. In Plato’s dialog, The Republic, he wrote that learningwas crucial for the Guardians, who held the reins of power in theutopian city state. Plato prescribed a tough regimen of intellectu-al and physical education for them from childhood, so they couldgrow to become leaders. The reason is simple: Leaders cannotguide their constituents unless they deepen their own knowledgethrough learning.

To be true to their function, however, leaders must be fastlearners—in a way that does not necessarily refer to formal educa-tion or bookish knowledge. The need for rapid learning arisesbecause all leaders—regardless of their domain—deal with reali-ties that are in ceaseless flux. Markets change, new sets of politi-cal or military circumstances appear, and it is often unclear

whether previous strategies or tactics still apply or new ones mustbe formulated. When situations change, is the correct response tostay the course or to change direction? Each decision is a judg-ment call, and leaders constantly are required to make them. To doso, they must be fast learners, seeking out new knowledge andinformation as they need it.

Each of the Top 25 leaders profiled in this book is a fast learn-er. William (Bill) H. Gates, chairman and chief software architectof Microsoft, belongs at the top of the list. He was a fast learnerlong before he began to write software programs at age 13, butespecially so after launching Microsoft in 1975—at age 20—withhis childhood friend, Paul Allen. In some 30 years, the companyhas grown into a software giant with more than 56,000 employeesand annual revenues of $32 billion—largely because of Gates’sability to rapidly learn—and get Microsoft to execute—whatneeds to be done to take the company to the next level.

Frederick Smith, founder, chairman and CEO of Federal Express, isanother leader who has repeatedly demonstrated his ability to learnrapidly from observation and experience. The classic example, inSmith’s case, was his ability to sense, before either his customers orcompetitors, the need for a tracking and tracing system for the pack-ages and documents that FedEx delivers. As Smith says, this hasenabled FedEx to set itself apart in a competitive field and to offerservices that cannot easily be “commoditized.”

Louis Gerstner, former chairman and CEO of IBM, is also a fastlearner. Soon after joining the New York-based computer giant, herealized that a plan by the former leadership to break IBM intosmaller Baby Blues would be disastrous, and he bet the companyon pursuing the opposite strategy—one in which IBM would offerintegrated solutions to companies with a vast range and variety ofIT needs. This knowledge, combined with a sharp focus on per-formance, helped Gerstner engineer a massive turnaround at IBM.

Examples and insights from these leaders can be invaluable in help-ing executives see how fast learning is a critical attribute to developtheir own leadership. A word of caution, however, might be in order.Fast learning, to be effective, must become a habit. Leaders who learna few lessons rapidly, and then expect to replicate their successes byapplying them over and over again, do so at great risk. Offering oldsolutions to new problems is often a prescription for failure.


Chapter 8 Fast Learners 185

WILLIAMH. GATESThe Challenge:Keeping Microsoft’s Regulators at Bay(on Both Sides of the Atlantic)

Success sometimes undermines itself. AtMicrosoft, Bill Gates’s combativeness and relent-less competitive drive helped propel the companyto overwhelming dominance in the global soft-ware industry. This massive clout assured risingrevenues and profitability for Microsoft and madeGates the world’s richest man. Market domi-nance, though, has a flip side. It created the great-est challenge that Gates and Microsoft have faced:Retaining their grip on the market while fendingoff antitrust regulators in the U.S. and Europe. In2000, regulators in the U.S. came close to break-ing up Microsoft into two companies.Though thatthreat has now disappeared, regulators stillimpose big legal and administrative costs on thecompany and could affect how it does business inthe future.

Muttering against Microsoft’s monopolisticmoves has been heard for more than a decade.ABusinessWeek article in November 1992 titled,“Does Bill Play Fair?” highlighted early concernsthat the company, though just 17 years old, hadgrown too big too fast. The magazine noted thatMicrosoft’s MS-DOS operating system at that timewas installed on more than 80% of the PCs world-wide.Today, Microsoft’s Windows operating systemresides on more than 95% of the world’s PCs.That,

1955: Born on October28 in Seattle. His father,William H. Gates Jr., is aSeattle attorney; his latemother, Mary Gates, wasa schoolteacher,University ofWashington regent, andchairwoman of UnitedWay International.1967: Gates entersLakeside, a privateschool where Seattle’sprivileged and wealthydenizens send theirsons. Here, heencounters his firstcomputer.1968: At age 13, Gatesdiscovers his interest insoftware and writes hisfirst software programfor playing tic tac toe.He later says thecomputer he used was“huge and cumbersomeand slow and absolutelycompelling.”1973: Enters HarvardUniversity as a freshman,where he lives down thehall from Steve Ballmer,now Microsoft’s CEO.While at Harvard, Gatesdevelops a version ofthe BASIC (Beginner’sAll-purpose SymbolicInstruction Code)programming languagefor the MITS Altaircomputer. He laterdrops out of Harvardwithout graduating.1975: LaunchesMicrosoft withchildhood friend PaulAllen.Their mission is tocommercialize softwarefor the personalcomputer. Microsoft has$16,000 in revenues inits first year.


by itself, is not necessarily bad. In fact, to the degreethat it establishes a uniform, global standard forcomputing, it helps consumers.The problem is thatMicrosoft does not just make operating systems; italso produces software applications and competesfor market share with other software firms. Thatissue has disturbed regulators—and undoubtedlyGates’s competitors. Critics allege that when con-fronted by a successful software rival, Gates andMicrosoft seem to adopt a two-fold approach:Buy it or bury it. Both tactics have serious anti-competitive implications.

An example of Gates’s “buy it” approach wasthe way he dealt with Intuit, which makes per-sonal finance software programs such as Quickenand Quickbooks.When its own personal financeproducts failed to make a dent in Quicken’s mas-sive market share, Microsoft in 1994 tried to takeover Intuit. Regulators soon intervened—the U.S.Justice Department sued Microsoft to preventthe merger—and by 1995, the deal was dead.

Critics also claim that when buying a potentialrival seems unlikely, Gates and Microsoft turn tohardball. The “bury it” tactic typically consists ofoffering the Microsoft application as a free down-load or bundling it with the Windows operatingsystem. More often than not, this continues untilthe competing application is no longer a threat.The best-known case in point: Netscape.

Launched in 1994, Netscape’s Navigatorbrowser rapidly became popular among non-technical users around the world who were justawakening to the power of the world wide web.By the time Netscape went public in 1995, theNavigator was the dominant browser among webusers—the hype surrounding its IPO helpedinflate the dot-com bubble. Microsoft, however,

1977: Microsoft, havinglanded software-programming projectsfor companies such asCommodore,TexasInstruments, and others,earns $112,000 in pre-tax profits on revenuesof $381,715.1979: Microsoft movesfrom Albuquerque, NewMexico, to Bellevue,Washington.The mainmotivation is a decliningrelationship with MITSand the difficulty ofrecruiting talentedsoftware programmersin New Mexico.1980: Gates,Allen, andBallmer meet with IBMexecutives who want tolicense Microsoftsoftware to introduce apersonal computer.Initially, talks center onsoftware in BASIC andother languages, buteventually thediscussions expand toinclude the operatingsystem.1981: Microsoftincorporates on June 25.On August 12 that year,IBM introduces itspersonal computer withMicrosoft’s 16-bitoperating system, MS-DOS 1.0.1983: Gates makes hisfirst keynote speech atComdex, a computerindustry trade show. Heannounces plans for anew software programcalled Windows. Gates’sfather operates the slideprojector during thepresentation.


struck back with Internet Explorer, which it laterclaimed was an inseparable part of Windows.As afree add-on, the Internet Explorer gained steadilyin popularity, while Netscape, whose revenuemodel suddenly became uncertain, was sold in1998 to AOL Time-Warner.

Over the next few years, Internet Explorercontinued to grow at the Navigator’s expense. InMay 2003, Microsoft signed an agreement withAOL Time-Warner, as part of which AOL agreedto use Internet Explorer as its primary browserfor seven years. Some observers believe that wasthe final nail in the Navigator’s coffin. CNET’sNews.com website noted that Netscape wouldmove from “a neglected orphan of AOL Time-Warner to a candidate for euthanasia.”

To deal with such issues, trustbusters at theU.S. Justice Department began looking intoMicrosoft. Following the lawsuit in Intuit’s case,they struck a more decisive blow against the com-pany in 2000 when Judge Thomas Penfield Jacksonfound Microsoft guilty of anti-competitive prac-tices and described it as a “predatory monopoly.”Jackson ordered that the company be broken intotwo: One company would make the operating sys-tem while the other made software applications.Microsoft, however, pushed back. It appealed; thedecision was reversed, and a much gentler punish-ment, in the form of restrictions, was imposed.Today, the case to break up Microsoft is all butdead. As The Economist noted in 2004, it “producesoccasional rumbles, like the death-rattle of a mortally wounded dragon, but it no longer posesa threat to the company’s survival.”

Still, Gates and his colleagues continued to facetwo other challenges. One was Microsoft’s fightagainst Real Networks, whose Real Player

1986: In February,Microsoft moves to acorporate campus inRedmond,Washington.A month later, thecompany’s stock goespublic.1990: Windows 3.0 islaunched with greatfanfare in May, afterseveral underwhelminglaunches.According toone observer, this is the“biggest, splashiestsoftware rollout yetconcocted.”1993: The U.S. JusticeDepartment launches aprobe into Microsoftfor monopolisticpractices.1994: On January 1,Gates marries MelindaFrench.1994: In July, the U.S.Justice Departmentreaches a settlementwith Microsoft.1994: Gates attemptsto acquire Intuit, acompany that makespersonal financesoftware programs suchas Quicken andQuickbooks. Ignoringopposition from seniorIntuit executives whoare opposed to themerger, Gatesnegotiates withcompany founder ScottCook to take over thecompany for $1.5 billionin Microsoft stock, a40% premium overIntuit’s value.1995: The JusticeDepartment files alawsuit to blockMicrosoft’s merger withIntuit; Gates withdrawsthe purchase offer.


1995: In August,Microsoft launchesWindows 95.1995: Gates writes TheRoad Ahead, a book inwhich he muses on thepast and future of thedigital age. It holds theNo. 1 spot on The NewYork Times bestseller listfor seven weeks.1995: In December,Gates outlinesMicrosoft’s commitmentto supporting andenhancing the Internet.1998: In June, Microsoftlaunches Windows 98.1999: Gates writesBusiness@The Speed ofThought, in which heargues that computerscan help solve businessproblems in new ways.The book makes thebestseller lists of TheNew York Times,The WallStreet Journal, USA Today,and Amazon.com.2000: In January, the Billand Melinda GatesFoundation is established,resulting from themerger of the GatesLearning Foundation,which worked to expandaccess to technologythrough public libraries,and the William H. GatesFoundation, whichfocused on improvingglobal health. Led by BillGates’s father,William H.Gates, Jr., and PattyStonesifer, the Seattle-based foundation has anendowment ofapproximately $27billion.2000: In February,Microsoft launchesWindows 2000.

software (which lets users access audio andvideo content on the Internet) competes withMicrosoft’s Media Player.The issue loomed largein the minds of regulators at the EuropeanCommission, who announced in March 2004,after a five-year investigation, that “Microsoft hasabused its near-monopoly power in markets forPC operating systems which resulted in restrict-ing the interoperability of Windows PCs withnon-Microsoft servers. The company also brokethe law by abusing its power in markets for thetechnology that allows people to play music andvideos on their PCs,” regulators said.

Wharton professor Eric Clemons thinks theEU’s point was well taken. “Under any technicaldefinition of antitrust, any technical definition ofabuse of market power, it’s self-evidently truethat Microsoft has monopoly power and that itabuses it,” Clemons states. “The classic defini-tions involve things like cross-subsidizing productlines.Any time you give away products free, thenby definition you’re overcharging for somethingelse. You have to be. If you’re overcharging forsomething else, then you’re crushing competi-tors…[Microsoft] can charge whatever it wantsfor Windows, and it can give away Media Player.The fact that it gives away Media Player, undertraditional antitrust law, [makes] it clear that it isovercharging for the operating system.”

The second challenge involved Google,Microsoft’s biggest rival in the Internet searchfield. Google, which went public in August 2004,is the most popular search engine—according toone estimate, it accounts for some 80% of allInternet searches—but its revenues, at $1 billion,are a fraction of Microsoft’s. Microsoft, which


2000: In April, theJustice Department winsan antitrust courtdecision againstMicrosoft that finds thecompany guilty ofanticompetitivepractices. U.S. DistrictJudge,Thomas PenfieldJackson, cites Microsoft’sillegal monopoly inoperating systems andorders the breakup ofMicrosoft into twocompanies.2000: In June, Bill Gatesand Steve Ballmeroutline Microsoft’s .NETstrategy for webservices. Gates notes,“You could say it’s a bet-the-company thing.Weare putting ourresources behind .NETbecause we believe inthis, and so our entirestrategy is definedaround this platform.”2001: Appeals courtreverses Jackson’sdecision orderingMicrosoft’s breakup andimposes “behavioralremedies” instead.2001: In May, Microsoftlaunches Office XP andin October that year,Windows XP.2001: Microsoft entersthe intensely competitivevideo games market,pitting its Xbox againstSony’s PlayStation 2 andNintendo’s GameCube.In three years, Microsoftpasses Nintendo tobecome Sony’s primarycontender in thismarket.

offers searches through its MSN web portal,launched a “toolbar” plug-in that resemblesGoogle’s toolbar. “Initially, the MSN toolbar is afree optional download, as Microsoft’s webbrowser and media player once were,” noted TheEconomist. “The next step, inevitably, will be tointegrate such search functions into Windows, onthe grounds that it constitutes a core technologythat should be part of the operating system…Inother words, Microsoft is preparing to use itsdominance in web-browser and operating-system software to promote itself in yet anotherseparate market—search engines this time—atthe expense of competitors.”

What does all this have to do with Bill Gates’sleadership? A great deal, because by all accounts,Microsoft’s moves follow from the intensely com-petitive culture that Gates has built at the com-pany since its inception. In the spring of 2004,however, some signs appeared that Microsoft maybe mellowing. The company settled its long-standing dispute with Sun Microsystems, an oldenemy. Microsoft also signed a major cross-licensing agreement with Siemens that allowedboth companies access to one another’s patents.Optimists might say that these are welcome signsthat after years of brawling, Microsoft and itschairman are moving toward a more collabora-tive, or at least less confrontational, approach toleadership.Time will tell.


Leadership LessonCombining Agility and Ability

Bill Gates was an eighth grader atSeattle’s prestigious Lakeside school whenhe found a new machine installed in themath and science building. As StephenManes and Paul Andrews write in theirbiography, Gates: How Microsoft’s MogulReinvented an Industry—and Made Himselfthe Richest Man in America, it was an ASR33 Teletype, an “ungainly electro-mechani-cal contraption combining a keyboard, aprinter, a paper tape punch and reader, anda modem that could connect the unit viatelephone to the outside world.” Gatesfound it fascinating. He taught himselfhow to program it so fast that WilliamDougall, a teacher who had helped bringthe computer to Lakeside, said, “It tookhim a week to pass me.” With that intro-duction to software came the first indica-tion what a fast learner Gates could be. Itwas no accident that one of his books wouldbe titled, Business @ The Speed of Thought.

During his career, Gates repeatedly hasshown he is a quick study who responds toand shapes emerging developments. Twoexamples stand out as being critical toMicrosoft’s emergence as the dominantcompany in global software, as well asGates’s personal development as a leader.They include the manner in which a fledg-ling Microsoft struck its deal with IBM tobecome the developer of the MS-DOS oper-ating system for Big Blue’s PCs; and theway that Microsoft, despite initially laggingbehind Netscape, rapidly recognized andresponded to the emergence of the Internet.

2002: In November,Microsoft and itspartners launch TabletPC, a computer onwhich users can writewith a stylus.2003: Microsoft has$32.19 billion inrevenues for the fiscalyear ending in June and55,000 employees in 85countries and regionsaround the world.2004: In January,Buckingham Palaceannounces that Gateswill receive honoraryknighthood from Britain’sQueen Elizabeth II.2004: On March 24,after a five-yearinvestigation, theEuropean Commission inBrussels announces thatMicrosoft has abused itsnear-monopoly powerfor PC operatingsystems.This has made itdifficult for Windows-based PCs to work withnon-Microsoft servers.The EC fines Microsoft$613 million. Microsoftsays in June that it willappeal.2004: In April, Microsoftand Sun Microsystemssettle their long-standingbattle.The agreementcalls for Microsoft to paySun $700 million toresolve antitrust issuesand another $900 millionto settle issues relatedto patents.

At least five years before starting work on the IBM PC, Gates,his friend Paul Allen, and other associates had developed a versionof the BASIC programming language for the MITS Altair, one ofthe first personal computers. At that time, Gates was a student atHarvard. One of the earliest lessons Gates learned was to treat soft-ware as a business. In the hobbyist-driven culture of those times—and in an interesting foreshadowing of debates that would occur20 years later about free versus paid content on the Internet—userswere willing to pay for hardware, but they expected software to beprovided free. Gates challenged that assumption, arguing thathardware without software was meaningless. As such, if a compa-ny hired and deployed full-time programmers to write softwarecode, it would incur costs and expect to recover them by earningrevenues and making a profit. Treating software as a commercialproposition from the beginning—a stance that made Gatesunpopular among the “free software” crowd—Gates and Allen setup Microsoft in 1975. In their first year, they received some$16,000 in royalties for Altair BASIC from MITS. In 1979, theyear the company moved into new digs in Bellevue, Washington,revenues crossed $1 million.

By the early 1980s, personal computers were widely recognizedas a fast-growing market. The Apple II, made by Apple Computer,was going strong, as were other machines made by Commodore,Radio Shack, and other firms. IBM was impatient to launch its ownpersonal computer and was looking for a partner whose softwarecould drive the machines. After an expensive and disastrousattempt to develop its own version of BASIC, IBM executivesapproached Microsoft in the summer of 1980. Initially, nonplussedby Gates’s youthful looks (he was 25 but looked 18), they were wonover by his confidence and knowledge of software. Microsoft wassoon ready to sign an agreement to write software in BASIC andother languages for the IBM PC—driven largely by Gates’s beliefthat the company would do what it took to land IBM’s business.

That, by itself, would have been a major coup for Microsoft—but a larger opportunity was in store. Many computers at the timeused the CP/M operating system made by a company calledDigital Research. Though Microsoft and Digital Research had aclose relationship—and Gates recommended Digital’s operatingsystem for the PC—IBM and Digital were unable to arrive at an


agreement. Determined not to let the transaction fall through,Gates cut a licensing deal with a company called Seattle Com-puter, which had developed a rudimentary operating system calledQDOS (an acronym for “Quick and Dirty Operating System”) toreplace Digital. Before the IBM PC was launched, however, Gatesplayed a masterstroke: Microsoft acquired the operating system—now renamed 86-OS—from Seattle Computer for $75,000.

As Manes and Andrews write: “It wasn’t just a fair deal forMicrosoft. It was the deal of the century.” This acquisition ensuredthat when the IBM PC was launched in 1981, Microsoft owned—and had the licensing rights to—its software and operating system. It laid the foundation for Microsoft’s operating systems—initially MS-DOS and then Windows—to become the prevailingstandard in the PC industry. Today, some 95% of PCs around theworld operate on Microsoft’s operating system.

What has kept Microsoft at the top all through this period isGates’s agility and his ability to understand new market condi-tions and what they mean for Microsoft. In the 1990s, for exam-ple, Gates was quick to understand the impact of the Internet onbusiness processes as well as on Microsoft. Gates explained his per-spective at the Internet World Conference held in April 1996.“The Internet phenomenon is really unbelievable,” he said. “It’sthe most fantastic thing to happen in the world of computingsince the original PC.”

According to Gates, in the two decades since its arrival, the PCbrought about massive changes. For instance, it transformed theway documents are created—because now more than 90% of alldocuments are created electronically. Still, the distribution ofmany of those documents did not initially change because mostpeople printed the documents and mailed them, just as they wouldif they had been type-written or handwritten. In other words,before the Internet came along, the PC was not a communicationstool, in part because the cost of communications was high and,secondly, because there wasn’t a large enough critical mass of peo-ple who might want to use the PC to communicate with oneanother.

Between 1994 and 1996, however, the situation changed.Several factors came together to allow the PC to become a power-ful communications device. In addition to a decline in the cost of


communications, the number of PCs and people connected to theInternet increased dramatically. Result: A critical mass of usersemerged that could use their computers to communicate. “What’sgoing on today is like the arrival of the printing press, or the tele-phone, or the radio,” Gates said. “And these communications toolsdid have pervasive effects. They made the world a smallerplace…Now the personal computer connected to the Internet is farmore powerful in many ways than any of these other communica-tions devices.” What makes it more powerful, Gates added, is thefact that the Internet allows PC users to connect to one another—and the marginal cost of communicating in this environment isclose to zero.

For Gates, it wasn’t enough to rapidly learn how the Internetwas transforming society; he also had to engage Microsoft in tak-ing advantage of the opportunities it offered. Microsoft respondedto the rise of the Internet in three ways.

First, Microsoft developed the Internet Explorer web browser,which it positioned directly against Netscape, the most popularweb browser of the mid-1990s. Pursuing a tactic that it hadrepeatedly used against rivals, Microsoft bundled the Explorerbrowser with its Windows operating system. Gates and Microsoftbet on the fact that, although this aggressive move might backfire,the regulatory backlash wouldn’t be strong enough to counter thebusiness benefit of becoming the market leader in this product.That, after a lengthy battle with the Justice Department’s trust-busters, is exactly what happened.

Second, Microsoft began to adapt existing products and developnew products centered on the Internet. According to Gates,“Group collaboration will become very strong on the web with theability to not only have audio but also to share applications…Thevalue of those systems is really hard to exaggerate.” To cater tothese needs, Microsoft deployed productivity software as well asauthoring tools, both built upon the foundation of its existingproducts.

Third, when companies came along that had established astrong presence in a niche where Microsoft was lagging behind,Gates responded with another time-tested tactic: acquisition.Example: one of the fastest-growing areas during the dot-comboom years was email, as Gates had noted in his analysis of PCs


becoming popular communications tools. Hotmail, an upstartprovider of free email (supported by advertising) saw explosivegrowth in this domain and became a Microsoft acquisition target:It was taken over in 1998 for more than $400 million.

Such moves, based upon fast learning and faster action, enabledGates to keep Microsoft moving onward and upward—and to keephis own leadership skills well honed.



1944: Born in Memphis,Tennessee. His father, afounder of the Greyhoundbus lines and ToddleHouse restaurant chain,dies when Smith is four;his mother later marries acolonel in the NationalGuard who has an aviationbusiness.1959: At age 15, learns tofly, enters prep school, andstarts a recording studiowith friends.1965:While aneconomics student at Yale,writes a paper about ahub and spoke system todeliver spare parts andsupplies to companiesovernight.1967: Joins the MarineCorps, serves four years inVietnam flying 230 combatmissions, earns the SilverStar, Bronze Star, and twoPurple Hearts.1970: Takes over airplanerepair shop in Little Rockowned by his stepfatherand grows frustrated withproblems getting parts.1971: IncorporatesFederal Express to moveparts and documents for companies overnightby air.1972: Federal Expressmoves to Memphisbecause of availability ofNational Guard hangarsand land.1973:With 33 Falcon jetsand 389 employees,Federal Express moves186 packages throughMemphis to 25 cities onits first day in business.1977: Helps lobby forairline deregulation, whichwould allow the companyto expand with largerplanes.

FREDERICKWALLACESMITHThe Challenge:Overnight Innovation

Fred Smith had one big idea and it generated anentire industry, nearly overnight.

Smith founded Federal Express in 1971 and thecompany grew to become the world’s firstovernight delivery system, handling 5.4 millionshipments a day in 210 countries. It wasn’t easy,but Smith’s toughest job was yet to come.

“This company was enormously successful inits first 20 years of existence largely because itfilled an unmet need,” says Smith.“As we enteredinto the 1990s, it became very obvious that thissingle line of business was simply not going to beviable by itself over the long haul. It was the clas-sic case of great success potentially sowing theseeds of its own destruction.”

Now known as FedEx, the company’s purpleand orange jets still ferry time-sensitive packagesthrough the night skies. But Smith has recastFedEx as an information-technology firm thatmanages customers’ internal supply chains as wellas their shipments by air and truck, even whiskinggoods through customs.

In a sense, FedEx helped drive itself out of itsoriginal business. The company showed its cus-tomers how much more efficient they could be bycutting back on inventory and supplies, and ship-ping only what was needed, when it was needed.

Once companies figured that out, there werefewer last-minute shipments that absolutely, posi-tively had to get there with a premium paymentto FedEx. Businesses are always “in the process ofcommoditization,” says Smith.“You simply have toconstantly look to where markets and needs aregoing and anticipate those needs.”

In 1973, he established his now-famous hub-and-spoke system in Memphis. Initially, Smithwanted to provide overnight transport of checksfor the Federal Reserve System; hence the nameFederal Express. The Federal Reserve thenbacked out, but the company grew and enjoyedsuccess through the late 1980s before hittingsevere headwinds.

The problems stemmed in part from Smith’ssupport for a project called Zapmail, a systemthat used fax machines at FedEx offices to trans-mit documents for clients in different cities.Afterbeing introduced in 1983, the service was sooneclipsed by the rise of fax machines priced cheap-ly enough that most offices could purchase theirown. In addition, Zapmail was based on satellitetechnology, which needed the space shuttle towork effectively. But the space shuttle blew up,dealing a body blow to FedEx’s plans. FedEx folded Zapmail in 1986, taking a costly write-off.

Innovation is not without risk. “There are lotsof examples of that at companies,” says Smith.“But on the other side of the coin, if you’re toocautious and too late—that’s the story of thedinosaur businesses. Navigating that fine line isvery important.”

With revenue-growth slowing as the companycame into the 1990s, Smith looked for new mar-kets overseas. His revolutionary overnight-delivery idea had worked well in the U.S., but by

1978: Company lists onthe New York StockExchange.1979: LaunchesCOSMOS, a centralizedcomputer system tomanage vehicles, people,packages, routes, andweather scenarios.1980: Introduces thefirst PC-based automatedshipping system, laternamed FedEx PowerShip.1981: Starts first interna-tional service to Canada.1983: Unveils Zapmail,a service in whichcustomers could faxdocuments from oneFederal Express office toanother. Service flops by1986 due to rapidexpansion of office faxmachines.1984: Acquires GelcoExpress, a Minneapolispackage courier serving84 countries.Also makesacquisitions in Holland,Britain, and the UnitedArab Emirates.1986: Initiates use ofSuperTracker, a hand-heldbar-code scanner systemused to capture packageinformation.1988: Creates WhiteGlove Services for itemsthat need specialhandling.1989: Tiger Inter-national, Inc. acquired,adding operating rights to21 countries as well as anadditional fleet of Boeing747s and 727s, andMcDonnell Douglas DC-8s.The move generatesfriction with FederalExpress’s pilots overseniority rights withFlying Tiger pilots.



the time he arrived in Europe, imitators werealready in place. Although FedEx spent $1.5 bil-lion on a global expansion, by 1991 it was beatenback. Meanwhile at home, competitor UPS wasgaining ground and FedEx was struggling with adifficult integration of the legendary Flying Tigerscargo carriers.

FedEx was forced to regroup. Smith deter-mined future growth would take place throughthe acquisition of more diverse transit companies,including ground operations. The major thrust,however, would be to buy and develop informa-tion companies that would tie into the shippingbusiness.

The company had always been ahead of thecurve in information systems. In 1979, it created acentral computer system to track everythingfrom vehicles to weather scenarios. In 1986, itintroduced a hand-held, bar-code scanner to trackpackages. And in 1994, it became the first largetransportation company to make extensive use ofthe Internet.

“One of FedEx’s biggest innovations, one thatrevolutionized our business but also revolutionizedthe whole world of business, was the developmentof a positive tracking and tracing capability for mil-lions of discrete items in motion,” says Smith.“Wesaw a need that nobody else had seen. It was theunderstanding that what customers really wantedwas to manage their inventory when it’s moving aswell as at rest.”

He met the challenge of remaking FedEx intoan information trafficker by assembling a manage-ment team with legal and financial expertisebecause he knew he would have to shape the newcompany with acquisitions. Smith also stressedthe need for executives to communicate with

1990: Federal Expresswins U.S. CommerceDepartment’s MalcolmBaldridge NationalQuality Award forservice.1992: Expansion inEurope fails afterproblems initiating thehub-and-spoke systemand reluctance byregulators to let thenew company intoexisting Europeanmarkets. Company takeshighest quarter loss andcloses European courieroperations, laying off6,600 employees.1994: First majortransport firm to launcha website with trackingand tracing capability.1997: UPS strike swellsbusiness with 800,000additional packages aday. Employees volunteerto work extra hours inhubs.After the strike,Smith takes out full-pagenewspaper ads thankingemployees and endingwith the military phrase,“Bravo Zulu.”1998: FedEx acquiresCaliber System Inc., theparents of RPS andViking Freight, andcreates FDX Corp., a$16-billion logistics anddistribution company,which is later namedFedEx Corp.2000: Acquires TowerGroup International, atransportation logisticscompany, forming thefoundations for FedExTrade Networks toprovide internationaltrade and transportationassistance, includingcustoms services.

employees, to let them know why the companyneeded to move in new directions.

“It took leadership and communication by theoperating management to explain to our folkswhat we were doing and make them feel goodabout it,” says Smith.“Finally, it required the devel-opment of an iron-clad, disciplined business planto execute on the acquisitions of new productlines we were offering, and to make sure we sup-ported our original employees. In essence, weturned the new people we acquired purple.”

In the late 1990s, FedEx went on an acquisitionbinge that added new ground and freight capabili-ties as well as logistics and technology services. In2004, it paid $2.4 billion for Kinko’s, the printingand office services retailer. Kinko’s had itself beenmigrating from a neighborhood copy shop to aninformation and document management company.

Smith says vision goes with his job title.“At theend of the day, that really is what the CEO job isall about. I don’t think I have a lock on that par-ticular skill.The common denominator for peoplethat have vision, and one of the things I think Ibring to the table is the ability to look at a broadrange of issues and synthesize a product, or serv-ice, or business solution.”

2001: Buys AmericanFreightways, a truckingcompany that consoli-dates shipments that areless than a full truckloadwith service in 40 states.2002: Announces a $1.8billion, six-year expansionof FedEx Ground, thecompany’s truck deliverysystem that will add 10new hubs and nearlydouble capacity by 2009.2004: Buys Kinko’s, theoffice-service company,to add distribution out-lets and tap the homeoffice market.


Leadership LessonLearning to Change Direction at Express Speed

Federal Express founder Fred Smith was not just a fast learner;he also was an early one. As noted previously, the idea that becameFedEx began life as a term paper for an economics class whenSmith was an undergraduate at Yale in 1965. The main point ofhis paper was simple: As machines replace human labor, produc-tivity will rise, but so will the need to fix equipment quickly whenit breaks down. This means a system must be found (or created) toensure that organizations have rapid access to spare parts andmaterials when they are needed. From this seemingly obvious butrevolutionary notion, Smith created a hub-and-spoke–based trans-portation system of rapidly moving inventory that not only revo-lutionized its own business but “revolutionized the whole world ofbusiness,” Smith says.

Along the way, Smith had to quickly learn—and sometimesunlearn—lessons so he could change direction as needed to keepFedEx growing. For example, while serving as a marine inVietnam, he noted how military supply chains worked to providefood, uniforms, and ordnance to soldiers, but he also recognizedthat these processes were too supplier-focused; they emphasizedconstantly pushing out items that the military had decided to dis-tribute. In contrast, the logistical processes he wanted to set uphad to be primarily customer-driven. He later applied theseinsights when developing a delivery system for FedEx.

After Smith laid out his framework for an overnight deliverysystem for high-priority documents and packages, he still had tochange direction many times to keep the company aloft. Early on,an obscure airline regulation would have restricted the type of air-plane he could fly. Smith went to Washington and got the ruleschanged so he could fly larger planes.

In 1997, the company used new computer technology to identi-fy low-profit customers and weed them out for better overallreturns. The company that was born to deliver overnight thenslowed the pace, building a better network of ground transporta-tion to deliver items that don’t absolutely, positively have to bethere overnight, but could get there in a few days.


One of the most important lessons Smith learned is that cus-tomers are keenly concerned about the status of their packages,not only when they are shipped and when they arrive, but alsowhile they are in transit—an insight that spurred FedEx to pio-neer the development of tracking and tracing capabilities. Havinglearned before its competitors that FedEx was not just in the busi-ness of transporting cargo but also of providing information aboutthat cargo to clients, Smith led the company to invest in informa-tion technology. As Fortune magazine reported, Smith “stressedthat knowledge about cargo’s origin, present whereabouts, desti-nation, estimated time of arrival, price, and cost of shipment wasas important as its safe delivery. He…insisted that a network ofstate-of-the-art information systems—a sophisticated mélange oflaser scanners, bar codes, software, and electronic connections—beerected alongside the air and vehicle networks.”

Smith says the reason he created this information system was that“people who move things—whether it is an abstract for an engineer-ing survey or a critical part for an airplane or a hospital—they allwould like the same level of control when it’s moving, as if it werein their hands or in their warehouse.” This understanding, synthe-sized with where technology was going, allowed FedEx to captureand manipulate the data at a low cost. The resulting innovation “hasnow revolutionized the world of logistics. It is one of the greatestimprovements in societal productivity you could name,” says Smith.

“The simple system by which FedEx tracks and traces all thecargo it delivers has allowed all businesses to significantlyimprove the velocity of their supply chains. It has dampened busi-ness cycles. That’s an example where you see a need that’s notimmediately apparent. I will assure you that not one in 100 of ourcustomers would have said, ‘I need a system like that.’ They justcouldn’t envision that until we had it.” Based on his ability tosense what his customers didn’t know they needed, Smith has for-mulated his own definition of vision. He says, “It’s simply a broadunderstanding of big needs and developments, and then under-standing how you can do something about it.”

In addition to speeding up the transportation process, Smithargues that these innovations have made the process more cost-effective. In 1980, logistics accounted for 16% of the cost of producing goods; now it is 10%, Smith notes.


FedEx has also had to adopt varying strategies in Europe, whereits hub-and-spoke system did not play out so well in Brussels. Bythe time FedEx began moving into Europe in the mid-1980s, imi-tators had already set up systems similar to its own. Regulatorsblocked FedEx from flying into new markets. Later, expensiveacquisitions were difficult to integrate. But Smith says the com-pany has persevered, changing its game plan along the way.

“Being absolutely determined to accomplish something is avery, very important asset,” Smith told Investor’s Business Daily in1998. “A lot of people are put off by adversity or mistakes. If youkeep your eye very firmly focused on where you want to go, andyou’re determined to get there, that’s worth a lot.”

Smith says his greatest contribution to society is the develop-ment of FedEx, which he says has allowed businesses to becomevastly more productive. “I love what I do because it’s right in themiddle of everything. We basically are the sinews that keep theeconomic body operating every day.” In part, that goes back to hisservice in Vietnam. As he told Fortune in 1997: “I wanted to dosomething productive after blowing so many things up.”


LOUIS V.GERSTNER,JR.The Challenge:Making Elephants Dance

“My friends, in the last three years we have lost$17 billion and half our market share.The mediais writing our obituary and our competitors arelaughing at us,” Louis Gerstner recalls telling IBMemployees in 1993, shortly after he undertookthe monumental task of turning around this bluechip company in freefall. “Don’t you think weought to try something different?”

The turnaround, Gerstner concedes, did nothinge on developing some heretofore-unknownstrategy. It depended, instead, on actually focusingon business fundamentals, such as consolidatingthe company’s 266 bookkeeping systems, 128chief information officers, and 339 surveys formeasuring customer satisfaction.“IBM knew whatdirections it needed to take. I found thousands ofpages of good strategic analysis in the file,” saysGerstner. “But the company didn’t execute on any of those strategies. Why? Because internallythe culture was bound up in a strait jacket…[Managers] would have loved me to introduce anew strategy, so they could do what they did sowell: discuss and debate abstract concepts.”

IBM dominated the computing industry fordecades with mainframe systems used by virtuallyevery corporation and government agency. By the


1942: Born March 1 inMinneola, New York. Hisfather, a milk-truckdriver, eventually becomesa dispatcher; his motheris a secretary andadministrator.1963: Graduates fromDartmouth College witha bachelor’s degree inengineering science.1965: Receives MBAfrom Harvard BusinessSchool.1965: Joins McKinsey &Co. consulting firm.Credits time there withteaching him the detailedanalytical process forunderstanding acompany’s foundations.1970: Becomes a principal partner at age 28, the youngest inthe firm.1975: Becomes adirector, again theyoungest, at 33. Growsincreasingly restlessplaying the role of anadvisor to the decision-makers. Remembersthinking:“I no longerwant to be the personwho walks into the roomand presents a report toa person sitting at theother end of the table; Iwant to be the personsitting in that chair—theone who makes thedecisions and carries outthe actions.”


late 1980s, however, companies like Hitachi andAmdahl were offering mainframe alternatives atlower prices, while others like Dell and Compaqwere encroaching on the personal computer busi-ness. In the process, IBM’s stock value crashed to$12 per share in 1993, from $43 in 1987.

Gerstner, the first outsider to lead IBM,had onlya few months to set Big Blue on the right track. Hequickly put an end to any talk of breaking IBM intoseveral little blues—the prevailing wisdom on howto harness the company’s valuable assets. Instead,Gerstner moved to transform the company into an“integrator,” which would build, run, and house sys-tems for customers using its own components aswell as those of its competitors. His decision rancounter to the trend of the day, which favored theidea of smaller, nimbler technology companies spe-cializing in only a few products and transformingthemselves quickly to meet market demands.“Wewere getting killed by these single-point competi-tors,” says Gerstner.“The only way we would havea distinctive competence in the market place wasto be an integrator.”

After extensive talks with customers, Gerstnerconcluded that clients wanted companies like IBMto handle their complex computing tasks. He rea-soned that the typical products delivered by thecomputer industry are overly complex—difficultto install, integrate, and operate. He realized thatcustomers are concerned about what they needdone while the computing industry thinks aboutcomponents and systems. “When I was a cus-tomer, what I really wanted was someone totranslate these components into solutions,” saysGerstner. “So I made this decision basically frommy gut, from having been a customer.”

1978: Joins AmericanExpress as an executivevice president and headsits charge card business.Rises to president ofAmerican Express andchairman and CEO of itslargest subsidiary,American Express TravelRelated Services. Growsfrustrated when he is nolonger next in line to beAMEX’s CEO.1989: Joins RJR Nabiscoas chairman and CEO.The company, created bya merger betweenconsumer food makerNabisco and tobaccogiant R.J. ReynoldsTobacco Co., had beentaken private through aleveraged buyout. Findshimself heading acompany saddled bydebt. Oversees the saleof $11 billion in assets tohelp reduce debt load.Learns that he prefers tobuild companies ratherthan take them apart.1993: Recruited to headIBM, a company introuble. General Electric’sJack Welch is amongmany candidates whodeclined the position.Gerstner, who initiallysaid he wasn’t interested,says later:“I guess I gotsomewhat motivated bythe fact that no one elseseemed to want the job.”1993: On April 1, beginsBig Blue career.Withinthree months, axesformer CEO John F.Akers’ plan to split thecompany into severallittle blues. Gerstnerargues that thecompany’s size andproduct breadth are itsstrength.

None of the steps would have been successfulwithout flushing out a calcified IBM culture com-posed of fiefdoms that were out of touch witheach other and with their customers’ needs—insidiously undermining performance. Gerstnerdescribes the IBM of that era as suffering from“success syndrome,” a disorder afflicting compa-nies that have been successful for decades. Thismalady, he says, locks them into repeating whatmade them successful in the first place, evenwhen the competitive environment changes andnew steps are required to remain relevant.

Gerstner says he spent about 40% of his timeduring his first two years meeting IBM employeesface-to-face, exhorting them, and filling them witha sense of urgency over a short-term plan thathad to be executed.“I was very blunt, very direct,and very honest,” Gerstner notes. “I appealed totheir pride, their competitive juices, and theireconomic necessities.” He told them it was timeto get back to fundamentals like talking to cus-tomers and actually selling products rather thansimply developing them. He essentially rebuilt theculture to focus on performance.

Along the way, Gerstner led the charge againsta vast number of internal processes that wouldinvariably derail any changes. For example, herevamped compensation, promotions, and train-ing programs. “It takes an enormous amount ofwork to change the culture because the cultureis embedded in everything.As a leader, you can’tjust get on a soap box and say, ‘Let’s do this, let’sdo that,’ if every day when [managers] come towork, the processes and the systems in the com-pany drive them in a different direction.” The cul-tural revolution spearheaded by Gerstner at IBM


1994: Sweeps clean theboard of directors anddisbands theManagement Committee,the beginning of hugecultural changes that willtake place throughoutthe company.2001: IBM dubbed asthe “turnaround of thecentury.” Annual netincome rises to $7.7billion in 2001 from aloss of $8.1 billion in1993; revenue rises to$85.9 billion from $62.7billion; stock price risesto $120.96 per share.About 100,000 newemployees are addedover a span of sevenyears.2001: Queen ElizabethII awards Gerstner thedesignation of honoraryKnight of the BritishEmpire for his efforts on behalf of publiceducation as well as his businessaccomplishments.2002: Retires from IBMin December. Publishesbook called Who SaysElephants Can’t Dance?Inside IBM’s HistoricTurnaround, about hisefforts to restructurethe company and itsculture.2003: Named chairmanof The Carlyle Group, aglobal private equity firmwith more than $13.9billion undermanagement.


invariably involved bloodletting. “Those people who could not adapt to thatnew culture left on their own volition or they left because we told them theyhad to leave.”

Gerstner concedes he was never fully confident about the company’s turn-around. “I was always convinced that we had gotten the strategy right or atleast the direction we were going in right. My confidence was challenged bymy sense of whether we could execute.”

They could. Between 1993 and 2001 (Gerstner stepped down as CEO thefollowing year), IBM’s annual net income rose to $7.7 billion from a loss of$8.1 billion; revenues rose to $85.9 billion from $62.7 billion, and the stockprice rose to $120.96 per share from $14.12 per share.

In his book, Who Says Elephants Can’t Dance? Inside IBM’s HistoricTurnaround, published in 2002, Gerstner wrote that “changing the attitude andbehavior of thousands of people is very, very hard to accomplish….You can’tsimply give a couple of speeches or write a new credo for the company anddeclare that a new culture has taken hold.You can’t mandate it, can’t engineerit. What you can do is create the conditions for transformation, provideincentives.”

Gerstner seems to have done that.After his retirement, he noted that IBM,despite its insular culture, was rich with creative talent that only needed tobe set loose.The head of every major business unit today, he said in his book,is a long-time IBMer, including his successor as CEO, Sam Palmisano.

Leadership LessonLife Lessons for Fast Learners

Imagine this: A young man or woman, about five years removedfrom an MBA, meets Louis Gerstner on an elevator, realizes he isthe former CEO of IBM, and asks him how to become a successfulleader. What would Gerstner’s two-minute reply be? In the bluntmanner that former associates at American Express, RJR Nabisco,and IBM have come to know well, he says: “Part of the problemwith people coming out of business schools is that they want to beleaders immediately. Their attitude is, ‘Make me the CEO.’ Butthey’ve got to realize that before they can succeed as leaders, theymust first become effective workers and managers.”

Gerstner offers plenty of advice to fast learners who want tobecome effective workers and managers en route to the Holy Grailof lasting leadership. “First, find an industry that is growing,” hesays. “Remember Warren Buffett’s statement that when an indus-try with a bad reputation needs an executive with a good reputa-tion, it is the industry’s reputation that stays intact. You’ve got todirect yourself to a profession in an industry that has prospects forgrowth.” Having done that, Gerstner adds, for the first five years,no matter what job you are offered, just adopt the adage, “I’mgoing to do this job better than anyone has ever done it before.”Focus on getting the job done better, not on who’s on the fast trackto being noticed. “Don’t game it,” he says. “Outperform. Believeme, people will notice you.”

Gerstner contends that when you become a leader, the situationchanges. “As a leader, you become a manager of many people. Thenit is a question of whether you can communicate honestly,” he says,explaining that leaders need to ask themselves several questions:“Can you provide people with an offensive direction that they canget excited about? Can you communicate honestly about where thecompany or the unit is? Can you be open about talking to your teammembers about their performance and how they need to get better?Can you develop a sense early on that your job is to make them suc-cessful and that their job is to make you successful? Because, at theend of the day, if you make them successful, they are going to makeyou triple successful.” In a nutshell, Gerstner says, the critical taskof becoming a leader is passing through the difficult time of


understanding that a strategy has to be executed correctly, and thatyou have to depend on others to get the work done.

When Gerstner was in his late 20s and early 30s, he had a hard timerecognizing this reality. “Too many young people, when there is ashortfall in an organization, simply say, ‘Give me that, I will do it—Iwill write the memo, prepare the presentation, do the work.’” At somepoint on the way to becoming a leader, that mindset has to change.“Leaders recognize that they only succeed if their team succeeds. Andfor a team to succeed, you need straight talk, sharing, and openness.”

Do different kinds of organizations differ in the kind of leader-ship they need? For example, did Gerstner need different leader-ship qualities at IBM than he did at American Express or RJRNabisco? “First of all,” Gerstner says, “IBM forced me to changenot so much my leadership style but my managerial style to a cer-tain extent.” As president of American Express, Gerstner had beenheavily involved in regular operational reviews of the business. “Ireviewed every one of my businesses every month with a strongperformance measurement system. I worked operations regularlywith my division presidents and group executives. When I got toIBM, I realized there were so many businesses, group executives,and division presidents that if I started having monthly financialreviews with every one of them, I would spend all month doing itand then start all over again.” As a result, he came up with a newsystem at IBM, one that relied more on other people to driveresults. “So, this is the message I would give a young manager try-ing to become a leader. You will find yourself increasingly becom-ing dependent on others, and by the time you get to the top of anorganization, your success will depend on your ability to select,motivate, and encourage the team working under you. That willaccount for 90% of your success.”

The fact that at IBM Gerstner was much less involved with day-to-day operations helped him realize the importance of culture asthe embodiment of what people do, what they think, and whatthey value in an institution. “I had viewed culture as one of thethings that you, as a leader, need to understand, and manage, likeyou do finance, marketing, public relations, and so on,” he says. “Ifinished my IBM career with the view that culture is not one of thethings you do, it is everything. Everything resides in culture. It isthe crucible. So if you think you are going to change a company’s


strategy, you had better understand before you even try whetherthe culture will support or fight that strategy.”

“I heard someone say the other day that when strategy clasheswith culture, culture always wins. Again, this is something thatmany people simply don’t understand. At one level, culture seemstheoretical and soft because it consists of values, attitudes, behav-ior. But those values and behavior are driven and reinforced everysingle day by the processes in the company.”

Gerstner offers an example of the dissonance that can emergewithin a company when culture is in conflict with operations. “Ilove CEOs who say, ‘We believe in the long term and are buildingfor the long term,’ and then on the next day, a memo arrives fromthe CFO saying, ‘I want you to cut your budgets by 5% for the nexttwo quarters.’ People respond to the CFO’s message, because theyhave to do that. So the culture becomes short-term oriented, notlong-term, even though the CEO is out there, pointing to thefences on long-term growth. Such mixed messages produce con-flicts within organizations. That is why so many successful peoplein the last decade who have come from outside to run an organiza-tion get enormously frustrated. They feel that what they point to,and suggest, and argue for, and even demand, does not get done.”


209

Managing Risk

9

L eadership involves coping with risk. It is no more possibleto imagine a leader who shuns risk than it is to conceive of aninnovator or entrepreneur who avoids it. Most leaders, however,are not uncontrolled gamblers (though some might be); theyinvoke factors that reduce the risks and make them manageable.

All businesses face uncertainty regarding the future because mar-kets might be influenced by factors that are neither known in advancenor fully controllable. As such, tools like scenario planning haveevolved, which let executives imagine alternate futures and developstrategies to deal with them. In no area of business, however, does riskmanagement play such a crucial role as in finance. Banks confrontmarket risk when they lend money to borrowers, and possibly evengreater internal risk that their own executives might make decisions

that jeopardize the enterprise. Insurance companies constantly evalu-ate and make decisions about risk ranging from natural hazards toother kinds of catastrophes. Venture capitalists routinely bet on start-ups, hoping that one or more will turn into a future eBay or Google.

The Top 25 leaders in this book are skilled at assessing and manag-ing risk. Three of them, however, demonstrate an uncanny ability todeal with it. Warren Buffett, chairman and CEO of BerkshireHathaway, has had a phenomenal track record in managing risk, notonly in his ability to pick winners among investment options but alsoin the field of insurance, which forms the core of the company’s busi-ness. While Buffett shows how leaders can manage risk by, for exam-ple, choosing appropriate investment targets, Alan Greenspan, whoheads the U.S. Federal Reserve, has been a master at managing risks ata macro level, including those that erupt from convulsions in the glob-al financial system—such as the Asian contagion in the 1990s—orfrom stock market meltdowns, such as the one that hit Wall Street inOctober 1987. Although Greenspan has erred in his judgment fromtime to time—his support of Charles Keating and the managementteam at Lincoln Savings and Loan comes to mind—he acknowledgesand corrects his errors. As Paul Samuelson once said about him, “Thething about Greenspan is that he doesn’t stay wrong.”

Peter Lynch, vice chairman of Fidelity Management & ResearchCompany, the investment advisory arm of Fidelity Investments, andmember of the Fidelity Funds Board of Trustees, managed Fidelity’sMagellan fund for 13 years from 1977 to 1990. He excels at manag-ing the portfolio of risks that confront mutual funds. During his leadership of Magellan, it became the top equity mutual fund in theU.S. He has written about his investment philosophy in popular bookssuch as One Up on Wall Street and Beating the Street—explaining thatinvestors should do their homework and avoid faddish stocks that arehot today but that may well burn out tomorrow.


Chapter 9 Managing Risk 211

WARRENBUFFETTThe Challenge:Investing for the Long Term

By 1999,Warren Buffett had long been an investinglegend.The year before, Berkshire Hathaway’s stockprice had risen more than 50% in the second-bestyear since Buffett took control in 1965. But 1999was terrible: a stock loss of nearly 20%, while theStandard & Poor’s 500 was up nearly 21%.

“We had the worst absolute performance ofmy tenure and, compared to the S&P, the worstrelative performance as well,” Buffett confessed inhis annual report to shareholders. Buffett didn’tblame the market. How could he when moststocks were soaring?

Buffett goes on to say, “Even InspectorClouseau could find last year’s guilty party: yourchairman. My performance reminds me of thequarterback whose report card showed four Fsand a D but who nonetheless had an understand-ing coach. ‘Son,’ he drawled, ‘I think you’re spend-ing too much time on that one subject.’ My ‘onesubject’ is capital allocation, and my grade for1999 most assuredly is a D. What most hurt usduring the year was the inferior performance ofBerkshire’s equity portfolio—and responsibilityfor that portfolio…is entirely mine.”

Shareholders could excuse a little levity. Thathad long been Buffett’s style. And long-terminvestors had little to complain about, as annualreturns since 1965 averaged a stunning 24%, morethan double the return of the S&P 500.

1930: Born in Omaha,Nebraska. Familyoperated an Omahagrocery store from 1869to 1969. Howard, hisfather, is a stockbrokerand Republicancongressman; hismother, Leila Stahl, is ahomemaker.1941: At 11 starts workin his father’s brokerageand buys his first stock.1945: Makes $175 permonth delivering TheWashington Post and buys40 acres of Nebraskafarmland for $1,200.1947–1949: Studies atthe University ofPennsylvania’s WhartonSchool, transfers to theUniversity of Nebraskato complete hisundergraduate degree.1950: Earns B.S. fromUniversity of Nebraska.As a senior, readsBenjamin Graham’s TheIntelligent Investor, whichadvises avoiding fads andseeking undervaluedstocks. Is turned downat Harvard BusinessSchool and enrolls atColumbia University’sbusiness school to studywith Graham.1951: Graduates fromColumbia and goes towork on Wall Street,against the advice of hisfather and Graham.Thenreturns to Omaha tobecome a stock brokerat his father’s firm andteach night businessclasses.1952: Marries SusanThompson, with whomhe has three children.


Throughout his career, Buffett’s strategy,whether buying a block of shares or an entirecompany, has been simple: Don’t pursue the high-flyers, look for beaten-down companies with lotsof value that other investors don’t see. He seeksout companies with good managers who will stay,and he generally leaves them alone. While manymoney managers change their entire portfolioevery year, Buffett intends to keep his purchasesforever. He told his shareholders at one point: “Ifthe choice is between a questionable business ata comfortable price or a comfortable business ata questionable price, we much prefer the latter.What really gets our attention, however, is a com-fortable business at a comfortable price.”

In 1999, the tech-stock bubble had driven theS&P 500 into the stratosphere. But despite somecriticism, Buffett had resisted any temptation tojump on the tech bandwagon. He had long avoid-ed investing in any business he could not under-stand. More importantly, he shunned companieswhose future cash flow could not be forecast.Many of the hot tech companies had no earnings,little revenue, and no long-term track records.

“If we have a strength, it is in recognizing whenwe are operating well within our circle of com-petence and when we are approaching theperimeter,” Buffett wrote. “Predicting the long-term economics of companies that operate infast-changing industries is simply far beyond ourperimeter.”

Buffett had long favored straightforward, tradi-tional businesses, and Berkshire had big holdingsin American Express, The Coca-Cola Co., TheWashington Post Co., Freddie Mac, Gillette, M&TBank, and Wells Fargo. But the heart of Berkshire

1954: Takes a $12,000-a-year job in New Yorkhelping manageGraham’s investmentpartnership.1956: Graham retiresand dissolves thepartnership. Buffettreturns to Omaha andforms Buffett Associates,Ltd. with $105,000raised from seven familymembers and friends,plus his owncontribution of $100.Later, he starts twoadditional partnerships.Eventually, the threepartnerships aremerged. His goal is tobeat the Dow by 10percentage points a year.1958: Buys the $31,500Omaha home he neverleaves.1959: Meets CharlieMunger, his lifelongpartner and eventualvice-chairman ofBerkshire Hathaway.1962: The partnershipthat began five yearsearlier with $105,000 isworth $7.2 million andthe Buffetts are worthmore than $1 million.Allthe partnerships aremerged into BuffettPartnerships, Ltd. Beginsbuying stock inBerkshire Hathaway, atroubled New Bedford,Mass. textile mill, at lessthan $7.60 a share.Buffett uses Berkshirecapital to invest in otherbusinesses, such asinsurance.1963: The BuffettPartnerships becomeBerkshire’s largestshareholder.


was its stable of insurance companies.The insur-ance “float”—cash collected in premiums andinvested until it’s paid out in claims—had beenused to fund many Berkshire investments. In 1998,he made Berkshire’s biggest purchase, paying $22billion for General Reinsurance. Unfortunately,storms in Europe pushed insurance claims unusu-ally high in 1999, while price competition under-cut premiums, causing a $1.4 billion underwritingloss at the big insurer. Buffett watchers com-plained General Re management had lost cohe-sion and Buffett had erred in sticking with hispractice of not interfering in the running ofBerkshire’s subsidiaries.

There also was trouble at some other holdings,including Coke. Starting in the late 1980s,Berkshire had acquired about 8% of Coca-Cola,paying an average of $10 per share and reasoningthat the markets had not fully recognized thevalue of the brand, especially given the potentialfor expansion overseas.The stock soared to $87in 1998, but then tumbled to the $50 range, cut-ting the value of Berkshire’s holdings in Coke by$7 billion.

In a March 2000 article titled “The Sage HasSome Explaining To Do,” BusinessWeek writerAnthony Bianco summed up the critics’ view: “Inloading up on Coke a decade ago, Buffett acted onone of the definitive insights of his career: therecognition that Wall Street was grossly underes-timating the intrinsic value of great consumerbrands. By now, though, Buffett’s view has been sothoroughly assimilated that it’s a cliché.” With thevalue of the brand fully reflected in Coke’s price,the stock might never again provide big returns,Bianco wrote. Buffett appeared to have erred by

1964: Begins buyinginexpensive shares ofAmerican Express whilethe company is mired ina financial fraud scandal.Shares double by theend of 1965.1965: Gains control ofBerkshire Hathaway.1966: Buffett’s share ofthe partnership isworth more than $6.8million.1967: Buffet’s networth is more than $10 million. He tells hispartners he sees nomore bargains in thesoaring stock market.Berkshire acquiresNational Indemnityinsurance for $8.6million.1969: The partnershipis dissolved afterachieving acompounded annualreturn of 29.5%, versus7.4% for the Dow.Buffett had concludedtoo many stocks wereoverpriced.Assetsdistributed to partnersinclude shares ofBerkshire Hathaway.Buffett is worth about$25 million. Single-handedly forcesOmaha’s premiercountry club to admitJews.1970: Buffett owns29% of Berkshire,names himself chairman,and begins writing theannual letter toshareholders thatbecomes famous.Berkshire makes only$45,000 from textiles,$4.7 million frominsurance, banking, andother investments.


1973: Berkshire beginsbuying The WashingtonPost Co. stock. Buffettbecomes a director a yearlater. Becomes aninfluential advisor to Postpublisher KatherineGraham.1974: With stock pricesplummeting, Buffett’s networth drops by half.TheSEC investigates Buffettto determine if he hadimproperly influenced theprice of stock in one ofhis holdings.After twoyears, the SEC takes noaction against Buffett andnames him to a blueribbon panel on corpor-ate disclosure practices.1976: Berkshire beginsmassive investment inGEICO insurance stock.Berkshire has its bestyear, with a 59.3% gain inbook value per share,beating the S&P 500 by35.7 points.1977: Susan Buffettleaves Warren’s home andmoves to San Francisco,though they remain closeuntil her death in 2004.Berkshire purchases theBuffalo Evening News.1979: With Berkshire at$290 a share, Buffett isworth $140 million.Berkshire begins to buyshares of ABC.1983: Berkshire ends theyear at $1,310 per share,and Buffett is worth $620million. Berkshirepurchases NebraskaFurniture Mart.1985: Buffett shuts downBerkshire’s money-losingtextile mill. EngineersABC-Capital Citiesmerger.

refusing to sell Berkshire’s Coke holdings theyear before in time to lock in his Coke gains.Some critics wondered whether his judgmentwas clouded by a conflict of interest: Buffett hadjoined Coke’s board of directors in 1989, and asale by Berkshire could have hurt Coke’s shareprice. But Buffett had always thought of his acqui-sitions as permanent; he hated to sell.

And he stuck with that policy despite the badresults in 1999. “Several of our largest investeesbadly lagged the market in 1999 because they haddisappointing operating results,” Buffett said.“Westill like these businesses and are content to havemajor investments in them. But their stumblesdamaged our performance last year, and it’s nosure thing that they will quickly regain theirstride.”

Buffett’s stay-the-course approach was vindi-cated in 2000, when Berkshire shares rose 26.6%.The S&P 500 lost 9% as tech stocks collapsed anda bear market took hold.Avoiding tech had paidoff; meanwhile, the turnaround strategy was inplace at the insurance subsidiaries, where premi-ums had been raised.

Also, Berkshire made a number of acquisitions.Buffett told shareholders, “We have embracedthe 21st century by entering such cutting-edgeindustries as brick, carpet, insulation, and paint.Try to control your excitement.”


Leadership LessonThe Noah Rule

Warren Buffett, arguably the most suc-cessful investor of our times, believes intaking risks—calculated risks. Whetherthe risk is worth taking or not depends, inpart, upon the circumstances in question aswell as the potential reward. An importantaspect of Buffett’s leadership lies in hisability to think about risk differently thanmost investors do. For example, when acompany is being slammed in the media,most investors might think it is time tohead for the exits. Not Buffett. Consider,for example, his approach to AmericanExpress when the company was in troublein the fall of 1963.

As Roger Lowenstein narrates in Buffett:The Making of an American Capitalist, theproblems at American Express had beguninnocuously and unexpectedly. An oilrefining company had supposedly storedtank loads of salad oil in a New Jerseywarehouse owned by an American Expresssubsidiary. Then, armed with receiptsissued by the warehouse, the refiner’s exec-utives had borrowed an estimated $150million. It turned out, however, that thetanks contained very little oil; most ofthem were filled with sea water. Havingdefrauded its lenders, the oil refinerdeclared bankruptcy; later, so did theAmerican Express subsidiary that ownedthe warehouse.

Who, then, should make good the loss-es? American Express CEO Howard Clark,who was concerned that the scandal mighterode the public’s trust in the company’s

1986: Berkshire hits$3,000 per share.1987: Berkshire buys a block of SalomonBrothers for $700million. Berkshire loses25% of its value in theOctober stock crash.1988–1989: Spendsabout $1.3 billion toacquire a big share ofCoca-Cola and joins the company’s board.The $10-per-shareinvestment soars to $87a share in mid-1998.Berkshire shares rise toover $8,000, givingBuffett a net worthexceeding $3.8 billion.1991: Steps in aschairman of SalomonBrothers during aTreasury bond tradingscandal.1995: Engineers the$19.5 billion sale of CapCities/ABC to Disney.Over the years,Berkshire earned a $2.5billion profit on its CapCities/ABC investment.Because Disney paid forpart of the purchasewith Disney stock, it was also a chance forBerkshire to become abig shareholder inDisney, and to benefitfrom the synergiesexpected when Disney,the content provider,was combined with thenetwork, a contentdistributor.1998: Pays $22 billionfor GeneralReinsurance.


name, accepted moral responsibility andoffered to pay off the liabilities—at least tothe tune of $60 million. American Expressstock took a huge hit, a situation madeworse by market turmoil that followedKennedy’s assassination at around the sametime. As details of the fraud unfolded,American Express shares continued to fall;they dropped from 60 before the scandal to35 in early 1964. Then shareholders suedthe company, arguing that by offering topay because of moral (rather than legal)considerations, Clark was squanderingAmerican Express assets. As the negativepublicity went on, the stock price plungedfurther.

Most investors believed, at that time,that American Express would be buried bythe scandal. The stock had become toorisky to hold, so they began to dump theirshares. Buffett, however, did somethingdifferent. Instead of focusing on the nega-tive news, he went to steakhouses andother restaurants, where he noted the factthat diners were continuing to pay formeals with American Express cards. Hevisited travel agencies, where he learnedthat tourists, unconcerned about the saladoil scandal, were continuing to buyAmerican Express travelers’ checks. Inshort, he realized that whatever the fallingstock price might suggest about the per-ceived risk of owning American Expressshares, customers trusted the companyenough to keep using its products. Basedon his investigation, Buffett concludedthat American Express would bounce back.He began to buy American Express stockand even met Clark to congratulate him for

1999: Berkshire has itsworst year, with theshare price down nearly21%, even as most stockindexes soared. Buffettrejects pressure to jumpinto technology stocksand says he’s happy withBerkshire’s holdings.2000: The tech bubblebursts and Berkshireshares soar nearly 27%while the S&P 500 loses 9%.2003: Harshly criticizesPresident George Bush’sproposed tax cuts as anunfair break for thewealthy. Surprises long-time Buffett watchers bybecoming a financial andeconomic advisor toCalifornia gubernatorialcandidate ArnoldSchwarzenegger. Buffetthas long believedSchwarzenegger has theleadership needed totackle California’s deepfiscal problems.2004: In his annualletter to shareholders, hecriticizes high pay forcorporate executives andmutual fund directorswho are not accountableto shareholders. Forbesmagazine lists Buffett asthe world’s secondrichest person, with anet worth of $42.9billion. (Microsoft’s BillGates is the richest.)

dealing with the problem as honestly as he had. Eventually,American Express stock prices rose again. Panicky investors wereproved wrong; Buffett’s view was vindicated.

Buffett has used a similar approach to weigh risks and rewards inmaking several investment decisions. As he explained to an audito-rium filled with Wharton students during a visit to the school inApril 1999, he bases his investment philosophy on four principles:

1. Understand the business in which you are investing. “I lookfor businesses within my circle of competence,” he said.Having a large circle of competence is less important thanhaving one with a well-defined perimeter.

2. Look for sound fundamental economics. Investors should seekout companies that have a sustainable economic advantage—aphenomenon Buffett called “a castle with a moat around it.”Consider Coca-Cola, for example. The company’s brand namehas represented enjoyment for generations, which nocompetitor can buy for millions of dollars. “Share of marketfollows share of mind,” noted Buffett.

3. Find competent leadership. Companies with a sustainableeconomic advantage need honest, capable, and hardworkingleaders to retain their lead. Berkshire Hathaway’s managershave one instruction: Widen the moat. That keeps the castlevaluable.

4. Buy at the right price. Purchases must be made at the rightprice if they are to pay off.

Buffett cited example after example to show how he used theseprinciples to make investment decisions during his career. As ayoung investment manager, he took Moody’s manuals and wentthrough them page by page until he found the companies hesought. A bus company in Bedford, for example, had $100 a sharein cash, but its stock was being traded at $40 a share. Buffettfound such deals because he went looking for them. “No one willtell you about them,” he said. “You only get told about thingssomeone is pushing for some reason.” Buffett invested in compa-nies like Coca-Cola and The Washington Post Co. for similar reasons. Berkshire Hathaway built its empire on the success ofthese investments.


The core of Berkshire’s business is insurance, where risk evalua-tion is crucial. In Buffett’s letter to shareholders reporting the2001 results—hurt by September 11 insurance losses—he notedsome key principles of risk control: For example, sound insurancecompanies usually “ignore market-share considerations” and are“sanguine about losing business to competitors that are offeringfoolish prices or policy conditions.” They also “ceaselessly searchfor possible correlation among seemingly unrelated risks.” A keyproblem in risk evaluation is to avoid excessive reliance on pastpatterns. “In short, all of us in the industry made a fundamentalunderwriting mistake by focusing on experience, rather than expo-sure, thereby assuming a huge terrorism risk for which we receivedno premium,” he wrote.

When things go wrong in assessing risk, Buffett’s style is to takethe blame himself and to credit others when they go right.Explaining Berkshire’s poor showing in 1999, he accepted theresponsibility personally. In fact, a major factor was a huge under-writing loss at the insurance unit General Re. Because it is impos-sible to forecast insurance claims perfectly, insurance is a volatilebusiness and losses in any one year can just as easily be the resultof bad luck as bad management. Another unavoidable factor inGeneral Re’s 1999 troubles was an insurance-industry price war.Instead of criticizing his managers, Buffett waxed eloquent abouttheir talents. “It’s simply impossible to overstate Ajit [Jain]’s valueto Berkshire,” Buffet wrote of his top General Re executive. Buffettpredicted—accurately, it turned out—that General Re would turnaround over the next few years and become a stellar holding.

In 2001, Berkshire’s net worth fell by $3.77 billion, though thecompany still did well relative to its benchmark, the Standard &Poor’s 500. “Though our corporate performance last year was sat-isfactory, my performance was anything but,” Buffett wrote. “Imanage Berkshire’s equity portfolio, and my results were poor,just as they have been for several years. Of even more importance,I allowed General Re to take on business without a safeguard Iknew was important, and on September 11, this error caught upwith us.” The September 11 attacks cost General Re more than $2billion. General Re, Buffett conceded, had violated two principlesof good insurance businesses: to take on only those risks that canbe properly evaluated and to limit exposure to huge losses from a


single event. “The events of September 11 made it clear that ourimplementation of [those principles] at General Re had been dan-gerously weak. In setting prices and also in evaluating aggregationrisk, we had either overlooked or dismissed the possibility of large-scale terrorism losses… Why, you might ask, didn’t I recognize theabove facts before September 11? The answer, sadly, is that I did—but I didn’t convert thought into action. I violated the Noah rule:Predicting rain doesn’t count; building arks does.”



ALANGREENSPAN

1926: Born in New YorkCity to Herbert, a smallbusinessman who laterbecomes a stockbrokerand economic consultant,and Rose, a homemaker.1931: His parentsdivorce.Alan and hismother move in with herparents in the WashingtonHeights neighborhood ofNew York, and she takes ajob in a furniture store inthe Bronx. Herbert andAlan remain distant forthe rest of Herbert’s life,visiting only occasionally.1943: Graduates fromGeorge Washington HighSchool as a member ofthe honor society andrecipient of a specialcitation from the musicdepartment.Though agifted mathematician,Greenspan’s ambition isto become a professionaljazz clarinetist. He beginsstudying at The JulliardSchool.1944: Drops out ofJulliard to tour with a jazzband, Henry Jerome andHis Orchestra, earning$62 a week. Greenspan isnot good enough for aprominent role in theband and remains abackground musician. Hedoes not join the bandmembers’ wild partyingbut does take over theband’s accounting andstarts reading economics.

The Challenge:Dealing with Uncertainty

In August 1998,Russia became the latest victim ofthe “Asian Contagion” that had started the yearbefore with traders pulling money out of riskybets in Thailand. Russian officials defaulted ongovernment bond payments and panicky tradersdumped bonds all over the world, causing pricesto plummet and interest rates to soar. Soon thestock markets were infected, and the Dow JonesIndustrial Average dropped 6% on August 31. AGreenwich, Connecticut, hedge fund called Long-Term Capital Management (LTCM) had madeenormous, leveraged bets on interest rate move-ments, which were now going the opposite wayfrom what LTCM had predicted.The hedge fundcould be wiped out, threatening to take downmany big Wall Street firms that had lent it billions.

For Federal Reserve Chairman Alan Green-span, the threat of a worldwide meltdown in thefinancial markets was reminiscent of the 1987stock crash he had handled so deftly. Whatshould he do this time?

A big part of the problem was psychological. Iflenders worried that borrowers could not repay,lenders would refuse to make loans even if bor-rowers could repay. And with interest rates soaring,companies and individuals were reluctant to bor-row anyway.The economic system might freeze uplike an engine running without oil—or it might not.


1945: Greenspan realizeshe doesn’t have the talentto be a professionalmusician. Enrolls in NYU’sSchool of Commerce,later known as the SternSchool of Business, andjoins a select group ofstudents studyingeconomics. (Greenspanhas a 4-F medicaldeferment from themilitary because of a spoton one lung, though helater turns out to be ingood health.)1948: Graduates summacum laude with a B.S. ineconomics. Beginsgraduate studies ineconomics at ColumbiaUniversity. Greenspangradually gives up hisearlier view thatgovernment should closelyregulate the economy andadopts a more laissez-faireperspective emphasizingfree markets andderegulation.1952: Marries JoanMitchell, a Canadian inNew York to study arthistory. Short of tuitionmoney, Greenspan dropsout of Columbia and takesa job with the NationalIndustrial ConferenceBoard, later called theConference Board, a non-profit business-researchorganization.1953: Greenspan andMitchell have theirmarriage annulled butremain close friends formany years. Mitchellintroduces Greenspan towriter and philosopherAyn Rand and her circle of objectivists.

“In practice, one is never quite sure what typeof uncertainty one is dealing with in real time, andit may be best to think of a continuum rangingfrom well-defined risks to the truly unknown,”Greenspan said in a 2004 speech reviewing hismonetary policy since becoming Fed chairman in 1987. “As a consequence, the conduct of monetary policy in the United States has come to involve, at its core, crucial elements of risk management.”

Greenspan had long believed no rigid set ofrules could dictate Fed policy: Key decisions werejudgment calls that, to be effective, had to be imple-mented well before a problem was clearly evident.This sometimes led to criticism, as Greenspan andhis Federal Open Market Committee (FOMC)raised interest rates to head off inflation that hadnot yet arrived, or lowered rates to stimulate aneconomy that still appeared healthy.

At times, dealing with uncertainty meant makinga decision that looked wrong. “Following theRussian debt default in the autumn of 1998, forexample, the FOMC eased policy [lowered rates]despite our perception that the economy wasexpanding at a satisfactory pace and that, evenwithout a policy initiative, it was likely to continuedoing so,” Greenspan said. “We eased policybecause we were concerned about the low-probability risk that the default might triggerevents that would severely disrupt domestic andinternational financial markets, with outsizedadverse feedback to the performance of the U.S.economy.”

In other words, the worst case wasn’t likely, butit would be so devastating if it did happen thatsomething had to be done.

First, the Fed organized a consortium of 16Wall Street firms that had lent some $20 billionto LTCM.The firms agreed to pool another $3.6billion to keep the hedge fund afloat, thus avert-ing the LTCM collapse that could set off a viciouscycle of fire sales in bonds. Brokering a bailout fora single player in the market was an unusual movefor the Fed and put its reputation at risk; criticscould claim this was a case of powerful peoplehelping out their rich friends. But there was nopublic money involved, and Greenspan reluctant-ly backed the New York Fed official who hadorganized the rescue.

Then at the end of September, the FOMC cutthe Fed Funds rate a quarter-point to 51⁄4%. Thecut was designed to assure the markets that the Fed would step in to guarantee liquidity—theavailability of money—so the system would notfreeze up. Fed rate-cutting could also help reversethe rise in rates that had swept the bond markets.Some FOMC members said another quarter-point cut was needed to ram the message home,but Greenspan held off the second cut untilOctober 15. Success was immediate: Bond pricessoared and interest rates dropped, and the nextday the Dow scored its third largest point gain inhistory. The markets had gotten the message—the Fed had the situation under control. In mid-November, Greenspan convinced the committeeto cut another quarter point as insurance.

As in 1987, Greenspan had been leery of mov-ing too fast. Since the start of his career in theearly 1950s, he had believed that, in most cases,regulators should let the markets sort themselvesout. But he was nonetheless the pragmatist. “Ioften come out almost ad nauseam with free

1953: While at theConference Board,begins outsideconsulting, then joins oneof his clients,WilliamTownsend, to found thefive-person economicsconsulting firmTownsend-Greenspan,which initially specializesin serving the steelindustry. Leaves theConference Board.1958: Townsend, 70,dies of a heart attack.Greenspan, 32, keeps thefirm going and, by thelate 1960s, is amillionaire.1966: Collaborateswith a Fortune magazineeconomist to produce an influential cover storythat shows the VietnamWar would cost $9billion more thanPresident Johnson hadcalled for in his 1967budget.1968: Joins the Nixonpresidential campaign ascoordinator of domestic-policy research. Invitedby old friends LeonardGarment, a formerbandmate who hadjoined Nixon’s law firm,and economist ArthurBurns, Greenspan’smentor at Columbia.1969: Serves as Nixon’schief of budget liaison onthe presidentialtransition team.Turnsdown Nixon’s offer to be budget director andreturns to Townsend-Greenspan. Greenspandoes, however, serve ona variety of governmentcommissions during theNixon administration.



market solutions not because I have an ideology,but because I believe it works,” he said.“Where itdoesn’t, I recognize that it doesn’t.”

Despite its power and the enormous statureGreenspan had attained, the Fed has very limitedtools—primarily its control of two short-terminterest rates affecting loans to and between insti-tutions. The long-term rates that affect the mar-kets most, such as those on bonds and mortgages,are set by forces of supply and demand that theFed cannot directly control. But the Fed can influ-ence those rates by sending signals aboutwhether it is likely to raise or lower short-termrates in the future. Piloting the economy takesdeft, gentle, and minimal adjustments to the throttle, else it would careen between excessive,inflation-producing growth and recessions that undermine corporate profits and drive upunemployment.

Under Greenspan, the Fed has adopted evermore elaborate ways to evaluate the economy toget an early read on the risk of overheating ver-sus slowdown. The Fed does not provide detailsof the data and computer models it uses, butGreenspan has long been known for wringinginsight from obscure signs.

“People who worked for him over the yearswere driven to distraction by the ever-increasingamount of data he would track,” wrote biogra-pher Justin Martin. As a consultant, for example,Greenspan had become enamored of paperboard,a ubiquitous packaging material. “If demand forpaperboard was up, Greenspan took it as a signalthat economic activity was on the increase…Greenspan was forever adding to his toolbox ofindicators.”

1970: The growingTownsend-Greenspancompany moves to largerquarters in New York’sfinancial district. In the1970s, Greenspan servesas consultant to theCouncil of EconomicAdvisors.1971: With inflationrising to 5%, Nixonimposes a 90-day freezeon wages and prices.Greenspan criticizes themove as inappropriategovernment fine-tuning.After the controls arelifted in 1974, pent upforces trigger the double-digit inflation of the mid-70s.1974: Accepts Nixon’soffer to be chairman ofthe Council of EconomicAdvisers, which advisesthe president on econo-mic policy. Nixon resignsbefore Greenspan isconfirmed. PresidentFord sticks withGreenspan, who isquickly approved by the Senate. Inflation isrunning at 12% and, bythe end of the year,unemployment has goneto 8%, up from 3.4% in1969—an unusual combination dubbed“stagflation.”

Because the Fed’s arsenal is so limited, its suc-cess often hinges on the stature of its chairman,and Greenspan is considered a master politician.In his appearances before Congress and in publicstatements issued by the Fed, he tries to reassure.But he stops short of offering guarantees aboutthe course of the economy lest otherwise unex-pected results undermine his credibility and effec-tiveness.

“Policymakers often have to act, or choose notto act, even though we may not fully understandthe full range of possible outcomes, let alone eachpossible outcome’s likelihood,” he said. “As thetranscripts of FOMC meetings attest, makingmonetary policy is an especially humbling activity.In hindsight, the paths of inflation, real output,stock prices, and exchange rates may haveseemed preordained, but no such insight existedas we experienced it at the time. In fact, uncer-tainty characterized virtually every meeting.”

1975: Though hedoesn’t believe ineconomic fine tuning,Greenspan urges Ford tocut taxes to stimulatethe economy, making theattack on unemploymenta higher priority thanfighting inflation.Theeconomic turnaroundbegins several monthslater. Recommends Fordresist any federal bailoutof New York City, miredin a fiscal crisis, but laterorchestrates a federalloan to the city.1976: Over objectionsfrom Ford andGreenspan, Congresspasses the Humphrey-Hawkins bill aimed atcutting employment to3%, from the currentlevel over 7%, withinthree years. Ford loseshis reelection bid toJimmy Carter. Greenspansteps down as CEA chairand returns to NewYork.1977: Completes hisPh.D. at NYU after takingcourses off and on forthree decades.1980: Becomeseconomic adviser toRonald Reagan’spresidential campaign.1981: Heads Reagan’sNational Commission onSocial Security Reform,which in 1982,recommends increasingthe payroll tax, increasingthe level of earningssubject to the tax, andtaxing Social Securitybenefits.Therecommendationsbecame part of a lawsigned in 1983.



Leadership LessonThe Limits of Risk Management

If Buffett did not foresee September 11coming, Greenspan didn’t realize when hemoved into his job at the helm of the FederalReserve that he would soon preside over aneconomy confronted by the biggest stockmarket meltdown in recent memory.Greenspan took office on August 11, 1987,“with much to learn and more to prove. Afew days into his new job, Greenspan told acolleague that he felt like a VCR on fast for-ward…Parachuting into the top job at theFederal Reserve is preposterously difficult.Greenspan scrambled to make sense of theFed’s awesome capabilities. One thing hequickly grew to love was the massive researchmachine now at his disposal… Only a fewweeks into his tenure, Greenspan began tosee mounting signs that the economy wasoverheating,” notes author Justin Martin inhis book, The Man Behind the Money.

Just 24 days into his term, Greenspanraised the discount rate a half percentagepoint to 6% to head off inflation. There werenumerous signs of trouble: a record tradedeficit, an economic-policy fight withGermany, a huge federal budget deficit, a risein interest rates that had taken the 30-yearTreasury bond from 8.8% when Greenspantook office to 10%. Fear was in the air. Soon,the panic began to spread to Wall Street.

Stocks started to plunge on October 12. Aweek later, on October 19—which was tobecome known as “Black Monday” Greenspanwas scheduled to fly from Washington toDallas to speak to the American BankersAssociation convention in his first public

1987: Reagan namesGreenspan FederalReserve Chairman.Greenspan closesTownsend-Greenspan inJuly and is sworn in asthe Fed’s 13th chairmanon August 11. InSeptember he raisesshort-term rates 1⁄2% to6%, worried the strongeconomic expansion willlead to inflation.Thestock-market crash hitsin mid-October, with theDow Jones IndustrialAverage falling 22.6% onOctober 19. Greenspanissues a statement thatthe Fed will pump extramoney into the systemto avert a bankingcollapse.The marketssoon turn around.1988: Fed returns totightening mode.Withthe stock market crisisover, attention is focusedon the superheatedeconomy, which hadgrown at an annual rateof 7.2% in the fourthquarter of 1987.Themove is unpopular withsome Reagan officialswho want a loose policyduring the election year.1989: George H.W.Bush becomes president,presiding over aneconomic decline, asavings and loan crisis,and recession.Greenspan and Bushhave an uncomfortablerelationship throughoutBush’s term.1990: The economyslips into recession.Greenspan is late inrecognizing the situation.

appearance since becoming Fed chairman.“Greenspan felt strongly that he should go toDallas. His colleagues agreed. Canceling theaddress might send an unsettling signal to themarkets. As a student of economic history,with 20-plus years in grad school and countlesshours debating the topic with [Ayn] Rand’scollective, Greenspan knew the value ofappearing blasé in the face of a mountingfinancial crisis,” says Martin.

He left for Dallas at 1:45 p.m. with theDow down 200 points. Arriving at 5:45,he asked about the market close and wastold it was “down five-oh-eight,” which heinterpreted as 5.08, before realizing aninstant later it meant 508, a record one-day loss of 22.6%. The big worry was notso much the stock decline as the potentialfor a panic that would cause a credit crisis.Businesses that needed to borrow wouldfail if they were denied loans, as had hap-pened in 1929 and in the 1930s, when Fedchairmen mistakenly raised interest rates.Greenspan and his assistants debated issu-ing a statement pledging the Fed to main-taining liquidity. Some thought this wouldworsen the crisis; others insisted a state-ment was needed. “Greenspan weighed indecisively; he felt that a statement wasabsolutely necessary. Striking a rare blowfor brevity, he also insisted that it shouldbe concise and to the point….

“People who dealt with him during thiscrisis were awestruck—a bit spookedeven—by his calm. Here he was, justweeks into his tenure and the stock markethad imploded. Although his reactionseemed odd, it was typical Greenspan.Calm and cautious were his natural

1991: Unemploymentrises to 7% andGreenspan comes undergrowing criticism, somefrom Bush, for notcutting interest rates.TheGulf War begins inJanuary and therecession ends in March.After failing to find analternative, Bushnominates Greenspan foranother term.1992: With therecovery limping along,the Bush administration,facing a reelection battle,pushes for bigger ratecuts than Greenspan iswilling to make, thoughthe Fed Funds rate isslashed to a 30-year lowof 3% by September.Bush loses the electionand blames Greenspan.1993: Bill Clintonbecomes president. Heand Greenspan make apriority of reducing thefederal budget deficit.Clinton pushes through a$241 billion tax increase.1994: Worried that theFed Funds rate hadstood at 3% for 18months, making inflationa threat, the Fed begins aseries of moves to raisethe rate to 6% byFebruary 1995.Greenspan is widelycriticized, since therewas little sign of inflationand the rate hike causesdeep losses in the bondmarket.



states—bolstered in this instance by hisage, his experience, and his knowledge ofeconomic history,” Martin notes. He didcancel his speech and flew back toWashington on Tuesday. Early Tuesday, heissued a one-sentence statement saying theFed “affirmed today its readiness to serve asa source of liquidity to support the eco-nomic and financial system.” The Fed waswilling to lend money to keep banks oper-ating, allowing them to lend money tobrokerages and other businesses hit hard bythe crash. “The Fed was delivering a one-two punch. First, it issued a statementabout flooding the markets with liquidity.Then, [New York Fed President E. Gerald]Corrigan followed up with the banks, did abit of canny arm twisting, made sure theyactually made the loans available,” writesMartin. Later on Tuesday, Greenspan andother officials met with President RonaldReagan to urge efforts to rein in the deficit.Though little was ultimately done, Reaganissued a statement indicating a willingnessto entertain proposals, and that helpedcalm the markets.

Greenspan’s tactics worked and the mar-kets quickly recovered. Some critics didargue his September rate hike helped unset-tle the markets. “But mostly, Greenspanreceived praise for reacting quickly anddecisively. By issuing its liquidity statementand backing it up by encouraging banks tolend, the Fed insured that 1987 did notbecome another 1929,” concludes Martin.

Greenspan’s leadership during the 1987stock collapse revealed his ability to man-age risk to the U.S. economy during timesof uncertainty. Over the course of his

1996: Greenspan beginshis third term. Clintonreelected. In a Decem-ber speech, Greenspansays the stock marketboom may be the resultof “irrationalexuberance.” The pre-emptive strike againstinflation works, with therate dropping to 2.7%.The economy grows at ahealthy rate of about3.7% in the late 1990s.1997: The Thai bahtcollapses, setting off the“Asian Contagion,”Russian bond default,and collapse of Long-Term Capital Manage-ment hedge fund.TheFed responds by cuttinginterest rates andorganizing a consortiumof investors to keep thehedge fund afloat.1997: Marries NBCpolitical correspondentAndrea Mitchell.2000: George W. Bushbecomes president.Thestock bubble of the late1990s bursts and a bearmarket begins. Fed beginsa series of cuts that willtake the Fed Funds ratefrom 6% to 1%.2001: Greenspan warnsthat too large a federalbudget surplus couldhurt the economy.Endorses large tax cuts.2002–2003: Greenspanwrestles with the“jobless recovery” aseconomic growthimproves and stocksbegin to rise again butemployers refuse toresume hiring.

tenure as Fed chairman, he has often shownthis ability. His sure hand in leading theFed—and also the U.S. economy—duringsuch crises as the Asian contagion andSeptember 11 helped him develop his ownrules of thumb about risk management,which he explained in early 2004.

In managing risk, Greenspan recognizesthere are limits to what he can do. In a speechtitled, “Risk and Uncertainty in MonetaryPolicy” delivered on January 3, 2004, to theAmerican Economic Association in San Diego,he said that “despite extensive efforts to cap-ture and quantify what we perceive as the keymacroeconomic relationships, our knowledgeabout many of the important linkages is farfrom complete and, in all likelihood, willalways remain so. Every model, no matter howdetailed or how well designed, conceptuallyand empirically, is a vastly simplified represen-tation of the world that we experience with allits intricacies on a day-to-day basis.”

Greenspan believes that some hazardscannot be avoided, so Fed policy shouldaim at reducing their consequences. Criticshave argued, for example, that monetarytightening and other techniques, such aslimiting margin lending, might have pre-vented the stock bubble of the late 1990s.Greenspan believes, however, that historyoffers numerous instances of tighteningfollowed by stock gains and that the Fedshould focus on the economy and not try tomanage the stock market. “Instead of try-ing to contain a putative bubble by drasticactions with largely unpredictable conse-quences, we chose, as we noted in our mid-1999 congressional testimony, to

2004: Greenspan warnsthat the growing federalbudget deficit presents aserious long-termproblem. Greenspan hadsupported the tax cutsimplemented in 2001 butsaid they should takeeffect only if theprojected budgetsurpluses actuallymaterialized, a conditionnot included in the finalpackage. In 2004, says thetax cuts should be madepermanent only if thereare offsetting budget cutsto reduce the deficit.Amidst worries thatAmerican jobs aremoving overseas, says jobgrowth shouldnonetheless come soon,and hiring does pick upin the first half of theyear.



focus on policies to mitigate the fallout when it occurs and, hope-fully, ease the transition to the next expansion.”

The stock-market bubble burst in 2001, and the economy andmarkets were hit by the September 11 attacks. During this period,the Fed reacted by lowering the federal funds rate 51⁄2 percentagepoints to a 45-year low of 1%. “There appears to be enough evi-dence, at least tentatively, to conclude that our strategy of addressing the bubble’s consequences rather than the bubble itself hasbeen successful,” he said, pointing to the unusually mild recessionthat followed the bubble’s burst.

PETERLYNCHThe Challenge:Picking the Winners

In 1982, Chrysler Corp. was bankrupt.The stockprice had nose-dived as investors raced to theexits to avoid further losses. No one, it seemed,wanted to own the legendary automaker.Almostno one.

Peter Lynch, manager of the Fidelity MagellanFund, started to wonder whether the commonwisdom about Chrysler was wrong. Ultimately,Chrysler was one among many, a prime exampleof the chief challenge of Lynch’s career: to findthe moment to go against the herd and bet hugesums on the belief that he was right and nearlyeveryone else was wrong. “I figured if I waswrong, I would lose all my money,” Lynch says.“The stock market is kind of counter-intuitive.When the headlines are terrible, that’s reallywhen you ought to start buying.”

While most Wall Street analysts and investorshad been focusing on Chrysler’s huge losses, Lynchfocused on the fact that the losses were gettingsmaller.An improvement on the same scale wouldhave excited investors had the company gone fromsmall profits to bigger ones, and Lynch reasonedthat a diminishing loss was just as positive.The mar-ket, he believed, had overlooked this point.

Also, the company had in hand a $1.5 billiondollar federal loan guarantee it had yet to tap.Chrysler “had this cushion of money it hadn’ttaken down yet,” Lynch recalls. The unions had


1944: Born in Boston.Father,Thomas, a mathprofessor and employeeof John Hancockinsurance, dies when heis 10. Mother, Esther, is ahomemaker. Lynch firststarted hearing aboutstocks while caddying forFidelity President D.George Sullivan.1963: As a collegesophomore, buys his firststock, Flying TigerAirlines, on what he latersaid was a faultypremise—that the airlinewas promising becausethe air freight businesswould grow.The stockrose fivefold, but foranother reason—acontract ferryingAmerican troops toVietnam.The Flying Tigerprofits helped pay Lynch’sgraduate schoolexpenses.1965: Graduates fromBoston College with abachelor of sciencedegree and startsgraduate studies at TheWharton School.1966: Works as asummer intern at Fidelity,researching the paper andpublishing industries bytraveling the country bybus because of an airlinestrike.


agreed to let the company outsource some of itsparts orders, giving Chrysler a cost-cutting advan-tage over the other big auto makers—Ford andGeneral Motors. While unions were playing hard-ball with the others, they had softened theirstance with Chrysler, so it wouldn’t go under andput them all out of work.

Meanwhile, the country was in a recession,with high interest rates, inflation, and unemploy-ment all cutting deeply into auto sales. But Lynchrealized that 49 states had auto-inspection pro-grams that forced people to replace older cars.Many purchasers took out car loans for three orfour years; after making their last payment, theycould take on new loans for replacement vehicleswithout increasing their cost of living.“They couldget another car and their payment would be thesame.” After more than three years of weak autosales, there must be a pent-up need to buy cars,Lynch figured at the time, noting there had neverbeen four consecutive years of falling sales. If therecession were to break, Americans would rushto the showrooms.

Lynch went to Detroit and met with ChryslerCEO Lee Iacocca and a number of his top execu-tives.“They were a bunch of really great auto guyswho knew the industry,” he recalls, “and they hada lot of good things on the drawing board, like theminivan.”

So Lynch started to buy Chrysler stock. Bymid-1982, it represented 3% of Magellan Fundassets and the price began to rise. By the end ofthe year, 5% of Magellan was invested in Chrysler.It was a very big bet. “I was just hoping the autoindustry would go from miserable to okay, andthat [Chrysler] would get into the black,” he says.

1967: Graduates fromWharton near the top ofhis class, having devel-oped a deep mistrust ofacademic market theory.Comes to believe theworldly traders at Fidelityhave better insight intothe financial markets thanacademics do. MarriesCarolyn Hoff, a physicaltherapist.They have threedaughters. Carolyn laterbecomes president of theLynch Foundation. Beginstwo years in the Army asa lieutenant in theartillery, stationed inTexas and Korea.1969: Joins Fidelity as ametals analyst.1974: Becomes Fidelity’sdirector of research.1977: Takes over man-agement of the MagellanFund on May 31, when thefund had $20 million inassets and only about 40stocks. Begins to buymany additional stocks, atone point owning 150 inthe savings and loanindustry alone. Fundreturns 11.6% by the endof the year, versus a lossof 4.38% for the Standard& Poor’s 500. Fund assets:$22.2 million as ofDecember 31.1978: Magellan returns31.7%, the S&P 500 6.6%.Assets: $26.4 million.Lynch first hears aboutLa Quinta Motor Inns,which will become one ofhis favorite investments.His first tip: a Holiday Innexecutive told him LaQuinta was killingHoliday Inn in Houston.Lynch is impressed thatLa Quinta offered roomscomparable to HolidayInn’s, but for 30% less.


That fall, Lynch appeared on the televisionshow Wall Street Week, which had earlier inter-viewed an analyst who insisted it was time todump Chrysler to capture recent gains.The stockwould go no higher, the guest said. Lynch dis-agreed. “When I did Wall Street Week and said Ithought Chrysler was attractive, some of my rel-atives called me up and said, ‘You don’t know?Chrysler is bankrupt!’”

Over the next five years, Lynch’s counter-intuitive bet on Chrysler paid off. Auto salesrebounded and the public embraced Chryslerproducts. With its costs slashed, the companystarted making money. Many of the shares Lynchacquired for Magellan in 1982 returned morethan 1,000%. Lynch calls that a “10-bagger”—twohome runs and a double.

Running against the herd as he did withChrysler required two things: hard work and theability to resist the doubts that come with beingalone.“When I think of my best ideas—Taco Bell,Chrysler, Fannie Mae, La Quinta—I think if 100people had done the work, 99 would have boughtthem,” says Lynch.“They just didn’t do the work.”He didn’t delegate; he spent eight or nine days amonth on the road closely studying hundreds ofcompanies a year.“You had to go visit the compa-ny or talk to them.You had to get the story.Youhad to understand the industry.”

Ultimately, the story—the reason the compa-ny was likely to do well—had to be simpleenough to explain to a 12-year-old, he says.“What’s the basic hypothesis? It’s usually the fun-damentals of the company…You have a verygood idea what McDonald’s does.You don’t haveany idea what Dow Chemical does. It’s a pain in

1979: Magellan returns51.7%, the S&P 50018.6%.Assets: $35.1million.1980: Magellan returns69.9%, the S&P 50032.3%.Assets: $53.5million.1981: Magellan returns16.5%, the S&P 500 loses5.0%.Assets: $107.3million.1982: Magellan returns48.1%, the S&P 50021.4%.Assets: $458.4million. Lynch becomesinterested in Ford MotorCompany, then tradingaround $4 a share,because the companyhas $8.35 billion in cash,over and above its long-term debt—a verypositive sign. By 1988,Lynch has boughtMagellan more than fivemillion Ford shares,realizing an enormouspaper profit when theprice rises to $38.Whilemany analysts think it istime to unload Ford,Lynch holds on, againattracted by thecompany’s enormouscash reserves.The stockrises another 40%.Alsoinvests heavily inChrysler Corp., bettingthe money-losingcompany will emergefrom bankruptcy withgreater operatingefficiency and attractivenew vehicle models suchas the minivan.Theprediction holds trueand Chrysler becomesone of his bestinvestments.


the neck…but you’ve got to learn it.” Accordingto Lynch, some of the most valuable insights arefound talking to a company’s competitors.“Peoplealways dump on the competition. If they ever sayanything positive about it, you know it’s true.”

At Fidelity, fund managers were given a greatdeal of freedom to make their own decisions, andthe company and fellow managers avoided thesecond-guessing and sniping that can undermine amanager’s confidence, Lynch says. “We tried tohave meetings where it was 99% light and 1%heat.” Ten-baggers like Chrysler do not comealong often, Lynch notes, and it’s important towait for them. “All you need is one good stockevery five or six years, not every five or six days.If, during the day, I can’t find any good ideas, I don’tbuy anything.”

In the nearly 13 years Lynch ran Magellan, hetallied annual gains averaging about 29%, approxi-mately double the returns on the Standard &Poor’s 500. Magellan’s assets grew from $20 mil-lion to more than $14 billion, making it the mostsuccessful fund of its time.“The person who turnsover the most rocks will win the game,” Lynchsays. “I just stayed on the offensive all thetime…I’m a Red Sox fan, and if you’re a Red Soxfan and grow up here, you have to be optimistic.You have to think things are going to turn outokay.”

1983: Magellanbecomes the largestfund in the world, withassets of $1.6 billion onDecember 31.The fundreturns 38.6%, the S&P500 22.4%. Some criticsworry that with morethan $1 billion in assetsto manage, it will beimpossible for Lynch tofind enough bargainstocks.They warnMagellan’s era of market-beating returns will end.1984: Magellan returns2.0%, the S&P 500 6.1%.Assets: $2 billion.1985: Magellan returns43.1%, the S&P 50031.6%.Assets: $4.1billion.1986: Magellan returns23.7%, the S&P 50018.6%.Assets: $7.4billion.1987: Magellan returns1.0%, the S&P 500 5.1%.Assets: $7.8 billion.During the Octobermarket crash, less thanthree percent ofMagellan investors takemoney out of the fund,apparently heedingLynch’s longstandingadvice to stick with thefund for the long termand ignore the market’sshort-term moves.1988: Named trusteeof Boston College.Magellan returns 22.8%,the S&P 500 16.6%.Assets: $9.0 billion.1989: Magellan returns34.6%, the S&P 50031.7%.Assets: $12.7billion. Lynch publisheshis bestseller, One Up onWall Street.


Leadership LessonNavigating Through theUnknown

Between 1519 and 1521, FerdinandMagellan, a Portuguese explorer whosailed under the Spanish flag, commandeda fleet of five ships that crossed unchartedseas and faced untold hazards (includingstorms and mutinies) to accomplish abreakthrough: His crew became the firstsailors in history to circumnavigate theglobe. At Fidelity’s Magellan Fund, PeterLynch also navigated through financialturbulence and economic uncertainty togreat success. Between 1977 and 1990,with Lynch at the helm, Magellan was thebest performing mutual fund, its valueincreasing by more than 2,700%.

Achieving that kind of leadership inmutual fund performance requires a surehand at managing risk. Lynch cultivated thatability by following a set of principles he dis-tilled from years of investment experience.

Lynch has often said that in decidingwhether or not a stock is worth buying orholding, it is useful to apply a simple test:Can you explain your reasons to a child inless than two minutes? Companies lookingfor capital often justify their needs andprospects with complicated explanationsbased on optimistic assumptions. Unlessthe value of an investment is so clear thateven a child could understand it, however,it is likely that muddle-headed thinking (atbest) or obfuscation (at worst) are at work.Lynch’s criterion for investment resemblesBuffett’s view that investors should put

1990: Ceases managingthe Magellan Fund onMay 31 and takes earlyretirement at 46, wantingto spend more time withhis family and pursueother interests. Fund hasmore than $14 billion inassets and more thanone million shareholders.A $10,000 investment atthe start of Lynch’stenure would havegrown to $280,000 byhis departure.1991: Becomeschairman of the Inner-City Scholarship Fund,which provides partialscholarships for BostonCatholic school children.1992: Receives NationalCatholic EducationAssociation SetonAward.1993: Publishes Beatingthe Street, which spendseight weeks on The NewYork Times bestseller list.Receives theMassachusetts Societyfor the Prevention ofCruelty to ChildrenFamily Award.1994: NamedOutstanding Alumnus bythe Wharton School.1995: Co-author ofLearn to Earn, abeginner’s guide toinvesting and business.1997: Produces the CD-ROM, The StockShop, containing researchtools for investors whowant to build their ownstock portfolios.


their money only into businesses theyunderstand.

Lynch also shares another trait withBuffett and Greenspan: His fondness forusing unconventional signals to read thetruth about the market. Just as Greenspansometimes used the demand for paperboard,as noted earlier, to see if the economy waspicking up, and Buffett wandered aroundsteakhouses to see if American Express cardswere still popular among diners, Lynchlooked at products people were buying intheir everyday lives. A well-known case inpoint: He urged Fidelity fund managers tobuy Hanes, a stocking maker that had justcome out with the L’eggs brand, sold in col-orful egg-shaped containers at grocery storesand other retail outlets. Lynch learned of theproduct through his wife, who had ravedabout it. Hanes rose sixfold before the com-pany was bought out.

In Lynch’s view, small, aggressive com-panies are most likely to be profitable forinvestors. His goal as a mutual fund man-ager was to find such high-growth compa-nies. The best of this lot, he believed, couldrise ten-fold in value in a few years. Lynchcalled such firms “ten-baggers.” “The verybest way to make money in a market is in asmall growth company that has been prof-itable for a couple of years and simply goeson growing,” Lynch told Money magazinein an interview.

The search for high-growth companies isa key component of Lynch’s investmentphilosophy. Even more importantly, how-ever, it is an essential part of his strategy tomanage risk in a mutual fund’s portfolio.The main advantage of having a handful of

2000: The School ofEducation at BostonCollege is renamed TheLynch School ofEducation in honor of a$10 million gift receivedin 1999 from Peter andCarolyn Lynch. In theintroduction to the 2000edition of One Up onWall Street, warns of therisk of the day’s hotInternet stocks, arguingthat investors shouldstick with companiesthey can understand.Argues it does not makesense to buy a stock atan escalated price thatcan only be justified ifthe company enjoysmany years of rapidearnings growth thatmay not materialize. Inhis own investing, hesays, he still relies onold-fashionedfundamentals.The dot-com crash of 2000proves Lynch right.2004: Inner-CityScholarship Fundprovides more than $5million to 5,000 studentsfor the 2003–2004school year. UnderLynch, the fund hasraised more than $55million for 45,000students.

ten-baggers in a mutual fund portfolio is that they can offset bador lackluster performance by other firms. As Money magazinewrote, “The occasional huge winner will offset a number of smalllosses. For example, if you had invested equal sums each in fivestocks, and three of them plunged by 75%, and one rose by 20%and another by 900%, your entire portfolio would still be up bysome 140%.”Another aspect of Lynch’s approach to managing riskis a variant of the old saw that wisdom means not just makinggood decisions but avoiding bad ones. He believes that one of themost risky moves investors can make is being seduced by compa-nies that are high on sizzle and short on substance. “The stock[Lynch] would most want to avoid is the hottest stock in thehottest industry,” writes Money magazine. “[This is] the one thatgenerates the most favorable publicity, that every investor is toldabout by other investors. Usually, the high growth is a honey potfor the competition, which strikes the hot company just when ithas spent huge sums to expand in order to hold on to marketshare.”


237

ConclusionMaking It Work:Lessons of LastingLeadership

10

W hat conclusions can be drawn from the experiences ofthe 25 leaders profiled in these pages? Are some leadership attrib-utes “better” than others? Is there one definition of leadership thatis a template for those seeking to become leaders themselves? Theindividuals in this book would most likely say that the secret oftheir success is as old and obvious as the ancient Greek injunctionto “Know Thyself” (and thy company). In the same way that goodnegotiators adapt the principles of successful negotiation to theirown personalities and goals, good leaders pay close attention towhat their own experiences and instincts tell them is the rightthing to do and the right time to do it. Andy Grove used his tech-nical knowledge, courage and resolution to build Intel into a for-midable IT powerhouse. Herb Kelleher believed in building a

motivated workforce knowing that, in return, his employeeswould do whatever it took to sell the company, and its discountedairfares, to the public. Michael Dell started a company based inpart on his experience as a frustrated consumer trying to buy acomputer. John Bogle created The Vanguard Group with theknowledge that average investors were being exploited by moneymanagers.

In some cases, these leaders have become household names. BillGates, long before he earned notoriety as the world’s richest man,was the first geek celebrity. Lee Iacocca wrote a best-seller abouthis careers at Ford and Chrysler. Ted Turner, with his flair for out-rageous overstatement and wacky antics, drew attention to hisfledgling cable business and turned it into a media empire. OprahWinfrey and Richard Branson, both of whom capitalized on anextraordinary ability to connect with their markets, are probablybetter known in their respective countries than most politicians.But others are stars mainly because of their steady performancewithin the boundaries of their profession: Peter Lynch and WarrenBuffett earned reputations as the best stock-pickers in the coun-try; George Soros made billions of dollars in risky currency bets;Alan Greenspan became the person who calmed markets and guid-ed the U.S. economy through recessions as well as “irrational exu-berance”; William George expanded Medtronic from a pacemakermanufacturer into a leading maker of implantable biomedicaldevices despite stiff opposition within the company.

Extraordinary achievement and, in some cases, fame have notdistorted these individuals’ ability to see that success in corporatelife is a team effort. Jack Welch applauded foremen in GE facto-ries who spoke up about what they saw as inefficient processes;Kelleher likes to say that a baggage handler at Southwest is moreimportant than an executive. The all-important customer isanother focal point for these leaders. James Burke pointed toJohnson & Johnson’s credo—with its primary emphasis on respon-sibility to the customer—to win support for his controversialdecision to recall 31 million bottles of Tylenol. Jeff Bezosrelentlessly stressed service by continually soliciting, and respond-ing to, customer feedback. Sam Walton’s stores were more than shopping destinations; they often served as outlets for the sociallives of their rural clientele.


These leaders have avoided the creative accounting and docu-ment shredding that afflicted firms such as Enron, WorldCom,Tyco, Adelphia, HealthSouth, Rite Aid and Parmalat. They didthis by folding their own healthy egos into the stronger ego of theorganization, thereby laying out a vision for the company thattranscended—and outlasted—themselves. Mary Kay Ash set up asystem of rewards and recognition for thousands of sales represen-tatives that encouraged them to mentor each other up the “ladderof success.” Louis Gerstner repositioned a hidebound and stagnantIBM into an integrator that would offer customers technologysolutions, not just hardware and software. Steve Jobs, who wasousted from Apple after a bruising boardroom battle, returned tolead the company to new heights and into new directions.

The ability to admit mistakes, and correct them, also stands outamong these individuals. Dell Inc. nearly crashed in the early1990s after sales shot up so high that the company was unable tomeet demand. Founder Michael Dell brought in outside managersto introduce stricter financial measures and ensure that futuregrowth spurts benefited the company. In 1999, Warren Buffettwrote a letter to his shareholders apologizing for a stock loss atBerkshire Hathaway of nearly 20% compared to an increase ofnearly 21% for the S&P 500. He stayed the course, however, andone year later his refusal to jump on the high-tech bandwagon paidoff when the company’s shares rose 26.6% compared to a loss of9% for the S&P. Sam Walton said the biggest error he ever madewas limiting a company profit-sharing program to managementonly, rather than opening it to rank and file employees. A yearlater, he reorganized the program to include them. Jack Welchadmitted that the superstar environment he allowed to exist atKidder Peabody enabled a rogue trader to commit massive fraud.

Probably the single most common skill these leaders have displayed is a knack for seeing into the future. Few could have imag-ined the impact that computers would have on businesses and consumers once a user-friendly interface became possible. Steve Jobsdid, and that realization led to the Lisa and then the Macintosh.Thirty years ago, Charles Schwab understood the need to get outfrom under the SEC’s requirement that all stock transactions berecorded on paper forms. He “bet the company” on a plan to com-puterize the transaction order process, a move that gave him a hugehead start building the country’s largest discount brokerage.

Chapter 10 Conclusion 239

Jeff Bezos recognized a decade ago the potential of the Internetto revolutionize retailing. He imagined a bookstore with more than10 times the inventory of the biggest brick–and-mortar stores, andthen he created it, with the backing of initially reluctant (exceptfor his parents) investors. Fred Smith rejuvenated Federal Expressin the 1990s by starting up a system that could trace and track mil-lions of packages as they were in transit. Lee Iacocca predicted thegrowth of the minivan, reasoning that Mustang buyers from the1960s would morph into soccer parents, thereby setting up a wholenew generation of loyal Chrysler customers.

Not all individuals in this book run companies, but all havedemonstrated leadership in the sheer intellect they bring to theirfields. Peter Drucker transformed the anecdotal study of manage-ment into an academic discipline by looking at corporations asboth social systems and economic organizations. He spent hiscareer consulting and teaching rather than tying himself to a sin-gle corporate employer. George Soros, who wants to be remem-bered as a philosopher as well as a philanthropist and financier, hasgiven away billions trying to encourage his vision of more opensocieties in formerly repressive countries. Alan Greenspan’s near-legendary ability to gather and interpret huge amounts of data hashelped him retain his leadership in the global economy for decades.

Finally, an important characteristic of these leaders has been awillingness to speak out against unfair or misguided business prac-tices. Muhammad Yunus openly criticizes traditional bankers,economists, and such agencies as the World Bank for attitudes thathe says perpetuate the cycle of poverty. William George, in hisbook Authentic Leadership, censures today’s executives for focusingon short-term numbers rather than the company’s customers,employees, and shareholders. Warren Buffett has slammed compa-nies for refusing to treat stock options as expenses on an income statement, arguing that by doing so these companies pres-ent a distorted picture of their finances to potential investors.

What’s in It for Us?

The lives of the 25 leaders covered in these pages are instructivebecause of the choices they made—often in the face of adversity—on their way to defining success in their respective fields. Their


experiences suggest questions worth considering when assessingthe leadership potential of ourselves or others:

■ Do we seek the positive seam when confronted with negativecircumstances?

■ How do we cultivate a corporate culture that inspires andempowers those around us?

■ How do we emphasize the importance of honesty, especially attimes when honesty is not the easiest course to pursue?

■ Have we sought to identify and cultivate underserved markets?■ Can we see the invisible? Are we able to dig deeper and

understand the connections between seemingly unrelatedphenomena?

■ Do we understand the role of price as a potential competitiveadvantage in our particular industry?

■ Do we cultivate and maximize brand identity?■ Are we fast learners, able to make decisions quickly and

reverse position when necessary?■ How well do we manage risk?

In the end, leadership boils down to a personal approach to thebusiness of managing. Leaders are able to communicate their ideas,values and beliefs to employees and the business community atlarge. They encourage innovation at times when none seems neces-sary. They work in chaotic environments and bring discipline anda vision of the future to their stakeholders.

It is, after all, the future that drives many leaders forward.Muhammad Yunus, whose bank has so far loaned more than $4 bil-lion to poor people around the globe, envisions a world that willbe free of poverty, where the market for his bank will no longerexist. This would be a world, he says, “we could all be proud tolive in.”

Chapter 10 Conclusion 241

INTRODUCTION“People are leaders because they choose to lead.” From a speech by John Bogle at theWharton School, June, 2000

243

References

CHAPTER 1:BEST OF THE BEST: INSIDE ANDY GROVE’SLEADERSHIP AT INTEL

Challenge essay:

“…only once every 27,000 years of spreadsheet use.” Only the Paranoid Survive.Andrew S. Grove, Doubleday, 1996, p. 12

“Your current computer is too accurate.” “Intel to Users: ‘Humbug!’” Information Week,December 19, 1994

“…back on the defensive again in a major way.” Only the Paranoid Survive.Andrew S. Grove, Doubleday, 1996, p. 14

“…of how not to handle a delicate situation?” “Intel to Users: ‘Humbug!’” InformationWeek, December 19, 1994


“…we had to made a major change,” according to Grove. Only the Paranoid Survive.Andrew S. Grove, Doubleday, 1996, p. 15

“…five years’ worth of the Pentium processor’s advertising spending,” says Grove.Ibid., p. 16

“…conference rooms with blackboards, based on data analyses,” Ibid., p. 17

Timeline:

“…easily colored by political considerations, could decide the merits of my work.” One-on-One with Andy Grove: How to Manage Your Boss,Yourself and Your Co-Workers,Putnam, 1987, p. 15

Chapter text:

“…and supported myself through my remaining years of college that way.” One-on-Onewith Andy Grove: How to Manage Your Boss,Yourself and Your Co-Workers, Putnam,1987, p. 16

“…that can be ethically wrong and will backfire every time.” Ibid., p. 235

“…experience was unique to Intel, the lessons it teaches are universal.” Only theParanoid Survive.Andrew S. Grove, Doubleday, 1996, p. 82

“If you don’t recognize the names, it’s because these companies are long gone,” notesGrove. Ibid., p. 84

“…was the availability of high-quality product priced astonishingly low,” Grove wrote.Ibid., p. 87

“‘Why shouldn’t you and I walk out the door, come back and do it ourselves?” Ibid., p. 89

“…that the microprocessor that’s inside his or her computer is the computer.” Ibid., p. 18

“…logos in consumer merchandising, up there with names like Coca-Cola or Nike.”Ibid., pp. 18, 19

References 245

CHAPTER TWO:LEADERSHIP AND CORPORATE CULTUREHERB KELLEHER

Chapter text:

“It’s going to be a battle for our lives.” The New York Times, March 25, 2004

MARY KAY ASH

Challenge essay:

“…will often work for recognition when she won’t work for money.” Mary Kay:You CanHave It All, Prima Publishing, 1995, p. 121

“…the first thing you know, [these salespeople] actually become successful.” Mary Kay,Harper Row, 1981, p. 160

“Wearing an invisible sign that says, ‘Make me feel important.’” Mary Kay:You Can HaveIt All, p. 9

“Their applause ranks among the most meaningful praise anyone can receive.” Ibid., p. 122

Timeline:

She replies,“I like to think God is using me.” Interview with Morley Safer on CBS’s 60 Minutes, 1979

Chapter text:

“…takes [the newcomer] under her wing and treats [her] as one of her own.” Mary Kay: You Can Have It All, Prima Publishing, 1995, p. 161

“And neither would our directors with their adoptees.” Ibid., pp. 161-162

“These vows are not idle words:At Mary Kay, they are how we live.” Ibid., p. 17

…offered women “the ultimate opportunity, with no ceilings, no boss.” Orange CountyRegister, Nov. 2, 2001

“Now, it allows women to stay home.” Fairchild Publications,April 6, 2001

“Truths about beauty, equality, success and the color pink.” The Washington Post,Nov. 24, 2001

“Home life, a family and be involved in [their] community.” National Post, Nov. 24, 2001

“Use their God-given talents and abilities.” Mary Kay, Harper & Row, 1981, dedication

“…to create better lives and to realize their dreams.” Mary Kay:You Can Have It All,Prima Publishing, 1995, p. 4

JAMES BURKE

Timeline:

…campaign’s theme is “Stop.Think.Tylenol.” The New York Times, March 17, 2004

Chapter text:

“He continually energized the system.” “At Johnson & Johnson, a Mistake Can Be aBadge of Honor,” by C. Power. Businessweek, Sept. 26, 1988

“Until they prove themselves unworthy of that trust, a lot more happens.” AmericanManagement Association’s Management Review, Oct. 1, 1996,Vol. 85, No. 10

“…hiring boards of directors that feel beholden to the CEO.” Harvard Business SchoolAlumni Achievement Awards: 2004

CHAPTER 3:TRUTH TELLERS

Introduction:

“…no force in the world that is so direct or so swift in working.” Young India,Mohandas Gandhi. Feb. 27, 1930

JACK WELCH

Chapter text:

“…it brought relief, and eventually McCann made up with his friend.” “The Truth Is, theTruth Hurts,” Fast Company,April 14, 1998

“…as we were in Louisville and Schenectady,” Welch writes in his autobiography.Straight from the Gut. Jack Welch and John A. Byrne.Warner Books, 2003. p. 186

“The two cultures and their differences never stood out so clearly in my mind.” Ibid., p. 226


PETER DRUCKER

Challenge essay:

“An observer, not a participant—making him, for his refusal to participate, all the keeneras an observer,” Forbes magazine said of him.“Seeing Things As They Really Are,” RobertKenzner and Stephen S. Johnson, Forbes, March 10, 1997

…moving the majority of the world’s largest companies to “radical decentralization,”wrote John Micklethwait and Adrian Wooldridge. The Witch Doctors, Crown Business,1996

“…a mob into an organization, and human effort into performance.” Managing TurbulentTimes. Peter Drucker, HarperBusiness, 1980, p. 104

Chapter text:

“…the most prescient business-trend spotter of our time.” Fortune, Sept. 28, 1998

…such terms as “privatization,” “knowledge workers,” and “management by objective,”Fortune, January 12, 2004

…that Drucker “has remained consistently fresh and ahead of the times.” The Wall StreetJournal, Dec. 31, 1999

“Such relationships are the way the world economy is going.” Training & Development,Sept. 1, 1998

“…totally absent today for executives—information about the world outside the company.” Ibid.

“These are all areas on which our modern technology gives absolutely no information.”Ibid.

“I am teaching, above all, how to manage oneself.” Ibid.

“…think through what results are wanted in the organization—and have then to defineobjectives.” “Age of Social Transformation,” The Atlantic Monthly, November 1994

…develop “meaningful objectives based on a thorough understanding of the work.”Christianity Today, Nov. 15, 1999

…do not exist to “make and sell things” but rather to “meet human needs.” Ibid.

References 247

WILLIAM GEORGE

Timeline:“…employees, and—ironically, since the Game is supposed to be all about them—shareholders.” Fortune, Sept. 29, 2003

Chapter text:

“That superstar CEO has now been indicted for fraud.” Authentic Leaders.org website

“No wonder many CEOs went to extreme measures to satisfy shareholders!” Authentic Leadership: Recreating the Secrets to Discovering Lasting Value. Bill George,Jossey-Bass, 2003

CHAPTER 4:IDENTIFYING AN UNDERSERVED MARKET

CHARLES SCHWAB

Challenge essay:

Schwab employees used something akin to a plunger to unplug the jam. Charles Schwab:How One Company Beat Wall Street and Reinvented the Brokerage Industry. John Kador,John Wiley and Sons, 2002, p. 53

“…calculating margin trades, and moving cash from trading accounts to money marketfunds.” Ibid., p. 54

“…no paper tickets generated by BETA, the NYSE refused to certify Schwab’s system.”Ibid., p.54

“…only save paper tickets but did not require them to write paper tickets.” Ibid., p.55

Timeline:

“…which he later describes as his ‘first fully integrated venture.’” Fortune Small Business,September 2003

Chapter text:

“…individual investors were sold stocks; they didn’t buy them,” recalls Schwab. FortuneSmall Business, September 2003


MUHAMMAD YUNUS

Challenge essay:

“…people earning less than $1 a day.” “Debate Stirs Over Tiny Loans for World’sPoorest,” The New York Times,April 29, 2004

“…we could all be proud to live in.” Banker to the Poor, PublicAffairs 2003, p. 262

Timeline:

…”’Oh, I don’t need money.’ When you hear that, you have found your person.” “WorldBank for the Little People,” by Jessica Mathews. The Toronto Star, Dec. 23, 1993

Chapter text:

“You never find out.That’s poverty.” Financial Times,April 14, 1998

“Such conceptual vagueness greatly damaged our efforts to alleviate poverty.” Banker tothe Poor. Muhammad Yunus, PublicAffairs, Perseus Books Group, 2003, pp. 40-41

“…had absolutely no chance of improving their economic base. Each one was stuck inpoverty.” Ibid., p. 41

“In all these families, all for the lack of $27.” Ibid., pp. 46-50

“Any credit because it very quickly gets politicized.” Interview with Yunus in The HinduBusiness Line, Jan. 11, 1999

“Put into practice the skills they already know.” Banker to the Poor, p. 140

“If they screw up, they won’t have access to lending.” From article in US Banker,Aug. 1,2003, entitled “Doing Good by Doing Well:As Third-World NGOs Morph into Full-Fledged Banks, Profits Are Swelling – and Global Bankers Are Taking Notice.”

CHAPTER 5: SEEING THE INVISIBLE

Introduction:

“It had a crude menu system. It had crude panels and stuff. It didn’t work right, but itbasically was all there.” The Smithsonian Institution’s oral history archive.

References 249

STEVE JOBS

Challenge essay:

“…we felt we were fashioning collective works of art.” The Smithsonian Institution’soral history archive.

“It was the combination of those two things that I’m the most proud of.” Ibid.

Chapter text:

“Customers pay 99 cents to download each song.After that, it’s almost like buyingmusic on a CD, LP, or tape.The user can play it on the computer, burn it to a CD thatcan be played on any device, or transfer it to an MP3 player.” “Online Music Wings ItsWay to the Celestial Jukebox.” Knowledge@Wharton, July 2, 2003

“The success of Apple’s iTunes service isn’t the downloading per se; it’s the interface—the fun of use.” “Which Online Music Service Will Have the Longest Playing Time?”Knowledge@Wharton, January 14, 2004

“…music lovers bought 7.7 million songs online, but only 4 million single-song CDs atstores.” “Online Music Wings Its Way to the Celestial Jukebox.” Knowledge@Wharton,July 2, 2003

“…unmatched by even his most powerful computer industry rivals.” The New YorkTimes. April 25, 2004

TED TURNER

Challenge essay:Turner won and CNN launched on schedule. Ted Turner: It Ain’t As Easy As It Looks.Porter Bibb, Johnson Books, 1993. pp. 171-172

Chapter text:“…that of an oil refiner short of crude during OPEC’s heyday.” Forbes magazine, Nov. 4, 1985

GEORGE SOROS

Challenge essay:

…with Soros himself “maintaining a low profile and keeping his ego out of it.” “TheWorld According to Soros,” The New Yorker, 1995, pp. 62, 64

“…and I made some wrong steps: Soros:The Life and Times of a Messianic Billionaire.Michael T. Kaufman, Knopf, 2002, p. 178

“…whatever I did made me an accomplice of the system.” Soros On Soros, John Wiley &Sons, Inc. 1995, pp. 114-115


References 251

“In effect, the foundation was run by the secret police: Ibid., pp. 126-127

“…signified citizen involvement in finding data and passing it on: Soros:The Life and Timesof a Messianic Billionaire. Michael T. Kaufman, Knopf, 2002, p. 197

“…difficult to run a foundation in a revolutionary environment.” Soros On Soros,John Wiley & Sons, Inc. 1995, pp. 128 and 129

“…emerging societies not from the bottom but from the top.” The New Yorker, p. 65

“…and not profit whenever this possibility arises.” Soros on Soros, p. 142

“If I did, I would not be alive today.” Ibid., p. 145

“In philanthropy as in business, Soros was pulling the trigger.” Soros:The Life and Times,p. 256

“Giving him Leverage if performance falters.” “Soros Has a Hunch Bush Can Be Beat,”Jeanne Cummings, Wall Street Journal, Feb. 5 2004, p.A4

“It is a unique combination.” Soros on Soros: p. 111

Chapter text:

“A clear sign that sterling was also vulnerable.” Soros on Soros: Staying Ahead of theCurve. George Soros. John Wiley & Sons, 1995, p. 81

“Very often those signs come from politics.” Fortune, Oct. 27, 2003

“…than Kohl was predicting, than anyone was predicting.” The Observer Magazine, Jan.16, 1994

“Where perception lagged behind reality, leaving room for exploitation.” “The WorldAccording to Soros,” Connie Bruck. The New Yorker, January 1995, p. 61

“…And learning that before others did.” Ibid., p. 61

“Disengage from the herd and look for a different investment thesis.” Soros on Soros:Staying Ahead of the Curve. George Soros. John Wiley & Sons, 1995. p. 12

“…paid off handsomely. It would not be the last time.” Soros:The Life and Times of aMessianic Billionaire. Michael Kaufman,Alfred A. Knopf, 2002. pp. 124-125

“Fixed exchange rates gave way to floating parities a year later.” Ibid., pp. 138-139

“When he thinks he’s right, he’ll bet the ranch.” The Observer Magazine, Jan. 16, 1994


“Not something that can be learned. It is totally intuitive.” Kaufman, p. 142

“That’s when you have lost your ability to get out of trouble.” Soros on Soros, pp. 56, 57

CHAPTER 6:USING PRICE TO GAIN COMPETITIVE ADVANTAGE

Introduction:

“They just didn’t spend it,” Walton writes in his autobiography, Sam Walton: Made inAmerica. Bantam, republished 1993. p. 5

“…the overall profit was much greater. Simple enough.” Ibid., p. 25

SAM WALTON

Challenge essay:

“…when you went inside the store, the mess just continued.” Fortune, Jan. 30, 1989

“I’ve probably been in more Kmarts than anybody in the country.” Sam Walton, Made inAmerica, p. 190

“We got so much better so quickly you couldn’t believe it.” Ibid., p. 190

“…adopted the attitude that competition was healthy,” Brand notes.” Masters ofEnterprise: Giants of American Business from John Jacob Astor and J.P. Morgan to Bill Gates and Oprah Winfrey. H.W. Brands, Free Press, 1999. pp. 229-230

“…attractive prices and store the merchandise.” Forbes,Aug. 16, 1982

“…new confidence that we could conquer anything.” Sam Walton: Made in America,p. 198

“We’ll never know because we chose the other route.” Ibid., p. 189

“It’s truly amazing what they can accomplish.” Fortune, January 30, 1989

Chapter text:

“And just blow that stuff out the store.” Sam Walton: Made in America, p. 24

“Everybody in town had a pair.” Masters of Enterprise, H.W. Brands, Free Press,1999. p. 227

“…could beat going to the Wal-Mart.” Sam Walton: Made in America, p. 160

“…sponsored local scholarships to help local kids attend college: Masters of Enterprise:p. 232

“To break the mold and fight monotony.” Sam Walton: Made in America, p. 159

“How much better off they would be as the company did better.” Ibid., p. 129

“…higher degree than most any other retail company.” USA Today, March 28, 1991

“Which is where we always plan to be.” Sam Walton: Made in America, p. 10

“…averaged less than one dollar per square foot.” Masters of Enterprise, p. 228

“And profits totaled $1 billion.” Ibid., pp. 229, 233

“Faced a real decline in its purchasing powers.” Value Migration: How to Think SeveralMoves Ahead of the Competition.Adrian Slywotsky. Harvard Business School Press,1996. pp. 210-211

“Two hours a week off their shopping time.” Ibid., pp. 211-212

“The enemy of small-town America.” Sam Walton: Made in America, p. 177

“Doing business the old-fashioned way.” Sam Walton: Made in America, p. 178

MICHAEL DELL

Challenge essay:“…was now unable to support our business.” Direct from Dell: Strategies thatRevolutionized an Industry, Harper Collins, pp. 44-45

Chapter text:

“…mastery of the computer industry’s central dynamic: falling prices.” “Picking a BigFight with Dell, H-P Cuts PC Profits Razor-Thin. ”The Wall Street Journal, May 12, 2004.

“…and deliver a lot of value,” said Dell in a magazine interview, referring to the printermarket. PC Magazine, February 2004

“It’s music, it’s videos and it’s television.” CNET news. September 2003

“We will keep pushing those as well.” PC Magazine, February 2004

References 253

JEFF BEZOS

Chapter text:

“Spend money on things that matter to customers.” The New York Times, March 31, 1999

“…guaranteeing that almost no one would make any money.” CNET News.com,May 17, 1999

“Provide an even better customer experience.” CNET News.com, April 11, 2001

“Less than a week later, Barnesandnoble.com followed suit.” CNET News.com,July 2, 2001

“One area of the country to geographic hubs.” CNET News.com, August 26, 2002

“He had the packaging redesigned.” The New York Times, March 31, 1999

“Also tell 5,000 people how horrible we are.” The New York Times, March 31, 1999

CHAPTER 7: MANAGING THE BRAND

OPRAH WINFREY

Challenge essay:

“How do you not cry about that?” Oprah Winfrey:The Real Story. George Mair, BirchLane Press, 1994, pp. 44-45

“…short man can make love to all the very tall girlfriends Moore has had.” Ibid. p.52

“You are responsible for your own life,” she told Fortune. Fortune, April 1, 2002

“She also signaled that it was all right to fail,” Newsweek said. Newsweek, Jan. 8, 2001

“And then people would fall out of their chairs laughing.” Fortune, April 1, 2002

“And she guards her off-air ventures as fiercely.” Newsweek, Jan. 8, 2001

“Owning myself is a way to be myself.” Fortune, April 1, 2002

Chapter text:

“…teadfastly resisted these entreaties.” Fortune, April 1, 2002


“It’s easy to be a true believer.” Essence, October 2003

“…just sitting up talking to you about service?” Newsweek, January 2001

“I feel I can learn something.” Investor Business Daily, Sept. 1, 1999

“What is happening in pop culture.” Broadcasting and Cable, Dec. 8 2003

“Recalls Hearst’s [magazine president] Cathleen Black.” Fortune,April 1, 2002

“Encouraging readers to revamp their souls.” Newsweek, Jan. 8, 2001

“Oppressed women in Afghanistan.” Fortune,April 1, 2002

“But it’s oh-so-Oprah.” Fortune,April 1, 2002

“My constant focus is on being better.” Fortune,April 1, 2002

LEE IACOCCA

Challenge essay:

“…And laid off more than 15,000 salaried workers.” Iacocca: An Autobiography.Lee Iacocca with William Novak. Bantam Books, 1984. p. 189

Chapter text:

“…cause the entire enterprise to backfire.” Ibid., pp. 268-269

“And when they don’t, I’ll buzz you:’” Talking Straight. Lee Iacocca with Sonny Kleinfeld,Bantam Books, 1988. p. 115

RICHARD BRANSON

Challenge essay:

All quotes in this section are from Richard Branson’s autobiography, Losing My Virginity:How I’ve Survived, Had Fun, and Made a Fortune Doing Business My Way,Three RiversPress, 1999, and Virgin Books Ltd., Richard Branson, 1998

Timeline:

“Declines offer of knighthood in 1999.” Forbes, July 13, 2000

References 255

Chapter text:

“…would recognize as having certain key values.” Losing My Virginity: How I’ve Survived,Had Fun, and Made a Fortune Doing Business My Way. Richard Branson.Three RiversPress, 1999. p. 47, and Virgin Books Ltd., Richard Branson, 1998

“…bought Mantovani or Perry Como.” Ibid., p. 59

“…framework of what Virgin later became.” Ibid., p. 59

“…That there was room for new competition.” Ibid., p. 153

“…had been filmed earlier in a flight simulator.” Ibid., pp. 163-64

“Probably gone as far as we can in the UK.” The Observer Guardian, March 2002

“…too informal, too restless, and I like to move on.” Losing My Virginity: p. 351

CHAPTER 8: FAST LEARNERS

WILLIAM H. GATES

Challenge essay:

“A neglected orphan of AOL Time Warner to a candidate for euthanasia.” CNETNews.com May 29, 2003

“…but it no longer poses a threat to the company’s survival.” “Sir Bill and his Dragons– Past, Present and future,” The Economist, Jan. 29, 2004

“…technology that allows people to play music and videos on their PCs, regulatorssaid.” “Microsoft and the EU:Who’s Right and Does It Really Matter?”Knowledge@Wharton, June 2, 2004

“…under traditional antitrust law, [makes] it clear that it is overcharging for the operat-ing system.” Ibid.

“…another separate market—search engines this time—at the expense of competi-tors.” Sir Bill and his Dragons – Past, Present and future,” The Economist, Jan. 29, 2004

“…agreement with Siemens that allowed both companies access to one another’spatents.” “Microsoft: Kinder, Gentler.” The Economist, May 13, 2004


Timeline:

…”this is the biggest, splashiest software rollout yet concocted.” Gates: How Microsoft’sMogul Reinvented an Industry – and Made Himself the Richest Man in America. StephenManes and Paul Andrews, Doubleday, 1993. p. 1

Chapter text:

“…and a modem that could connect the unit via telephone to the outside world.”Gates: How Microsoft’s Mogul Reinvented an Industry – and Made Himself the Richest Man inAmerica. Stephen Manes and Paul Andrews, Doubleday, 1993. pp. 25, 27

“It wasn’t just a fair deal for Microsoft. It was the deal of the century.” Ibid., p. 175

“…most fantastic thing to happen in the world of computing since the original PC.”Internet World, 1996, remarks by Bill Gates,April 30, 1996

“…critical mass of people who might want to use the PC to communicate with oneanother. Harvard Conference on Internet society, Bill Gates keynote address, 1996

“…more powerful in many ways than any of these other communications devices.” Ibid.

“…value of those systems is really hard to exaggerate.” Internet World, 1996

FREDERICK WALLACE SMITH

Chapter text:

“…and electronic connections—be erected alongside the air and vehicle networks,”“Why FedEx Is Flying High,” by Linda Grant. Fortune, Nov. 10, 1997, p.158

“…and you’re determined to get there, that’s worth a lot.” Investor’s Business Daily, 1998

“I wanted to do something productive after blowing so many things up,” he told Fortunemagazine in 1997.“Why FedEx Is Flying High,” by Linda Grant. Fortune, Nov. 10, 1997

References 257


LOUIS V. GERSTNER, JR.

Challenge essay:

“…can do is create the conditions for transformation, provide incentives.” Who SaysElephants Can’t Dance? Inside IBM’s Historic Turnaround. Louis V. Gerstner, Jr.,HarperBusiness, 2002, p. 187

Chapter text:

“…before they can succeed as leaders, they must first become effective workers andmanagers.” Louis Gerstner’s interview with Knowledge@Wharton,April 2004.

CHAPTER 9: MANAGING RISKIntroduction:

“The thing about Greenspan is that he doesn’t stay wrong.” From The Man Behind theMoney, by Justin Martin, quoted in Knowledge@Wharton, “Alan Greenspan:Woody Allenwith Math Skills,” Feb. 2, 2001

WARREN BUFFETT

Challenge essay:“…compared to the S&P, the worst relative performance as well,” 1999 Letter toShareholders, published March 1, 2000

“What really gets our attention, however, is a comfortable business at a comfortableprice.” Ibid.

“Companies that operate in fast-changing industries is simply far beyond our perimeter.”Ibid.

“…the stock might never again provide big returns,“ Bianco wrote. Businessweek,March 20, 2000

“It’s no sure thing that they will quickly regain their stride.” 1999 Letter toShareholders, published March 1, 2000

“…industries as brick, carpet, insulation, and paint.Try to control your excitement.”2000 Letter to Shareholders, published Feb. 28, 2001

References 259

Chapter Text:

“As the negative publicity went on, the stock price plunged further.” Buffett: The Makingof an American Capitalist. Roger Lowenstein. Main Street Books, 1995, p. 80

“Though our corporate performance last year was satisfactory, my performance wasanything but,” Buffett wrote.Annual Letter to Shareholders regarding 2001 results.Written in 2002.

ALAN GREENSPAN

“…has come to involve at its core crucial elements of risk management.” Risk andUncertainty in Monetary Policy, speech to American Economic Association, Jan. 3, 2004

“…with outsized adverse feedback to the performance of the US economy.” Risk andUncertainty in Monetary Policy, speech to American Economic Association, Jan. 3, 2004

“Where it doesn’t, I recognize that it doesn’t.” Greenspan:The Man Behind the Money.Justin Martin. Perseus Publishing 2000, p. 110

“Greenspan was forever adding to his toolbox of indicators.” Ibid. p. 56

“In fact, uncertainty characterized virtually every meeting.” Risk and Uncertainty inMonetary Policy, speech to American Economic Association, Jan. 3, 2004

Timeline:

Biographic material mainly from Greenspan:The Man Behind the Money. Justin Martin.Perseus Publishing, 2000

Chapter text:

“Greenspan began to see mounting signs that the economy was overheating,”Greenspan:The Man Behind the Money by Justin Martin. Perseus Publishing, 2000, p. 171

“Greenspan knew the value of appearing blasé in the face of a mounting financial crisis,”says Martin. Ibid., p. 173

“…in this instance by his age, his experience, and his knowledge of economic history,”Martin notes. Ibid., p. 175

“…did a bit of canny arm twisting, made sure they actually made the loans available,”writes Martin. Ibid., p. 177

“…bubble’s consequences rather than the bubble itself has been successful,” he said.Risk and Uncertainty in Monetary Policy, speech to American Economic Association,Jan. 3, 2004


PETER LYNCH

Chapter text:

“…has been profitable for a couple of years and simply goes on growing,” Lynch toldMoney magazine in an interview. Money. Feb 1, 2003

“…and one rose by 20% and another by 900%, your entire portfolio would still be upby some 140%.” Ibid.

“…just when it has spent huge sums to expand in order to hold on to market share.”Ibid.

261

INDEX

Aaddiction, work in (James Burke),

44-46Adelphia, 239Akers, John, 108Akhter, Firuza, 93Allen, Paul, 184, 191AlliedSignal, xiiiAmazon.com, xxv, 132. See also

Bezos, Jeffcapital investment in, 151-154pricing strategy, 155-157

American Association of Advertising Agencies, 44

American Bankers Association, 225American Economic Assocation,

228

American Express, 206-207, 212,215, 217, 235

American Motors, 173Amit, Raffi, xxvantitrust regulation, 16-17, 185-189AOL Time-Warner, 187Apollo Investment Fund, 119Apple Computer, xxv, xxix, 103,

150, 191, 239. See also Jobs,Steve

competition from industry leaders, 106-111

online music business, 112-113Apple Confidential:The Real Story of

Apple Computer(Linzmeyer), 108

Aresty Institute of ExecutiveEducation, xxv

Arterial Vascular Engineering, 67Ash, Mary Kay, xxi, xxv, xxix, 22, 239

biographical timeline, 30-33challenges for, xxix, 30-33corporate culture, 34-37

AT&T, 16, 163attributes of leadership. See charac-

ter traits of leadersauthentic leadership, 68-71Authentic Leadership (George), 69,

240AVECOR Cardiovascular, 67

BBanker to the Poor (Yunus), 96, 99Barnesandnoble.com, 132, 155Barrett, Craig, 12-13, 18Barry, Nancy, 101Beatty, Jack, 57behaviors, relationship with values,

xix-xxiBell Labs, xxviBerkshire Hathaway, xxiv-xxv, xxvii,

217-218, 239 See alsoBuffett,Warren

long-term investment challenge,211-214

Bezos, Jeff, xxv, xxix-xxx, 132, 238,240

biographical timeline, 151-154challenges for, 151-154price, using for competitive advan-

tage, 155-157


Bianco,Anthony, 213“Big Brother” commerical, 109Black, Cathleen, 167Black, Leon, 119“Black Monday,” 225-227Boeing, xiiiBogle, John, xxiii-xxv, xxix, 73, 238

biographical timeline, 75-79challenges for, 75-79character traits of leaders, xxviitargeting underserved markets,

80-83Borders.com, 132, 155bosses, relationship with, xixBossidy, larry, xiiiBower, Marvin, 62brand recognition, 159-160

Richard Branson, 179-181Andrew Grove, 15-16Lee Iacocca, 172-174Oprah Winfrey, 165-167

Brands, H.W., 135Braniff, 28Branson, Richard, xxv, xxix,

159-160, 238biographical timeline, 175-177brand recognition, 179-181challenges for, 175-178

British Airways, 175-176, 178Buffett,Warren, xxiv-xxv, xxix, 48,

121, 206, 235, 238-240biographical timeline, 211-216challenges for, 211-214character traits of leaders, xxviirisk management, 215, 217-219

Buffett:The Making of an AmericanCapitalist (Lowenstein), 215

Burke, James, xxi, xxv, xxix, 22, 238addiction, work in, 44-46biographical timeline, 38-42challenges for, 38, 40-41character traits of leaders, xxviiicorporate culture, 42-44

Bush, George W., 125Business @ The Speed of Thought

(Gates), 190

CCable News Network. See CNNcable television. See satellite broad-

casting challenge (TedTurner)

candor, in leadership development,xv-xvi

Canon, 148capital investment in Amazon.com

(Jeff Bezos), 151-154Cappelli, Peter, xxv, xxvii, 22, 56, 82careers, selecting, xvii-xviiiCarrey, Jim, 167Carter, Dennis, 9Cartoon Network, 117, 120Carville, James, 174Center for Human Resources, xxvCenter for Leadership and Change

Management, xxvchallenges for leaders, xxix

antitrust regulation (Bill Gates),185-189

capital investment in Amazon.com(Jeff Bezos), 151-154

Index 263

Chrysler management (LeeIacocca), 168-171

competition between Wal-Martand Kmart (Sam Walton),133-136

competition from industry leaders(Steve Jobs), 106-111

growth of Dell Inc. (Michael Dell),142-145

growth of Medtronic (WilliamGeorge), 64-68

IBM turnaround (Louis Gerstner),202-205

information systems (Fred Smith),195-198

investment in Chrysler (PeterLynch), 230-233

long-term investments (WarrenBuffett), 211-214

management studies (PeterDrucker), 57-61

microcredit (Muhammad Yunus),93-96

mutual fund company management(John Bogle), 75-79

Pentium flaw (Andrew Grove), 4-9personal business control (Oprah

Winfrey), 161-164philanthropy (George Soros),

121-126restructuring of General Electric

(Jack Welch), 50-53sales force motivation (Mary Kay

Ash), 30-33satellite broadcasting (Ted Turner),

114-117

Southwest Airlines startup (HerbKelleher), 23-26

technology integration (CharlesSchwab), 84-89

Tylenol crisis (James Burke), 38-41uncertainty, dealing with (Alan

Greenspan), 220-224Virgin Music versus Virgin Atlantic

(Richard Branson), 175-178character traits of leaders,

xxvii-xxxi, 237-241brand recognition, 15-16, 159-181corporate culture, 17-44fast learning, 183-208price, using for competitive advan-

tage, 131-157risk management, 16-17, 209-236tartgeting underserved markets,

13-15, 73-101teamwork, 11-13thrift, 27-29truth-telling, 10, 47-71vision of future, 103-129, 200

Charles Schwab & Co., xxv, 90, 92.See also Schwab, Charles

technology integration, 84-89Chrysler, xxv, 160, 238, 240. See also

Iacocca, Leebrand recognition, 172-174investment in (Peter Lynch),

230-233management of, 168-171

Clark, Howard, 215, 217Clemons, Eric, 188


CNN (Cable News Network), xxv,105, 114-117. See alsoTurner,Ted

Coca-Cola, 16, 38, 160, 181,212-213, 217

Cody,William, 141Commodore, 191Communist Youth League, 123Compaq Computer, 15, 149, 203competition. See also global

competitionfrom industry leaders (Steve

Jobs), 106-111Wal-Mart and Kmart, 133-136

competitive advantage, using pricefor, 131-132

Jeff Bezos, 155-157Michael Dell, 146-150Sam Walton, 137-141

ComputerLand, 108Concept of a Corporation (Drucker),

59-60, 63consumer trends. See vision of

futurecorporate culture

Mary Kay Ash, 34-37James Burke, 42-44Andrew Grove, 17-19IBM, 204-208importance of, xx-xxiHerb Kelleher, 21-22, 27-29

Corrigan, Gerald, 227criticism of unfair business prac-

tices, 240

Croson, David, 148-149Cultural Initiative Foundation, 123culture. See corporate culturecustomers, importance of, 238

DDayton’s, 133Dell Inc., xxv, 132, 203, 239. See also

Dell, Michaelgrowth of company, 142-145

Dell, Michael, xxv, xxix-xxx, 132,238-239

biographical timeline, 142-144challenges for, 142-145price, using for competitive

advantage, 146-150Della Femina, Jerry, 38differentiation, in leadership

development, xv-xviDigital Research, 191Direct from Dell: Strategies that

Revolutionzed an Industry(Dell), 143

Donahue, Phil, 162Dougall,William, 190Dow Chemical, 232Drexel Burnham Lambert, 119Druckenmiller, Stanley, 124Drucker, Peter, xxv, xxix, 12, 48, 240

biographical timeline, 57-61challenges for, 57-61truth-telling, 62-63

DuPont, xvii

Index 265

E-Fedge, in hiring philosophy, xviiieducation. See fast learningenergy, in hiring philosophy, xviiiEnron, 46, 48, 68, 239execution, in hiring philosophy, xviiiExxon, 136

F.W.Woolworth, 133Fader, Peter, 113Fairchild Semiconductor, xxvi, 11Fannie Mae, 232fast learning, 183-184

Bill Gates, 190-194Louis Gerstner, 206-208Fred Smith, 199-201

Federal Express, xxv, 184, 199-201,240. See also Smith, Fred

information systems, 195-198Federal Open Market Committee

(FOMC), 221-222, 224Federal Reserve System, xxv, 196

dealing with uncertainty, 220-224FedEx. See Federal ExpressFidelity, 92Fidelity Magellan Fund, xxv. See also

Lynch, Peterinvestment in Chrysler, 230-233risk management, 234-236

Firestone, 38Flying Tigers, 197FOMC (Federal Open Market

Committee), 221-222, 224Ford Motor Company, 60, 168, 170,

172-173, 238

Ford, Henry, II, 60, 168, 170, 172Freddie Mac, 212Fund for the Reform and Opening of

China, 123future, vision of, 103-105, 239

Steve Jobs, 112-113Fred Smith, 200George Soros, 126-127, 129Ted Turner, 118-120

The Future of Industrial Man(Drucker), 58

GGates, Bill, xxiv-xxv, xxix, 184, 238

biographical timeline, 185-190challenges for, xxix, 185-189character traits of leaders, xxviiifast learning, 190-194

Gates: How Microsoft’s MogulReinvented an Industry—andMade Himself the RichestMan in America (Manes andAndrews), 190

GE Aircraft Engines, xiiiGE Capital, xiii, 52GE Credit, xiiiGE Medical Systems, xivGE Power Systems, xiiiGeneral Electric, xvii, xix, xxv, xxviii,

48, 238. See also Welch, Jackacquisition of Kidder Peabody, xxleadership development, xiv-xvleadership positions, xiii-xivrestructuring of, 50-53

General Motors, 58-60


General Reinsurance, 213, 218-219George,William, xxv, xxix, 49, 238,

240biographical timeline, 64-66challenges for, 64-68character traits of leaders, xxviiitruth-telling, 68-71

Gerstner, Louis, xxv, xxix, 184, 239biographical timeline, 202-204challenges for, 202-205fast learning, 206-208

Gharib, Susie, xxviGillette, 212Glass, David, 133global competition, restructuring of

General Electric, 50-53. Seealso competition

GM (General Motors), 58-60Goergen Entrepreneurial Research

Program, xxvGoodyear Tire, 170Google, 188Grameen Bank, xxv, xxviii, 73, 97,

99-100. See also Yunus,Muhammad

microcredit, 93-96Greenspan,Alan, xxv, xxix, 235, 238,

240biographical timeline, 220-228challenges for, 220-224risk management, 225-229

Grokster, 112Grove,Andrew, xxiv-xxv, xxix, 1-3,

237background of, xxvibiographical timeline, 4-9

challenges for, xxix, 4-9character traits of leaders, xxvii

brand recognition, 15-16corporate culture, 17-19risk management, 16-17targeting underserved markets,

13-15teamwork, 11-13tenacity, xxxitruth-telling, 10

growth of company Michael Dell, 142-145William George, 64-68

Gutfreund, John, 48

HHanes, 235Hanna-Barbera animation studio,

117, 119Harpo Inc., xxv, 159, 164, 167. See

also Winfrey, Oprahpersonal business control,

161-164HBO, 116HealthSouth, 239Hearst, 167Heinz, John, 174Hewlett-Packard, 148-149hiring philosophy of Jack Welch, xviiiHitachi, 203The Home Depot, xiiiHomebrew Computer Club, 107honesty. See truth-tellingHoneywell, xiiiHotmail, 194

Index 267

hubris, 68The Human League, 177

I-JIacocca, Lee, xxv, xxix, 160, 231, 238,

240biographical timeline, 168-170brand recognition, 172-174challenges for, 168-171

Iacocca: An Autobiography (Iacocca),173

IBM, xxv-xxvi, xxix, 15-16, 52, 85-86,107-110, 148, 160, 184, 190,239. See also Gerstner,Louis

corporate culture, 204-208deal with Microsoft, 191-192turnaround of, 202-205

Immelt, Jeff, xiiiindex funds, 77-78information systems (Fred Smith),

195-198insurance, risk management, 218-219integrity. See truth-tellingIntel, xxv-xxvi, xxix, xxxi, 2-3, 38,

107, 148, 163, 237. See alsoGrove,Andrew

brand recognition, 15-16corporate culture, 17-19Pentium flaw challenge, 4-9risk management, 16-17

intellect and leadership ability, 240Internet revolution and Microsoft,

192-194Internet World Conference, 192

Intuit, 186investment in Chrysler (Peter

Lynch),230-233

investment principles (WarrenBuffett), 217

J.C. Penney, 139Jack: Straight from the Gut (Welch),

48Jackson,Thomas Penfield, 187Jain,Ajit, 218Jefferson Airplane, 179Jett, Joseph, 56Jobs, Steve, xxv, xxix, 239

biographical timeline, 106-111challenges for, xxix, 106-111vision of future, 103-104, 112-113

Johnson & Johnson, xvii, xxi, xxv,xxviii, 22, 238. See alsoBurke, James

challenges for, 38-41corporate culture, 42-44

Johnson, General Robert Wood, 43Jones, Lewis, 58

K-LKahn, Barbara, xxv, 167Kaufman, George (Soros:The Life and

Times of a MessianicBillionaire), 127

Kaufman, Michael T., 122Kazaa, 112Kelleher, Herb, xxi, xxv, xxix, 23-29,

237biographical timeline, 23-26


challenges for, xxix, 23-26character traits of leaders

corporate culture, 21-22, 27-29thrift, 27-29

Kenyon & Eckhardt, 173Kidder Peabody, xxKidder Peabody scandal, 56, 239King, Coretta Scott, 166Kinko’s, 198Kleiner Perkins Caufield & Byers,

154Kmart, xxix, 137, 139

competition with Wal-Mart,133-136

knowledge workers, 62Kohl, Helmut, 127Kozlowski, Dennis, 69Kuhn’s Big K, 136

La Quinta, 232leaders

challenges for. See challenges forleaders

character traits. See charactertraits of leaders

reasons for studying, xxivleadership

heart of, xivversus management, xvi

The Leadership Moment (Useem), 48leadership philosophy of Jack

Welch, xiv-xxilearning quickly. See fast learningLong-Term Capital Management

(LTCM),220, 222

long-term investment challenge(Warren Buffett), 211-214

long-term vision. See tenacity; visionof future

Losing My Virginity (Branson), 175LTCM (Long-Term Capital

Management), 220, 222Lynch, Peter, xxv, xxix-xxx, 238

biographical timeline, 230-235challenges for, 230-233risk management, 234-236

MM&T Bank, 212Magellan Fund. See Fidelity Magellan

FundMair, George, 162The Man Behind the Money (Martin),

223, 225, 227management by objective, 63management studies, invention of

(Peter Drucker), 57-61management versus leadership, xvimanagers, types of, xxMarkkula, Mike, 107Marks & Spencer, 57Mary Kay Inc., xxi, xxv. See also Ash,

Mary Kaychallenges for, 30-33corporate culture, 34-37

Mary Kay:You Can Have It All (Ash),31-32,35, 37

Matsushita, 119MCA, 119

Index 269

McCann, Jim, 54McDonald’s, 232McGraw, Phil, 167McKinsey & Co., 62McNeil Consumer Products Co., 38,

42McNerney,W. James, xiiiMedtronic, xxv, xxviii, 49, 238. See

also George,Williamchallenges for, 64-68

MGM movie studio, 116, 118Micro Interventional Systems (MIS),

64microcredit, xxviii, 93-96Microsoft, xvii, xxv-xxvi, xxviii-xxix,

16, 104, 110, 113, 148, 184,190. See also Gates, Bill

antitrust regulation, 185-189deal with IBM, 191-192Internet revolution, 192-194

Midas Rex, 67MIS (Micro Interventional Systems),

64mistakes, importance of admitting,

239Mittelstaedt, Robert E., Jr., xxv,

xxvii-xxviiiMoore’s Law, 11Moore, Dudley, 162Moore, Gordon, xxvi, 11-14Morpheus, 112Mostek, 13, 15motivation of sales force (Mary Kay

Ash), 30-33mutual fund company management

(John Bogle), 75-79

NNapster, 112Nardelli, Robert L., xiiiNational Steel, 170NBC, xxviii, 51, 116NBR (Nightly Business Report),

25th anniversary, xxivNetscape, 153, 186-187, 190, 193New York Stock Exchange (NYSE),

84Nightly Business Report (NBR),

25th anniversary, xxivNike, 16, 181no-load mutual funds, 78“Noah rule,” 219Norris, James, xxiiiNoyce, Robert, 11-12NYSE (New York Stock Exchange),

84

O-PO’Neill,Thomas “Tip,” 174O,The Oprah Magazine, 162, 167online music business, 112-113Only the Paranoid Survive (Grove), 7,

13-14Open Society Foundation, xxv, 105

philanthropy, 121-126opportunity, in career selection, xviioptions, in career selection, xviiownership, in career selection, xviii


Paine Webber, xxPalmisano, Sam, 205Palo Alto Research Center,

103-104, 108Pandya, Mukul, xxvpaper trail challenge (Charles

Schwab), 84-89Parmalat, 48, 239Partnership for a Drug-Free

America, 44-46passion, in hiring philosophy, xviiiPaul,Vivek, xiiiPaychecks of the Heart (Mary Kay

Inc.), 35Pearson, Bill, 84-85Pendleton,Yvonne, 35Pentium flaw challenge (Andrew

Grove), 4-9People Express, 180Perkins, Brian, 42-43personal business control (Oprah

Winfrey), 161-164philanthropy (George Soros),

121-126Physio-Control International, 67Pixar, 103, 106Pottruck, David, 92poverty

microcredit, 93-96targeting underserved markets,

97-101The Practice of Management

(Drucker), 12

price, using for competitive advan-tage, 131-132

Jeff Bezos, 155-157Michael Dell, 146-150Sam Walton, 137-141

Procter & Gamble, 43

Q-Rqualities of leadership. See character

traits of leadersQuantum Hedge Fund, 121, 124, 127Quarterman, John S., 154quick learning. See fast learning

Radio Shack, 191Ralph Lauren, 163Rand,Ayn, 226RCA, 51, 116Reagan, Ronald, 227Real Networks, 187Recording Industry Association of

America, 112The Republic (Plato), 183restructuring of General Electric

(Jack Welch), 50-53risk management, 209-210

Warren Buffett, 215, 217-219James Burke, 43-44Alan Greenspan, 225-229Andrew Grove, 16-17Peter Lynch, 234-236

Rite Aid, 239RJR Nabisco, 206-207Rogers, Richard, xxix, 30, 35-37Rollins, Kevin, 145

Index 271

SS.S. Kresge, 133sales force motivation (Mary Kay

Ash),30-33

Salomon Inc., xxvii, 48Sam Walton: Made in America

(Walton), 131, 134Sam’s Club, 140satellite broadcasting (Ted Turner),

114-117Satyagraha, 47Schmidt,Al Xavier, 1-2, 7, 10Schwab, Charles, xxv, xxix, 73, 239

biographical timeline, 84-89challenges for, 84, 86-87, 89targeting underserved markets,

90-92Scott, Ridley, 109Sears Roebuck, 57, 108Seattle Computer, 192SEC (Securities and Exchange

Commission), 84, 90Siegel, David, 29Siemens, 189Six Sigma, 53Sloan,Alfred P., 58-59Smith, Fred, xxv, xxix, 184, 240

biographical timeline, 195-198challenges for, 195-198fast learning, 199-201

Sofamor Danek Group, 67Sony, 113, 149Soros Fund Management, 105,

127-128

Soros on Soros (Soros), 122, 126-128Soros, George, xxv, xxix, 105, 238,

240biographical timeline, 121-125challenges for, 121-126vision of future, 126-129

Soros:The Life and Times of aMessianic Billionaire(Kaufman), 127

Southwest Airlines, xxi, xxv, xxix,238. See also Kelleher, Herb

challenge in starting up, 23-26corporate culture, 21-22, 27-29thrift, 27-29

stock market,“Black Monday,” 225-227

Stoker,Angela, 37Sun Microsystems, 189

TTaco Bell, 232Talking Straight (Iacocca), 173Target, 133, 137TBS (Turner Broadcasting System),

115-116, 119teamwork, 11-13, 238technology integration (Charles

Schwab), 84-89telegraph versus telephone analogy,

108television. See satellite broadcasting

(Ted Turner)


tenacity, xxxi. See also vision offuture

Thorn EMI, 177-178Thorndike, Doran, Paine and Lewis

Inc., 753M, xiiithrift, 27-29TNT (Turner Network Television),

105, 114traits. See character traits of lead-

erstrend-spotting. See vision of futuretrust, 45truth-telling, 47-49

Peter Drucker, 62-63William George, 68-71Andrew Grove, 10Jack Welch, 54-56

Turner Broadcasting System (TBS),115-116, 119

Turner Classic Movies, 117, 120Turner Network Television (TNT),

105, 114Turner,Ted, xxv, xxix, 105, 238

biographical timeline, 114-119challenges for, 114-117vision of future, 118-120

Tyco, 68-69, 239Tylenol crisis (James Burke), xxviii,

38-41

U-VUBS, xxuncertainty, dealing with (Alan

Greenspan), 220-224underserved markets, targeting,

73-74John Bogle, 80-83Andrew Grove, 13, 15Charles Schwab, 90-92Muhammad Yunus, 97-101

unfair business practices, speaking out against, 240

Unisem, 13, 15UPS, 197US Airways, 29Useem, Michael, xxv, xxvii-xxviii, 48,

59, 61Utah International, 51

Value Migration (Slywotsky), 140values, relationship with behaviors,

xix-xxiVanguard Group, xxiii-xxv, xxvii, 73,

80-82, 92, 238. See alsoBogle, John

mutual fund company manage-ment, 75-79

Virgin Atlantic, 175-178, 180Virgin Group, xxv. See also Branson,

Richardbrand recognition, 179-181challenges for, 175-178

Virgin Mobile, 181Virgin Records, 159-160, 175-178vision of future, 103-105, 239

Index 273

Steve Jobs, 112-113Fred Smith, 200George Soros, 126-129Ted Turner, 118-120

WWagner, Mary Kathlyn. See Ash,

Mary KayWal-Mart, xxv, xxvii, 131-132,

137-141. See also Walton,Sam

competition with Kmart, 133-136Walton, Sam, xxv, xxix, 131-132,

146, 238-239biographical timeline, 133-136challenges for, xxix, 133-136character traits of leaders, xxviiprice, using for competitive advan-

tage, 137-141The Washington Post Co., 212, 217Welch, Jack, xiii, xxv, xxix, 48,

238-239biographical timeline, 50-53challenges for, 50-53character traits of leaders, xxviiileadership philosophy, xiv-xxiconversation with, xiiitruth-telling, 54-56Winning, xvii

Welch, Suzy, Winning, xviiWellington Management Company,

75, 77-78Wells Fargo, 212Wharton School Publishing, xiv-xvWhatley,Tom, 36

Who Says Elephants Can’t Dance?Inside IBM’s HistoricTurnaround (Gerstner), 205

Winfrey, Oprah, xxv, xxix-xxx, 159,238

biographical timeline, 161-165brand recognition, 165-167challenges for, 161-164

winning, Jack Welch’s definition of,xvi

Winning (Welch), xviiWipro, xiiiWomen’s World Banking, 101Woolco, 133work-out sessions (General

Electric), 55World Bank, 240WorldCom, 48, 68, 239Wozniak, Steve, 106-107

X-ZXerox, 103-104, 108Xomed Surgical Products, 67

Yahoo, 153Yunus, Muhammad, xxv, xxix, 73,

240-241biographical timeline, 93-99challenges for, 93-96character traits of leaders, xxviiitargeting underserved markets,

97-101

Zapmail, 196


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