August 18, 2010

Managing for growth: An interview with former Emerson CEO Chuck Knight

The company's CEO from 1973 to 2000 explains how it transformed itself from a local manufacturer of simple components into a global technology giant.

The numbers speak for themselves: from the mid-1950s until 2000, Emerson Electric notched up 43 consecutive years of annual increases in earnings per share and 44 consecutive years of increased dividends per share—a winning streak that ranks among the longest in US corporate history. Such financial consistency, however, obscures the true nature of a company in a state of nearly continual change. Indeed, over this period St. Louis-based Emerson evolved from its regional roots as a maker of simple industrial components (such as electric motors) into a global provider of technology components and systems, including automated process controls, network power systems, climate control technologies, and even appliances and tools, as well as a host of related services.

Leading Emerson during most of this span of years was Charles F. (“Chuck”) Knight, the Cornell-trained engineer who became the company’s CEO in 1973 and its chairman in 1974. Knight retired as CEO in 2000 and served as chairman until 2004, when he was named chairman emeritus. Underpinning Knight’s management philosophy is a unique and singular belief in the power of process. A manager’s job, Knight argues, can be broken down into components that can in turn be optimized, planned, and controlled.1 At Emerson, this idea took the form of a continual and uncompromising cycle of planning conferences designed to enable each of the company’s more than 60 divisions to create specific plans to improve profitability and growth, as well as to hold feet to the fire so the targets were met.

While these conferences may have been stressful for the participants—the meetings were intended to be provocative and even, at times, confrontational—they produced impressive results. In 1973 Emerson had revenues of $938 million; by 2000 they exceeded $15 billion (40 percent of it generated outside the United States). Moreover, the process has proved remarkably transferable—Emerson acquired more than 200 companies during Knight’s tenure as CEO.

At Emerson’s headquarters, in St. Louis, Knight talked with Mike Murray, formerly a director in McKinsey’s Chicago office, and Warren Strickland, a director in the Dallas office, about the role that process plays in management, M&A, and talent development, as well as Knight’s reflections on transforming Emerson from a fast follower into a technological leader.

The Quarterly: What, in your view, is the proper role of management?

Chuck Knight: Let’s start with what it isn’t. There’s a commonly held misconception that management’s job is to take care of a company’s stakeholders. That’s too broad a definition, and it’s the wrong way of looking at the issue. What we did at Emerson was to try and keep it as simple as possible. To us, management’s job was to successfully identify and implement the investment decisions that you have to make in order to meet the company’s targets for growth and profitability, so as to create shareholder value—and it’s nothing more than that.

Successful management—finding out how to drive that value—is very much a process. You’ve got to do a good job of in-depth planning, a great job of implementation and follow-up, and have an action-oriented organization, and those things take time and discipline to develop. Too many people think of management as something you can learn in school and simply apply, but management is not just a practice or a profession. You’re not ordained to run a company. Plus, what’s the average tenure of a CEO today, five years? That absence of management continuity, in my view, sums up the problem with the professional side of management. I had 27 years as CEO at Emerson, and Buck Persons2 had 19 years. I’ll bet the same will hold for David.3 Our tenure and our shared beliefs about Emerson’s management process are the keys to long-term success.

The Quarterly: What other benefits are associated with a process-based approach?

Chuck Knight: A process can be more effective than corporate structure when it comes to guiding an organization. For Emerson, it’s had a tremendous coalescing effect. People know the game—they don’t walk around here wondering what’s expected of them. It’s a fact-based place, and people like that. What’s more, our approach created a company without politics. I can’t emphasize that enough; there’s just no bureaucratic nonsense around here. If people mess around with politics they are history.

Another benefit is accountability. There’s no gap between strategy and operations at Emerson. The divisions set their business plans at the annual planning conferences and then own them—they’re responsible for execution. But it’s not a blame game. We like to say we are a “blameless” company, because the CEO and other corporate officers are at those planning conferences too, and we’re all agreeing on the plan. So if the plan is working, then it’s fun. If it’s not working, then we redo it together.

The process also lets us move fast. Every quarter, people from the divisions come [to Emerson’s headquarters] to report on the important action items that come out of the planning conferences and to tell us if they’re going to make their financial targets for the quarter or the year. So if something’s going haywire, we see it very quickly and can do something about it.

The Quarterly: Emerson acquired more than 200 companies during your tenure as CEO. Describe your approach to M&A and the thinking behind it.

Chuck Knight: Deals create a huge amount of value and opportunity for us. They bring technology, market share, a global position, and talented people. They’re a vital part of what we do, and we’re good at it—more than 80 percent of the dollars we invested in acquisitions earned more than our cost of capital. That’s a pretty good average.

Because M&A is so important to us, we’re constantly looking at deals. Many of the ideas about which companies to acquire come from within the divisions. At every divisional-planning conference there will be 10 to 15 acquisitions in the funnel, and we’re assessing it all the time. But we’re not just looking at the fundamentals of the businesses we acquire—we’re getting the management team as well. The inherent know-how these managers bring is invaluable, and we don’t want to lose them and start over from scratch. We believe that they’ll grow in our system and strengthen the company as a whole. Today we have people all over the company who originally came from acquisitions and then grew into even bigger jobs at Emerson.

The Quarterly: Does the management process present any challenges with respect to M&A?

Chuck Knight: Management, management, management. When we bring a company in, the managers are not always sure they like our process. They don’t always understand it. So there’s typically at least a year or so to sort things out. However, once the company’s management sees the benefits and the opportunities that the process creates, they come around pretty quickly. This is especially true in China and much of Asia, where I think managers really like the discipline we bring to business.

The Europeans were the toughest. For example, we have a wonderful partner in Europe. When we acquired the company and talked about implementing our management process, the CEO told me to buzz off—which I proceeded to do for three years. He would look at certain aspects of the process and say, “We don’t do that. We can’t afford to do that.” But over those three years he decided the process worked. Every time he’d come [to St. Louis] he’d get exposed to everyone else, and he’d get bigger and bigger responsibilities associated with other divisions, and he saw how they were benefiting. It changed his mind.

The Quarterly: You mentioned the role that acquisitions play in acquiring talent. Would you care to elaborate on the topic of talent?

Chuck Knight: We pay a great deal of attention to identifying and developing our high-potential employees. One way we find them, of course, is through the planning conferences, where people are coming in from all over the world. During those meetings I could expect to see the 5,000 people most important to the future of this company. But we do a variety of things to find and develop talented people, such as mentoring and MBA recruitment. We’ve been bringing in talented MBAs since 1974, and we keep most of them. All four of the current members of our Office of the Chief Executive4 came from this program. Another major source of executives is acquisitions. And of course retention is crucial to the way we think about talent management.

The Quarterly: What actions should a company take to retain talented employees?

Chuck Knight: Make it hard for them to leave. At Emerson, part of that is finding opportunities for people—for example, challenging jobs in other divisions. There’s no set program as to how high-potential employees move within the company, but we’re very conscious of finding big jobs for them. And we make it clear to them that when they take these jobs it doesn’t mean they have to stay there for life. There are always lots of opportunities to move around the company.

But the environment here is really the key to retention, and I wish I could explain it better. We’re a demanding company, but we’re fair. I mean, I could be pretty tough with a group in a planning conference but then have dinner and drinks with them afterward, and nobody would remember how tough the discussion was. It wasn’t personal, nobody got fired, and the next day everybody was working to get the plan on track.

We really do care about our people. We worry about them. For example, we do a survey every two years to gauge the attitudes of our employees. We do this everywhere, at every plant, for hourly employees as well as salaried. And we track the results. If there are bad managers or supervisors out there, it shows up and we either fix the problem or get rid of them. If there’s an issue, we see it and deal with it. That’s one reason why very few of our plants are unionized—our employees are satisfied.

And that satisfaction extends throughout the organization. Consider the leadership succession process that led to David Farr’s selection as CEO, in 2000. There were three finalists, including David—all of them enormously talented people. We kept all of them. That’s not the way it is at most companies. A big part of it, believe it or not, is friendship. We’ve worked with one another for 30 years in some cases, and we all grew up in this atmosphere. It’s just fun. It’s a fun place to be.

The Quarterly: Your 27 years as CEO spanned a period of enormous technological change. Yet over that time, Emerson maintained strong financial results and developed a reputation as a technological innovator. How did you do it?

Chuck Knight: The first decision that we made in the early planning conferences was that we had to become number one in technology in our businesses—and we were way behind. We were fast followers, and that wasn’t going to cut it. The nature of technology was changing as the world moved toward electronics. Our products were based on older technology.

To catch up, we looked outside—to acquisitions, of course, but also to universities, to Battelle,5 and to other places. They gave us the outside help that we needed and couldn’t afford—or didn’t want to afford—internally. We closed all of our [corporate-development] labs. They weren’t focused and simply didn’t work.

At the same time, we had to make product development a priority for the divisions. One way we did it was to start tracking new-product sales at the division level. It was a terrific idea because it let us set targets for new-product development in the planning conferences, which in turn helped us understand what the technology needs would be to get there. Ultimately, it helped show us what we needed to do in terms of shortening product life cycles and ramping up. In 1973, for example, new products were 2.1 percent of sales; in 2000 they were 36 percent.

The Quarterly: What actions did you take to shorten product life cycles?

Chuck Knight: One example is what we call “swarm engineering.” Here’s how it works. Think of a product—anything made with electronic components. Say it’s on a five-year redesign cycle. That’s an enormous problem because electronics costs are dropping at 10 percent a year, but you’re not getting at those savings until the end of the fifth year. Of course, neither are your competitors.

However, if you break the project into steps that can be tackled concurrently and you double the number of engineers working on it, you can redesign the product in half the time—and get the advantage of the declining cost curve of the electronics. And with the skilled engineering talent in places like China and India, we were able to add those engineers without raising our costs.

The Quarterly: Emerson was quick to view China as both a market and a manufacturing hub. Emerson’s Rosemount division began operating in China in 1979, and the company began expanding its operations in the country in the 1980s. Could you reflect a bit on that experience?

Chuck Knight: I met with Zhu Rongji6 several times in the late 1980s and in the 1990s, when he was vice premier. I’ll never forget one of those meetings, when I asked him three questions. First, are we going to be allowed to make a profit? He said that making a profit was up to us, but he felt that China’s economic climate would provide us with the same financial flexibility that we’d expect to find in any other world market.

Next, I asked him if we’d be able to protect our intellectual property. Again, his response was encouraging. He indicated that although China didn’t have the laws in place—and might not have them for some time—so long as we operated with written contracts our rights would be honored. And our experiences in China confirm he was right.

Finally, I wanted to know whether or not he thought we’d be able to get the right kind of people: talented employees with the right background and education. And he said, “Yes. There are extremely bright people interested in working for American-based companies. But you can also help yourselves by supporting local business programs and by challenging our people and our education system.” So we took his advice to heart. The executive education program that we set up in Shanghai—along with Anheuser-Busch, Washington University of St. Louis, and Fudan University, in Shanghai—has worked out very well for us. We hire a big slug of very talented people there, and we’ve had no problem getting and keeping good people in China.

And I’ll tell you, the Chinese people were ready to go from the first day. For example, in the early 1990s I gave a speech in Shanghai on the Emerson management process. The next day I walked into one of our plants nearby and found that management had already translated the key points from the speech into Chinese and posted them in huge block letters.

The Quarterly: When you look back at your time as CEO, is there anything you wish you had done differently?

Chuck Knight: In the early 1990s we found ourselves faced with the fact that the company wasn’t growing fast enough—the ultimate challenge for every management group. Up until then we’d been able to avoid tackling growth, because Emerson was doing pretty well. We were creating bottom-line returns that, for the most part, met our targets. But all of a sudden it was clear that we needed to get the top line ginned up. Our internal initiatives pointed to it and, increasingly, our investors were expecting it too.

And what I didn’t see quickly enough were the opportunities we were passing up. These opportunities required us to do a number of things—upgrading our marketing capability, coordinating approaches to key customers across the divisions, developing new business models, offering all of the customer services and solutions that really get big market share. We were selling components, and even systems in many cases, but we had not taken advantage of the opportunities that services and solutions provide.

My belief in the importance of autonomy for our divisions—and in planning and controlling profits at the lowest possible level of the company—had made me unwilling to share the necessary resources across our companies to do certain things. For example, we hadn’t been pulling together our marketing or sales resources across businesses, because I absolutely hated those kinds of shared costs. I was probably a few years late in waking up to what we had to do.

So that’s fundamentally what we started doing in the late 1990s: reorganizing the businesses around platforms to force the sharing of technology, engineering, and marketing and to take advantage of our scale on the growth side so we could offer services and solutions to our customers. These efforts substantially increased our served markets, creating opportunities for more top-line growth. And David Farr and his team have taken these opportunities to a whole new level and just done an outstanding job. In some ways I wish we had done it sooner, but I guess that’s life in the big city.

The Quarterly: Is there anything that you are most proud of?

Chuck Knight: Developing technology to the point that we are number one in all of our businesses. I didn’t think we had a prayer. And to go from zip to being better than any of our competitors is a great, great advantage. Technology is what drives margins. It’s what drives your ability to put services and solutions together—things I didn’t think about when we made the initial commitments but that became obvious as we moved ahead.

I would add that I’m also proud of the way we managed the CEO succession process. The senior-management team has an average tenure of 27 years with Emerson, and we have very strong leadership in each of the businesses too. And the management process continues to serve the company very well.

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