From bottom to top: Turning around the top team
A
case study of change at Philips illustrates the importance of the
“soft stuff.”
When
Pieter Nota joined Philips, four
years ago, to run the Dutch technology group’s Consumer Lifestyle
sector, he found a business in poor shape. The market shares of
several important products were falling in the wake of harsh trading
conditions and a lack of earlier investment. Sales of the company’s
televisions were declining alarmingly following a brief spike ahead
of the 2010 FIFA World Cup. More fundamentally, an overcentralized
and functionally led organizational structure was proving ill suited
to the task of managing the two formerly separate companies (small
domestic appliances and consumer electronics) first brought together
under the Consumer Lifestyle umbrella, in 2008.
The
story of the unit’s subsequent turnaround, from Philips’s
problem
child to part of a group that recently announced its tenth
consecutive quarter of strong revenue and profit growth, is one of
astute portfolio divestment and renewal, clear strategic choices,
more disciplined operations, and a rigorous focus on performance
management. Underlying and driving the recovery, however, has been a
less visible, but no less important, improvement in the effectiveness
of the Consumer Lifestyle sector’s top team—that handful of
senior executives who provide the energy, inspiration, and vision for
any enterprise. As the accompanying exhibit illustrates, the results
of successive surveys carried out from May 2011 to May 2014
demonstrate a remarkable rise in team-effectiveness scores rating
alignment on strategic direction, the quality of execution, and the
ability to change.
This
summer, Pieter Nota sat down with McKinsey partners Udo Kopka and
Michiel Kruyt to discuss the journey and the lessons he and his team
have learned along the way.
The
Quarterly:As
an outsider to Philips, how did you determine what the most serious
issues were?
Pieter
Nota: One
of the first things I did when I joined, in late 2010, was to write
an open letter to about 700 people—basically, the group we call the
Consumer Lifestyle leadership and a layer below them. I invited them
to tell me what they thought was working well in the business and
what wasn’t. This gave me a pretty good idea of what was cooking
and a lot of useful insights: the sense that two of our biggest
businesses, small domestic appliances and consumer electronics, were
not functioning well together; the frustration with the lack of
investment and innovation, particularly in domestic appliances; and
empowerment issues in the sales organizations. All that came out of
this exercise.
The
Quarterly:
What
were your initial actions as the new CEO?
Pieter
Nota: Consumer
Lifestyle was the biggest of Philips’s three businesses at the
time, and it was not performing well. The business environment was
flat, and we were challenged on both sales and profits. It became
clear quite quickly that we might have to divest the TV business.
Given TV’s central place in the group’s history, this was pretty
drastic. The emotional response was how I imagine it would be if
Unilever were to suggest getting out of detergents.
The
Quarterly:
How
did you find morale in the top team—and in the organization more
widely?
Pieter
Nota: I
inherited a large and diverse top team of 15 people, representing
various businesses, geographies, and functions, with team members
from Europe, the United States, and Asia. Morale was pretty low. For
example, the two very distinct businesses in Consumer
Lifestyle—consumer electronics and small domestic appliances—each
had very different rules of the road. There was a lot of tension and
friction, since we were structured to manage them as one business.
Financial performance was poor, and there had been a reluctance to
invest during the financial crisis of 2008. Nor did it help when, in
mid-2011, we had to issue a profit warning for the TV business, a
unit we retained until late 2012, when a majority stake was sold to
TPV Technology.
For
all these reasons, the team was insecure and couldn’t understand
why things were going so badly. The top-team survey we did in May
2011, in preparation for our first off-site meeting, exposed some of
the challenges—it showed how misaligned we were on the direction of
the business, the poor quality of our discussions, the lack of trust,
the lack of confidence in our ability to implement strategy, and the
perception that we were ineffective at making change happen.
The
Quarterly:
How
and when did you go about starting to rebuild the team?
Pieter
Nota: In
retrospect, I think our first big off-site meeting—in May 2011, at
Huizen, in the Netherlands—was significant. This is where we put
the issues on the table. Two things remain clearly etched in my
memory. One is a no-holds-barred conversation on team loyalty, which
emphasized the importance of our values, our core purpose, and the
essential notion of trust. The second is the introduction of some
critical new thinking on how to improve the quality of our operations
and implementation capabilities.
On
the first, I knew that I did not have all my team members on board
and that this needed to be addressed. Even after my predecessor had
gone, some who had been in his very close circle were continuing to
have conversations with him. During the opening of the off-site
meeting, this topic had already come up. We ended up spending three
hours talking about the past, clearing the air, and gaining a better
understanding of each other. At the end, everyone got to the point
where they could decide whether they wanted to be in or not. That was
a pivotal moment.
The
other discussion was aimed at breaking down the silos that had
developed between central marketing and product development, on the
one hand, and the regional market units, on the other. We wanted to
move from a functional organization to an organization built around
customer-focused business-market combinations. These were to become
the performance units in which the central business folks—marketing
and product development—and the regional market folks would plan
and deliver results as a team. They were to be jointly responsible
for the results, so they could no longer point fingers at each other
if they failed to carry out the plan.
In
this way, we created more transparency and accountability around the
performance of individual business-market-combination units and
improved resourcing decisions across them. We pioneered this idea in
Consumer Lifestyle as part of the company’s wider Accelerate!
transformation program—the program launched in 2011 by Frans van
Houten, the group’s CEO, to unlock the full value of Philips. There
are now roughly 150 business-market combinations in Consumer
Lifestyle at Philips, and they are the vital conduit through which we
allocate our resources, drive the business, and run granular
performance management.
The
Quarterly:
How
receptive was the team—and the organization—to these new ideas?
Pieter
Nota: In
mid-2011, this was all still new. People didn’t understand it, and
the team members’ first reaction was to say I did not trust them
and wanted to micromanage the business. It was a year before we
really started implementing business-market combinations effectively
and before the market and business folks on the team started to gel.
Once the members of my team began to act as role models for this new
form of collaborative accountability, the idea started to trickle
down to the rest of the organization as well.
The
Quarterly:
Given
the dissension in your top ranks, many CEOs might have fired half the
team. Why didn’t you do that?
Pieter
Nota: I
take the view that structure follows strategy, so for me it was
important, first off, to know where we were going with the businesses
before changing the team. That said, I did take early action on a few
team members who could not let go of the past. Once the new strategy
became clear, I made some specific appointments in the team to
support the new direction. For example, I moved the headquarters of
our Domestic Appliances businesses from Amsterdam to Shanghai—China
was our biggest growth region—and appointed an Asian leader. In the
time I have been with Consumer Lifestyle, the size of the team has
fallen from 15 to 12, but on the whole I’d characterize what’s
happened as evolution and not a big bang. It is always important to
have a balance between old hands with domain expertise and new
people.
The
Quarterly:
It
seems that by the time of the second survey—a year into your
tenure—things were starting to improve. Why?
Pieter
Nota: We
were starting to gain more team cohesion. And our strategic alignment
was improving. In this respect, the strategy paper we prepared for
our Capital Markets Day, in September 2011, was another turning point
because it showed explicitly the transformation route from a
consumer-electronics business toward a personal-health and well-being
business. It showed that the audio/video business was a separate
animal and made people realize that we would probably exit this
activity as well as TV. In the end, we completed this portfolio shift
in early 2013.
What
was equally clear from the second survey, though, was that the
business-market-combination initiative wasn’t gaining enough
traction. People still didn’t know clearly enough what the
implications were at the operating level. Nor were we yet
sufficiently willing to have the sorts of tough conversations that
would allow us to make the necessary trade-offs and hold each other
accountable with the help of increased transparency through
business-market combinations.
That
said, we managed to put in a decent financial performance in Q4 of
2011, admittedly from a low base—something reflected in what was
then a rare positive reference to Consumer Lifestyle results in the
subsequent Philips earnings press release. I remember noticing at
this time that people were starting to recover their pride and
fighting spirit.
The
Quarterly:
Can
you remember the moment when you realized you were making real
progress on the business-market combinations?
Pieter
Nota: I
can remember a moment—in the second team off-site meeting, at
Amsterdam, in November 2011—when the “us versus them” mentality
that had characterized team discussions between marketing and the
business units really started to change. During the day, we spoke
about new ways of collaborating. Over dinner, a business leader’s
side comment to the head of the China unit about its performance
sparked a huge gloves-off debate, which, though stormy, led to a
better understanding of both sides’ positions and needs. After a
few more conversations, the two leaders initiated a major end-to-end
transformation project in China from which we are still benefiting
today and which has proved to be a model for Philips overall.
From
that point onward, we started to have much more hard-nosed
performance and collaboration discussions, where people were really
challenged in direct language but where tensions would be dissipated
by humor. We called these “courageous conversations” to make them
easier to start, and we still explicitly make time for them in our
face-to-face meetings. That session in Amsterdam and its sequels
turned a lot of negative energy into positive energy and taught us to
address difference and conflict in a quick and constructive manner,
thus enabling the business-market-combination model to work.
The
Quarterly:
When
did the emphasis really change from thinking about the short term to
the long term?
Pieter
Nota: If
you look at the results, it is clear that in the period before and
around the first two surveys, we were putting the basics of strategy
and team collaboration in place. After that, we concentrated on
turning those basics into habits and on making our execution more
disciplined. Throughout 2012, in addition, a lot of management time
and attention was given to innovation and the championing of new
products. I think people started to notice, at this stage, that we
cared about the innovation pipeline, particularly in kitchen
appliances, and that we weren’t just speaking at a high level about
structures and processes.
In
our March 2013 team off-site, for instance, we spent a lot of time on
blue-sky thinking, coming up with an exciting vision for Consumer
Lifestyle. We then ended the day with a very powerful exercise in
which we brainstormed “the ten excuses we would use two years from
now for not having made the aspiration a reality.” We addressed
each one and made it clear that we would not be allowing ourselves to
use these excuses in the future. It was a great combination of
dreaming and realism.
The
Quarterly:
Looking
ahead, where does Consumer Lifestyle’s top team need to improve?
Pieter
Nota: Instead
of divesting businesses, such as TV and audio/video, the challenge
now is to show that we can build new categories for Philips. The most
important areas for future improvement are our capabilities,
particularly digital capabilities, and our ability to reallocate
resources dynamically. It’s hard to take resources away from one
area and deploy them elsewhere, particularly with a strong team.
Everyone tends to treat the past as an entitlement. But with the
right trust between teams and a willingness to reward those who drive
higher profits and sales growth, you can get significant top- and
bottom-line improvements with resource reallocation.
The Quarterly: To
what extent do you think the turnaround was the result of a clearer
strategy and operating model, and to what extent has better
leadership been responsible?
Pieter
Nota: It’s
true that our Accelerate! program and the design of the whole
business-market-combination approach was a prerequisite for improved
performance. But without a better team dynamic and the sort of
courageous conversations I’ve talked about, our turnaround wouldn’t
have been as fast. One doesn’t go without the other. The team is
critical, and you have to ground people in the new reality and remove
those who are wedded to the past. The whole experience of the last
four years has confirmed what I thought at the outset—that team
leadership and general management are about 70 to 80 percent of the
battle, with domain expertise accounting for the rest. This
experience has proved to me that the soft stuff is what really makes
the hard stuff happen.
By
Udo Kopka and Michiel Kruyt
http://www.mckinsey.com/insights/organization/from_bottom_to_top?cid=other-eml-alt-mkq-mck-oth-1411
