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Developing Your

LeadershipRegional Leadership Institute

September 18, 2006

Michael UseemWharton School

University of Pennsylvania

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1. When does leadership make the greatest difference? And is it the top person or top team?

2. What are the leadership capacities that make a difference?

3. Making leadership decisions under stress: Wagner Dodge fights a fire in Mann Gulch

4. Drawing upon personal resilience: Roy Vagelos at Merck combats River Blindness

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1. When Does Leadership Make the Greatest Difference? And Is It the Top Person or Top Team?

A study of 48 firms among the Fortune 500 largest U.S. firms --asked two direct reports of CEO to assess the extent CEO was...

a visionaryshowed strong confidence in self and otherscommunicated high performance expectations and standardspersonally exemplified the firm's vision, values, and standardsdemonstrated personal sacrifice, determination, & courage

These leadership capabilities make greatest difference in company performance when the firm faces an uncertain and fast-changing environment.

Other research reveals that the quality of management teamsare better predictors of company performance than the CEO alone.

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eBay on September 11, 2001

Margaret Whitman, CEO, eBay:

1) Check on employees

2) Secure website

3) “Auction for America”

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2. What Leadership Capacities Make the

Difference?

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Clockwise: Fujio Cho, Toyota; Anne Mulcahy, Xerox; Jack Welch, General Electric; Liu Chuanzhi, Lenovo; Margaret Whitman, eBay

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IBM acquires Lotus Development Corporation in mid-1995 for $3.5 billion, an acquisition first resisted, then embraced

Lotus chairman Jim P. Manzi to become IBM senior VP andremain as Lotus CEO.

Lotus intends to proceed with plans for cost-cutting and layoffs ($50 million to be cut from budget after quarterly loss, 15% of managerial ranks to be trimmed; director Richard Braddock is working part-time to supervise reductions).

IBM promises Lotus autonomy to run own business.

IBM chairman Louis Gerstner is to meet 2,200 Lotus employees the day after the acquisition announced.

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IBM & Lotus Development, continued

As Louis Gerstner, what will you say to the Lotus employees? What should be stressed, and how will you say it?

Develop a presentation in discussion with several others, and be prepared to give the speech and answer questions from Lotus employees.

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How Leadership Is Developed

When asked how they developed their leadership, senior managers typically identify three factors:

1. Self-conscious self-study of leadership through witnessing others, reading history, taking programs.

2. Mentoring by many others whether explicit or not.

3. Opportunities taken or given to experience assignments outside comfort zone.

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The Leadership TemplateArticulate a vision: Formulate a clear and persuasive vision and communicate it to all

members of the enterprise. Specify a strategy: Set forth a pragmatic strategy for achieving that vision and ensure that it is

widely understood. Honor the room: Frequently express your confidence in and support for those who work with

and for you. Transcend adversity: Embody personal resilience and build organizational resilienceIdentify personal implications: Help everybody appreciate the implications of the vision and

strategy for their own work and future with the firm. Convey strategic intent: Make it clear what is expected of those who work with and for you,

and then – assuming that they are well trained and prepared to do what is expected – avoid micro-managing their achievement of your intent; specify the goals and the “why,” and then let others work out the “how.”

Motivate the troops: Appreciate the distinctive motives that people bring to their work, and then build on those diverse motives to inspire the best from each.

Convey your character: Through gesture, commentary, and accounts, ensure that others appreciate that you are a person of integrity.

Reinforce values: Frequently remind others through both words and deeds of the company’s enduring principles and culture – and why commitment to the company and its values is essential.

Say it so it sticks: Communicate all the above in ways that people will not forget; simplicity and clarity of expression help, as do elements ranging from personal gestures to grand events.

Decide decisively: Foster a bias for action but not “shooting from the hip.”Build the team before it is needed: Well developed teams generally outperform individuals,

and build those teams before their great performance is needed; limiting the size of the team and including those of diverse stakes, experience, and views will assist.

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3. Making Leadership Decisions Under Stress

Jan. 20, 1961

Oct. 27, 1962

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Decisions at Cisco Systems

Larry Carter, CFO

John Chambers, CEO, Cisco Systems

John Morgridge, Chairman

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Track real-time info. on firm operations and environment

Build multiple, simultaneous alternatives

Seek advice of experienced counselors

Use partial consensus to resolve conflicts

Integrate the decision with other decisions.

Focus on planning; gather limited info. on environment

Develop a single option, go to 2nd if 1st fails

Solicit advice irregularly, less experienced advisors

Take decisions after consensus, by deadlines

Consider the decision as a single action

Fast Slow

Source: Kathleen Eisenhardt, "Speed and Strategic Choice"

Comparison of software firms in Silicon Valley that are fast or slow in decision making

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Decision Instruction in the U.S. Marine CorpsMarine commanders seek a “70-percent”

solution, not 100 percent consensus.

Officers learn to explain unambiguous objectives, and then leave their subordinates to work out all the details.

Mistakes are tolerated, even encouraged, if they point to stronger performance next time.

Indecisiveness is a fatal flaw – worse that making a mediocre decision, because a mediocre decision, especially if swiftly rendered and executed, at least stands a chance.

“High-risk, high-speed, high-focus assaults tend to be unforgiving on bureaucratic or autocratic management styles. Commanders who refuse to distribute decision-making power to their men quickly find themselves with few men left to command.”

Source: David H. Freedman, Corps Business: The 30 Management Principles of the U.S. Marines. New York: HarperBusiness, 2000.

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Necklace Trading

A man buys a $78 necklace at a jewelry store, and he gives the jeweler a check for $100. Because the jeweler does not have the $22 change on hand, she goes to another merchant next door. There she exchanges the man's check for $100 in cash. She returns to her store and gives the man the necklace and the change.

Later the check is returned by the bank due to insufficient funds in the buyer's account, and the jeweler must then give the other merchant $100. The jeweler originally paid $39 for the necklace.

What is the jeweler's total loss?

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Necklace Trading: Join Area with Your Answer

$0-50 $51-75 $76-100Front of Room

$101-150 Back of Room $151-200

A man buys a $78 necklace at a jewelry store, and he gives the jeweler a check for $100. Because the jeweler does not have the$22 change on hand, she goes to another merchant next door. There she exchanges the man's check for $100 in cash. She returns to her store and gives the man the necklace and the change.

Later the check is returned by the bank due to insufficient funds in the buyer's account, and the jeweler must then give the other merchant $100. The jeweler originally paid $39 for the necklace.

What is the jeweler's total loss?

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Sub-Optimal Decision Making When Under-Prepared

Over-value early information in areas where you are inexperienced -- rely on a product's list price to estimate its bargain price

Become over-confident in own judgments when the terrain is unfamiliar -- make overly precise forecasts of sales growth for new product

Seek confirming evidence and ignore conflicting data -- when advocating a new product, confine focus to its merits

Warning: Positive organizational moods increase use of sub-optimal decision procedures, negative moods decrease their use.

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Wagner Dodge Fights a Fire in Mann Gulch

On a very hot, dry, and windy day, a small forest fire starts in Montana.

15 "fire jumpers" parachute into the area to extinguish the fire at 5PM (they are joined by a 16th on the ground).

The 16 are a young but experienced group under the leadership of Mr. Dodge, age 33 (technically skilled but "a man of few words").

By 5:50 PM, the fire jumpers have been trapped by the fire.

How were decisions made during those critical minutes of high uncertainty and stress?

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DZ

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Robert Sallee and Walter Rumsey

22Wagner Dodge (clutching handkerchief)

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Stress

Perf

orm

ance

Cohesive teams

Individuals and poorly led groups

Panic point

Lessons for Organizational Resilience Under StressPrepare the leadership foundations early to help ensure that-- communication from you is clearly understood -- credibility is high when others need to understand & accept your decisions

Prepare others to make effective decisions -- continuously sharing your knowledge, information, & experience -- empowering them to make decisions and building their resilience

Exercise consistent leadership

Develop allies among those who work with you

Build teams for high performance under stress

Design organizations to fosterleadership capabilities, includingpersonal resilience

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4. Drawing upon Personal Resilience: Roy Vagelos at Merck Combats River Blindness

Village of Sikoroni, Mali, West Africa

MERCK AND RIVER BLINDNESS

In the mid 1970's, rural populations in Africa and Latin America suffered from a malady called River Blindness Disease. The disease, which threatened 80 million people, had already victimized almost 20 million of whom 600,000 had become blind. In fact, the disease was so common, that children in the affected countries assumed that as they aged they would become ill and then blind. The process was thought to be just another part of "growing up". P. Roy Vagelos, director of research for Merck & Co., was told by his scientists that a veterinary compound they had formulated might have applicability to River Blindness. While significant research would be required, scientists at the company were reasonably confident they could produce a drug that would relieve the early symptoms of the disease (itching so severe that it occasionally resulted in suicide) or possibly even provide a cure. The task, however, would require a budget of $25-50 million (approximately 4% of total research expenditures) which would be spent over a seven to eight-year period. In addition, any success in the research program would require additional expenditures to pay for extensive testing as part of a possible submission to the appropriate regulatory agencies. Even if successful – and there was no guarantee of success – the drug would have no applicability outside of poor countries in Africa and Latin America. Unlike other medications that are typically used in many parts of the world and can, therefore, have poor populations subsidized by more affluent ones, River Blindness Disease was limited to poor people living in remote regions on Africa and Latin America. As Roy Vagelos, you have been given the responsibility of making the decision as to whether or not the research should be undertaken. Various governments and private foundations have already been contacted and all have declined to help fund the project. As no modern infrastructure exists in the affected areas, it is conceivable that Merck might not find a third party able to distribute and administer the drug directly to the victims even if the research should prove successful. In short, the company has the opportunity to invest a large amount of research money in the hope of creating a product that has no present distribution channels and is designed for a patient population with no apparent ability to pay for even a small portion of the product's cost. As you contemplate your decision, you are well aware of your responsibility to shareholders to maximize returns. On the other hand, there are all those sick people, many of whom will become blind, who have no other realistic hope of a cure.

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Blind Mother with Son in Southern Chad

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1. What price should he set for the drug?

2. Should Roy Vagelos tell his board about the decision to develop the drug?

3. What should Roy Vagelos say to a major investor who asks why Merck had developed a drug that has little or no prospect of financial return?

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02468

101214161820

Millions

1989 1992 1994 1996

Number of People Treated Worldwidefor River Blindness with Mectizan, 1989-96

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Geneva headquarters of the World Health Organization. Similar statues appears at the headquarters of Merck, the World Bank, and the Carter Center.

Leading up is as important as leading down

Focusing on the long-term is as vital as looking short-term

Thinking like a marketing executive, HR executive, and other functional managers can be critical for all positions

Lessons for Personal Resilience

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Summary

Leadership makes greater difference in changing and unpredictable environments -- and is thus very important in the years ahead, as confirmed by Wharton research.

Mobilize your organization with a vision, strategy, honoring of the people, and resilience, as seen in Martin Luther King, Margaret Thatcher, and Lou Gerstner.

Foster a capacity for all to make decisions under stress, as seen in Silicon Valley and the U.S. Marine Corps

Build personal and organizational resilience now to anticipate the challenges ahead, as seen in Wagner Dodge in Mann Gulch and Roy Vagelos at Merck.

SUGGESTED LEADERSHIP READINGS Norman R. Augustine and Kenneth L. Adelman, Shakespeare in Charge: The Bard’s Guide to Leading and Succeeding on the Business Stage. Hyperion, 2001. Warren Bennis, On Becoming a Leader (expanded edition). Perseus, 2003. Arlene Blum, Annapurna: A Woman’s Place. Sierra Club Books, 1998. Larry Bossidy and Ram Charan, Execution: The Discipline of Getting Things Done. Crown Business/Random House, 2002. Ram Charan and Noel M. Tichy, Every Business Is a Growth Business. Times Books/Random House, 1998. Jim Collins, Good to Great: Why Some Companies Make the Leap…and Others Don’t. HarperBusiness, 2001. David H. Freedman, Corps Business: The 30 Management Principles of the U.S. Marines. Harper Business, 2000. Howard Gardner, Leading Minds: An Anatomy of Leadership. Basic Books, 1995. John Gardner, On Leadership. Free Press, 1993. Bill George, Authentic Leadership: Rediscovering the Secrets to Creating Lasting Value. Jossey-Bass, 2003. Doris Kearns Goodwin, Team of Rivals: The Political Genius of Abraham Lincoln. Simon & Schuster, 2005. Belle Linda Halpern and Kathy Lubar, Leadership Presence: Dramatic Techniques to Reach Out Motivate, and Inspire. Gotham, 2003. Jim Lovell and Jeffrey Kluger, Lost Moon: The Perilous Voyage of Apollo 13. Houghton Mifflin, 1994. Norman Maclean, Young Men and Fire. University of Chicago Press, 1990. Mukul Pandya, Robbie Shell and Nightly Business News, Lasting Leadership: What You Can Learn from the Top 25 Business People of our Times. Wharton School Publishing and Pearson Education, 2004 David S. Pottruck and Terry Pearce, Clicks and Mortar: Passion Driven Growth in an Internet Driven World. Jossey-Bass, 2000. Ed Ruggero, Duty First: West Point and the Making of American Leaders. HarperCollins, 2001. J. Edward Russo and Paul J. H. Schoemaker, Winning Decisions: Getting It Right the First Time. Doubleday, 2002. Jason A. Santamaria, Vincent Martino, and Eric K. Clemmons, The Marine Corps Way: Using Maneuver Warfare to Lead a Winning Organization. New York: McGraw-Hill, 2004. Michael Shaara, The Killer Angels. Random House, 1974. Noel M. Tichy, The Leadership Engine: How Winning Companies Build Leaders at Every Level. Harper Business, 1997. Michael Useem, The Leadership Moment: Nine True Stories of Triumph and Disaster and Their Lessons for Us All. Random House, 1998. Michael Useem, Leading Up: How to Lead Your Boss so You Both Win. Crown Business/Random House, 2001. Michael Useem, Jerry Useem, and Paul Asel, co-authors and co-editors, Upward Bound: Nine Original Accounts of How Business Leaders Reached Their Summits. Crown Business/Random House, 2003.

Also see or subscribe to the free monthly electronic Wharton Leadership Digest at <http://leadership.wharton.upenn.edu/digest/index.shtml>.

Michael Useem, Center for Leadership and Change Management, Wharton School, University of Pennsylvania, Philadelphia, Pa. 19104-

6370, USA. E-mail: useem@wharton.upenn.edu. Tel. 215-898-7684. Fax 215-573-2122.

PRESENTATION OF LOUIS GERSTNER, CHIEF EXECUTIVE OF IBM

to employees of Lotus Development Corporation, Boston, June 12, 1995 Thank you, Jim. Thank you very much. That was a great welcome we got when we came on this stage. I hope a little of it was for us. I'll say a little more about Jim in a moment. I want to take a few minutes and describe to you why we think this joining of Lotus and IBM makes so much sense. Some of you may have seen some of the excerpts from the press conference that was literally, I guess almost to the hour, a week ago. There are a number of things happening in this industry. In fact every day, lots of things happen. But there are a few things that are very central. And one of them is that the industry is definitely moving to a new phase of how the customer wants to use this technology. And we’ve gone from the phase of highly-centralized, post-base systems, although they still play a very important role in large enterprises, to the stand-alone PC world that has exploded for a decade around the world. But increasingly, customers, be they the owners of the enterprise or the end users, are finding that the model is not working as it should, and that there is a need to both integrate host and client computing, but much more importantly -- as companies go through reengineering and changes in the way they think about how they're managed, and as how people begin to work away from central sites -- that there is an extraordinary need for two things. First, a horizontal ability to communicate across the organizations, which is very much a technology that Lotus leads and is almost synonymous with. There are other things that are needed, and that is a very significant increase in software that provides systems management across these heterogeneous distributed platforms, and that is something that IBM has spent a great deal of time and has a great deal of resources. But this new model of computing calls for, from IBM's perspective and Lotus' perspective, an open platform -- an open platform that recognizes and respects the heterogeneity of most enterprises in terms of what exists in those enterprises. Multiple systems, multiple operating systems. Multiple networks. And so as we move into this new model, there’s two choices emerging in the world. There's the model led by Lotus, and now I hope IBM-Lotus. And there’s another guy out there. There’s another guy out there who has a different solution, and his solution is: "Well, it's very complex and it hasn't worked, so just put it all on our proprietary system. And it'll be closed, front office, back office, on our operating system, our APIs." And over the next couple years, a huge battle will be waged for where this industry is going to go. Now, I was a customer of this industry for 20 years, and I want to tell you what the customer wants and what the customer needs is an open, interoperable platform. And I think we have a chance between Lotus and IBM to set that standard, not because we want to own standards. Because that's what the customer deserves. That’s what the customer needs. And in order to do that, we need to send a signal to the world that the leadership in this industry changed yesterday. It is going to be our responsibility and our opportunity to provide that leadership. And I think that the marriage of Lotus and IBM will do that in ways that no other individual company, be it ourselves or any other combination, can do. So, I am very excited to be here today, because you represent the leading edge of fundamental change in this industry, and we think, combined with our resources, we can make sure that your success happens.

Now, let's talk about the events of last week. It was interesting that I did place a call myself to Jim at 8:25 and he answered his own phone and I said, "This has got to work. I'm placing the call; he's answering the call." (Laughter) His reaction wasn't quite as positive as that. (Laughter) But he was incredibly polite. (Laughter; applause) And I had been thinking about this phone call all night or all the previous night, and I was sort of thinking how I would have reacted if I had been in his shoes, and so I was really prepared for a different reaction, but it was the first sign of a man I got to know over the last week that is truly remarkable. I said at the press conference when asked why were we doing a hostile (takeover), I said, "We don't want a hostile. We are hopeful that the steps that we have taken will lead to a negotiated transaction in which both sides are excited about the future." I said that at eleven o'clock a week ago, I did not expect it to be quite as successful, and I give all of that credit to your CEO, Jim Manzi. His call to me on Tuesday took a lot of guts. It took a lot of sophistication in terms of focusing on what was important for Lotus and not what was important for Jim. And throughout the discussion that took place, not only were our discussions always very civil, but they were always focused on what's right for Lotus, its customers, its shareholders, its employees, and they never focused on what's right for Jim. So, I couldn't be more pleased that he's agreed to stay. He's agreed to stay as the CEO of your company, and we will work together -- Jim, John, and myself -- to really make this thing work. Let me close with just a comment that I made this morning to the senior group of Lotus executives that we met with briefly before this session. My expectations for Lotus are very simple. I want you to win in the marketplace. I want you to beat our competitors. I want you to grow fast. I want you to execute a set of strategies brilliantly to deliver what we all want, which is leadership for our customers. We did not purchase Lotus because we feel like we're good at downsizing. We're hopefully done downsizing at IBM. There is no way we can get our 3.5 billion dollars back by downsizing Lotus. We want all parts of Lotus, not just Notes. We want all parts of Lotus to grow fast, to take advantage of a competitor who is looking in 10 different directions at once and who is on the wrong side of the issue in terms of what customers should have. We want to make the term Windows an opportunity in the next 18 months that will be huge for both of us. Those are my expectations. That you succeed, that you execute well and that we find ways to work as a team without in any way destroying what's important to you as a group of people and as a culture. Thank you very much.