The impact of the financial crisis began to hit DuPont about a month after the collapse of Lehman Brothers in September 2008. Sales volume slid, good customers cancelled orders and employees were gripped by fear and uncertainty.
As the environment worsened and sales fell by up to 50% in some units, DuPont CEO Ellen J. Kullman ordered two traumatic restructurings. Perhaps more importantly for DuPont’s future, Kullman also concluded that the company faced a “new reality” requiring fundamental changes if it were to remain successful.
Her challenge was balancing the need for immediate action to maintain the company’s financial stability during the crisis, while focusing on strategic objectives that would preserve the company’s leading market position in the future. Among the highest hurdles: Motivating employees to work on the things they could control and avoid becoming paralyzed by the market’s volatility.
Speaking at the recent 13th Annual Wharton Leadership Conference, co-sponsored by the Center for Human Resources and the Center for Leadership & Change Management, Kullman described how she changed the company’s thinking about its business model, while reinforcing its 200-year-old culture of innovation. “The question is, given the megatrends in the world and given the new economy, what changes do we have to make to continue to be successful? … There is no playbook for what we are experiencing today,” said Kullman, 53, a 20-year DuPont executive who became CEO in January.
In April, DuPont announced first-quarter earnings of $0.54 per share, 59% lower than a year earlier, reflecting a severe decline in industrial demand due to the global recession. The company increased its 2009 fixed-cost reduction goal to $1 billion and reduced capital spending by $200 million in an effort to preserve cash and better position the company for economic recovery.
Kullman’s first step was “understanding the dynamic relationship between what should not change … and what has to change — and having absolute clarity on that.” Deciding what would not change was easy: the company’s commitment to science and innovation as primary drivers of growth since its founding in 1802 as a maker of black powder. Deciding what to change was far more difficult.
Kullman identified three trends that would transcend the current crisis and provide a strategic framework for the company’s annual $1.4 billion investment in research and development — increasing agricultural productivity, reducing dependence on fossil fuels and protecting lives.
But organizing the company to respond to these long-term trends during a period of extreme uncertainty required strong leadership and specific initiatives “to change the way we think,” said Kullman, who joined DuPont in 1988 as a marketing manager for medical imaging, and was named executive vice president and a member of the office of chief executive in 2006, and president in October 2008. Prior to joining DuPont, Kullman, who has a B.S. in engineering from Tufts and a master’s in management from Northwestern, worked at GE.
She shared four leadership principles that she has implemented to guide DuPont through the financial crisis since October 2008.
The first principle: Focus on what you can control. Kullman realized she needed to shift the company’s attention from what was going wrong to the immediate action required to protect DuPont’s financial position as revenues fell dramatically. “Last October, I saw a lot of people who looked scared and didn’t know what to do,” she said. So, she directed DuPont’s management to “figure out those … things we can do something about, and get about doing them.”
“We realized that what we had to protect … mostly was our financial stability and flexibility, so we had to focus on cash. We’re a company that spent 207 years focused on earnings and the cash seemed to show up. All of a sudden, it’s a new world and we had to adjust every single business person’s mindset around the notion that earnings are nice, but cash is more important,” Kullman said.
To preserve cash, she issued four financial directives: Maximize variable contribution dollars, drastically reduce spending, zero-base capital expenditures, and significantly reduce working capital. Maximizing variable contributions required “a tremendous amount of coaching” to teach the sales force how to think about pricing in a downturn and how to engage with customers who “didn’t want to talk.”
Promoting DuPont’s innovations — 901 new product launches last year and a record 500 in the first quarter of this year — proved an effective way to generate sales and increase variable contributions. “There’s nothing like a new product, a new innovation that allows you to go out and talk to that customer,” she said.
One approach involved finding new markets for existing products, such as selling an engineered polymer designed for India’s railways to China. “We needed to get our people in India working with our people in China,” Kullman said. The interaction resulted in an $18 million order. Another involved introducing improved versions of widely-used products, such as Kevlar for bullet-resistant vests and Nomex for fire-resistant suits. DuPont is hoping that U.S. economic stimulus programs could create a market for upgrading the equipment of “firefighters … police, and even the military.”
The second of her leadership principles for the crisis has been to “adopt a new trajectory by rethinking your business model.” For DuPont, that meant “getting people to think differently” about a business model that had always measured success based on plant capacity and capital investment: “We invent, we build, we make, we sell,” Kullman said. The change has involved developing service-based models providing new ways to engage with customers and monetize products. Although it is difficult to get people who are very successful to embrace change, she has found that they are willing to try new models when markets are in disarray and when there’s uncertainty about what will work in the future.
Kullman led a new trajectory 11 years ago when “we decided to take our safety capability and see if we could create a business out of it.” It wasn’t easy. “We spent 200 years trying to figure out how to create a very safe environment for our people. We have lots of methodologies … but we didn’t know how to sell it, how to create a contract around it. Believe me, the lawyers were really concerned about our liability.”
The new venture started as a pilot with a small team that brainstormed with Wharton faculty and “made a lot of mistakes” in initial customer pitches over six months before “figuring out a value proposition that played.” The service was a logical extension of DuPont’s industrial businesses because “our sales force is calling on plants that have serious issues around safety [in which] we can help.” Result: In addition to annual revenues in the hundreds of millions of dollars, DuPont’s safety and protection business creates “relationships with customers around the world that we can leverage” across all of the company’s business lines.
More recently, DuPont’s applied biosciences unit developed a high-performance plastic polymer, grain Hytrel, made from renewable agricultural sources that addressed the auto parts industry’s need for sustainable products. As a newcomer, DuPont was able to win business from a demanding global parts maker, Denso Corp., by providing “real innovation” in sustainability that “they think is important to their future.”
The ability to address broader customer needs through high-value services — going beyond the traditional “make-sell” business model — is critical in deciding which new technologies will receive funding, Kullman said. But how do you incite the change required for new trajectories in a global organization with 60,000 employees in more than 70 countries? Kullman recommends a viral approach, starting with a small pilot program in one area, generating interest, and communicating its success to other parts of the business. “If you try to change everybody at once, you’re changing nobody, so you really have to start in one area, or a couple of areas, and show success.”
Getting Employees’ Attention
Kullman’s third crisis leadership principle: Communication is key. “I’m a firm believer that there is a direct correlation between growth and the success of our communication. When we have an aligned team that understands” very clearly what the goals and the tradeoffs are, “that’s when things can absolutely happen,” Kullman said.
“The first step is really getting their attention, and that’s a very hard thing to do with all the noise” in the world today, she said. But getting through to employees is vital because their natural tendency is to “hunker down,” hoping the crisis will pass and “everything will go back to normal.”
In announcing two restructurings within five months since December 2008 — unprecedented at DuPont — Kullman insisted that her leadership team “get out in front of the troops” with a consistent message. “It’s not something they can delegate.” She personally went to plants in Germany and Ohio where there were layoffs and “answered very tough questions about the deal [employees] thought they had with DuPont.”
If company leaders aren’t willing to “get out and communicate on the really tough issues, then the credibility our organization has in the decisions we are making is always going to be called into question,” Kullman said.
There is a risk that business leaders will grow tired and stop communicating after delivering the message five or six times. “We think they’ve heard it and move on to another message, [but] all we’ve done is confuse them. It takes 15 or 16 engagements [for employees to understand] that this is what we need to do and this is where we need to go.” Economic uncertainty has made the task more difficult, “but I think maintaining that communication — the strength and alignment around it — is more critical in today’s environment.”
The last of her four crisis leadership principles is to maintain pride around the company’s mission. “There’s nothing like a bad economy to get people confused about what their mission is. They start thinking their mission is to reduce cost. That’s a tactic, that’s not our mission,’ Kullman said.
During informal weekly meetings with employees, Kullman said she was amazed that the “number one question was about whether we are going to stick with our mission.” She quickly realized that “people are scared [and] people want direction.” Making sure that people understand the mission — and linking their daily activities to the company’s broader purpose — is essential to reducing fear, maintaining morale and keeping employees motivated, Kullman said.
DuPont’s mission is “sustainable growth,” defined as increasing shareholder value by reducing the company’s environmental footprint — and that of its customers, Kullman said. The mission includes “denominator strategies,” such as reducing waste and fossil fuel usage at its chemical plants. It also involves “numerator strategies,” such as inventions supporting biofuels, photovoltaics and other forms of renewable energy, or hurricane-resistant building materials that help save lives.
“It’s really critical that we maintain the focus on the mission and keep reminding people of it. People have a lot of pride in the mission and they want to understand that the mission is not going to change, even though the world around it has changed tremendously. You’ve got to capture that heart and soul,” Kullman said. “That’s how we’re going to be successful.”