As Wharton marketing professors George Day and Paul Schoemaker see it, the recent and well-publicized travails of the Ford Motor Co. offer a clear example of the distinction between vigilant leadership and operational management.
To explain that distinction, Day and Schoemaker — building on research from their recently published book, Peripheral Vision: Detecting the Weak Signals That Will Make or Break Your Company — have identified four leadership traits: external focus, conceptual ability, organizational role and time horizon.
Vigilant leaders are more externally oriented: They are open to new ideas, seek diverse perspectives, listen to a wide array of sources and foster broad social and professional networks. Richard Branson, says Day, is an example: The inveterate inventor and promoter — with 200 start-ups under his belt — is now developing alternative fuels. Operational leaders are more narrowly focused, have less interest in outside opinions and confine their networking to familiar settings.
Under conceptual ability, or strategic foresight, vigilant leaders are more imaginative and “probe deeply for second order effects,” Day notes, citing as an example a CEO who looked at China’s victorious bid to host the 2008 Olympics in Beijing and immediately began to consider what impact that would have on steel and cement orders. Vigilant leaders also embrace uncertainty and learn from well-intentioned failures. Operational leaders are more predictable, stay focused mainly on the task at hand, rely on past experience and try to avoid mistakes at any cost.
In their organizational role, vigilant leaders are both enablers and visionaries who create slack that allows the company to explore areas outside their main focus; operational leaders are more controlling, focus on efficiency and cost cutting and don’t explore outside potential. Finally, a vigilant leader’s time horizon is longer while an operational leader’s is shorter.
In the case of Ford, which recently announced it was bringing in a former Boeing executive to be CEO — replacing William Ford, who will retain the title of chairman — the lack of vigilant leadership has long been apparent in its belated moves to reduce the company’s emphasis on gas-guzzling SUVs and trucks in favor of the newer crossover models pioneered by rival Toyota, says Day.
“You can see why Ford has been addicted to trucks and truck-based SUVs. They are very profitable and Ford knows how to build them well,” Day notes. But a vigilant leader in this industry would have been hedging its bets when it came to rising oil prices, “which have been on the horizon for a long time. And while Ford does in fact have a fine new crossover vehicle, it came to the party late. Toyota was first, in 1996, with its RAV4, followed by Honda. Ford could have been a player in this much earlier on.” Crossovers, which are car-based SUVs, are typically lighter, quieter and more fuel efficient than the heavier truck-based SUVs. These days, they are outselling conventional SUV models.
Ford’s top management, Day says, did not have “vigilant leadership, which ultimately has to do with anticipating events, seeing what is coming next before others do. You can bet that Toyota is already thinking ahead to what the next version of the car will be.”
Concerning Ford’s decision to bring in Alan Mulally as CEO, Day suggests the change was way overdue. “It was absurd that William Ford had so many different roles and responsibilities at the company after [former CEO] Jacques Nasser was ousted in 2001. There were some elements of vigilance to Ford’s performance over the past several years but he was basically getting buried by all the problems that had been building up in the company for years. If you consider the two major leadership roles in any organization — the vigilant leadership role and the more operational role — Ford wasn’t doing either one adequately because he was so overloaded.”
As for the reception that Mulally will receive when he assumes his position on October 1, Day notes that the auto industry is “notoriously inward looking. They don’t typically bring in, or accept, outsiders. So I see a real upward battle. Someone like Dieter Zetsche can come into Chrysler and succeed because he is an auto person. Mulally has great credentials as a turnaround specialist and he knows big systems, but that is more on the operations side — making cutbacks, tightening, looking for efficiencies. It’s a little less clear where the vigilance piece is.”
Mulally, Day adds, “will be trying to get his arms around a firm with few degrees of freedom. Think of all the things that constrain Ford today: pensions, health care costs, union contracts, an intractable dealer network, low productivity for many brands, and so forth. Mulally will have his hands full just dealing with these issues.”
On the one hand, Mulally needs to make bold, early moves, Day notes. “But we found that impending crises narrow the peripheral vision of both people and organizations — and limit what a vigilant leader can tackle. When survival is at issue, you focus tightly on fixing the problems, and don’t have either the time or the resources to be vigilant about new opportunities or to position the firm for the long term. Toyota has that luxury; Ford doesn’t. Paradoxically, one path he could follow is to ratchet up the sense of crisis to force the stakeholders to finally take painful actions.”
Enzymes and Stone-washed Jeans
Articles in the press routinely offer examples of instances where operational leadership prevailed at times when vigilant leadership was needed, says Schoemaker, who is research director of Wharton’s Mack Center for Technological Innovation. He cites the mismanagement of airport security at London’s Heathrow airport in August (“It wasn’t as if this terrorism threat came out of the blue,” he says), and Israeli leaders’ miscalculation of the strength of Hezbollah in Lebanon.
But there are also examples where vigilant leadership has made a significant difference to both companies and consumers. He points to Denmark-based company Novozymes, a global leader in industrial enzymes, which has demonstrated “the ability to always question and provide room for disproving conventional wisdom.” For example, the company substituted a few grams of enzymes for the loads of pumice stone traditionally used in the stone-washing of jeans. The use of enzymes allowed garment producers to avoid tedious work processes and minimize overuse of their washing machines.
The company also had the foresight to see that corn kernels could be converted to fuel alcohol without cooking the starch to make it accessible to conversion. “This was, until recently, considered highly speculative and at least economically uncompetitive, but Novozymes’ management pushed against the conventional wisdom until a solution was found,” says Schoemaker. “In less than 18 months, a market was established that now holds promise to outperform the conventional process.”
Schoemaker also cites the example of Dutch drugmaker Organon (part of Akzo-Nobel). When the company was conducting clinical trials for a new antihistamine, a secretary in charge of registering the volunteers for their periodic medical checkups noticed that some were unusually cheerful. After she relayed her observation to the managers running the trial, further exploration was authorized. It turned out that all the cheerful participants were in the treatment rather than the control group. Even though the drug failed as an allergy remedy, it proved to be a highly effective treatment for depression.
And when Bill Gates was looking at Google’s web site several years ago, he noticed the company was posting job descriptions for software engineers that didn’t fit Google’s business model, says Schoemaker. Gates, says Schoemaker, recognized this as an early warning sign that Google was moving into a new area and alerted others at Microsoft to this development. (As it turned out, no one followed up and Google became the dominant player in desktop search.)
Operational leaders — those who are focused on the task at hand, excel at execution, and pursue clearly definable goals — may have been effective several decades ago, Schoemaker says. “But as our society becomes more complex and cross-cultural issues become more interconnected, leaders also need to be able to see the bigger picture.”
Just consider the ongoing Coke and Pepsi fiasco in India.
Ignoring the Signals
When India’s Center for Science and the Environment announced in August that Coke and Pepsi’s carbonated beverages contained more than 24 times the safe limits for pesticides, “these global companies faced a potential crisis in a crucial emerging market — $1.6 billion a year for soft drinks, with Coke having 60% market share,” says Schoemaker, citing figures from an August 23 New York Times article titled, “For Two Giants of Soft Drinks, a Crisis in a Crucial Market.” “If you were the leader in charge,” he asks, “how would you respond, considering the many other operational and strategic problems” demanding your attention?
The traditional leadership response, he notes, “calls for a quick study of the problem: Is it a real issue? If so, how bad is it? Can we fix it soon and efficiently? Can we do it alone or do we need help?” In many ways, Coke and Pepsi followed the dictates of the textbook on crisis management, as the Times article reports: They formed task forces in the U.S. and India to work on the technical, legal and public relations questions; in addition, they commissioned laboratory tests and waited with public comments until the results were in.
“This strong operational focus, however, was exactly the wrong approach,” says Schoemaker. The companies got caught up in technical issues, issued defensive responses to the charges and made claims about meeting international safety standards that were hard to validate, according to the Times story. “In the process of solving the problem, they lost sight of the real danger: eroding consumer confidence … in a critical emerging market,” Schoemaker says.
By contrast, vigilant leadership addresses both the narrow problem at hand as well as the broader political and cultural context surrounding it, he adds. “Vigilant leaders would have focused on the following signals: The soft drink was subjected to a partial or full ban in multiple Indian states; some political leaders viewed this … as an opportunity to exploit anti-western sentiments — no doubt fueled by the wars in Iraq and Lebanon — and environmental groups jumped on this issue to promote their general anti-pesticide agenda.”
In addition, there were cultural issues. In the past, the Times article noted, Indian problems could remain localized, within a town or province, but today’s media can quickly raise a local issue into a national obsession. Furthermore, silence is usually interpreted as guilt in India. “The Western model of ‘no comment’ until the data are in or the legal issues have been shored up is not the right response for India,” says Schoemaker.
Day and Schoemaker also cite other examples, some of them taken from Peripheral Vision, in which leaders failed to recognize the signals of a changing market or culture. The leadership at Mattel, for example, focused on recovering from its “disastrous” acquisition of educational software maker The Learning Company, and in doing so, failed to see shifts in the external market, including a move by young consumers away from Mattel’s Barbie dolls to the more sophisticated and multicultural Bratz dolls.
The lighting industry, including Philips Lighting, GE and Osram Sylvania, misjudged the popularity of LEDs (light-emitting diodes), which, because of technological breakthroughs, are about to change the $15 billion general-illumination market, Day and Schoemaker say. One piece of evidence: U.S. federal regulations are requiring that all traffic signals switch to LEDs by the end of this year. The industry missed the rise of LEDs, Day and Schoemaker suggest, because it was focusing on the drop in the average selling price of traditional light bulbs and the shrinking of the light bulb market from $2.9 billion in 2000 to $2.4 billion in 2003.
A Habit of Asking Questions
According to Day, vigilant leaders “can see possibilities in almost anything. Look at all the people getting into social networking. It was the convergence of technology along with a need for people to communicate.” The really vigilant leaders, he adds, “are most needed in markets that are very volatile, complex and quickly changing, such as entertainment, media, telecommunications — all the convergence industries.” Not surprisingly, when “we started asking investment managers, mainly in hedge funds, how they decide which companies to invest in, their response was they avoid leaders who act as operating managers, and instead focus on leaders who have the ability to find a situation where there is significant unrealized value, and then go after it.”
The special challenge for leaders is to ask questions, and more generally to create enterprises that exhibit the requisite level of curiosity about the internal and external environment, say Day and Schoemaker. This raises issues beyond leadership alone, adds Schoemaker, “such as what kind of strategic planning process is used, how well information is shared across organizational boundaries, how knowledge is tracked and managed, and whether there is a deep culture of debate and inquiry. Leaders have a habit of asking questions — ‘What happened last month that is unusual, what surprised you, what are you puzzled about?’ — that can lead to unexpected results, like the discovery of Organon’s anti-depression drug.”
Vigilant leaders, he adds, “look for signals that don’t fit the current problem definition and approach. They create mental and organization space to see what is not in the focal area…. In one classic experiment, people failed to notice a gorilla walking through a basketball court because they were instructed to count how often the ball was being passed. The simple task of counting bounces and passes restricts their vision so much that they don’t see the gorilla at all. This is what happened to Coke and Pepsi: They missed the gorilla amid the technical, legal and PR problems of the pesticide charge.”