July/August 2016 Chief Executive Magazine by Chief Executive Group

Smart Manufacturing How technologies are reshaping industry, p. 58

Ready to Reshore

Why more businesses are bringing jobs home, p. 40

Radical Engagement

How social responsibility can boost your business, p. 46

Business Travel

Making private aviation economical, p. 72

JULY/AUGUST 2016

2016

CEO OF THE YEAR AT&Tâ&#x20AC;&#x2122;s Randall Stephenson

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CONTENTS

JULY/AUGUST 2016 No. 283

FEATURES 28 Cover Story: CEO of the Year

How Randall Stephenson Took AT&T Into the Future of Digital The twin forces of advanced high-speed wireless networks and the emergence of sensors in use everywhere have not only transformed the nation’s first communications company, but will change every other industry along with it.

By J.P. Donlon

40 Manufacturing

The Reshoring Challenge Why—and how—CEOs are moving jobs back to America. By William J. Holstein

46 Corporate Citizenship

Radical Engagement: The Shifting Role of the CEO Effectively navigating environmental and social issues can be a key differentiator for your company. By John Browne with Robin Nuttall and Tommy Stadlen

53 Economic Development:

Regional Report: West Reno is suddenly as hot as a firecracker. By Warren Strugatch

72 Plane Advantage

Changing The Way You Do Business Longer lines, overbooked flights and rampant delays are increasingly making private aviation an economical alternative to commercial air travel. By Mark Patiky

SPECIAL EVENT COVERAGE

58 SMART MANUFACTURING SUMMIT

Building Tomorrow’s Manufacturing World Today

How new technology and processes are redefining best practices in manufacturing—and reshaping businesses.

By Jennifer Pellet

69 CEO ROUNDTABLE

Productivity-Driven Investment Strategies

Can smart manufacturing initiatives fuel U.S. productivity?

By Jennifer Pellet

02 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

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CONTENTS Editor-in-Chief Emeritus J.P. Donlon Editor at Large Jennifer Pellet Creative Director Marne A. Mayer Production Director Rose Sullivan Chief Copyeditor Rebecca M. Cooper Art Director Gayle Erickson Associate Copyeditor Carl Levi Contributing Editors John Browne Dale Buss Bill Holstein C.J. Prince Joe Queenan Dr. Thomas J. Saporito Prof. Jeff Sonnenfeld Online Editor Lynn Russo Whylly VP, Associate Publisher Christopher J. Chalk 847/730-3662 cchalk@chiefexecutive.net

DEPARTMENTS 8 Editor’s Note

24 Mid-Market Report

Building a Successful Sales Team C-suite executives share the tips and techniques that work for mid-market firms.

11 CEO Watch

• CEO Insights on Income Inequality • Meltzer Group’s Alan Meltzer on fostering a culture of philanthropy • Henry Shein’s Stanley Bergman on managing an acquisition spree • CEO Confidence Index

26 Sonnenfeld

22 Chief Concern

Effective, Not Ideological Leadership The political landscape offers lessons on leadership. By Dr. Thomas J. Saporit o

New Battle Plans for Returning Generals History tells us that a comeback is possible—if managed judiciously. By Jeff Sonnenfel d

80 Flip Side

When Entourages Restructure Let’s take lean to new levels. By Joe Qu eenan

CORRECTION: The cover story of Chief Executive’s May/June issue mistakenly reported that Indiana is not a Right to Work state. This was inaccurate, as Indiana has been a Right to Work state since 2012. Chief Executive regrets the error.

Chief Executive (ISSN 0160-4724 & USPS # 431-710), Number 283, July/August 2016. Established in 1977, Chief Executive is published bimonthly by Chief Executive Group, LLC at 9 West Broad Street, Suite 430, Stamford, CT 06902, USA, 203.930.2700. Wayne Cooper, Executive Chairman, Marshall Cooper, CEO. © Copyright 2014 by Chief Executive Group, LLC. All rights reserved. Published and printed in the United States. Reproduction in whole or in part without permission is strictly prohibited. Basic annual subscription rate is $99. U.S. single-copy price is $33. Back issues are $33 each. Periodicals postage paid at Greenwich, CT and additional mailing offices. POSTMASTER: Send all UAA to CFS. NON-POSTAL AND MILITARY FACILITIES: send address corrections to Chief Executive Group, PO Box 47574, Plymouth MN 55447. Subscription Customer Service: p | 800-869-6882 e | cex@kmpsgroup.com w | chiefexecutive.net/magazine

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Director, Business Development Lisa Cooper 203/889-4983 lcooper@chiefexecutive.net Director, Business Development Liz Irving 203/889-4976 lirving@chiefexecutive.net Director, Business Development Marc Richards 203-930-2705 mrichards@chiefexecutive.net Vice President Phillip Wren 203/930-2708 pwren@chiefexecutive.net Marketing Director Jason Golden 203/889-4978 jgolden@chiefexecutive.net Vice President, Human Resources Melanie Haniph Controller Steve Hallem Wayne Cooper Executive Chairman

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CHIEF EXECUTIVE OF THE YEAR 2016 SELECTION COMMITTEE CATHY ENGELBERT CEO, Deloitte LLC

CEO BRIEFING Vital insight and analysis to help you run your business delivered right to your email inbox

DAN GLASER President and Chief Executive, Marsh & McLennan FRED HASSAN Chairman, Zx Pharma Partner/Managing Director, Healthcare, Warburg Pincus TAMARA LUNDGREN President and Chief Executive, Schnitzer Steel Industries JIM MCNERNEY Former Chairman, Boeing, and 2015 Chief Executive of the Year ROBERT NARDELLI Chief Executive, XLR-8 WILLIAM R. NUTI Chairman and Chief Executive, NCR THOMAS J. QUINLAN III President and Chief Executive, RR Donnelley JEFFREY SONNENFELD President and Chief Executive, The Chief Executive Leadership Institute, Yale School of Management MARK WEINBERGER Chairman and Chief Executive, EY MAGGIE WILDEROTTER Executive Chairman, Frontier Communications

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THOMAS SAPORITO Executive Chairman, RHR International, is an advisor to the Selection Committee C O N TACT U S Corporate Office Chief Executive Group, LLC 9 West Broad Street, Suite 430 Stamford, CT 06902 Phone: 203.930.2700 | Fax: 203.930.2701 www.chiefexecutive.net Letters to the Editor letters@chiefexecutive.net Advertising, Custom Publishing, Events, Roundtables & Conferences Phone: 847.730.3662 | Fax: 847.730.3666 advertising@chiefexecutive.net Reprints Phone: 203.889.4974 hdewing@chiefexecutive.net

Randall Stephenson AT&T Chairman, Chief Executive Officer and President

CVS Health congratulates Randall L. Stephenson on being honored as Chief Executive Magazineâ&#x20AC;&#x2122;s 2016 CEO of the Year

EDITOR’S NOTE

If you believe Bernie Sanders, capitalism itself is at fault.

By J.P. Donlon BUSINESS LEADERS ARE FINALLY pushing back on the generally accepted views thrown off about income inequality. On page 11 of the issue, we call attention to a well-thought-through letter that MMI Outdoor CEO David Cobb wrote to us about this issue. If you believe Bernie Sanders, capitalism itself is at fault, nevermind that in countries where capitalism is not practiced dire poverty is often the societal norm. Cobb makes the point that education and healthcare systems contribute to the issue by creating “protected oligopolies that do not have to compete openly for their customers.” In education, for example, “poor lifestyle choices and values systems” are partly to blame, as well as “the concept of throwing more federal tax dollars into the public system,” he writes. Cobb is not alone here. In my conversation with our 2016 Chief Executive of the Year, Randall Stephenson of AT&T, it was evident that this issue bothers him just as much as it does Cobb. The son of an Oklahoma cattle-feed operator, Stephenson hails from a family that was far from wealthy. He worked his way through the University of Oklahoma and “paid my own way.” He says that he looks around his company and finds that most people employed there come from a similar economic background. “When I reflect on my own experience I ask, ‘Did I pull the ladder up behind me?’” he asks. “Did I close the

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door after I got in? No—in fact, I’m working very aggressively to ensure that these opportunities are available to more people. I’m working right now with the University of Oklahoma on something similar to what our company did at Georgia Tech. [Online learning programs that employees do on their own time.] I’m doing this at a personal level. Those opportunities are still there to ensure that these opportunities are available. Those opportunities have not gone away. But there are things we as leaders can do to enhance those opportunities? I want to ensure that the degree that I got at the University of Oklahoma can be obtained by somebody who is not advantaged, especially with government funding of colleges decreasing and with tuition going up. “Technology is the answer—maybe not to everything—but it’s the answer to a lot of this,” he asserts. “Just as our business model gets disrupted every year by folks like Google and Apple, our educational system, especially our higher educational institutions need to be disrupted or they need to disrupt themselves. Our institutions need to be disrupted to ensure that the next Randall Stephenson has access to the University of Oklahoma to get the education that I got. Just because state funding went away it doesn’t mean that we need to punt and complain about income inequality. We need to say, ‘Let’s get after it.’”

I LLU ST R AT I O N BY T I M TO M K I N S O N

J.P. Donlon

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The people of UnitedHealth Group, Optum and UnitedHealthcare congratulate

RANDALL STEPHENSON on being named Chief Executive’s CEO of the Year. We are inspired by your continuous commitment to innovation, and we applaud your dedication to enriching our world by connecting people everywhere they live, work and play.

CEO WATCH

Insights on Income Inequality Fed up with getting caught in the crossfire of a national income inequality debate, CEOs are taking a stand on the issue. By Dale Buss

SELIN KESEBIR IS the kind of person who drives capitalists nuts. The assistant professor of organizational behavior at the London School of Economics’ new research posits that “nationwide happiness” may depend on evening out income inequality. Kesebir also asserts that job creators themselves should be happy to pursue that goal. “Is making money the major goal for entrepreneurs?” she asked in a recent paper. “For most of them, probably not. Not making big money, but making some money so they have income security, will be fine.” Democratic presidential candidate Bernie Sanders has also fueled the controversy, notably when he visited the Vatican in April. “The issue of wealth and income inequality is the great economic issue of our time, the great political issue of our time and the great moral issue of our time,” said the socialist from Vermont. However, more CEOs have been

pushing back against the view that income inequality demonstrates some sort of villainy on the part of the 1 percent or even the global economic system. And it is only natural that they should complain to Chief Executive about the victimization. In part, that’s because Chief Executive kicked off a discussion of the effects of an uneven economic playing field with the story, “Why Crony Capitalism Hurts Us All,” in the September/October 2014 issue of the magazine. After the magazine ran another story, “8 CEOs Weigh In on Income Inequality,” in the January/February issue this year, MMI Outdoor CEO David Cobb took the trouble to write a long and eloquent letter to the magazine. “The general mindset appears to be that income inequality is the great fault of capitalism, which seems to ignore the reality of dire poverty around the world in non-capitalist societies,” wrote Cobb, a maker of

JULY/AUGUST 2016

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/ 11

CEO WATCH tents and other outdoor gear based in Montgomery, Alabama. “If we are to ultimately fix the problem,” Cobb continued, “we have to candidly address all of the factors that contribute, rather than seek to put a Band-Aid on the issue through tax increases or more welfare for the lower class.” In Cobb’s analysis, the country’s education and healthcare systems contribute to the issue by creating “protected oligopolies that do not have to compete openly for their customers.” In education, for example, “poor lifestyle choices and values systems” are partly to blame, as well as “the concept of throwing more federal tax dollars into the public system.” Also to blame is a rising dropout rate stemming from a “cultural values problem,” and the fact that “as our societal values have changed, postsecondary education choices have become alarmingly bad.” “The problem we face with income inequality is an indictment of our collective values in this country, not an indictment of capitalism, and we can’t fix every problem overnight,” Cobb concluded. “But as CEOs, we can lead by example.” Another CEO has also gone public with his frustrations about the inequality critique. In an open letter to presidential hopeful Bernie Sanders in February, tech entrepreneur Rob May first “confessed” to starting four

“The problem we face with income inequality is an indictment of our collective values in this country, not an indictment of capitalism.” —David Cobb, CEO of MMI Outdoor businesses, two of which failed, and to becoming a millionaire. “It only took 15 years,” the CEO of Cambridge, Massachusetts-based Talla wrote in a missive published on Fortune.com. As a result, May continued, “I’m the bad guy. I’m the white male who is only successful because everything was handed to me. I don’t deserve the money I made. All the things I sacrificed don’t matter. The additional stress I was under doesn’t matter. The risks I took don’t matter.” May concluded by asserting that it’s the wannabe, not the accomplished person, who needs to learn from the “rigged” economy.

“Any economic structure will favor some at the expense of others. But the wonderful thing about America is that if you are willing to make the right sacrifices, you can achieve whatever you want. Unfortunately, we’ve come to believe that achievement should be easy. Changing that attitude is the first step towards making yourself more successful.” Another important question is: After the elections in the fall, will the inequality issue fade, or will it continue to create a huge cleft in the American body politic? Chief Executive put the question to May, who reported that he got lots of feedback after his Fortune.com contribution, much of it critical, some in support. In theory, he said, the U.S. divide on income inequality “is bridgeable.” If someone shadowed a CEO for a few days “and saw the kind of work we do,” for instance, “I think they would walk away saying, ‘Wow, that is difficult and stressful and they earn their pay.’ “In practice though, [the divide] is unbridgeable. There isn’t a simple answer, and to get through to people today, you have to package things up in nice little sound bites. Problems that aren’t packageable as sound bites aren’t solvable in modern American politics.”

To read the full text of of MMI Outdoor CEO David Cobb’s letter, visit ChiefExecutive.net/DavidCobb

THORNS & ROSES

Fueling Controversy

Audience Appreciation

New York Attorney General Eric Schneiderman issued a subpoena demanding that Mobil turn over records concerning its research on climate THORNS change. Recently he announced that a coalition of attorneys general “will hold fossil fuel companies accountable.” Aside from the obvious threat to scientific inquiry and free speech Schneiderman and his coalition never bothered to ask a judge—a questionable constitutional move. Usurped subpoena power is a dangerous use of prosecutorial overreach.

AMC Entertainment CEO Adam Aron backpedaled on statements he made to Variety about being open to allowing texting in some theaters. Following a social ROSES media outcry from moviegoers, the new head of AMC Entertainment reversed himself in a statement released on social platforms that there will be no texting allowed in theaters. “Not today, not tomorrow and not in the foreseeable future,” he promised. “NO TEXTING AT AMC. Won’t happen. You spoke. We listened. Quickly, that idea has been sent to the cutting room floor,” the AMC Theatres official Twitter account wrote.

12 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

Bravo, Randall!

Congratulations to AT&T Chairman and CEO Randall Stephenson on his recognition as Chief Executiveâ&#x20AC;&#x2122;s 2016 CEO of the Year.

CEO WATCH CORPORATE CITIZENSHIP / ALAN MELTZER, CEO OF THE MELTZER GROUP

Creating a Philanthropic Culture

Alan Meltzer and employees at an event for underprivileged children

By C.J. Prince

ALAN MELTZER, CEO of The Meltzer Group, is a strong believer in giving back—and fostering the philanthropic spirit. Along with his wife, Amy, Meltzer launched the Meltzer Group Employee Giving Fund in 2005 as a way to increase giving to local nonprofits and to build a stronger philanthropic culture within his 30-year-old company.

WA R D

CI AT E T IZ E N S

6 201 CORP

HOW IT WORKS: Each year, voluntary employee donations to the fund are matched by gifts from The Meltzer Group’s top three executives. The Fund’s steering committee surveys employees to decide on the focus for that year’s gift. Members of the committee then research potential beneficiaries in that chosen area and receive paid time off to go out and meet with representatives of the charities. “Management has nothing to say about which organizations get the money. [Employees] don’t ask me— they tell me,” says Meltzer, adding that whichever charity is chosen, his firm will not “prospect,” or try to sell that organization insurance services, for a period of three years. “We don’t want anyone to look at this as if we’re trying to benefit from it. We benefit from the goodwill in the community and our

EXECUT

employees love it. It’s become a cultural thing in the company.” HOW IT’S GOING: Currently, more than 80 percent of The Meltzer Group’s employees contribute to the Fund. Since its inception, the Fund has distributed more than $400,000 to nonprofit organizations. For the past six years, The Meltzer Group has been ranked by Washington Business Journal as the No. 1 midsize corporate philanthropist in the D.C. area. WHAT IT’S DONE FOR THE COMPANY: By empowering employees to give back to the charity of their choice, Meltzer says, the company has created a richer culture and deepened engagement and loyalty, which directly affects retention. “Nobody leaves us,” he says, estimating firm-wide retention at about 97 percent. As intermediaries between insurance companies and end consumers, “the job my folks have is not an easy job,” he adds. “So everything I can do to make the experience for the people at The Meltzer Group positive makes our brand better.”

“I AM THE LUCKIEST MAN IN THE WORLD. I MUST GIVE BACK.” WHO

Alan Meltzer, founder and CEO of The Meltzer Group

WHAT

Insurance brokerage and advisory practice in Bethesda, Maryland

FOUNDATION

The Employee Giving Fund

Enter Your Company in Chief Executive’s CORPORATE CITIZENSHIP AWARDS Are your corporate philanthropy efforts aligned with your corporate mission? Do you, as the CEO, play a key role in leading your corporate giving efforts? If the answers are yes, then your organization may be a candidate for a Corporate Citizenship Award. Visit ChiefExecutive.net/chief-executives-corporate-citizenship-awards to nominate your company for our Best Corporate Citizenship awards.

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CEO WATCH CEO WATCH

CEO PROFILE / STAN BERGMAN

Henry Scheinâ&#x20AC;&#x2122;s Stan Bergman: Acing Acquisitions Drilling down on a dental supply companyâ&#x20AC;&#x2122;s transformation strategy. By Jennifer Pellet

THE CHALLENGE: You are named CEO of a family-owned dental distribution business after the death of its leader, your mentor. The family has hived off a profitable pharmaceutical division and tasked you and a team of young, untested executives with building up its remaining distribution business and taking it public within five years.

THE BACKSTORY: Founded in the back of a soda shop in 1932, Henry Schein was the brainchild of its namesake, a Columbia 16 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

University College of Pharmacy graduate who had the bright idea of selling medical supplies to doctors by mail order. After the company moved into dental supplies in the 1960s, that business took off, accounting for about 12 percent of the U.S. dental-supplies market and $225 million in revenue by the time Stan Bergman was named CEO in 1989. However, fierce competition from thousands of hungry competitors, all offering equivalent products at similar or lower prices, was putting pressure on prices and driving mar-

CONGRATULATES CEO OF THE YEAR

RANDALL STEPHENSON We salute your commitment to innovation and passion to help people achieve more.

CEO WATCH gins down. Meanwhile, the company lacked the field sales teams that many of its peers boasted and was ill-equipped to compete on service. Clearly, something needed to change.

THE SOLUTION:

“IF PEOPLE TRUST YOU, THEY WILL TALK. AND WHEN YOU LISTEN, IT’S AMAZING WHAT YOU HEAR.” WHO

Stan Bergman, CEO, Henry Schein

WHAT

Distributor of health products and services to office-based dental, medical and animal health practitioners

REVENUES:

$10.6 billion

MENTOR

Jay Schein

PASSIONS :

Skiing, opera

LEISURE INTERESTS

Golf and Traveling

Looking to both increase margins and differentiate from competitors, Bergman and his team decided on a three-pronged strategy: to become more than a mere supplier to its clients, to diversify into other types of medical practices and to extend Henry Schein’s geographic reach. Over the past 20 years, the company has done just that—transforming itself into a full-service provider to dental, veterinary and medical practitioners around the world. In addition to selling supplies and medical equipment, it offers value-added products and services, such as practice-management software and financial consulting. “Our job is to help healthcare practitioners understand the business aspects of running a medical practice,” explains Bergman. “Veterinarians go to veterinary school because they like animals. You have to explain to them that you can love pets and do a great job for your clients, but they’re also the CEO of a business. They need to worry about managing a staff, building banking relationships, designing their buildings, being able to afford their mortgages. We have about 4,500 field sales consultants today whose job it is to help practitioners run their businesses well.”

THE EXECUTION: Five years into its transformational journey, Henry Schein raised $72.8 million in an IPO, giving the company an influx of expansion capital. It promptly began gobbling up smaller distribution and manufacturing companies to gain new product lines, add field sales consultants and establish itself in new regions through a combination of outright acquisitions and joint ventures that involve a stake-

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holder position for Henry Schein. “About a third of our sales are in joint ventures,” explains Bergman. “We’ll invest in a company that’s doing something that we want to do. We give them capital and whatever help they need—finding a CFO, getting lawyers, that kind of thing; they give us good ideas, great talent and business.” Navigating these relationships has become a core competency for the company, he adds. “They’re not easy. You have to pre-negotiate everything. It’s like a marriage. If [the] husband says to the wife, ‘This is the way we’re going to do it, I don’t care what you think,’ the marriage is over.”

THE HURDLE: Like many companies pursuing acquisition-fueled growth, Henry Schein has had its share of hiccups, reports Bergman, who says the company has learned to vigorously vet potential partners. “We’ve had deals for superb businesses that we haven’t done because we thought there would be a clash with the culture and the values,” he says. He also stresses that social responsibility and the notion of “our ability to make a difference in society” is a core value for Henry Schein. “We do a lot of due diligence up front; and if we find somebody who is not going to walk the talk, then we part ways.” That vigilance extends to new hires as well. “When you’re recruited as an officer at Schein, you’ve got to meet 20 to 25 people; to become a board member, you have to meet the entire board and 15 people within the company,” says Bergman. “We’re very careful who we let in organically.”

THE RESOLUTION: Today, Henry Schein continues to sell supplies and equipment, primarily through electronic and telephone sales, but also has an army of 4,500 field sales consultants who serve more than 1.5 million medical practitioners. While margins remain slim

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CEO WATCH on the distribution side of the business, the bump from value-added services brings average gross profit to a healthy 30 percent. Already in 33 countries, with a third of its revenue from abroad, the company intends to push into new areas and regions, says Bergman. “We will continue to make investments that advance our geographic presence; there is still a long way to go globally. Also, we will advance our market share in under-penetrated markets. There are parts of the U.S.

where we’re not that strong, so we may buy a regional player to get us into there.”

THE LESSON: Bergman acknowledges that nurturing a culture of trust and shared values becomes more and more challenging as the company grows. “As you grow and grow, you no longer know everyone personally, so you need to industrialize trust,” he says. “Everyone in management has to be a DNA carrier of trust and of your

values. I try to set an example by traveling extensively and fostering open dialogue. “If people trust you, they will talk. And when you listen, it’s amazing what you hear. I talk and talk and talk. I walk and walk and walk. You have to get out of your office and communicate. If I do it, others do it. There is no shortcut to institutionalizing trust other than walking the talk and making sure that everyone else is doing that as well.”

CEO CONFIDENCE INDEX

CEOs’ Outlook Continues to Sour: They See Election Choice as Between Bad and Worse will remain the same and the risk of doing any major changes or M&A become high. How risky depends on the person who is elected. It significantly impacts the risk-reward ratio on all business decisions.” Business leaders are also concerned about the effects of global issues on their business, such as Brexit, the UK’s possible exit from the European Union, as well as the economic downturn in China. As a result of these and other trends, nearly half (42.8 percent) will not be increasing their capital expenditures over the next 12 months, while 24.1 percent expect to increase them less than 10 percent. Another 17.9 percent expect their CAPEX to drop, while just 16.1 percent will increase their capital expenditures more than 10 percent.

CEOS’ CONFIDENCE IN FUTURE business conditions (12 months out) is at its lowest point since January 2015, according to Chief Executive’s May 2016 CEO Confidence Index survey. The key driver of this low rating is concern over the choices for the U.S. presidency, which CEOs see as between bad and worse. “[The] economic and political environment has created an event of business challenges in which no one can actively predict,” one CEO said. “Everything depends on the presidential election,” another said. “The two top candidates are not really attractive and will definitely have an impact on the economy. If Trump is elected, I fully expect a major economic downturn. If Clinton is elected, I expect a slowing economy. At best, the economic conditions

CEO CONFIDENCE AT NEAR-RECORD LOWS (12 MONTHS OUT, ON A SCALE OF 1 TO 10, WITH 10 BEING THE HIGHEST)

7.0

6.71

6.52

6.5

6.41 6.45

6.48 6.23 6.25

6.08

6.14

6.04

5.92

6.33

6.0

6.09

6.06

5.99 5.58

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5.5

“Fireman’s Fund… a brand name that has

been in existence for more than 150 years will fade away.”

- Insurance Journal January 12, 2015

“Chubb to be acquired… for $28.3 billion.”

- Investor’s Business Daily

The high net worth insurance market is undergoing massive change. There’s no better time to explore PURE. Founded in 2006 with a unique membership model for the most responsible owners of the finest-built homes, PURE has sustained annual growth of 40% or more every year and maintains a remarkable 96% annual member retention rate.i Today, our membership spans nearly 50,000 successful individuals and families from across the U.S., including many former Fireman’s Fund and Chubb policyholders. Our growth is fueled by our commitment to alignment of interests, the support of an elite network of the finest independent brokers, and the unique combination of superior service and significant savings.

S U P E R I O R S E RV IC E

S I G N I F I C A N T S AV I N G S

Our exceptional member experience starts with licensed adjusters receiving claims, not call center reps as is customary, so you’ll tell your story once and begin the settlement process immediately. PURE Member Advocates® provide conciergelevel support to help members prevent losses and then make life easier when one occurs. They’ll even research claims and pay to prevent them from recurring. These are just a few reasons why we have the highest member retention in the category.

We’re designed to have highly competitive rates. For starters, our member-owned model affords a lower cost of capital, which is reflected in our premiums. Further, we restrict membership to those less likely to submit frequent or frivolous claims. What’s more, our Risk Managers offer personalized advice to help keep members safe and reduce risk to their property. For these reasons and more, members report average annual savings of more than 25% on their homeowners insurance.ii

Annual Member Retention Ratei

Average Annual Savings on Homeowners Insuranceii

$2,701

$2,232

AFTER SWITCHING FROM

CHUBB

FIREMAN’S FUND

If you insure your home for $1 million or more, you should explore PURE. Contact a PURE-appointed independent insurance broker Visit explorepure.com Call 888.815.PURE Annual member retention rate as of Sep ‘15. iiAverage annual savings on homeowners insurance for members nationwide who reported prior carrier premiums from Jan ‘11 through Sep ‘15. Actual savings, if any, may vary. PURE® refers to Privilege Underwriters Reciprocal Exchange, a Florida-domiciled reciprocal insurer & member of PURE Group of Insurance Companies. PURE Risk Management, LLC, a for proﬁt entity, (PRM) serves as PURE’s Attorney-In-Fact for a fee. PURE membership requires Subscriber’s Agreement. Coverage is subject to insurance policies issued & may not be available in all jurisdictions. Visit pureinsurance.com for details. Trademarks are property of PRM & used with permission. ©2015 PURE. PURE HNW Insurance Services, CA Lic. 0I78980. i

CHIEF CONCERN

Effective, Not Ideological Leadership The political landscape offers lessons on leadership. By Dr. Thomas J. Saporito

MY WORK WITH COMPANY CEOS over the past 35 years has taught me many things. Foremost among them is that the best CEOs focus more on being effective than on being the smartest person in the room. In fact, CEOs who insist on being right often go down in flames. Why? Because they are unable to create enough alignment to move their organizations forward. With this in mind, I can’t help but reflect on today’s political environment and the contrasting leadership models before us. I’m not so naïve as to believe in a silver bullet. But I know from experience that effective, not ideological, leadership is the answer. Let me explain. The U.S. is more divided today over policy, strategy, priorities and culture than it has been in years. The question isn’t about who’s right; the question is, who can lead this country forward? One doesn’t have to go very far to experience how fed up people are with our political leadership. Now, I’ll grant you, politics is legitimately a battleground of ideology and beliefs. But when ideology—whether conservative or liberal—drives division rather than unification, something is broken. According to a Pew Research poll taken in October, only 19 percent of Americans say they trust the federal

government. This is among the lowest levels in the past 50 years. Furthermore, according to a Monmouth University Poll taken in January, 62 percent of Americans believe that all or most of their fellow citizens are angry with Washington. Americans are also divided over what approach their representatives should take. Fifty percent say that elected officials unwilling to compromise are the source of the issue, while 40 percent believe that elected officials who are unwilling to stand up for their principles cause more problems. We need to focus more on effectiveness than on being right. Now is the time to look to business as a model of leadership. The best CEOs know how to take polarized cultures and create healthy organizations. What do they do? They listen, they form relationships, they build trust, they bring people together to discuss and debate, and they create a climate of problem solving. There are many examples of effective CEOs, but one who stands apart and is relevant to this discussion is Alan Mulally. When Mulally took over as CEO of Ford Motor Company in September 2006, the automaker was clearly broken. Its stock price was in severe decline and its debt was at junk status. It

was widely expected that the company would file for bankruptcy. That didn’t happen though. In two years, Mulally transformed Ford into a profitable enterprise. The essence of Mulally’s effectiveness was in his ability to instill a “One Team” mindset. His goal was to get people to believe that they were “all in this together” and to work across the silos as “One Ford,” which in itself became a mantra repeated in every meeting, conversation, email and interview. Maybe our political leaders, particularly as we come into this presidential election, can look to effective CEOs for an answer to our leadership challenges. Maybe they can become more riveted on creating an environment of unification rather than standing on ideology and perpetuating a sense of division. Look to our most successful CEOs. They will tell you that in order to be effective, the “my way or no way” mindset must be the first thing to go. Yes, they each have their deep beliefs and points of view, but they remain focused on finding alignment. And though they don’t always attain complete consensus, they’re still able to pull people together and get things done.

DR. THOMAS J. SAPORITO (tsaporito@rhrinternational.com) is chairman and CEO of RHR International, a global firm committed to the development of top management leadership.

22 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

MID-MARKET REPORT

Building a Successful Sales Team

C-suite executives share the tips and techniques that work for mid-market firms.

“SETTING CLEAR SALES perfor-

According to the results, the fastest-growing mid-market firms are more likely to: set and use sales quotas, devote resources to sales force mentoring and coaching, provide in-house training for new hires and source senior positions internally. Incentive pay is also more prevalent among higher-growth businesses, with a higher percentage paying at least some of their salespeople on a straight commission basis. Also,

mance expectations and rewards can help drive more sales and thus faster revenue growth for businesses,” reports the National Center for the Middle Market, which joined forces with the American Marketing Association to survey more than 400 C-level middle market executives on their business-to-business selling efforts for a study entitled The Force is With You: Building a Highly Effective Sales Organization.

more fast-growing companies than slower-growing firms reported employing straight-commission salespeople. Respondents also reported success with formal mentoring and coaching programs. “Formal mentoring and coaching methods are popular across the middle market for a good reason: they work,” concludes the study. “Eight in 10 middle market leaders say such training programs are very to extremely effective.”

Counting on Incentive Compensation

Quotas Remain Key

Fast-growing companies tend to base a higher percentage of compensation on commission.

48 percent of high-growth mid-market firms set specific sales quotas, with most based on revenue generated.

% of monetary compensation in salesperson's compensation package Base Salary

Compensation

TOTAL MIDDLE MARKET

Bonuses

Others

57%

25%

61%

$10M - $50M

24%

57%

$10M - $50M

27%

54%

$10M - $50M

24%

17% 15% 15.5%

21%

SALES QUOTAS USED

48% 54% 48%

Total Middle Market

High-Growth Firms

HIGH-GROWTH FIRMS

55%

SLOWER-GROWTH FIRMS

28%

58%

24%

15% 17%

FACTORS IMPACTING SALESPERSON QUOTAS

Top Training Tools Three-quarters of business leaders find in-house training very useful, while just 53 percent rank outside training effective. Effectiveness of sales training tools Extremely Effective

Very Effective

23%

18% 34%

Somewhat Effective

29%

28%

Not Very/At All Effective

17%

18%

45% 47%

Formal mentoring/ coaching

Slower-Growth Firms

46%

In-house Training

24 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

36%

51%

Technology-enabled/ virtual training

Outside seminars/workshop

80% 43% 40% 5%

Revenue Generated

Profit

Activities Performed

Other

CohnReznick is an independent member of Nexia International

EXPERTISE PUTS YOU AT THE TOP OF THE GAME Get proactive insight and transformative advice from a recognized leaderâ&#x20AC;&#x201D;insight that helps middle market businesses identify strategic growth opportunities, assess risk, optimize financing and capital structures, and maximize ROI. Find out what CohnReznick thinks at CohnReznick.com.

Forward Thinking Creates Results.

Joe Torre Baseball Executive, Hall of Fame Inductee

cohnreznick.com

SONNENFELD

New Battle Plans for Returning Generals A YEAR AFTER Twitter founder Jack Dorsey Jeffrey Sonnenfeld

Returning CEOs, as ‘generals’ must bring new plans for changed conditions.

returned to office, his stock has crashed by over 60 percent. Similarly failed returns plagued Charles Schwab and Yahoo’s Jerry Yang, raising the question of whether leaders can ever go home again. Yet, ample evidence suggests that retired generals can be recalled to active duty to lead a mission to greater glory. World War II was a triumph of heroes returning to office, such as: Winston Churchill, Charles De Gaulle, Douglas McArthur and George Patton. Surely the success of such returnees as Apple’s Steve Jobs, Dell’s Michael Dell, Starbucks’ Howard Schultz, Google’s Larry Page, Reddit’s Steve Huffman and Procter & Gamble’s A.G. Lafley remind us that such heroic returns are also possible in corporate life. General McArthur proclaimed, “Old soldiers never die, they just fade away.” Corporate generals, too, can stage successful reentries. Some, such as ITT’s feared Harold Geneen and CBS founder William Paley, may even help undermine successors to trigger their own glorious return. In 2008, Twitter’s Dorsey was pushed out due to distracting interests. Returning as chairman, in 2011 he tweeted, “Today I’m thrilled to get back to work @Twitter leading product as Executive Chairman. And yes: leading @Square forevermore as CEO. #200%.” Dorsey resumed the role of Twitter’s CEO while still “distracted,” serving as CEO of the mobile payment company Square that he took public in October 2015. Often, a general’s return is driven by nostalgia for a rosy period in the enterprise’s history, raising concerns that he or she will be intent on replicating a romanticized earlier version of the company. For example, some analysts wrongly feared that Schultz’s Starbucks return would herald a retreat in expanded food and beverage offerings. Schultz addressed the culture but did not take Starbucks backwards. At the time of his 2008 return, the company’s stock price had been flat for over eight years. The stock jumped

8 percent the day Schultz’s return was announced—soaring 520 percent since and adding $68 billion in market cap. In 2001, Google co-founder Larry Page stepped down as its CEO under pressure to “build a world-class management team.” Yet, it was Page, not successor Eric Schmidt, who signed off on the 2004 IPO and led the 2005 purchase of Android. Returning to office in 2011, he profoundly restructured Google’s operating units. By early 2016, four months after creating parent company Alphabet—separating its Google search, Android, and YouTube businesses from newer, riskier ventures—the company soared past Apple to become the highest-market-value company on the planet. In 2013, Dell Technologies Founder Michael Dell, who had returned its as CEO in 2007 after a three-year hiatus, led a historic $22.8 billion privatization. His success repositioning the PC business to focus more on business segments than consumer markets allowed Dell to build the nation’s most integrated technology firm with big new investments in the cloud and analytics even as competing firms had to divest businesses. “As a private company, Dell now has the freedom to take a long-term view,” said Dell, just prior to his $67 billion purchase of data storage giant EMC. That $67 billion transaction, the largest tech acquisition in history, was funded largely with low-cost investment grade financing thanks to the company’s rise under his lead. In Q1 2016, Gartner Group rated Dell No. 1 in U.S. PC sales. What can be learned from this litany of successful re-entries? It’s key to avoid the distractions of political maneuvering between warring fiefdoms and conflicting external interests. In addition, all too often generals wrongly reapply the prior lessons from a past war. Returning CEOs, as “generals” must bring new plans for changed conditions. As baseball legend Yogi Berra warned, “The future ain’t what it used to be.”

JEFFREY SONNENFELD is senior associate dean for leadership studies and Lester Crown professor in management practice at Yale University, and president of the Yale Chief Executive Leadership Institute.

26 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

I LLU ST R AT I O N BY T I M TO M K I N S O N

History tells us that a comeback is possible—if managed judiciously. By Jeffrey Sonnenfeld

CEO OF THE YEAR

HOW RANDALL STEPHENSON TOOK AT&T INTO THE FUTURE OF DIGITAL

The twin forces of advanced high-speed wireless networks and the emergence of sensors in use everywhere (Internet of Things) have not only transformed the nationâ&#x20AC;&#x2122;s first communications company, but will change every other industry along with it. by J.P. Donlon 28 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

P H O T O G R A P H BY M AT T F U R M A N

CEO OF THE YEAR

IT’S NO ACCIDENT

TEACHING TECH Stephenson with a second-grader in AT&T’s Aspire program

Thirty-four years ago, Randall, then 22, and his brother Kevin, then 23, took jobs at a local Southwestern Bell office after figuring that the cattle-feed business wasn’t for them. Kevin worked as a lineman fixing the traditional copper lines that still connect landline telephones in most homes. Randall worked his way up the ranks, eventually becoming CFO under Ed Whitacre, the larger-than-life CEO who ran Southwestern Bell, which became SBC Communications and took over the old AT&T in an acquisition in 2005. Two years later, Stephenson succeeded Whitacre at the helm of the new company that took the AT&T name. Stephenson’s father and Ed Whitacre were major influences on his life, particularly when it came to managing risk. “My dad told me once that you will never have a lot of success until you’ve had a lot of failure because until you’ve had a big failure you’ll be afraid of it,” he says. Whitacre, who would later serve 10 months as chairman and CEO of GM after it emerged from bankruptcy, told Stephenson that “when you have a very large company, you have to do significant things to move the needle and significant things in terms of the kind of people you

30 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

hire.” “He encouraged me to take risks on people,” the AT&T chief recounts. It’s safe to say that the AT&T of today barely resembles the Ma Bell of yesterday. The $147 billion Dallas-based company has invested aggressively in mobile, fast and secure connectivity to 355 million people in the U.S. and Mexico—a seamless cross-border network that’s unique in the marketplace. This includes high-speed fiber connections to more than 1 billion U.S. locations, as well as global IP network services that connect businesses on six continents representing 3.5 million businesses or 99 percent of the world’s economy. In addition, AT&T has invested $1.3 billion in a high-quality wireless spectrum to get a jump on demand for mobile Internet services—particularly video entertainment, thanks in part to its 2014 acquisition of Cricket and a $18.2 billion acquisition of a near-nationwide block of high-quality spectrum in a 2015 government auction. Switching to a software-defined network (SDN) by replacing hardware with software is enabling AT&T to move more data at a lower cost-per-bit. The goal is to have the lowest cost structure in the industry—in

RANDY ANDERSON

that the digital economy was the single bright spot during the Great Recession. Despite the downturn, the technology industry responded on an unprecedented scale. AT&T alone spent $140 billion between 2009 and 2014 to build advanced wireline and mobile networks—more in the U.S. than any public company. These networks became innovation platforms for Silicon Valley and numerous entrepreneurs. As a result, whole industries were transformed and new ones created. “They were the first to focus on smartphones, he first to offer the iPhone and, in fact, the only provider to do so for years,” says Jack Kagan, Equities. com analyst, who notes that AT&T and AT&T Mobility have been leaders in carrier transformation and connected networks. “They are at the forefront of not only expanding their company, but of transforming and expanding the entire communications industry.” AT&T pioneered the all-in-one entertainment and communications package with U-Verse; and the company’s acquisition of DirecTV takes it one step closer to becoming the digital-entertainment hub for the home. Under Stephenson, the emphasis has been on adapting to the marketplace, where the key words are instantaneous connectivity, virtualization and cloud computing. This push extends to employees, who are encouraged to take skills-improvement classes on their own time or risk on-the-job obsolescence. As early as 2012, Stephenson realized that to be a premier integrated-communications company, its workforce of 280,000 had to improve its skills. Vision 2020, Stephenson’s signature program, combines classroom-based and online classes in areas like data science and digital networking to elevate people’s technology skills. The man behind this transformation is a tall, soft-spoken former accountant born in Moore, Oklahoma whose father ran a cattle-feed business.

Qualcomm Congratulates Randall Stephenson, Chief Executiveâ&#x20AC;&#x2122;s 2016 CEO of The Year. We thank you for your partnership and for sharing our vision of bringing the future forward faster. qualcomm.com

qualcomm.com/blog

facebook.com/qualcomm

@qualcomm

CEO OF THE YEAR

effect beating Moore’s Law in network performance. As he relates in the following interview, Stephenson is a big believer in the IoT where sensors—in everything from cargo containers and jet engines to machines on a factory floor—are connected. By the end of 2015, AT&T had more than 26 million connected devices and had certified more than 2,200 different types of connected devices on its network. Stephenson admits to one disappointment: the government frustrating AT&T’s bid to acquire T-Mobile from Deutsch Telekom in 2011 without technically blocking it. “We ended up replacing the spectrum we would have gotten through a different route so we landed in a good place,” he says. Soon afterward, the wireless industry split into two directions, with AT&T pushing the envelope with new offerings and a spectrum-rich portfolio. The company is partnering with Ericsson and Intel to develop its 5G network, which it expects to deliver broadband speeds 10 to 100 times faster than existing LTE network connections. Customers will likely see speeds in the range of gigabits per second instead of megabits. (Verizon is working with Alcatel-Lucent, Ericsson, Cisco, Nokia, Qualcomm and Samsung to test 5G also.) “My odyssey has been amazing,” Stephenson reflects. “Who could have ever conceived of a kid born in Moore, Oklahoma having the opportunity to run a company like AT&T? I get a little frustrated with a lot of the talk about inequality in our country today. I look at AT&T today and the people moving up in the company today are a lot like me.” A voracious reader of books about Winston Churchill, he believes “there’s a lot to be learned about his leadership style, conviction, dogged determination and ability to rally an entire country to endure what was going on in that era and not give up and not lose hope.” Conviction and hope are attributes he appears to have in abundance.

32 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

The communications industry has gone through waves of growth. Local phone service grew until the early 2000s and then started to decline. Wireless has grown for decades with the acceleration of the iPhone and Android. Now that growth of smartphones is slowing, what do you see as the next growth wave and how do you plan to capitalize on it? We’ve been investing aggressively in pursuing the smartphone wave and trying to stay ahead of it. This required an enormous amount of investment. In fact, one of the hidden secrets of our industry is how much money companies like ours must pour into just buying licenses to operate wireless networks. Since I’ve had this job, we’ve spent almost $40 billion in just licenses to operate these wireless networks and building spectrum. It’s about fast, scaled ubiquitous networks that can handle incredible amounts of data to accommodate mobile phones and facilitating mobile video. Video is the future—the ability for people to watch video anywhere, anytime on whatever device they want. We are at a point where this is now possible. Video consumption is moving to smaller and remote devices. Getting there requires not only the network commitment, but also a major investment in access to content to deliver. The current ecosystem has not been conducive to this. That’s why we bought DirectTV. We bought DirectTV because it’s the largest pay TV provider on the globe, not because we like satellite technology. It gives us a unique place with the people who develop and make content. By combining the largest pay-TV

provider with one of the largest smartphone customer bases on the planet, you have a unique marriage to partner with the content folks. This fall, we will roll out a whole new category of video that’s “TV Everywhere.” It will offer inexpensive video for mobile-centric consumers all the way up to ultra-highdef consumers who want tons of sports programming and multiple TVs in a large home and everything in between. In addition, we’ve partnered with the Chernin Group to form Otter Media, a joint venture offering subscription-based online video services, such as Fullscreen to deploy content targeted towards Millennials. If you’re my age, you wouldn’t recognize any of them—I don’t recognize any of them, but this is a platform that’s growing very fast. This is the future. The second major wave is sensor technology. Low-cost sensors are popping up everywhere. My hot water heater is connected to our wireless network. It can sense when water is leaking and will send me a message accordingly. The automobile industry is moving aggressively toward a world of sensors in every car. Think about healthcare with sensors on the body. I’m wearing one on my wrist right now. People call this the Internet of Things, but it’s just lowcost sensors connected to networks. This second wave is not about changing how we think about networks; it’s forcing every industry to change how it thinks about itself. Think about the last car commercial you saw. What did they advertise? In all likelihood they advertised their connectivity, not so much the car. We’re moving towards smart cities where traffic lights and city infrastructure have these sensors and everything will be connected to cars.

“Video is the future— the ability for people to watch video anywhere, anytime on whatever device they want.”

WHAT HAPPENS WHEN

PROCESS meets

perfect Fruit processor makes the most of cherries in Michigan. Shoreline Fruit LLC, located in northwest Lower Michigan, is the largest tart cherry operation in North America, spanning nearly 7,000 acres of cherry orchards and a 137,000-square-foot production facility. Most recently, Shoreline developed CherryPURE®, a nutraceutical supplement produced with the leftover cherry skins from the juicing process. “It’s made from 100% tart Montmorency cherries, proven to be a rich source of powerful antioxidant flavonoids which promote health and recovery benefits,” said CEO John Sommavilla. Which shows how you can make the most of any business in Pure Michigan.

1.888.565.0052 michiganbusiness.org/CE

CEO OF THE YEAR

AT&T: WHAT THE NUMBERS SHOW

Another good example is the shipping industry. Maersk, the big shipping-container company, has 300,000 of their containers all over the globe connected with sensors that allow the company to know where those containers are at any point in time anywhere in the world. Not only do they know that, but they know what the temperature is inside, whether the container is being jostled or if it falls off the ship. Maersk can even reroute the shipment. There is not an industry that is being untouched in a radical way by what is called the Internet of Things, especially when these low-cost devices are paired with cloud technology and Big Data. This world is all meshing together in ways we haven’t fully anticipated.

TOTAL ANNUAL AVERAGE RETURN TO SHAREHOLDERS 10% 8.91%

9.07%

5 YEARS

10 YEARS

(ANNUALIZED)

NET INCOME COMPOUND ANNUAL GROWTH 10% 8.9% 5%

What do you mean by tuning itself? You can’t see it from this office, but up here there are antennas that can adjust to follow traffic or people down there in this courtyard below us. So if there’s a big event, say, a major parade here in downtown Dallas, the antenna can be adjusted for better performance on your network. Self-optimizing antennas or networks can adjust to maximize information and data. We think it’s pretty radical in terms of how a company like ours is run. Think about the billboard-advertising business. By virtue of connected devices, billboard companies can know not only

1.6%

5 YEARS

10 YEARS

EPS (CAGR) 10%

S O U R C E : C O M PA N Y R E P O R T S

How will AT&T change over the next five years as it relates to this reality? We will always be an aggressive competitor for the smartphone marketplace because the connected world will come together at the level of the smartphone or the tablet. The home once served as the hub for content. In the next two years it will become just one connection among many. From a business perspective, information about one’s customers will come from sensors via cloud technology and Big Data. We have tools now that allow any company to develop insights and analytics we could not have conceived of five years ago. I’ll give you an example for what this means for us. We’re accumulating massive amounts of data on how our network is performing. That data is now being aggregated in the cloud. Big Data tools are being used and our network is constantly tuning itself without human intervention.

3.9% 3.1%

5 YEARS

10 YEARS

(GAAP)

how many people are passing by that billboard at a particular time of day, they can know the demographics of the people passing by that billboard. Assuming people are willing to give permission to the billboard company, they can determine who went to the place advertised on the billboard. The biggest change will likely come in healthcare. The idea that people go to a doctor for an annual check-up will be superseded in a world with biometric sensors where real-time data about your body—heart rate, sugar levels, everything that you might want to know about your health—is now available. This will radically change how a doctor administers medicine. We are working with MD Anderson and IBM using artificial intelligence and connected devices to see how medical care can be advanced.

34 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

Given what you’ve said and the fact that much of the technology you’ve invested in is software AT&T seems closer to companies like Google, Amazon and Netflix than to traditional phone companies. Describe your new competitive set. You just did. Our traditional competitors, Verizon and Comcast, will be our competitors for a long time. Google is building fiber into networks, so they’re a direct competitor there. Google is also working to build connectivity and leverage their data centers. They’re working to use advertising-supported models to displace what we call subscription models. Amazon is, obviously, in the video business and so are we. As we branch out and do more it brings new competitors. Netflix is a major competitor of ours, but they’re also a major driver of bandwidth, which is a good thing for us. The competitive environment just keeps getting more and more complex. How far along are you in your conversion to a so-called software-defined network that replaces hardware with software? How will this effort reduce your costs? A lot of people get confused about what software-defined networks means. Think about what the cloud did. It stored computer data in a data center that was formerly very expensive to store. The cloud virtualized the hardware by using software. The cost in a data center to store and manipulate all this data has plummeted. Software-defined networking takes this technology and moves it into our network. Our network is doing what the data center did, allowing up to 60 percent greater efficiency in some places. Yes, it drives cost down. But more importantly it revitalizes the innovation cycle, allowing us to bring new products to market faster. New products like NetBond are developed in months, not years. We have a capability called Network on Demand that allows business customers connected to our network to automatically turn bandwidth up and down as needed, giving the customer the flexibility to manage cost as well as to manage their networks. You’ve spent $140 billion over five years—in wireless, wireline, networking, software on demand. How long can you keep this up?

Leaders do more than guide. They inspire. UPS congratulates Randall Stephenson, Chief Executive magazine’s CEO of the Year.

united problem solvers™

CEO OF THE YEAR

In his recent book The Third Wave, AOL founder Steve Case argues that regulation of the Internet will greatly diminish innovation. Where do you stand on the current administration’s efforts to treat the Internet as a utility? History will look back and see 2015 and 2016 as a period when the government threw an incredible amount of sand in the gears of telecommunications, Internet and technological innovation. The implications of the regulatory framework that was put in place in 2015 will drag on indefinitely. The chairman of the FCC said he had no intention of regulating pricing with his regulations. Yet the evidence so far suggests that he’s actively and aggressively involved in how pricing is set. We will look back and see that the pace of innovation, and the investment in innovation, will have been affected by what happened in ’15 and ’16 unless the courts tell the FCC that it has overstepped what the law says it can do. There is a big lawsuit right now pending in the circuit court. If the courts invalidate this, as we’re hopeful they will, then hopefully this is just a bad dream that we’ll all wake up from and realize that the innovation can continue apace. Having the right people with the right skills is one of your biggest challenges in transforming AT&T. How are you dealing

FOSTERING FITNESS Stephenson kicking off a team wellness initiative

with the need to adapt and retrain a workforce of 280,000? Over the next five to six years, one of our biggest logistical challenges will be how to re-skill our workforce. You can’t just replace them. One thing we are doing is leveraging technology to improve educational outcomes, training and development. We took a big step by engaging with Georgia Tech and Udacity to develop a fully accredited master of computer science program that students can do from home through the Massive Open Online Course (MOOC) environment. Here’s the beauty of it. Rather than going to Georgia Tech to get a master of computer science degree for $41,000, our program costs about $6,700. The same accreditation, the exact same degree, at a fraction of the cost. That’s big. So far, a million courses have been completed by tens of thousands of our people. The training qualifies them for new responsibilities and jobs and it’s all being integrated into our HR system. This is key. You can’t just put these tools out there and say, “Go train yourself.” By integrating it in with your HR system, people see what jobs are trending up and which ones are declining. They can tell what online training they need to qualify for specific internal jobs. I am convinced that by 2020 we’re going to have—not all—but a great deal of our workforce reskilled and retrained for the work that we need.

36 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

You see AT&T as an innovation company. What specific innovations during your tenure are you most proud of? We believe we revolutionized how networks are developed, engineered and built to handle the mobile Internet. I feel really good about our leadership with this. Our development of software-defined networking was ahead of the curve, taking that innovation and putting it into the open-source environment so that it could be propagated broadly and developed into what is a radical advance in terms of how telecom networks are built and developed. This fall we’re going to see a very different experience on TV—the TV Everywhere experience. We will be offering a different user interface for watching live TV in a mobile world or in a fixed-TVmounted-on-a-wall world. In addition, our bandwidth-on-demand (network-on-demand), which allows companies to manage bandwidth and data demand within their environment, will prove revolutionary in terms of how companies interact with their telecom providers. Finally, our use of technology to change the game in reskilling the workforce will revolutionize training and development. We are demonstrating that you can accelerate the pace of learning and dramatically expand the footprint of skills using technology. It’s something that elementary, secondary and higher education should all mimic.

PA Z B E AT T Y

Industry analysts always ask me what our capital spend is going to be—basically a different version of the question you just asked. I tell them if you want to be a serious competitor in this industry, you better get ready because it requires an incredible amount of capital investment and it’s really not very complicated. Take revenues times 15 percent or 16 percent and drag it as far out as you want and that’s what you’re going to spend. We just completed our 4G network build, putting LTE in our network, so our capital spend spiked for a period of time. What’s going on now? Fiber to the home. This will take the place of what just came out of our spend. We’re hopeful that the 15 percent to 16 percent doesn’t become mechanical and that, by virtue of software-defined networks, we can get to a slightly more efficient investment model. But it’s still a lot of money. You have to be committed to investing in this industry if you want to be a serious competitor.

LEADER VISIONARY CEO

PHILANTHROPIST COLLEAGUE MENTOR PA RT N E R

Yo u’ r e r i g h t , R a n d a l l — & i s e v e r y t h i n g . Congratulations to AT&T’s Randall Stephenson, Chief Executive Officer of the Year

CEO OF THE YEAR these complex times, all the while delivering outstanding results and reshaping one of America’s most important companies.” —Jeffrey Sonnenfeld President and Chief Executive The Chief Executive Leadership Institute, Yale School of Management “Randall continues to transform AT&T without negatively impacting any of AT&T’s stakeholders. Randall is successfully meeting or exceeding short-term expectations without sacrificing AT&T’s long-term plan. He is an advocate for the business community and has led from the front on many of the major issues confronting the business community in Washington, DC.” —Tom Quinlan President and CEO, RR Donnelley

Why Randall Stephenson?

Excerpts from comments by CE’s Selection Committee members on the selection process. “Randall is a visionary leader who has guided AT&T through several major technology shifts and has seized those disruptions to propel AT&T’s growth. He has led a tremendous transformation within the company as well, building a culture that encourages and supports innovation—a must-have in today’s business environment. But Randall’s impact goes well beyond his company and his industry. He sets the bar high for all of us, demonstrating what it takes to be a great leader and a great CEO.” —Cathy Engelbert, CEO, Deloitte LLP “Randall is a genuine leader who has delivered fine financial results while effectively repositioning and dramatically improving AT&T in a highly competitive, rapidly changing industry.” —Dan Glaser President and CEO Marsh & McLennan “Navigating through turbulent times requires a lot of courage and disciplined decision making, but it also means taking your people with you and focusing on execution. Randall has done all these extremely well. AT&T is now a new company under him.” —Fred Hassan Chairman, ZX Pharma and Partner/Managing Director, Healthcare, Warburg Pincus “By engendering the trust of those he leads, Randall demonstrates the best qualities demanded of leaders today. By getting ahead of the technology, he has transformed and continues to transform the company and has become a disrupter. In addition, AT&T’s workforce

education program has made the company a role model and leader, not only in business but in public policy.” —Tamara Lundgren President and CEO Schnitzer Steel Industries “Randall Stephenson represents not just among the finest of American industry, but the kind of transformational leader in telecomm that Alexander Graham Bell and Theodore Vail would have celebrated today for mastering technology, regulation, reach and customer service.” —Jim McNerney former CEO, Boeing and 2015 Chief Executive of the Year “Randall has taken on a very complex industry, one that is totally customer oriented that demands a tremendous amount of customer satisfaction and response time, and infused it with innovative products and services that have changed the game.” —Bob Nardelli CEO, XLR-8 Randall deserves high praise for masterminding a challenging reinvention of a great company over many years. And he managed this strategy while bringing along all the important stakeholders at AT&T.” —Bill Nuti Chairman and CEO, NCR “Randall Stephenson, in many ways, embodies today and tomorrow’s leader with the character, credibility and authenticity demanded of

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“Randall Stephenson, as CEO, has effectively led AT&T through several major transitions, resulting in international leadership in wireless, broadband and now video. He is a value-based, strategic leader who cares about his employees, customers and shareholders. Randall also gives back to the communities he serves and to our country in many ways—including his tenure as chairman of the Business Roundtable and his active service on the Boy Scouts of America’s board of directors. He is most deserving of this award!” —Maggie Wilderotter Executive Chairman Frontier Communications

CRITERIA FOR EVALUATING A CHIEF EXECUTIVE OF THE YEAR Each year’s selection committee agrees upon the criteria to be used in evaluating finalists. In making a final decision, some committees have emphasized different criteria than others, but most of the following 11 elements have been in general use since 1993. 1 Courage 2 Leadership 3 Vision 4 Demonstrable impact on company, industry and business in general 5 Degree of difficulty 6 Sustained performance 7 Employee engagement, leadership development and internal people processes 8 Innovativeness 9 External benchmarks: Customer value and shareholder value created 10 Moral dimension, personal character (Is there a coherent “higher” purpose?) 11 CEO respect/beacon of excellence/reputation

VA L E R I E C AV I N E S S

ASSESSING LEADERS CEO of the Year Selection Committee members deliberating

“Randall is a terrific role model and leader, taking courageous and forward-looking stands in his industry, in business more broadly and in public policy.” —Mark Weinberger Chairman and CEO, EY

MANUFACTURING

THE RESHORING CHALLENGE

By William J. Holstein

Why—and how—CEOs are moving jobs back to America. BY WILLIAM J. HOLSTEIN

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Don Rongione, CEO of Bollman Hat Co. in Adamstown, Pennsylvania, had a unique ally in his effort to shift hat production from China to Pennsylvania—famed actor Samuel L. Jackson, who along with other Hollywood stars, was a fan of the company’s Kangol 504 woolen knit cap. Rongione paid to move unique knitting equipment from China to Pennsylvania in part by using a YouTube video of Jackson to appeal to investors on Kickstarter, the crowd-sourcing website. Bollman, which says it is America’s oldest hat company, with more than $10 million in annual sales, bought the Kangol brand in 2001 from a British company. That company had previously sent all of its custom-made machines dating back to the 1930s and 1940s to southern China, where it made the beret-like Kangol hats. So Bollman, in effect, inherited a factory in China, containing the special machines that performed at much lower costs than any new machine might. Bollman struggled to manage the factory profitably and ultimately sold it to a Chinese hat maker, but that arrangement fell apart and the idea to simply move the equipment to central Pennsylvania was born. Rongione set aside some of the employee-owned company’s funds, raised some from the state of Pennsylvania and then launched the Kickstarter campaign. Jackson, wearing a t-shirt that reads “Motherfunder,” a slight variation of a word he’s known for uttering on screen, appealed to viewers to support the move. They did, ponying up more than $100,000. The company has just moved 10 of the knitting machines, is preparing to move dozens more and is hiring workers at a starting hourly wage of $10.30 an hour. But it is finding that its workers, both new and old, have a big learning curve ahead of them in absorbing how to master the knitting process, which is new to the company. “Hiring people with the specific knowledge has been virtually impossible,” Rongione says. “No one has the

knowledge on this type of equipment.” So the company has brought in experts from Britain who are familiar with the equipment and worked with a local community college in Reading, Pennsylvania, to train students to become apprentices. The final outcome remains uncertain. “We still have a mountain to climb,” Rongione says.

KEY TAKEAWAYS 1 An Economic Advantage

HOMEWARD BOUND More American CEOs are, in fact, deciding to bring home jobs from China and elsewhere. After going only in one direction for many years, the Reshoring Initiative, based in Kildeer, Illinois, reports that the total number of manufacturing jobs that were created in the U.S. in 2015 slightly exceeded the number of jobs shipped to other countries. It estimates that the combination of reshoring and foreign direct investment brought about 67,000 jobs back to the U.S. in 2015 versus 60,000 that went out, for a small net margin of 7,000 jobs. About 60 percent of the jobs returning come from China. The auto industry is the most significant in terms of jobs repatriated, suggesting that large companies are the prime movers. But the Reshoring Initiative says companies of less than $1 billion in annual sales account for about half the jobs being created in the U.S. The trend lines are not sparking the kind of celebration many reshoring advocates might have hoped for, at least not yet. One reason is that the presidential campaign rhetoric has politicized the issue so deeply that major companies such as Caterpillar, NCR and Ford Motor, all of which have brought some jobs home, decline to discuss the issue. Ford and the Carrier air conditioner unit of United Technologies are engaged in public slanging matches with Republican frontrunner Donald Trump because of plans to move production to Mexico and those CEOs are trying to maintain low profiles. Others have suffered unintended outcomes: GE made a splash by moving the production of water heaters from China to its Appliance Park in Louisville, Kentucky—and then proceeded to sell the entire appliance

Home turf advantages like a shorter, more manageable supply chain are driving reshoring

2 A Level Field

The number of manufacturing jobs going offshore versus the number being created in the U.S. is nearly equal

3 Domestic Skills Gap

Companies leading reshoring efforts are struggling to find skilled labor

4 Incentives Needed Better business and tax conditions would help bring millions of lost jobs home

division to Haier of China. Another reality is that the jobs that do come home seem to be very different than those that left. The rough rule of thumb is that if five American jobs went to China, it required perhaps 12 Chinese workers to do the same work because fewer workers there are trained in multiple functions. But when those jobs come home, they may be only three jobs, and they require higher levels of skills to work with computers and automated production equipment. That’s not good for millions of displaced Ameri-

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MANUFACTURING can workers, who may have only high school educations. Moreover, millions of jobs that went offshore may never come back. Harry C. Moser, founder and president of the Reshoring Initiative, which has emerged as the most definitive source of information on the trend, estimates that U.S. manufacturers would bring back home 1 million jobs if they did comprehensive evaluations of their true offshore production costs.

HAMPERED BY REGULATION AND TAXATION But Moser reckons that another 3 million jobs will not return to American soil unless governments undertake sweeping changes to the business and tax climate and seek to eliminate the approximately $500 billion annual trade deficit. Those challenges seem unlikely in the current polarized political environment. One bright spot among major companies, ironically, is Walmart, which helped spark the flood of jobs to low-cost locations in the first place. The company announced its Made in USA initiative in January 2013, vowing to buy $250 billion more in products from U.S. suppliers over a 10-year period. Cindi Marsiglio, the Walmart vice president overseeing the U.S. sourcing push, says the retailer is on track to achieve that goal, finding American suppliers of such basic items as towels and socks.

There are three elements to its strategy. One is to buy more from exiting U.S. suppliers already manufacturing in the States. The second is encouraging reshoring and the third is finding new U.S. suppliers. This strategy appears to be much more than a publicity stunt aimed at improving the image of Walmart as the giant retailer that destroys smaller retailers and good jobs in the communities where it operates. Walmart is finding that the Made in USA initiative makes solid business sense because it can move production closer to its customers, allowing its suppliers to respond faster to new designs or new trends. It can also manage inventories more efficiently. Many companies that have reshored jobs discover big gains in reducing the “coordination costs” of having multiple executives on long business trips and trying to communicate across 12 time zones. Others, like NCR, found that locating production closer to customers improves the company’s ability to innovate because customer needs can be more rapidly communicated to engineers and others who design products. At the same time, the macroeconomic conditions that encouraged wholesale outsourcing are changing. “Labor conditions and wages are rising overseas,” Marsiglio says. Transportation costs, muted at the moment by cheap oil, also have risen over time. “When you do the math, it became clear that the U.S. was highly competitive again,” she says.

THE PATRIOT FACTOR

Bolton Hats recruited Samuel L. Jackson to appear in a Kickstarter campaign seeking funds to bring its manufacturing operations back from China to Pennsylvania; it was wildly successful, raising over $100,000.

Another funny thing happened on the way to the forum; some Americans are now saying they care where their products are made. “They are telling us that that is impacting their purchase decisions,” Marsiglio says. She declines to say that American consumers don’t trust Chinese products—because Walmart still sells billions of dollars’ worth of goods made in China. Instead, she puts the emphasis on the positive—Americans want anything they eat themselves or feed to their children or pets to be made in America.

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READY TO RESHORE? Here’s what to think about when weighing a change in venue: CALCULATE THE COST.

If you have production offshore and are considering bringing any portion of it back to the U.S., calculate the complete cost of the products being made offshore with a tool like the Total Cost of Ownership method developed by the Reshoring Initiative (reshorenow.org/ tco-estimator). Whatever measurement tool you use, be sure to include the softer, sometimes intangible factors, such as coordination costs, the cost of sending executives on long trips abroad, the risks to your intellectual property from operating in some markets and delays in introducing new designs or new products caused by lengthy supply chains and inventory management costs.

PARTNER FOR TALENT. If it makes sense to consider reshoring, the biggest obstacles appear to be finding suitably skilled American workers and parts suppliers. One way to address this challenge is to work with community colleges that are often willing to partner with you on developing curriculum around the skills you need. PREPARE FOR HICCUPS.

Some manufacturers have stumbled by not developing adequate inventories and have lost sales when the reshoring process proved more difficult or took longer than anticipated.

CULTIVATE INCENTIVES.

Local economic development programs may also be able to ease the transition. Work with state and local governments to see what tax incentives they will provide to companies bringing jobs to the area. You don’t have to go it alone.

MANUFACTURING

So Walmart is putting “Made in USA” labels on the front of packages of those products. “When I walk through the aisles of a Walmart today, I can much more easily find things that are made in the USA,” she says. Walmart created its strategy working with Boston Consulting Group (BCG), which estimates that by the end of the 10-year period, the retail giant will have created 250,000 direct manufacturing jobs in the U.S. and 750,000 supporting jobs, for a total of 1 million. What kind of jobs are they? “Commonly, you will hear the statement ‘that when manufacturing comes back, the jobs will come back too,’” Marsiglio says. But they are different jobs. “When I walk through automated factories making products for us, people may be [wearing white coats] and using their iPads to check the machinery,” she says. Across the board, American manufacturers are becoming more technology-intensive, using wireless communications, for example, to link supply chains with manufacturing and assembly lines.

DOMESTIC FROM THE START Suppliers who went global but maintained some production in the U.S. are better able to respond to Walmart’s initiative because they have some infrastructure and some employees in place. But starting from scratch is much more difficult, as John Dammermann, CEO of Impact Innovations, discovered. Impact Innovations, an employeeowned company with about $150 million in annual sales based in Clara City, Minnesota, specializes in making seasonal holiday items for major retailers, such as Walmart, Kmart, Michael’s and Big Lots. It sells ornaments, Christmas stockings and bows, indoor and outdoor décor and wrapping paper. For years, these items have been made mostly in China. In 2011, Impact Innovations acquired a gift-wrap competitor, Cleo, in Memphis, Tennessee. Cleo had shifted half of its gift-wrap-making to China and

“Labor conditions and wages are rising overseas...when you do the math, it becomes clear that the U.S. is highly competitive again.” —Cindi Marsiglio, V.P., Walmart Impact Innovations completed that offshoring process. Impact Innovations did not acquire Cleo’s old printing presses, but kept its converting equipment. Those converters allowed the company to cut large runs of wrapping paper mass-produced in China into smaller packages of paper that could be sold at retail. Dammermann approached Walmart in 2012 about bringing some of the gift-wrap production back to the U.S. His labor costs in China were increasing by 15 to 20 percent each year and he reckoned that wrapping paper was less labor-intensive than ornaments or stockings. So it was the product closest to the tipping point of being cheaper to make domestically. But he needed assurances that his contracts with Walmart would last long enough to justify buying new printing presses. The retailer made the commitment and Impact Innovations invested $7 million in two presses, installing one in Memphis in June 2014 and then a second in January 2016. It expects to spend another $3 million this year. “The commitment from Walmart gave us the confidence to go out and invest,” Dammermann says. “A lot of big, public corporations would not want to make the commitment we did because it’s a long-term payoff. We just decided it was the right thing to do.” It shifted half of its paper sales to Walmart to Memphis-based production in 2015; and this year, more than half of all the gift wrap it sells to Walmart will be made in Tennessee, not just converted. Just as Rongione at Bollman Hat discovered, however, finding the right people to operate the

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new printing presses has been a challenge. Impact Innovations has added 25 jobs to its staff of 35, as well as 100 seasonal jobs. Some employees are from the company that got bought out, Cleo, but even they need help with the newer equipment. “There is certainly more technology involved and there has been some retraining,” Dammermann explains.

THE PEOPLE PROBLEM He is frustrated that more young people are not interested in manufacturing jobs. “The perception of manufacturing jobs may be that they are somehow dirty and manual,” he says. “But it’s much more technology-driven. There is much more automation. The jobs can be very rewarding and challenging.” However, it’s a tough sell. “I don’t know anyone who wouldn’t prefer to manufacture in the U.S.,” Dammermann continues. “It’s just easier to manage. I think we will continue to see more manufacturing coming back, but the workforce is going to have to be here for it. That means different types of training and education. It’s not like flipping a switch and everything moves back. It’s a process.” The bottom line: The reshoring of American manufacturing is real, but it will require a great deal of effort over several years before it becomes a major contributor to U.S. economic growth. BILL HOLSTEIN (williamjholstein.com)

is a New York-based journalist and author of The Next American Economy: Blueprint for a Real Recovery.

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CORPORATE CITIZENSHIP

RADICAL ENGAGEMENT: The Shifting Role of the CEO By John Browne with Robin Nuttall and Tommy Stadlen

EFFECTIVELY NAVIGATING ENVIRONMENTAL AND SOCIAL ISSUES CAN BE A KEY DIFFERENTIATOR FOR YOUR COMPANY.

Former BP CEO John Browne outlines a four-point plan that will help you get started. A 30-30-30 PHENOMENON shows the stark contrast between the importance of companies engaging with the world around them and their failure to do so successfully. On average, 30 percent of corporate earnings are at stake from a company’s relationship with external stakeholders such as regulators and NGOs, according to research by McKinsey. CEOs say they spend 30 percent of their time addressing how their companies engage with these stakeholders. Yet, less than 30 percent of CEOs believe their companies engage successfully. Traditionally, companies have relied on Corporate Social Responsibility (CSR) as a primary means of governing their relationships with society, yet CSR departments have become increasingly detached from core commercial activity. As Enron’s excellent CSR record showed, a great CSR program is no guarantee that a company’s business operates in the interest of society. During my tenure as CEO of BP I was an early proponent of CSR, but I think that the idea of connecting with society in this way is now dead. 1 GET RADICAL ABOUT ENGAGEMENT In its place, CEOs need to find ways to integrate societal and environmental issues deeply into their companies’ strategy and operations. Business needs to become more inclusive of all relevant internal and external stakeholders, engaging radi-

cally with people outside the company, on their agenda, not its own. In order to embed this new approach within the company, business leaders will need to drag the management of environmental and social issues into the professional era. Bloomberg Chairman Peter Grauer, shares this view. In one of the 80 CEO interviews that my collaborators and I recently conducted, he told us that

KEY TAKEAWAYS 1 CSR is DOA

Traditional corporate social responsibility programs no longer work

2 Beyond Financials

Stakeholders are holding companies accountable for societal issues

3 Priorities Please

The most effective initiatives focus on key issues around the company’s core purpose

the “traditional approach to managing this part of enterprise needs a dramatic overhaul. This is likely to become a key differentiator as the pressures on business increase.” In my view, capturing the 30 percent value at stake must begin with a fundamental re-appraisal of the role of the CEO. The requirements for the top job have changed. Sam Palmisano, who led IBM from 2002 to 2012, believes his time at the helm coincided with a palpable shift in the criteria used to evaluate CEOs. “It was shareholder value creation, pure and simple,” says Palmisano, reflecting on the “very straightforward measure” of performance by which some of the great CEOs who came before him— IBM’s Lou Gerstner at IBM, GE’s Jack Welch, Emerson’s Chuck Knight— were measured. “People looked past how they got there.” Lee Scott, Walmart’s CEO during the same era, agrees. “Someone like Jack Welch was able just to get up in the morning and drive through the things he felt were best for GE,” he says. “In those days you acted in the best interests of your investors and your customers and you really did not need to worry too much about the outside world looking in.” Today, however, most CEOs agree that the job is harder than it has ever been. As Scott points out, the CEO’s audience “is not just your customers and your employees, it’s the entire world.” Even in the narrow sphere

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CORPORATE CITIZENSHIP

of financial performance, the judgements are harsher. “Look at Tim Cook of Apple,” says Scott. “Here is a guy who is increasing revenues, increasing profits, creating new products and maintaining a brand that is universally adored. Yet he faces the most intense criticism on an almost daily basis.”

places on financial performance as an indicator of good business. In 2008, operational excellence (including investor returns) remained the primary driver of corporate reputation among the general public. Six years later, it was the least important of the five ‘trust performance clusters’ that Edelman cites (the others being engagement, purpose, integrity and products and services).

Are your corporate philanthropy efforts aligned with your corporate mission? Do you, as the CEO, play a key role in leading your corporate giving efforts? If the answers are yes, then your organization may be a candidate for a Corporate Citizenship Award.

WA R D

People now demand that companies deliver across a much wider range of societal issues

3 CORPORATE CITIZENSHIP CLARITY If the success of business leaders is increasingly tied to the way their companies engage on social and environmental issues, what should CEOs do about it? The answer depends on the company and on the industry, but my third point is that CEOs need to offer clarity of tone from the top. This means showing staff that you care deeply about the topic in question, dedicating time to speak to people about it and offering role models who serve as champions. In 2000, a media storm blew up about the denial of healthcare benefits to same-sex couples in the oil industry, and the episode served as a trigger for BP to cut a distinct path as a leader on diversity. My deputy, Rodney Chase, encouraged me to appoint a well-respected outsider who could drive the initiative forward. We brought in Patti Bellinger as president of global diversity and inclusion. “As an African-American woman, with a title like that, I stood out like a sore thumb,” recalls Bellinger. “The suits in BP’s St James’s Square offices could not believe what they were seeing. They thought it was some sort of nonsensical PR exercise dreamt up in America.” I had to work hard to ensure that the message went out loud and clear to senior management that she had the boss’s ear. Rodney Chase met with Bellinger for four straight hours on Day One and he did the same on Day Two and Day Three. Senior decision-makers were asked to make the

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2 IDENTIFY WHAT’S IMPORTANT People now demand that companies deliver across a much wider range of societal issues. What’s more, after understanding these new expectations, the second thing CEOs must do is think about whether their company is addressing the issues that will allow it to continue to grow in the long run. The goalposts were already shifting when I was CEO of BP. Financial performance was no longer enough; companies increasingly needed to demonstrate their positive impact on society. It led me to make a landmark speech on climate change at Stanford in 1997, arguing that the link between climate change and fossil fuel emissions could no longer be ignored. I could see that addressing these environmental issues head on was the only way to secure BP’s future. It was the only way for the company to gain a seat at the negotiating table when the future of the industry was being discussed, to show customers that we were planning for change and to convince talented young people with a vision for the future that they should work for us. It challenged BP

and the wider oil and gas industry to think about how to take our business “Beyond Petroleum.” Palmisano notes that in the current business environment, hitting financial targets is “not going to get you more than a B minus when people grade you as a CEO.” Instead, “you have to define your mission as a CEO and as a company in much broader terms. That’s what drove me, and it will only become more important for the next generation.” Research by Edelman further supports this case: in recent years, society has reduced the emphasis it

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Allocating human resources in a strategic manner is a key aspect of the CEO’s role, because it involves not only considering what we know today but also anticipating what skills and experiences leaders will need to run businesses that may not yet exist. — A.G. Lafley Chairman Procter & Gamble

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CORPORATE CITIZENSHIP

‘LEADERSHIP, NOT MANAGEMENT’ CEOS CAN ONLY FOCUS on the company’s purpose by effectively delegating management to their teams. Management is not the same thing as leadership. It seems the best tech founder-CEOs are doing this better than their counterparts in traditional industries. The model I saw repeatedly when I spent time with these firms was of a founder-CEO who focuses on the future of the product and industry, and on the company’s relationship with the outside world. It meant leaving a large proportion of management responsibilities to an experienced presi-

dent or chief operating officer. The most striking example was at Box, the cloud storage company started by Aaron Levie as a nineteen-year-old from his dorm room, now worth more than $1 billion. At the age of 29, Levie has handed over the day-to-day management of his company to industry veteran Dan Levin. “I run the company,” says Levin. “The entire executive staff reports to me, and I report to Aaron. He’s the head and I’m the neck. He’s got the eyes and the ears, he decides what direction we should go, he decides what the

diversity agenda a priority. The results were significant. Over the next few years, BP more than doubled the number of women in leadership and became a leader on LGBT inclusion. 4 PRIORITIZE AROUND A PURPOSE Inclusion is just one example. When the list of possible tasks is endless, how does a CEO know which issues to focus on? My fourth point is that CEOs should concentrate only on the issues that help define and enact their company’s core purpose. In particular, that means avoiding issues that are about an ill-defined sense of doing good. Building a more inclusive work environment at BP for example, would not have worked if it were simply a “nice to have.” I had to make it clear that inclusion was central to our ability to engage employees and that more engaged teams would help us deliver better results for customers and shareholders. As the evidence now shows, engaged employees are more productive: the shares of companies with the most engaged teams outperform average

next mountain to climb is, and then I try to figure out how to get the body to do it.” No more than 30 percent of Levie’s time is now taken up with operations. He spends the rest of his day reading about the history and future of technology, talking to customers and meeting people from outside the industry to gain fresh perspectives. “The CEO should be in perennial start-up mode, thinking deeply about the core product, about new business and about rapidly changing external forces in the world.” Levie believes Silicon Valley CEOs are “ahead

competitors by more than 20 percent over the course of a decade. The unremitting energy it requires to define and enact the company’s purpose has been a common theme in my interviews with CEOs. During Paul Otellini’s tenure at Intel, the chipmaker started to attract anti-trust questions from regulators and politicians due to its market dominance. “I ended up going to Washington 12 times a year,” he remembers. “I didn’t go anywhere 12 times a year, let alone somewhere that wasn’t a customer. But I had to get used to it because this went to the core of our ability to grow.” Meanwhile, Unilever’s Sustainable Living Plan aims to double the size of the business while lowering its environmental impact—a plan that includes a 50 percent reduction in its ecological footprint by 2020. CEO Paul Polman says he views it as his role “to give people outside and inside the company the confidence that the Unilever Sustainable Living Plan is a winning strategy.” In today’s business environ-

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of the curve” but fully expects other sectors to catch up because “no one is exempt from the increased pace of change that will require leaders to focus more on the big picture.”

ment, successful companies need to incorporate societal connection formally into their business, from the boardroom to the shop floor. Achieving this will require worldclass management at every level of the company, applying process and operational excellence to the way that companies think about societal and environmental issues. As examples of companies ranging from Walmart to IBM show, it also requires the very best leadership at the top. The combination of technical management and emotional leadership—persuading, motivating and offering direction—brings out the best in business. Both will be required if business is to transform the way it engages with society.

JOHN BROWNE is the former CEO of BP. ROBIN NUTTALL is a leader in the public

sector practice at McKinsey. TOMMY STADLEN is a technolog y entrepreneur and author. All three are co-authors of the forthcoming book How Companies Succeed By Engaging Radically With Society.

Congratulations, Randall! World Wide Technology proudly salutes AT&T’s Randall Stephenson as Chief Executive’s 2016 CEO of the Year!

Through our culture of innovation, we inspire, build and deliver business results from idea to outcome. We start with our greatest innovation of all: our people.

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Co-Founder, Echelon Front

Former Navy SEAL officer, author of “Extreme Ownership: How U.S. Navy SEALs Lead and Win”.

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ECONOMIC DEVELOPMENT

REGIONAL REPORT

The West Reno is suddenly as hot as a firecracker. By Warren Strugatch ARROHEALTH, A NATIONAL provider

of medical payment analytics, opened a new operation in Reno, Nevada in mid-February. Three weeks later, Cam-Concept, a Canadian specialized industrial equipment manufacturer, announced it was opening a U.S. headquarters in Sparks. Three days after that, Sonwil Distribution cut the ribbons on a new logistics center in Reno. The three were among the latest companies to relocate or expand in Greater Reno (population: 426,000) close to the California border. Their new neighbors include eBay, Switch, Black Ridge Technology, Clear Capital, Flirtey and Petco—and the not-to-bemissed Tesla Motors. A company building a 10 millionsquare-foot battery plant in a recession-hammered market is tough to overlook. “Our world has just changed with Tesla!” proclaimed Mike Kazmierski, CEO of the Economic Development Authority of Western Nevada, when news broke that Tesla's "gigafactory" would create 6,500 full-time jobs there. Kazmierski’s team, working with the state’s economic development operation, won out over California and several other rivals for the most coveted build-out of the year by offering

$1.25 billion worth of incentives over 20 years—larger by far than any preceding Nevada welcome package, and among the largest in U.S. history. “Reno is hot right now, as hot as a firecracker,” says Jim Renzas, a site selector from Orange County, California who cites the region’s numerous advantages. Because of use of natural gas, “energy costs are about half what they are in California,” he says. Then there’s the workforce. “The labor market features a surplus of talented workers,” he notes. Another major advantage is location. Employers pay lower taxes and comply with generally less restrictive environmental regulations while being able to easily service the California market across the nearby border. “Reno-Sparks can be the next Austin,” declares Floyd Rowley, a commercial real estate broker and senior VP with the Johnson Group in Reno. The city is “in a position to replicate this tech-driven growth.” NEVADA | #9 | WHAT HAPPENS HERE…

Nevada, one of the states hit hardest by the Great Recession, has been among the slowest to recover. Las Vegas experienced 14 percent unemployment at the

epicenter of the recession, now down to 5.8 percent. Jobs are coming back; the Sagebrush State ranked fifth last year in job creation. “We’ve turned the corner on the recession and the recovery,” says Steven Hill, Nevada’s top economic development official. “That’s all in our rear-view mirror right now.” Expansions of local companies and an influx of tech businesses have fueled Nevada’s recovery. Apple’s decision to open a $1 billion data center in Reno in 2012 gave the state instant cred as a platform for tech operations. And the aforementioned Tesla decision instantly propelled the state into the economic development’s major leagues. The elevated status comes at a cost to taxpayers; Nevada is the third most aggressive issuer of relocation and expansion incentives in the country, behind only Texas and Florida. Its flexible approach to property tax abatements enticed eBay to open a $412 million data center in the Reno-Sparks corridor last year. While the lion’s share of economic attention goes to Reno, Las Vegas has made headway as well. It inked a $1 billion factory development deal early this year with Faraday Future, the other electric car company, and is working hard to overcome what some suggest is a perception problem. “People perhaps don’t realize there is a large city outside the strip with a big labor force,” says Seth Martindale, a managing director with CBRE in Los Angeles. WYOMING | #14 | ENERGY BLUES

For more than a decade, Wyoming— whose energy sector accounts for 40 percent of GDP—well outpaced national economic growth and job-creation activity. Not anymore. The air continues to rush out of the Cowboy State’s oil and gas balloon. Sector employment will bottom out this year at 13,800 jobs, before inching back beginning next year, predicts University of Wyoming economist Anne Alexander. Mining has a bright spot—trona, which supplies about 90 percent of the nation's soda ash and whose produc-

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ECONOMIC DEVELOPMENT tion is seen rising through 2019. Federal government employment, a main labor cluster, is also down. Agriculture is a mixed bag: better growing conditions have improved crop product, but increased supply has lowered prices. Many Wyoming residents feel the pain; personal income will drop 2.1 percent this year, estimate state economists. Casper, the state’s biggest city, has made strong gains in leisure and construction while holding onto its energy-sector workforce. Along with Cheyenne, the state’s second-largest municipality, both metro regions are seeing new businesses and restaurants opening, with more tourists coming for the scenery and recreation, says Alison Felix, economist at the Kansas City Fed. COLORADO | #15 | LURE OF THE GREAT OUTDOORS

Colorado has been among the fastest-growing states this century. It’s posted faster economic growth than all but a few states this year. Prosperity indeed trickles down in this entrepreneurial, do-it-yourself state; which topped the nation in personal-income growth for three years running earlier this decade. Colorado continues to add jobs in

almost every business sector, says Richard Wobbekind, economist at the Leeds School of Business at the University of Colorado. Wobbekind foresees over 65,000 new jobs coming online this year for a 2.6 growth rate. Nearly a quarter will be in professional and business services, Colorado’s fastest-growing cluster. Biotech clusters are taking hold in the Boulder-Longmont corridor and south of there in Colorado Springs, says site selector Eric Dienstbach of Denver-based Binswanger. On the red side of the ledger, the mining sector is slumping, reflecting plunging oil and gas prices. Agriculture, especially cattle farming, is softening due to rising feed prices and droughts. The state’s workforce delights employers, but Colorado needs more workers. Paced by fast-expanding metro Denver, the population is growing faster than all but three states, yet that’s not fast enough. Housing is booming, and a well-utilized new rail line connects the airports to downtown and industrial parks. The region’s cultural offerings, iconic recreational opportunities and the availability of legal marijuana ensure that Millennials will continue to join the work force.

UTAH | #16 | BUSY AS A BEEHIVE

Utah was the No. 1 job-creating state last year, growing its labor force at a 4.1 percent rate. The pace has ebbed this year, but the Beehive State is still expanding— enough to add 1.4 million jobs since last spring. Tech expansion drove GDP and IT sector growth 7.7 percent in 2015. Other sectors flexed their muscles as well. Construction reached its highest level in eight years, leisure and hospitality thrived and financial services companies displayed “Help Wanted” signs; Goldman Sachs alone hired 2,600. Less happily, state GDP growth stagnates; Utah seems mired at its 19th-lowest national ranking. Utah ranks No. 4 among states in number of startups seeded, says the U.S. Chamber Foundation. Organic growth is essential in a state site selectors often shy away from, citing lack of workplace diversity and the dominant role of the Mormon Church in civic life. Utah’s focus on collaboration underpins economic growth. Government worked with CEOs to identify issues and improve education outcomes, including making teachers’ salaries more competitive. Office-building construction, as well as residential construction, is booming

How The States Stack Up CEO Rank 1 (1-50)

U.S.

Nevada

GDP Rank 2 (1-50)

GDP VALUE 2 ($ billions)

$17,232.00

Relocation/ Expansion Incentives (HQ/Job 3 Creation)

Business Tax Climate 6 Rank (1-50)

% Scoring College-Ready on Standardized 7 Tests

Community College Performance (Meeting labor market 7 expectations)

Business 3 Environment

Workforce Quality (readiness and 3 availability)

Unemployment Rate (December 4 2015)

Economic Outlook Rankings 5 Rank (1-50)

5.0%

135.00

B/B

B+

B-

5.8%

Wyoming

43.80

B+ / B+

B-

5.2%

Colorado

305.90

B- / B-

B+

2.9%

Utah

140.00

B+ / B

A-

B+

3.5%

Idaho

63.20

B+/ B+

B+

B-

3.8%

14%

Montana

44.10

B- / B-

C-

4.3%

Alaska

56.70

B- / B-

C-

6.6%

4.7%

Washington

422.90

C-/ C-

C+

A-

5.8%

Oregon

212.90

C- / C-

B-

4.5%

Hawaii

76.20

B- / B-

C-

3.1%

10%

California

2,306.00

C/ C

C-

A-

5.4%

13%

Sources: 1 Chief Executive magazine reader poll; 2 Bureau of Economic Analysis; 3 Site Selector Consensus: Jim Renzas, RSH Group; Seth Martindale, CBRE; Eric Dienstbach, Binswanger; 4 Bureau of Labor Statistics; 5 American Legislative Exchange Council (ALEC); 6 Tax Foundation; 7 U.S. Chamber of Foundation.

54 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

WHY WE’LL BE HERE / CALIFORNIA

economy workers. The High-Tech Business Alliance, formed in 2014, says members expect to add 940 jobs this year. A clutch of out-of-state companies including Workiva, Helix Business Solutions, Advanced Technology Group and SoFi recently located offices in the state.

WHO Mark Riddlesperger, Founder and President, LA Propoint SITE HISTORY After a long-term project working for Universal Studios in Japan came to an end, Riddlesperger returned home to Southern California. Working with a business partner, he opened LA Propoint as a designer, fabricator and installer of stage and show systems, museum exhibits and entertainment modules. The company began in a 5,000-square-foot warehouse just outside downtown Los Angeles. Seeking more space, it moved to a 15,000-squarefoot location in the San Fernando Valley, in 2004. Four years later, when the space next door was vacated, the company moved once more, again doubling its size. WHY CALIFORNIA “Most of the entertainment companies are here in L.A. Our business involves theme parks, museums, sciences centers and theaters. San Fernando Valley is very desirable because the suppliers, the customers and the talent in the industry are all here. So are our customers. We’re near Warner Bros, Universal and Disney and they are all, or have all been clients.” REASON FOR LOCATION “Real estate is cheaper than in downtown L.A., and you can get larger spaces. We’re between the St. Gabriel mountains and the ocean, which is very appealing, at a location that’s very close to a major commercial thoroughfare serving the region.”

in greater Salt Lake City, Utah’s capital and by far its largest metro region. Strong technology-company hiring fuels the metro area’s sustained growth. Utah is hot because of the work force, says site selector Renzas. “Because the state has a very high birthrate, there are a lot of young people in the area who are very good with computer and tech skills. They’re very well educated and they don’t want to leave.” IDAHO | #21 | GROWTH, BUT BRAIN DRAIN CONTINUES

Idaho enjoyed its best year economically in more than a decade in 2015, adding 28,000 jobs—as much as it gained the previous two years combined. Gains in manufacturing, retail and leisure/ hospitality continue to spearhead expansion. Less happily, thousands of jobs in computer and electronics manufacturing disappeared during the last recession, likely for good. Nonfarm payrolls will expand 2.3 percent this year and 2.2 percent over the next three, Idaho’s government economists predict. Business leaders are looking to schools to fuel further growth. The Idaho Business for Education group contends that 80 percent of state secondary school students are

ALASKA | #30 | A SHRINKING ECONOMY

poorly prepared for high school. Many top students don’t stick around; half the state’s grads leave Idaho for work within four years of graduation. MONTANA |#25 | DOING BETTER THAN EXPECTED

Energy, mining and farming—Montana’s top three industries—all contracted last year. The state economy sustained a reverse trifecta of declining oil and gas prices, reduced metal mining activity and falling grain prices. Despite the pressure on three fronts, the state's economy did relatively well. In 2015, Montana generated 6,000 jobs—representing more than $60 million in wages and salaries—over the previous year. In 2015, job growth more than doubled as compared to 2014 and continues this year. In Billings, Montana’s largest city, commercial and industrial projects are breaking ground. Manufacturing and residential construction—the latter having flattened out several years ago— is again up in the state’s western region, especially fast-growing Bozeman. Montana’s business leaders fret over brain drain and hope the high-tech cluster taking root in the state’s western half opens opportunities for digital-

Once characterized by boom-and-bust economic cycles, Alaska’s economy settled in the ’90s into slow but steady growth driven by its key sectors: federal government, mining, tourism, fishing, air cargo and healthcare. More recently, slow-but-steady has become drip-dripdrip. Since July 2013, job growth has been negative. Federal government employment has shrunk nearly 1 percent, a big problem in a state where nearly a quarter of residents cash federal paychecks. This and the effects of plunging oil prices have Alaskans wondering if they’re back in a recession. Business leaders, some of whom suspect recent economic changes are permanent, are pressing government officials to begin planning for a smaller revenue base to avoid raising taxes or postponing infrastructure repairs. WASHINGTON | #31 | HELP WANTED

Washington is experiencing year-overyear growth in nearly every sector. A construction boom is driving employment gains, including a 4.6 percent rise in King County, which encompasses Seattle. In a tight labor market, many employers struggle to staff up. State employment will rise 1.8 percent this year, down from last year’s 2.8 percent, predicts Steve Lerch, executive director of Washington’s Economic and Revenue Forecast Council. Seattle, the state’s business capital, will grow at a 2.5 percent rate this year, down from last year’s 3 percent, projects Chris Mefford, CEO of Seattle consultancy Community Attributes. “Companies want to hire more people, but it’s not easy,” he says. Metro Seattle’s Big 3—Boeing, Micro-

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ECONOMIC DEVELOPMENT soft and Amazon—dominate the region, although iconic retailer Starbucks and tech expansionists like Expedia are gaining attention. Expedia recently opened a 40-acre, 4,500 employee site three miles from the central Seattle waterfront. The city’s mojo comes increasingly from fast-growth startups in technology, business and professional services. A fledgling biotech cluster has taken root in the South Lake Union neighborhood, tapping startup money provided by Microsoft’s Paul Allen. One of America’s fastest growing cities, Seattle is rapidly transforming into a global city even as it guards a unique sense of place that attracts well-educated newcomers. Employers compete with housing developers for prime waterfront space; the economy needs to accommodate both. Housing all the recent newcomers is challenging, but essential; the labor pool must expand for growth to continue. OREGON | #39 | BUSIER THAN BEAVERS

Oregon enjoys full-throttle growth and rising wages in all major industries in the state. The state’s average paycheck, while still lower than the nation’s, has risen to its highest relative point “since the mills closed in the early 1980s,” says Josh Lehner of the State’s Department of Economic Analysis. Oregon’s surging economy is pulling workers into the labor market, as the participation rate increases from recessionary lows. Lehner attributes Oregon’s strong growth to the state’s industrial structure and net migration flows. Legal sales of recreational marijuana have bolstered sales tax revenues. while exports, traditionally a foundation of the regional economy, are down nearly 20 percent year over year, reflecting the strong dollar and soft markets in China and other trading partners. Job growth has been concentrated in two suburban counties in greater Portland, Multnomah and Washington Counties. The Oregon part of Portland is the state’s biggest urban center. In Eugene, the Beaver State’s second-largest

municipality, more than $300 million in downtown real estate and business projects have transformed downtown. Developers are busy replacing dilapidated, counterculture-era storefronts with technology complexes and operations for specialized-food producers, craft-beer brewers and more. New corporate arrivals include Avago Technologies, Winnebago Industries and Firstsource. HAWAII | #44 | TOURISM WILL GROW, SLIGHTLY

Hawaii’s economy is expected to show modest growth during the rest of 2016 and into 2017. The Aloha State’s economy is largely dependent on tourism and conditions in Japan, its major trading partner. Tourism is expected to grow 1.9 percent this year; yet with the stronger dollar, tourists will squeeze their dollars tighter than originally projected. Stagnation in Japan and softening in China constrict tourism and trade revenues. Improving labor and construction markets buoy optimism. Overall, Hawaii’s economy, as measured by real GDP, is projected to grow 2.3 percent in 2016. State economists predict 2.4 percent real GDP growth forecast for 2017. Unemployment is projected to be 3.5 percent this year, sliding to 3.3 percent next year, say forecasters. CALIFORNIA | #50 | THE ABCS OF CORPORATE RETENTION

California is the place CEOs love to hate. Consistently named the worst state for business by Chief Executive readers, the Golden State also houses the nation’s biggest debt—$2.4 trillion. Its output surpasses all but seven nations. California supplies more agricultural products to the world than any other state and is home to TV, film, video-game and music producers, as well as to Silicon Valley, the engine of the Innovation Economy. There are warning signals in many of those areas. Most noticeably, VC money, which has fueled a small army of startups, began tailing off last summer. Still, California addresses abound on patents, a proxy for sector robustness.

56 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

The Bay Area is thriving. San Francisco has become the world’s most expensive office market as measured by rent increases. Demand so exceeds supply that Oakland—of which Gertrude Stein once wrote, “There is no there there”—has collected the overflow. In Southern California, advancing industries include healthcare and social assistance, construction, professional and business services, scientific and technical services, and environmental and waste removal, according to the Kyser Center for Economic Research at the Los Angeles Economic Development Corporation. The economists at the Anderson School of Management at UCLA point to a decidedly mixed-bag future. Innovation from the research departments at Stanford and other institutions supply California with innovation, fueling its GDP. “L.A. is seeing a little bit of a tech boom," says native-son relocation advisor Seth Martindale of CBRE. "Even downtown is undergoing revitalization. There are a lot of smart young, educated people, and companies taking advantage of the fact that L.A. is cheaper” than Seattle, Portland and San Francisco. San Diego continues to grow its biotech hub, attracting a broad range of high-tech companies glomming onto its labor market, sunshine and lifestyle. Recent arrivals include Bizness Apps, GoPro and Wrike. Earlier this year, local biotech BD announced an in-town expansion that would keep over 3,000 jobs local. Still, there’s significant churn in a state where the acronym ABC could mean “Anyplace But California.” Executives, middle managers and salaried employees alike are seeing incomes stagnate. Real personal income growth is estimated at 3.6 percent this year, slipping to 3.2 percent next year and 3 percent in 2018. It’s no surprise that California business owners eyeball locations across their borders and fantasize about less expensive, less congested and less regulated places to do business—but usually stay put.

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CHIEFEXEC.COM

SMART MANUFACTURING SUMMIT Summit participants touring the HarleyDavidson Museum, which celebrates more than 100 years of motorcycle making

Wisconsin Governor Scott Walker welcomed CEO Summit participants

How new technology and processes are redefining best practices in manufacturing— and reshaped businesses. by Jennifer Pellet 58 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

Building Tomorrow’s Manufacturing World Today

“IT’S NOT OUR PARENTS’ MANUFACTURING ANYMORE,” Governor Scott Walker told CEOs gathered

in Milwaukee, Wisconsin for Chief Executive’s Smart Manufacturing Summit on April 5. The governor’s comment referred to the changing nature of the products being produced—and the jobs required to produce them—in his state over the past few decades. But it took on a broader meaning during the gathering as business leader after business leader echoed the sentiment. The pages to follow offer learning gleaned from sessions on everything from technologies like additive manufacturing and the Internet of Things to how the evolution of lean manufacturing is redefining best practices in manufacturing and revolutionizing businesses. P H O T O G R A P H S B Y S A R A S TAT H A S

Q&A / A FULL-THROTTLE MANUFACTURING TRANSFORMATION HARLEY-DAVIDSON CEO MATTHEW LEVATICH DISCUSSED LESSONS LEARNED BRINGING CUTTING-EDGE PROCESSES AND TECHNOLOGIES TO A 113-YEAR-OLD COMPANY. MORE THAN ANY OTHER BRAND,

Harley-Davidson has been fiercely dedicated to American manufacturing,” said Marshall Cooper, CEO of Chief Executive Group, in presenting Chief Executive Magazine’s annual Leadership in American Manufacturing Award to Matthew Levatich, the iconic motorcycle company’s CEO. “It represents American quality like none other.” Kicking off the 2016 Smart Manufacturing Summit by recognizing Harley-Davidson was fitting because the company exemplifies the potential that dedication to manufacturing excellence can realize. After a 1981 management buyout, the company re-engineered its production processes, redesigned its engines and implemented best-in-class manufacturing techniques—lean, continuous improvement and predictive maintenance— learned from its Japanese competitors. It then went even further, adapting its production process to accommodate the seasonality of the business, in which demand can swing as much as 50 percent over a few months. The effort involved overhauling a preWorld War II vehicle operations facility— what Levatich describes as a “seismic event” that completely transformed the plant. “It was a rabbit warren of waste and inefficiency,” he noted. Today, the plant’s continuous-motion assembly line requires half as many full-time employees, with that number bolstered during peak demand periods. “This is a seasonal business; we need to produce as close to demand as we possibly can,” explained Levatich, who noted that the change demanded a delicate negotiation with workers. “We needed a labor agreement that allowed us to bring on 30 percent of casual workers who could support our surge manufacturing capability each spring.” While the very qualities associated with the company’s legacy may seem somewhat contrary to the principles of manufacturing excellence, the company has found a way to forge alignment. “The ideas of freedom, independence, my way or the highway and stick it to the man—all those things that exist loud and clear for our customers—have no place inside the

four walls of a factory or business,” noted Levatich, who has been with Harley-Davidson since 1994 and was named CEO last year. “But channeling all that positive energy toward driving safety, quality and productivity is a big part of what we do in our business. It is all about serving the customer.” Excerpts from an interview with Levatich by CE’s J.P. Donlon follow. From a practical standpoint, what did becoming a more flexible and responsible manufacturing operation entail for Harley-Davidson? One component was the labor agreement; we needed a labor agreement that allowed us to bring in 30 percent surge capacity in the spring. We started that with an agreement in our York facility and then rolled it through the other plants. We also needed to invest in ERP systems to manage raw materials. We needed different approaches with our suppliers. We have a lot of small suppliers that can’t necessarily make huge investments in systems and technology; how are they going to handle surge? Do they have labor agreements to allow them to bring in surge workers or will they need to build inventory? The last piece was capital. We used to have four assembly lines in York, Pennsylvania spread across 42 buildings. We leveled 41 buildings, sold the land and said, “This is it. There’s no going back.”

Chief Executive’s J.P. Donlon, Chief Executive Group (CEG)’s Marshall Cooper, CEG’s Wayne Cooper and Chief Executive Network’s Bob Grabill flank Harley-Davidson CEO Matt Levatich (center), winner of the Chief Executive 2016 Leadership in Manufacturing Award

From those four assembly lines came one assembly line capable of building any motorcycle. A whole lot of technology and capital was necessary to do that, but the principle was built around the decision that we were no longer going to have duplicate-capacity, dedicated assembly lines. We would have a flexible assembly line able to build any model, any line, any day across our whole system. We’re not actually there yet, but that was the guiding principle. You have said that you don’t believe in introducing technology just for the sake of having advanced technology. How did that philosophy affect the transformation? When someone says, “smart manufacturing,” you think of all kinds of devices and applications and things. I believe that you have to be clear on what your manufacturing strategy is, to know how you gain a competitive advantage in what you do and you have to apply technology to support that end and only that end. In our case, our flexible manufacturing strategy is all about getting the right motorcycle to the right customer at the right time. In 2010, 40 percent of the motorcycles JULY/AUGUST 2016 /

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SMART MANUFACTURING SUMMIT

that we sold in the U.S. to a given dealer were retailed by a different dealer. That represented multiple points of inefficiency—risk of damage, real cost in transportation, customers who had to wait, who didn’t get to see the bike that they wanted when they walked into a dealership. We run a seasonal business, but we were building motorcycles in October, November and December that weren’t going to be retailed until May. We were making bets on model mix, content, color, destination—and we were getting 40 percent of them wrong. There’s no better example in my mind than [our] saying, “This is a seasonal business; we need to produce on a seasonal basis. We need to produce as close to demand as possible, so we can adapt and adjust. It’s getting more competitive, more global and more dynamic.” Those statements don’t just apply to Harley; they apply to every business today. You went from having separate assembly lines for different motorcycles to having one line capable of building different models. How does that common assembly architecture work in practice? Everybody knows how to go about being great at managing building materials, but this was about building a process that goes right up into product development. How do we develop [assembly line processes] that will allow us to mount multiple frames and do that in an efficient, effective way, as well as having our work force able to accommodate that [ability]? Standardized work and rigorous training are essential to being successful in that flexible environment. I’ve worked

on different parts of the assembly line at both York and Kansas City. It’s a continuous-motion assembly line where I had to adjust the clutch of the bike coming at me and the bike would be halfway into my zone by the time I got to it. Then, I would be halfway into the next guy’s zone [finishing it]. It’s a team, so they were helping me out, obviously also making a lot of fun of me, too. All of this is about having a standard bill of process and standardized work so that the operator knows what to do when he or she is presented with an Australia-spec motorcycle—that it needs a KPH speedometer and a left-dip headlight, not a miles-per-hour speedometer and a right-dip headlight—but that otherwise is exactly the same. Another key for us is the ability to effectively and safely bring on 30 percent of casual workers. They’ve got to work safely and they’ve got to do their jobs consistently every day just like everybody else. How do you add 30 percent of seasonal workers and ensure that they’re properly trained? The standardized work is a big part of it. I mentioned that I worked on the assembly line. I’ve got skills and capabilities, but I don’t know how to do those jobs. So, when I walked in there, the first thing that they did with me is what they do with a casual worker. The team leader walked me through the work instructions and then shadowed me for a while to make sure that I was doing the work the way the work should be done. We also rotate our workers to different shifts and add the surge employees

SPOTLIGHT

HARLEY-DAVIDSON: A CYCLICAL SOLUTION DURING A TOUR of Harley-Davidson’s Pilgrim Road Powertrain Operations facility, CEOs learned how the the Menomonee Falls, Wisconsin facility implements lean principles like standardization, continuous improvement, built-in quality, just-in-time inventory management and people involvement. “Built-in-quality is about building it in, rather than inspecting it in,” said Randy Christianson, the company’s Pilgrim Road Powertrain Operations facility manager. “Too many companies try to catch and remove the bad parts instead of managing the process to prevent them.”

60 / CHIEFEXECUTIVE.NET / JULY/AUGUST 2016

“Standardized work and rigorous training are essential.” —Harley-Davidson’s Matt Levatich

equally across. That way, there’s a solid base of 70 percent full-time workers to balance the system from a talent and knowledge perspective. Cost is a big barrier for many companies in adopting new technology. What advice would you give to other CEOs approaching that challenge? Any investment that you make has to have a point and ought to have a return. This isn’t about bells and whistles. This is about, “Are we clear how this technology investment helps us be better at that? And if it doesn’t make us stronger along a clearly defined strategic path, then why are we talking about it?” The clarity of flexible, responsive manufacturing as a strategic direction defined everything we did. That piece of it is necessary; otherwise, your people are confused. They don’t have the ground rules to even make the decision, “Is this a good investment or not?” How did this transformation mesh with Harley-Davidson’s culture? There was an adjustment. There used to be a rugged individualism that existed in most hourly employees. “I’m what makes this Harley great. My unique way of torquing that bolt.” Well, guess what? Unique ways of torquing bolts don’t make for quality motorcycles, so that meant retraining everybody on what we are trying to do here. The trick is a simple twist: conveying that it isn’t about rebelling against management, process, discipline; it’s rebelling for the customer. We’re not trying to rebel against one another; we’re trying to rebel for the customer by doing our work better every day.

PANEL

Smart Design and Production

CONCEPT Three CEOs offered their insights on incorporating 3D printing, robotics and software into production processes. ADDITIVE ADDS UP

WHO Rick Smith, president of The Additive Manufacturing Council and author of The Great Disruption: Competing and Surviving in the Second Wave of the Industrial Revolution. On the potential of additive manufacturing—aka 3D printing… “With 3D printing, costs are not tied to the number of units that are produced. So you’re not penalized by producing in very small, customized quantities. And cost is not tied to complexity. The printer doesn’t care; it’s just printing things in layers. These are not just better, faster, cheaper types of innovations—they are completely transformative. Right now, we’re just scratching the surface with small quantities where it’s cost effective to produce using additive manufacturing. But the future we see is customization of production, anything, any place, in any quantity and unlimited complexity of design.” On staying on top of innovation… “With disruptive technologies of any type, you don’t know all the answers. You can’t go to the CFO and ask, ‘What’s the ROI if I start investing in this area?’ But there are a lot of areas where you can start small and then learn, adapt and figure out where you’re going to go. So if you think, ‘In 10 years, 10 percent or more of my physical inventories will be produced on demand rather than warehoused. It’s not going to happen tomorrow, but

Donlon with Sage Electrochromics’ Alan McLenaghan, Newport News Shipbuilding’s Matt Mulherin and The Additive Manufacturing Council’s Rick Smith

where could I start today? Can I identify 500 or 1,000 parts?’ It’s all about experimentation. Pick a spot, dive in and start experimenting.”

MODELING SOLUTIONS

WHO Matt Mulherin, president of Newport News Shipbuilding, a $4 billion shipbuilder that produces ships for the U.S. Navy, including their nuclearpowered aircraft carriers. On future applications of 3D printing… “A ship carries repair parts on board based on a history of usage—how many times they pulled those parts out. With a 3D printer, the right materials and the 3D data that tells the printer what the geometry looks like, you can print parts as you need them and save all that space and weight on the ship. Space and weight on a ship is a great premium, especially for an aircraft carrier.” On how 3D printing is being implemented… “The development of 3D product models for both our carriers and submarines—and

even for the refueling overhaul ships—has allowed us to get into smart manufacturing. We’re able to create 3D models of some relative intelligence. We’re trying to go all digital. [The challenge is:] How do I get away from 2D drawings and just give our craftspeople everything they need on an iPad or a smartphone? The opportunity is tremendous.”

CLEANING UP WITH AUTOMATION

WHO Alan McLenaghan, the CEO of SAGE Electrochromics, a manufacturer of advancedtechnology glass products used in buildings and other applications. On the advantages of automation and robotics… “When we first created our product, humans were manufacturing it and the first devices had about 1,000 defects on them. You are not going to pay a premium for a product that has 1,000 visible defects on it, even if it’s a cool product. It’s like selling you an Aston Martin with 25 dings

on the side of the door and expecting you to say, ‘That’s okay, it’s still a cool car.’ “We realized early on that the quality needs to be at least two orders of magnitude better than today’s glass products— and we weren’t going to achieve that through constant human contact. So, we took the approach of automating as much as possible. Many of the robots that we originally looked at were super at handling the product but generated more debris than the clean room could cope with. We needed clean-room-capable robots.” On staying abreast of gamechanging innovations… “We’re trying to encourage our people—through what we as leaders do and how we recognize and award them—to stay connected within our industry, to bring in ideas from outside and to never, ever get to the point where we think we are the leaders. I want to be the leader, but I don’t want them to think that they’re already the leader because then you get [complacent].”

CEO TO CEO “What I see happening with lean today is less, ‘We know what the program is and we just need to roll it out and get you to do it,’ and much more of a feeling of, ‘We are engaging our people to create and adapt the program that we’re going to continue to use.’” — MIKE MARTYN, FOUNDER, SISU CONSULTING

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The Internet of Things

CONCEPT Three CEOs shared their experiences using sensors and the IoT to solve business challenges and bring advanced manufacturing from theory to practice. ON HARNESSING THE POTENTIAL OF MACHINE LEARNING…

Thomas Mayer, COO of Renault Sport Formula One Team: “We created a digital twin of the real Formula One car. It’s a virtual model, a mathematical model down to the screw, that allows us to have a reverse design and manufacturing approach that we didn’t have before. Instead of producing a part and then fine-tuning it through trial and error testing—wind tunnel, track testing—we can use virtual data, put the drivers into the simulator and let them run. Then, if we are able to extract performance, meaning get the car to go faster, we go back and starting producing. We tell the engineers, “Look, that’s the physical property of the part you need to design.” That way, we are just physically producing one part, the part we are actually putting [into] the car. We save time, we save money, we iterate faster—and all of that brings performance.” Ted Doheny, CEO of mining equipment company Joy Global: “In mining, the challenges today are immense. In the last four years, the prices of commodities across the board have been cut in half, so our customers are under a lot of pressure. We use sensors and the IoT to solve mining challenges. Our longwall shearing system, one of the most automated pieces of mining

equipment, is a good example. Where a mine once had more than 35 people underground, we now have 7,000 sensors and 140 cameras that constantly monitor and control processes, transmitting data between machines and up to the surface. If that longwall system goes down, it’s $1,500 a minute. So we help our customers use this data to predict a problem and get the inventory in place to make a repair before it goes down. As we drive automation, we look to simplify the process, eliminate waste and remove people from harm’s way. For one of our customers, automation was able to eliminate $100 million of waste and reduce 35 people working underground down to less than five.” Todd Teske, CEO of engine manufacturer Briggs and Stratton: “One of the ways we’ve dipped our toe in the water with IoT is on our standby generators, which go on automatically and power your house during an outage. What we’re really selling is peace of mind; but with a mechanical piece of equipment, things can go wrong. As a homeowner, you want to know when your unit stops cycling regularly so that you can get the unit fixed before you actually need it. “We developed an app that you can pull up on your phone to check to see that your generator cycled successfully. If there’s a fault, it will notify you and tell you the dealer to call

Donlon, Briggs and Stratton’s Todd Teske, Joy Global’s Ted Doheny and Renault Sport’s Thomas Mayer

near your house who can get it fixed. We think the commercial applications will be quite interesting. We think we can drive better productivity, which means uptime, which means better billing cycles, for our customer base.”

ON WHAT THEY LEARNED ALONG THE WAY…

Meyer: “At the end of the day, it’s about making the right decisions—in our case, do we pit the car or not? But sensors can have the wrong readings. Whenever we have an alert, we crosscheck it with two or three other sensors and put the physics behind it to see if what the sensor is telling us is even possible. Otherwise, we could retire a car just because we have wrong information coming from the sensor.” Doheny: “Once you’re embedded into your customer’s system, you need to be able to handle the truth both ways. Ever since we did our first smart-services center, we’ve

CEO TO CEO “Every machine on every shop floor in every plant connected to the Internet. That’s the goal.” — DEAN BARTLES, EXECUTIVE DIRECTOR OF THE DIGITAL MANUFACTURING AND DESIGN INNOVATION

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been able to tell which operating crews in the mine were the best. We can tell when people are not working as they should. Vice versa, our customer could tell when we had an equipment problem. It’s a different relationship when you have that much data. The question becomes, what will you do with it? We focus on three things obsessively: safety, production and cost. If it moves the needle on those elements, that’s where we should focus.” Teske: “You do need to decide what to do with all this data. We went back to our framework and how we talk about innovation, because innovation is an overused word that means something different to everybody. We defined it as user-driven problem-solving and that’s where we started. We looked at how we accumulate data and communicate it so that it becomes information that ultimately solves a problem, whatever that problem is, for the user.”

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Donlon with Barnes Group’s Patrick Dempsey, Snap-On’s Nick Pinchuk and MillerCoors’ Fernando Palacios

Leadership and Talent Management: The CEO’s Role CONCEPT Three CEOs shared their challenges finding and retaining skilled employees—and the solutions that are helping to bridge the gap. BRINGING UP BREW MASTERS

WHO Fernando Palacios, Chief Integrated Supply Chain Officer, MillerCoors Backstory: The No. 2 brewer in the U.S., MillerCoors manufactures the flagship brands Coors Light and Miller Lite, as well as craft and import brews like Blue Moon, Foster’s and others. The Talent Challenge: “Beer is all about fermentation. My best comparison is paint. If you want pink paint, what do you do? You pick out a base, they dial 2347, and that can of paint becomes pink. Formulas work. In our case, you’re dealing with living things. You’re dealing with barley and hops. I can dial 2347, but what comes out is not necessarily pink. “Our folks have to smell, touch and taste, then cut and add. Our constant challenge is in how to bring people with a chemistry/biochemistry

background into something that also has some art to it. We can’t just take someone out of a university and say, ‘Here, come and brew beer.’ We need to spend the time to get them to the point where they can literally smell barley, touch it and say, ‘This is going to be good extract.’” The Solutions: “We’re trying to bring in people with a science background and educate them in our own two-year program very specifically on how we want them to brew beer. And that’s how we [train our brewers], either through us, or we’ll send them to Nottingham in the UK. “On the technical side, all of our breweries have a direct relationship with one technical campus, whether that’s a university, a college or a vocational school. “The programs may take place inside the breweries or at the schools, where they will

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mimic everything we do, from electronics to mechanical design.”

AN ALLIANCE APPROACH

WHO Nick Pinchuk, CEO, Snap-On The Backdrop: Kenosha, Wisconsin-based Snap-On is a 95-year-old company that manufactures and distributes high-quality hand tools and auto diagnostic equipment. The Talent Challenge: “There’s an art to producing a hand tool—an art around heattreating, grinding, a number of other things. Therefore, we need people who can handle low-volume manufacturing and apply an art to it. We also keep trying to increase our complexity because the ability to solve any major critical problem in the workplace is what people pay us for. So our talent challenge is, one, to feed the pipeline and two, to

have the people educated and capable enough to deal with the complexity.” The Solutions: “We train our people in three ways. One, we have training in-house. In Milwaukee, existing employees get to spend 40 hours—two hours on our time and two hours on their time—training on new skills to handle the machinery of the future and bid on jobs that become available on those machines. “Two, we partner with community colleges. For our power tool plant in Murphy, North Carolina, we found a community college that was receptive to partnering to build the training for the workforce we needed. “Three, we [helped establish an organization called the National Coalition of Certification that assists community colleges to develop [curricula] that match what’s needed in the industry today.

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DISCUSSION SESSIONS INCLUDE: New Business Models and Strategies for the Digital Economy The CEO’s Role in Leading Digital Transformation in an Established Business The Internet of Things: What CEOs Need to Know What CEOs Need to Know about Cybersecurity

DECEMBER 6, 2016 / NEW YORK CITY

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SMART MANUFACTURING SUMMIT

Leadership and Talent Management: The CEO’s Role (continued) We have 250 schools, 3,000 instructors and 30,000 students involved. We’ve given out almost 60,000 certificates saying, “You’re certified in a standard curriculum to be able to weld, to be able to use an automotive diagnostic or whatever the case may be. That’s very important because community colleges, believe it or not, need help in terms of calling in the airstrikes and matching their curricula [to the jobs].”

Palacios described MillerCoors’ multi-pronged approach to brewing technical talent

TEACHING TOMORROW’S WORKERS

WHO Patrick Dempsey, CEO, The Barnes Group The Backdrop: Founded in 1857, The Barnes Group is an international aerospace and industrial manufacturer and service provider. The Talent Challenge: “Our new vision and strategy is to move more towards engineered products and innovative solutions. As we [progress] through that transformation, the challenges have been quite significant. Three years ago, we had zero design engineers as part of Barnes

Group. Today, we have 125 design engineers. “We currently have 35 manufacturing facilities worldwide and generate 45 percent of our revenues overseas. Five years ago, a communication to our workforce that went out in English captured 90 percentplus of our workforce. Today, we need to put it out in seven different languages. These are some of the challenges that we’re facing in adapting to our new needs and to the needs of the new workforce.” The Solutions: “Sometimes

when you go to the universities, it’s a day late and a dollar short. At that point, many students have already been influenced heavily as to what careers they’re going to pursue. So we start a lot earlier. Last week, 30 people from Barnes spent four hours in our local elementary school talking to the kids about all the different types of jobs that make a community successful. “We used donut manufacturing as something that the kids could relate

to. We said, “Now you’re going to be a part of a manufacturing process, and the end product is going to be donuts.” At the end, we had the kids actually project their donuts up onto a screen to highlight what was a great donut and what was a defective donut. They all were split up into separate teams so there was a competitive spirit there, but the heart of the message was that manufacturing, whatever the end product is, is a career that contributes to society.”

SPOTLIGHT COMMITTED TO CONTINUOUS IMPROVEMENT “LEAN IS NOT ROCKET SCIENCE,” GE Healthcare’s Mike Pappalardo, production team leader at GE Healthcare’s Electric Avenue factory told CEOs touring the x-ray tube manufacturing facility. “Changing the culture, that’s what’s challenging.” During the tour, participants learned how the West Milwaukee site applied lean manufacturing, Six Sigma and a commitment to continuous improvement in the design and manufacture of x-ray and computed tomography. The result? Huge yield increases, a drastic reduction in materials waste and a safer more ergonomic workplace.

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to recognize greatness

Congratulations to Randall Stephenson, CEO of the Year, who drives innovation day in and day out at AT&T.

SMART MANUFACTURING SUMMIT

CEO ROUNDTABLE

PRODUCTIVITY-DRIVEN INVESTMENT STRATEGIES Can smart manufacturing initiatives fuel U.S. productivity? By Jennifer Pellet WHILE THE U.S. ECONOMY is in far better shape than it was in the aftermath of the financial crisis of 2007, the nation’s productivity has yet to recuperate. That unhappy reality raises questions about just what needs to happen to boost efficiency and eliminate waste, noted leaders participating in a roundtable discussion at Chief Executive’s 2016 Smart Manufacturing Summit. “Total-factor productivity in the U.S. economy has been sliding since 2007,” pointed out Lee Swindall, vice president of business development at the Wisconsin Economic Development Corporation, which co-sponsored the discussion. “And there’s clearly a strong correlation between that slump and the low GDP growth we’re been registering during that period. This phenomenon is a serious issue that we’re going to have to address.”

Tech to the Rescue Smart manufacturing practices, which use technology like embedded sensors and integrated software to collect and analyze supply-chain data and drive real-time improvements in production, are obvious solutions. Historically, the adoption of information technology advances has fueled increases in productivity. By driving efficiency across processes, smart manufacturing has the potential to do the same. Connected machines can use predictive analytics to boost production by reducing downtime, improving worker safety, streamlining operations and eliminating waste. Yet, despite this powerful potential, most manufacturing companies have yet to join the smart manufacturing

Ted Doheny, CEO of Joy Global and John Rothenbueler, CEO of Kwik-Lok revolution. In fact, just 13 percent of participants in the American Society for Quality’s 2014 Manufacturing Outlook Survey reported having at least partially implemented smart manufacturing. The good news? The majority of those who did so (82 percent) reported increased efficiency. Given that impressive success rate, why haven’t more U.S. companies sought to harness the power of smart manufacturing? Reasons range from cost barriers and management resistance to security risks and the prospect of workforce disruption. “The risks need to be known and fully managed before we capture the true promise and potential of this evolution,” noted Swindall. “These include linear risks like data integrity, network integrity, privacy, data storage capacity and standards integration, as well as things like

KEY TAKEAWAYS EXCELLENT ECONOMICS

Smart manufacturing practices have the potential to boost productivity AN ROI HURDLE

Concern over the costs and risks involved is delaying adoption LABOR DILEMMA

Companies will need to be proactive about training workers in new technologies

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SMART MANUFACTURING SUMMIT displacement of the existing workforce and social disruption.” Cost was cited as a major barrier by CEOs participating in the roundtable. Several reported struggling to sell their companies on making the investment necessary to spur productivity. “I have a board telling me that I need a twoyear payback period on any idea we present,” said John Rothenbueler, CEO of Kwik-Lok. “Whereas in my mind, three to five years is a good payback on increasing productivity.” That point resonated with Ted Doheny, CEO of Joy Global, which manufactures and services heavy machinery used in underground and surface mining. With his company under pressure from customers reeling from commodity price cuts, Doheny is also grappling with demand for a rapid payback on technology investments. At the same time, such a burning platform can help drive change, he noted. “In 1999, there was a huge investment in new technology since all the computers were going to blow up because of Y2K,” he pointed out. “What happened? In 2001, productivity shot up because they had to use all the technology they put in place. So adversity defined that change.” Yet, even those who recognize the need to invest in manufacturing-technology advances often hesitate, afraid they will choose the wrong technology. This is particularly true for companies burned by IT investments in the past, reported Swindall. “Over-investment in the preceding generational technologies from which they have yet to reap a full return causes a natural hesitation to adopt new platforms,” he said.

People Pros and Cons Workforce considerations also weigh heavily on both sides of the smart manufacturing adoption equation. Hampered by the perception that facilities are dirty and jobs are low-paid with limited prospects for advancement, today’s manufacturing companies have a tough time attracting new hires. As a result, CEOs like Elizabeth Feldman of

“Total-factor productivity in the U.S. economy has been sliding since 2007...this phenomenon is a serious issue that we’re going to have to address.” —LEE SWINDALL, WISCONSIN ECONOMIC DEVELOPMENT CORP.

brazing materials manufacturer Lucas Milhaupt, are looking to automation and robotics as a solution to thinning ranks of workers. “Our system is so old that we still do a lot of things manually, but we don’t have as many people coming into the company to fill our ranks,” she explained, noting that the company is in the midst of an ERP implementation. “I looked at the new technology and said, ‘We need to be there to compete,’ because I’m not going to be able to find as many employees who want to come in

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WEDC’s Lee Swindall and Kohler’s John Brickner

and do manual jobs. Young people want to work in new systems. If we don’t put this system in, I will continue to lose people and I won’t be able to service my customers.” In a similar vein, John Brickner, director of operations at Kohler, is looking for ways to automate jobs as 30- and 40-year veterans leave the power systems manufacturing company. “I think part of the denigration of productivity has been the attrition of the workforce,” he said. “The custom side of our business is more difficult to automate because those jobs are more complicated; but on the more commoditized consumer-product world, where there’s more task repetition, I see application for robotics.” Ideally, technology will enable manufacturers to capture the institutional knowledge of experienced workers and systemize it, added Randy Hauser, president of Chicago Metal Fabricators. “Since we’re a custom builder, 80 percent of what we build is from other people’s prints, so the key intellectual property for us is really our estimators, They can take a blueprint of something that has to be cut, laser-welded and machined and come up with a number.

We need to get to the point where we can put that knowledge base into software and integrate it into our current systems.” That’s a formidable challenge for a mid-size company that doesn’t have its own IT department, he acknowledges. “Bringing someone in from outside to do that is more costly, plus adoption is never as good when an outsider is trying to implement something. So we don’t really have the resources, plus this thing is moving so fast that you think, ‘What if I spend $50,000 to put this system in here and by the time I implement it everybody has moved over there?’”

the education sector in making sure the skills are there,” he said. Over time, methods of educating future workers will evolve with the nation’s workforce, asserted Michael Lovell, president of Wisconsin’s Marquette University. “I’m a believer that higher education is going to actually reform itself in the next 15 years and you’ll see a huge change in the way we educate students,” he said. “We can’t rely on lectures—one-way [dissemination of] information—because teaching information isn’t all that important in an economy where you always have it at your fingertips. Our students need to be able to creatively problem solve.”

Seeking Skilled Workers

A Burning Platform

However, even as they look to automation as a solution to a dearth of manufacturing workers, CEOs are well aware that finding skilled workers to operate the more complex machinery in smart factories will be problematic. “With the advent of new technologies, we can bring jobs back to the U.S.,” said Chris Bopp, CFO of Standard Textile, which manufactures towels for customers like Marriott International in its facilities in Georgia and North Carolina. “But we have a huge skills gap when it comes to people to take care of the management, monitoring and maintenance of machines with the latest technologies—ERP, robotics, IoT. Then we talk about the ability to take the information collected by these machines and make use of it—it’s very difficult to train people to be able to do that.” To overcome that challenge, Standard Textile has created alliances with local colleges that now recruit and train for its U.S.-based facilities, Bopp noted. As demand for workers with specific skill sets continues to increase, more and more companies and universities may find themselves teaming up to train and educate prospective employees about new technologies, added Chicago Metal Fabricators’ Hauser. “The only way we are going to solve this [gap] is by having a much closer collaboration between the industry sector and

Despite the clear challenges of investing in both new equipment and technology, as well as the talent necessary to operate them, CEOs agreed that making the transition is a competitive imperative. Smart manufacturing initiatives are widely expected to usher in the next

wave of innovation and productivity in the industrial domain. In fact, McKinsey Global Institute has forecasted that the financial impact of the Internet of Things alone will be between $3.9 trillion to $11.1 trillion by 2025. Clearly, adapting to the tectonic shifts under way—regardless of the risk that entails—is no longer optional, noted several CEOs. “First, it’s not all about return on investment made, it’s about survival,” said Kwik-Lok’s Rothenbueler. “Second, the longer that you defer it, the harder and more expensive it becomes to make whatever change is required.” “The way I would fully factor this is: If the tsunami is coming, the chance that you are not going to get wet is nearly nil, and in my judgment, all the evidence suggests the tsunami is coming,” summed up Swindall. “So you either have a craft that will float and you will survive, or you will be washed over and you’ll perish. Not reacting doesn’t seem to me a reasonable option.”

CEO Roundtable Participants ■ CHRIS BOPP COO, Standard Textile

Development Corporation (WEDC)

Associate VP, Marquette University

■ JOHN BRICKNER Director of Operations, Kohler

■ HENRY KIM Executive Vice President, Wheels Up

■ DONNA SCHOLER COO, Microbiologics

■ TED DOHENY CEO, Joy Global ■ J.P. DONLON Editor Emeritus, Chief Executive ■ ELIZABETH FELDMAN CFO, Lucas Milhaupt ■ RANDY HAUSER President, Chicago Metal Fabricators ■ ED HEFFERNAN Director, International Operations, Polaris Industries ■ MARK HOGAN CEO, Wisconsin Economic

■ LEE SWINDALL VP, WEDC

■ DR. MICHAEL LOVELL President, Marquette University

■ MICHAEL TAPP President, Interstate Battery System International

■ AARON MILTON VP of Manufacturing, Polaris Industries

■ DAN THOMAS Director of the Grainger Institute for Engineering, University of Wisconsin-Madison

■ IAN ROBERTSON Dean, College of Engineering, University of WisconsinMadison

■ JEFF TICKNOR SVP, BMO Harris Bank

■ JOHN ROTHENBUELER CEO, Kwik-Lok

■ LINDA TORAKIS President, McKechnie Vehicle Components

■ DR. CARMEL RUFFOLO

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PLANE ADVANTAGE

CHANGING THE WAY Longer lines, overbooked flights and rampant delays are increasingly making private aviation an economical alternative to commercial air travel.

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BY MARK PATIKY

YOU DO BUSINESS

“When you have to be in places like Ponca City, Oklahoma; Bentonville, Arkansas; Morrisville, North Carolina and Woonsocket, Rhode Island, you had better not depend on the airlines. If it’s a matter of getting the contract or losing it, then the higher cost of business aviation represents tremendous value.” —Phillip Swan, CEO of Bellevue, Washington-based EZ Grill

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PLANE ADVANTAGE

IN A COMPETITIVE GLOBAL MARKET, business leaders must ask themselves some tough questions. What value do you place on time? What’s the value in retaining the best people? What price tag do you put on the productivity lost sitting around airline terminals and the opportunity lost while waiting for the next day’s departure? The answers help measure the true value of a business aircraft. In fact, the vast number of companies that use them realize the true cost of a business aircraft is not having one at all. Sure, commercial airlines will move you efficiently between major hubs like Atlanta, Chicago, New York

and Los Angeles, but for the nation that put man on the moon, our airline industry certainly has a hard time getting him from Asheville to Albuquerque. Longer lines, more delays and scaled back service mean the disparity in speed and convenience with airline travel will only continue to grow. That makes the need for a company plane stronger than ever. “When you have to be in places like Ponca City, Oklahoma; Bentonville, Arkansas; Morrisville, North Carolina and Woonsocket, Rhode Island, you had better not depend on the airlines,” says Phillip Swan, CEO of Bellevue, Washington-based EZ Grill. “If it’s a

matter of getting the contract or losing it, then the higher cost of business aviation represents tremendous value.” The tens of thousands of companies worldwide that own business aircraft, fractional shares and jet cards or that charter daily have come to a similar realization. These companies don’t want to wait for opportunity to knock; they want to go out to find it—and they can’t afford to wait for the next airline flight to do so. They use business aircraft and realize big dividends in time and opportunity. The best part about business aviation today is that you don’t have to own a plane to gain the benefits. With

SABIN METAL CORPORATION: REFINING THE QUALITY OF LIFE EAST HAMPTON, NEW YORK, located on the southern tip of Long Island, is a two- to three-hour drive to the New York-area airports. That didn’t deter Andrew Sabin, chairman of Sabin Metal Corporation, the largest privately owned precious-metal refiner and recycler in the U.S., from establishing the head office of his 70-year old company in this small village. “I came out here as a quality of life decision,” says Sabin. With two business aviation airports close by, he can run his global business from this rural location and remain within easy reach of plants far away from any airline routes in the northern regions of North Dakota, upper New York State and a remote part of Ontario, Canada. “Business aircraft have been vital to our growth,” he says. “The biggest advantage for me is time. I go to oil refineries, chemical plants and customers across the nation that are in places with little or no commercial service. Unless you have your own plane, you’re going to lose two days getting there.” For the past 30 years, Sabin has relied on business aircraft to gain unparalleled easy access to his clients, suppliers and company facilities. He chartered at first, then acquired fractional shares in two Flight Options jets 15 years ago and has never looked back. Now he has an additional share in a PlaneSense turboprop Pilatus, which can access the shortest runways and unprepared landing strips. Having access to a private plane provides the freedom to expand his business and also further his environmental interest. Sabin, who is dedicated to the preservation of endangered species, founded the South Fork Natural History Museum in Bridgehampton, New York. He is also an active supporter of the Nature Conservancy, the Wildlife Conservation Society, the Wildlife Rescue Center of the Hamptons and the Worldwide Fund for Nature among many other conservation groups. As a staunch conservationist, he has taken the lead to remove the tarnish from an industry not exactly known for its earth-friendly reputation. His company plants, which

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maintain the industry’s most stringent environmental management policies, are models for environmental and regulatory compliance, and they showcase his deep environmental concerns. On a recent trip, Sabin departed from East Hampton’s relatively short runway in an Embraer Phenom 300 and arrived at his Scottsville, New York plant, 10 miles from Greater Rochester International airport, in just over an hour. In the afternoon, he visited a nature conservation project in Glens Falls, New York and landed back in East Hampton for dinner. “Because the jet is always available, it’s not only easy, it’s a pleasure,” he says. Aboard a Bombardier Challenger 300, the nonstop trip to Williston, North Dakota takes just over three hours, and he touches down minutes from his plant. That’s less time than it would take to reach an airline gate and board a commercial flight. “The amount of time this saves is unbelievable,” he reports. “I bring some of my managers or customers with me. I can spend four or five hours at the plant and come back the same day. It is just so convenient. I could never do this commercially. It’s just impossible. It has made my business much more efficient, and because it’s easy to get there, I can visit more places much more often.” With high-speed Internet available during the flight, he adds, “I can do all my emails, I have all the news, I keep up with the markets, the price of gold, silver, platinum, palladium, so I can do all my work in the air.”

PLANE ADVANTAGE

charter, jet cards and fractional ownership, companies can travel where they want to with speed, convenience, economy and agility. What’s more, it’s not just large corporations or top-level executives that benefit. According to a Harris Interactive study, nearly 85 percent of the companies that rely on business aviation are small and mid-size firms, and a large majority operates to or from communities with limited airline service. In addition, nearly three-quarters of all passengers on business aircraft are non-executives. These hardworking middle managers, researchers, technicians and marketing teams use a wide range of business aircraft to travel when and where they need to go. They gain direct access to otherwise hard-to-reach communities that are

catalysts for business development. They compress long, wasted hours of commercial air travel to short, intensely productive time. They arrive rested and ready, not drained and debilitated. Plus, with a business aircraft, they fly on their schedule, not an airline’s. That is a huge advantage in responding to critical needs and perishable opportunities. A BRAVE NEW WORLD OF BUSINESS TRAVEL It’s time to start seeing the world from a whole new perspective. Business aircraft are not just a reward for those who have achieved success; they are the means for creating it. The flexibility of having your own plane enables you to go wherever you to need on short notice in order to meet custom-

ers and investigate potential opportunities. The ability to land at more than 5,000 local airports, typically 15 to 20 minutes from virtually any destination, means you’ll have direct and unfettered access across the nation. Keep in mind that airlines serve only about 500 locations, and about 70 percent of all airline flights route through only 30 hub airports. That means that unless you are traveling between major cities, you’ll likely need to change planes, which will boost travel time to five to eight hours for even the shortest distances. On the other hand, with a business aircraft, you can fly direct to 10 times as many places as the airlines, you’ll arrive within minutes of your ultimate destination, and you can land your next big deal even before your competitor

HANNAY REELS: ACCESSING OPPORTUNITIES NESTLED IN THE ROLLING HILLSIDES near the Helderberg Mountains 150 miles north of New York City is the hamlet of Westerlo, New York, home to Hannay Reels. For many in this small hill town, Hannay Reels means employment. Known for quality and service, the 80-year-old company has grown to become an international leader in hose and cable reel manufacturing. Two million Hannay industrial reels are currently hard at work around the world, and the company produces more than 80,000 reels annually. Like a vast number of small businesses that keep the economy humming, Hannay Reels is located well off the beaten airline path. So are many of its 3,000 customers and suppliers. Although Albany, the nearest commercial airport, is just 40 minutes from Westerlo, it offers only a handful of direct flights to just a few major hubs. Hannay Reels solved that problem early on, says company Chairman Roger Hannay. In the 1950s, Hannay’s father and uncle landed a large account in Elmira, New York. Getting there by car was an ordeal, so they turned their rural location into an advantage using a single-engine, piston-powered airplane that enabled quick, efficient statewide access. Today, Hannay’s customers are nationwide, and the company jet provides entree to a completely new world of opportunity. It allows sales teams, engineers and management to visit quickly and easily with customers and suppliers in any part of the country. They can have meetings in hundreds of hard-to-access small towns, make those all-important face-to-face contacts and, best of all, visit multiple locations in a single day, which would be impossible by airline. “These are trips that we might not have made at all if we had to rely on commercial transportation,” says Hannay. “Our success depends on face-to-face personal relationships. Having our own aircraft means that it is always

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available to us, and we can travel when and where we need to.” Recently, he and a group flew to South Bend, Indiana, made their first sales call by 9:30 a.m. on a Monday morning and then went on to visit with 20 customers and two suppliers in rural areas of Indiana, Michigan and Ohio by the end of that week. “We flew home from Akron, Ohio in 48 minutes, and we were able to enjoy the weekend with family,” Hannay says. With a small staff of only 150, Hannay Reels achieves amazing efficiency. “The biggest advantage to having a plane is the targeted ability to go where we want to go and not where airlines send us,” says Hannay. The jet not only slashes travel time; it serves as a virtual office aloft. “Bringing a group of people along in the cabin gives us an opportunity to get ready for the next visit, so that has tremendous benefit,” he says. Also, the jet frequently flies customers in to visit the Westerlo plant, turning a three-day commercial venture into a one-day trip. Hannay emphasizes that operating a business jet is not always purely a dollar decision. “It’s not just about getting there. It is also about getting back. One less night away from home for our people makes a huge difference. We’re a very family-oriented company and quality of life is an essential consideration. The toll that commercial airline travel takes on our employees and customers—just the time and hassle of it—makes owning a plane like this an absolute necessity.”

“WHEELS UP LETS ME FLY EFFICIENTLY, LAND CLOSER, AND MAKE IT HOME IN TIME FOR A HEALTHY DINNER.” Irwin Simon CEO, Hain Celestial Group, Inc. Father, Husband, Entrepreneur Aircraft: King Air 350i Name: Title:

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The King Air 350i is the most efficient way to make every appointment, from my multiple Hain Plants to retailers to a night with the kids at home. It’s the smartest way to balance my work schedule with my family life, while still watching my bottom line. Wheels Up acts as an agent for the Wheels Up members, and is not the operator of the program aircraft; FAA licensed and DOT registered air carriers participating in the program exercise full operational control of the program aircraft. Subject to additional terms and conditions in the Wheels Up Program documents.

PLANE ADVANTAGE

boards a commercial flight. Getting there faster is just the beginning. Time on board a business aircraft can actually be more productive than time spent in an office. Cabins equipped with sophisticated electronics, satellite communications and high-speed Inter-

net allow aircraft passengers to stay continuously connected to the world below. With complete privacy from door to door, you can use valuable transit time to freely discuss proprietary business plans, hold confidential negotiations or participate in impromptu brainstorm-

ing sessions en route. So, you don’t just get there faster, you get there ready. For a complete guide to business aviation options, look for the next installment of Plane Advantage in the November/December issue of Chief Executive.

LABOV: A TOOL FOR TALENT FORT WAYNE, INDIANA IS A GREAT PLACE TO LIVE, but traveling anywhere from Fort Wayne can be problematic. That was Barry LaBov’s dilemma when he opened the doors of his small marketing communications firm, LaBov Advertising, Marketing and Training, in 1980. “We were very ambitious, and we decided to specialize in sales and marketing communications training for companies with large manufacturing, distributor or dealer networks across the nation,” LaBov recounts. Most, including Harley-Davidson in Milwaukee, BMW and Ferrari in the New York area and UPS in Atlanta, were based in major metropolitan areas. “Every flight to New York or Los Angeles, for example, was going to be at least two legs so we would have to set aside maybe six to seven hours for travel,” explains LaBov. “It immediately became clear that limited commercial airline service would present significant travel challenges. Flight cancellations or delays endangered our connections and appointments with clients.” That lack of accessibility put his company at a huge disadvantage over big-city competitors. LaBov decided that chartering a business aircraft would enable the company to be more frequently and easily available. However, chartering ultimately lacked the consistency that he wanted. Pricing and quality varied from day to day and place to place, and his plane of choice wasn’t always available when needed. To gain more control, LaBov purchased a new, small-cabin Cessna Citation CJ1, which the company operated for seven years. At the time, fractional ownership was in its infancy and jet cards were just emerging, so full ownership was the best option. As the economy slumped, some clients went out of business and his aircraft use dipped to about 150 hours annually, increasing his per-flight-hour costs considerably. Four years ago, LaBov sold his jet and began using Sentient and Flight Options jet cards. “The thing that we like is that even though we don’t own those planes, the quality, consistency, reliability and safety is extraordinarily high,” LaBov says. He retained all of the business aircraft benefits that he had—in fact, gained some—while eliminating the fixed ownership costs such as maintenance, hangarage, insurance and pilot salaries, which accrue whether the plane flies or not. Equally important, he eliminated the market risk associated with owning any asset. Although jet cards, which operate like pre-paid debit cards, typically cost more per flight hour than owning or chartering, they have some distinct advantages. LaBov pays upfront for exactly what he needs at an agreed per-flight-hour-rate. The hourly rate is the same whether he flies to or from Warren, Pennsylvania; Johnson City, Tennessee or Fort Wayne, and availability is guaranteed. In addition, unlike charter or ownership, he pays only for time aboard so he can arrive in Morristown, New Jersey, visit clients, drive to another meeting and call for his plane in Bridgeport, Connecticut without incurring repositioning costs. In fact, he could easily change plans, return the next day or three

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days later, and the cost would remain the same. Perhaps best of all, when all card hours are used, he can opt for a new one or walk away without obligation; there is no asset to sell or capital gain or loss to consider. LaBov determined that although the jet card per-hour cost was higher, his overall annual outlay dropped considerably because he eliminated the administrative burden of running an internal flight operation. On the other hand, he gained complete cost predictability and quality, as well as flexibility to easily ramp up or ramp down usage as business conditions change. Whether with charter, outright ownership or jet cards, business aircraft access put an entirely new perspective on LaBov’s business. “It allows us to meet not just one but several clients in a day. We can fly to New Jersey, with large presentation materials and equipment, drop off half the team, three others can continue to Boston to meet with another client, and we can all fly home that night, be with our families and be fresh and ready to go the next morning. A typical short trip to meet with a client in Toledo, Ohio, takes under an hour door-to-door. That’s faster than driving across the city at rush hour. Including connections, the equivalent commercial flight will eat up five hours of the workday day. Plus, LaBov can send five people to meet with a client and make great use of their time instead of flying one or two commercially and taking three days to do it. “Having a business aircraft available changed the way we do business, and it gave us a chance to grow faster,” LaBov says. “We went from a small-town, Midwest agency to a national contender, because we showed the wherewithal and the resources to be there and not spare convenience or expense to connect face-to-face with the client.” LaBov, who employs about 30 people, considers numerous intangibles that don’t fit on a spreadsheet as key factors in the business jet value equation. “The use of a business aircraft must focus around people and opportunities,” LaBov points out. Making travel more comfortable and less time-consuming for his team members helps make the company a more desirable place to work, he says. “If we had to make every trip commercially, we would lose some very talented people, and we wouldn’t travel as frequently. However you gain the benefits, you have to look at a business aircraft as an investment for growth. If you are an aggressive, confident and growing company, a business jet is an essential tool. It certainly has been integral to our success. We have uncompromised freedom to travel and we control our own destiny.”

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Joe Queenan

Let’s take lean to new levels. By Joe Queenan

WHEN CORPORATIONS get into deep trouble, they often announce that they are “restructuring.” This involves reorganizing debt, selling assets and shedding personnel. The company emerges leaner and meaner. Why, then, is restructuring not a more common practice outside the corporate world? There are many situations when shedding useless assets, consolidating debt and axing dead wood could help a non-corporate entity. Here are a few obvious examples: ORGANIZED CRIME. When the economy is flush, criminal enterprises expand into businesses for which their skill sets are poor matches. They also take on too many employees. Gangsters do well when they concentrate on prostitution, gambling, narcotics, waste removal, loan-sharking and protection. They get in over their heads by drifting into more competitive, legitimate businesses, such as banjo repair. Restructuring would allow them to shed these businesses, returning to the core operations that made them profitable in the first place. It would also enable gangs to trim staff by offering early-retirement and buyouts to gangsters who are not pulling their weight. As one economist puts it, “A gang doesn’t need three consiglieri when the economy goes south; and once you have more than five guys on the payroll named Little Jimmy, a bloating effect takes hold. This is the time to restructure.” POSSES. Posses build when a movie star, musician or athlete is at his or her peak and pulling down vast sums of money. But when fashions change or injuries take their toll and the money starts to dry up, stars with large crews should restructure. “You want to keep the enforcers and the limo drivers, and you definitely want to hang on to the drug guy,” says Rococo Messerschmidt, founder of Posse Pruners, which specializes in downsizing cliques. “But guys

you knew in grade school? Distant relatives of hangers-on? Those losers you can cut loose. This also applies to entourages.” STRING QUARTETS. String quartets are basically trios that got too big for their britches. Today, there are far too many string quartets and far too few music-lovers to support them. The obvious solution: Restructure. “Why would you need two violins?” asks Jackson Salieri, who runs a Vienna-based firm that specializes in downsizing sinfoniette into camerata musicales. “If the second violinist was any good, he’d be the first violinist. And if you absolutely insist on having one, hire some 20-year-old out of Julliard. Those kids will work for nothing.” Certain organizations outside the business community do have the good sense to restructure. Destiny’s Child, a trio, went through nine different members. The original Jefferson Airplane dropped a few members and became the Starship and then spun off Hot Tuna. Cher purged Sonny; Brooks might one day do the same thing to Dunn. More than a decade ago, an obscure band called Kara’s Flowers broke up, restructured and resurfaced as Maroon 5. Maroon 5 now has six members. This is what they call bloat. Cabal founders know this problem only too well. By their very natures, cabals should never grow to enormous size. Yet in boom times, cabals often bring in a lot of personnel whose skills are not essential to the organizations’ operations. Web site designers. Events coordinators. Pilates instructors. IT honchos. “Cabals rarely have cash-flow problems,” observes Rhiannon Quigley, author of Why the Knights Templar Still Matter. “But they frequently get way too bloated with relatives who lack the skills that make a cabal click. As one cabal leader recounts: “My worst mistake was bringing my nephew Skyler on board. Let’s be serious: Why would a cabal need a full-time social-media expert?”

Q U E E N A N I LLU ST R AT I O N BY T I M TO M K I N S O N

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That’s the power of AT&T.