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September 7, 2006

Always in Control

Charles F. Knight's demanding and exacting management style at Emerson Electric is instructive for the next generation of executives competing in an unforgiving marketplace.

For Charles F. Knight, planning has always been a contact sport. He elevated the strategic planning process at Emerson Electric Co. to equal parts rugby match and fine art.

Pity the poor young executive who didn’t have the relevant margin numbers at his or her fingertips. He or she surely would be the target of a withering comment from the demanding CEO who saw marathon meetings as an essential way to set targets, track progress and steep managers in the Emerson culture. “I jumped out of my chair often,” recalls the 70-year-old Knight, now Emerson’s chairman emeritus and a benefactor of the Olin School of Business at Washington University in St. Louis.

The sometimes harsh and unyielding process was, in fact, remarkably effective and contributed to an unbroken string of 108 quarterly earnings increases during Knight’s 27-year tenure at the St. Louis manufacturer of motors, process controls and instruments, power systems, appliances and tools, which generated revenue of $17.3 billion last year.

“He didn’t have all the answers, but he was asking the right questions,” recalls Ike Evans, former president and chief operating officer of Union Pacific Corp. and a former senior vice president at Emerson. “He kept asking until he got the answer and a comfort level.”

Knight never received the national media attention of such Forbes 500 CEOs as Jack Welch of General Electric Co., Lawrence Bossidy of Honeywell International or Louis Gerstner of IBM Corp. But executives who worked for Knight put their former boss on the same footing. Executive recruiters liked to target Emerson talent who could export Knight’s exacting management style to other corporations. In addition, Emerson’s highly decentralized structure was good for breeding leaders because managers could gain profit and loss responsibility for business units at a relatively young age.

“If I had a $2 billion client looking for a CEO, a good candidate might be someone running a $1 billion part of Emerson,” says James J. Drury III, a longtime executive recruiter who now chairs his own recruiting firm in Chicago, James Drury Partners.

Knight, who retired in 2000, ran Emerson on a 24/7 basis even before the around-the-clock schedule became part of the corporate lexicon. “He might phone you any hour—Sunday morning or Saturday afternoon,” recalls G. Thomas McKane, chairman of Franklin Park, Illinois-based A.M. Castle & Co. and a former senior vice president at Emerson. “He’s highly competitive. He hates to lose.”

Evans agrees, “There was a desire to excel and be good at what you do. He chose good people who were like him, who fed off each other and strived to make the company better.”

When then-CEO W.R. “Buck” Persons, who led Emerson for 19 years, invited Knight to take over as CEO in 1972, Knight initially decided he would rather stick to consulting, since he recently had acquired control of his family business, Lester B. Knight & Associates in Chicago. But over the course of the CEO search, he changed his mind and assumed the top spot in 1973 at the age of 37.

Under his stewardship, Emerson’s sales grew 15-fold, to more than $15 billion, and earnings increased 18-fold, to more than $1.4 billion. He guided the company through tough periods of overseas competition and moved some production offshore. He moved Emerson into China in the early 1990s so that it was well positioned when the Asian giant’s economy took off. He completed more than 200 acquisitions valued at more than $10 billion.

Since his retirement in 2000, Knight has thrown himself into the field of executive education. He helped fund Olin’s Charles F. Knight Executive Education Center. Among the top executive talent who speak to his second-year graduate students are such peers as Welch, Bossidy and Gerstner.

Q: YOUR MEMOIR, “PERFORMANCE WITHOUT COMPROMISE,” OUTLINES THE PLANNING PROCESS AS A CORNERSTONE OF EMERSON’S SUCCESS. DO YOU BELIEVE THAT MANY COMPANIES DON’T PLAN SUFFICIENTLY AND THAT DECISIONS ARE MADE BY THE SEATS OF THEIR PANTS TO THEIR DETRIMENT?
A: I suspect that all companies plan in one way or another. We believe Emerson is successful in this area for several reasons. First, we have defined management’s job in a single phrase: identifying and successfully implementing business investment opportunities that support the company’s targets for growth and profitability. So management’s job begins with setting ambitious financial targets, and our planning process focuses on specific opportunities that will enable us to meet these profit and growth targets and drive shareholder value. Management really can’t do its job without a deep personal involvement in planning.

Beyond that, there are several distinctive aspects of our planning process. For example, the people who plan are the people who execute the plan, so there is no gap between a planning department and operations. Plans address real market conditions.

Second, corporate and division management ultimately agree on every division plan. That allows us to be a blameless organization, because if a plan turns out to be less than ideal, there is no finger-pointing. We all agreed on it, and we all work together to make any necessary corrections. Overall, the planning process creates tremendous momentum and is the key to identifying times for important change.

For example, when you sit through 40 or more planning conferences in a year, and you begin to see low-cost competitors from outside the United States selling at prices below Emerson’s cost, you see the need to make changes. That situation led to the development of our Best Cost Producer strategy in the 1980s to compete not exclusively on price but on value and which enabled us to win on a global basis.

Q: WAS THERE A “EUREKA” MOMENT WHEN YOU REALIZED THE IMPORTANCE OF PLANNING, OR WAS IT EVOLUTIONARY?
A: It has been evolutionary. Emerson has a history of planning that dates to the 1950s with individual division planning conferences. We have refined and improved substantially the planning process over the years.

For example, we separated profit planning from the planning conferences that focus on the investment opportunities required to drive shareholder value. The profit plan is a five-year plan for the existing company, and it is reviewed every year. Of course, if new investment opportunities are identified, we look at their potential as they develop, and those that are most promising are considered at the next profit planning meeting. We added organization reviews to ensure that we have the right personnel in place to carry out our plans. We track progress quarterly in a detailed control cycle to ensure that we are doing what we said we would do. And we ultimately took our planning process abroad with international conferences. So the process continues to improve.

Q: DURING YOUR TENURE AT EMERSON, YOU MIGHT HAVE ATTENDED SOME 45 PLANNING CONFERENCES A YEAR. DID YOU EVER WANT TO JUMP OUT OF YOUR CHAIR? CLEARLY, EMERSON EXECUTIVES MUST BE FOCUSED AND DETAIL-ORIENTED. WHAT OTHER ATTRIBUTES ARE REQUIRED TO MAKE THE PLANNING PROCESS SUCCESSFUL?
APlanning has been described as a contact sport at Emerson, so I jumped out of my chair often. It was a great way to keep people focused and to get the facts, which isn’t always easy. And it does require time because there are so many things going on in a daylong planning session.

Planning trains new generations of leadership on our policies and culture, and exposes them to senior management. It gives corporate management insight into the thinking of division managers. Planning helps us recognize changes that are taking place, and it helps us deal with them. For example, several years ago, our planning process indicated that one way to increase our served markets would be creating a services and solutions business. We have done that, and it has been highly successful. And planning is a dynamic process. We plan for five years out, and we review the plans every year. If they are working, we don’t make any changes. If they aren’t working, we go back to the drawing board and get it right.

Nothing is sacred, and everyone knows we haven’t finished planning until we have something to do in terms of specific assignments. It also is stimulating because our people want to win, and just having the opportunity to participate in this environment is satisfying.

Q: YOU ARGUE THAT PLANNING RESULTS IN A BLAMELESS COMPANY, WHERE TRIUMPHS AND SETBACKS ARE SHARED. IS THAT A REASON FOR THE LOW TURNOVER OF MANAGERS AT EMERSON?
A: That’s one reason, but there are others, too. We are a non-bureaucratic organization with a relatively small corporate staff, and we eliminate corporate politics. We give people challenging assignments at early points in their careers, and if they succeed, we continue to offer them new opportunities. Although we are a global company, we have a structure that enables our managers to make significant decisions and act quickly at the local level. All of these things are attractive to managers.

We find that our policies and processes tend to strip away politics. But it must start with the CEO. He or she has to set the example of no tolerance for politics and has to enforce it. One key is the CEO taking ultimate responsibility as the executive in charge of all personnel activities, such as compensation, organization planning and human resources.

Keeping the corporate staff small also helps. And we refuse to publish an organization chart for corporate. That allows us to focus on programs and results rather than reporting structures.

Q: CAN SMALL COMPANIES AFFORD TO SPEND SO MUCH TIME IN THE PLANNING PROCESS?
A: Over the years, many companies, large and small, have expressed an interest in our management process, and we have been open about sharing that information. Most of them ultimately tell us they would not have the discipline or the willingness, or whatever, to commit as much time to planning as we do. It does take a great commitment to carry it off. In many cases, companies find that they gain from utilizing parts of what we do.

 

Q: YOU DESCRIBE THE TRANSFER OF JOBS OVERSEAS AS A NECESSARY PART OF REMAINING COMPETITIVE—SOME DIVISIONS HAD 70% TO 80% OF THEIR JOBS MOVED OFFSHORE. WAS THERE AN INTERNAL DEBATE ON THIS AT EMERSON? WAS THERE ANY WAY TO SAVE THOSE JOBS?
A: The percentages you cite are the extreme. And nobody takes pleasure from moving a job, but job moves are inevitable in the face of competitive challenges from abroad. Having some percentage of jobs outside the United States enables us to lower our overall cost structure, and thus preserve many jobs here. The profits generated abroad return to the company in the United States and help improve shareholder value in terms of share price and increased dividends—all of which contribute to the health of the economy in this country. Also, don’t forget, many of the international jobs we created are there to serve customers in Europe, Asia and other markets.

Q: EMERSON WAS SUCCESSFUL IN CHINA BECAUSE IT GOT AN EARLY START AND HAD A LOT OF TIME TO LEARN THE LAY OF THE LAND AND MAKE MISTAKES. WHAT IS YOUR ADVICE FOR COMPANIES JUMPING IN NOW, WITH THE CHINESE ECONOMY IN A FAR MORE OVERHEATED STATE? WHAT ARE THE PITFALLS?
A: We built our position in China over 30 years, and we took time to understand the country and its culture. Early in the process, I had an opportunity to meet with Premier Zhu Rongji in Beijing, and I asked him three questions: Considering China’s financial regulations, would Emerson have the financial flexibility to earn adequate profits, reinvest in China and pay dividends? Could we protect our intellectual property? Could we find enough employees with the right backgrounds and education?

The premier’s response was encouraging in all of these areas. One bit of advice he gave us was to support good business curricula in China’s top universities. Subsequently, Anheuser-Busch and Emerson, along with Washington University in St. Louis and Fudan University in Shanghai, established a leading executive education program in Shanghai.

Overall, I suggest building over time, and finding out what works and what doesn’t. And we benefited by aligning ourselves with some very bright people in China, which always is important.

Q: AS A MULTINATIONAL, IT SEEMS THAT EMERSON WOULD BE HELPED MORE THAN HURT BY THE UNDERVALUED YUAN. DO YOU BELIEVE THAT DOMESTIC MANUFACTURING IS THREATENED BY THIS SITUATION, AND DO YOU BELIEVE THE UNITED STATES SHOULD TAKE ACTION TO PROTECT DOMESTIC MANUFACTURERS, SOME OF WHICH DON’T HAVE THE RESOURCES TO EXPAND OVERSEAS?
A: The Emerson philosophy is to have a manufacturing presence in each of the major local markets that we serve. As we look at our global product platforms, we employ a regional manufacturing strategy. For example, a majority of what we make in China is sold in China, similarly for North America. Therefore, currency will have little or no impact. While our manufacturing supply and local demand are not always in perfect balance, over time, we hope that any effect from exchange rates is minimized. As far as possible government action related to international currencies, that’s a policy issue and I prefer to leave it to the policy makers.

Q: CLEARLY, ONE OF THE CHALLENGES OF YOUR TENURE WAS FINDING A WAY TO SPARK GROWTH WHILE SUSTAINING PROFITABILITY. HOW SHOULD COMPANIES IN MATURE INDUSTRIES ATTACK THIS PROBLEM?
AAs I said in the book, growth is the ultimate challenge for many management teams, and there is no one simple means of growing faster. We could discuss this for hours. When the growth of our base company began to slow in the 1990s, we benefited from consultant Gary Hamel’s advice. Emerson always had been known for its management processes that focused on profit. He suggested that we create a parallel process to focus on growth, or as a group of our managers told us, we needed to develop the same passion for growth that we had for profitability.

That was a major step, and it led to a great learning process and subsequent success in this area. For example, we expanded our served markets into services and solutions for our customers. We also sacrificed our autonomous division structure for business platforms with integration of key functions (e.g., marketing, technology and engineering) to better serve customers.

Q: DO YOU THINK OLDER LINE MANUFACTURING INDUSTRIES ALWAYS WILL BE AT A DISADVANTAGE IN THE MARKET BECAUSE GROWTH IS INHERENTLY SLOWER?
A: There are so many ways for manufacturing companies to address this issue. Ultimately, though, it all comes down to technology and the ability to expand served markets. Investing in the right technology can create a sustainable competitive advantage.

Building Emerson into a global technology leader in our business is one thing I’m proudest of. To expand served markets, we built a world-class marketing organization. With the advantages of the Internet, great things are possible in this area. And we developed services and solutions businesses to complement our existing operations. Ten years ago, we described Emerson as a manufacturing company. Of course we still are, but today, the company has become a leading global technology and solutions provider.

For example, Emerson Process Management established a worldwide leadership position by developing smart instrumentation and state-of-the-art systems to improve performance in process industries such as oil and gas. Emerson has similar strong competitive positions in air conditioning technology and backup electrical power.

Q: EMERSON CEO DAVID FARR SAYS THE METRICS HAVE CHANGED IN MEASURING THE SUCCESS OF A BUSINESS. DO YOU AGREE, AND WHAT ARE THE MOST IMPORTANT METRICS NOW?
A: I think you are referring to David’s comments about placing more emphasis on operating capital efficiency and free cash flow. We began using return on total capital (ROTC) as a metric in the 1980s, but at that time, we put greater emphasis on sales growth and operating profit. David and his team have not diminished their focus on growth and earnings, but they have an increased emphasis on ROTC as a factor in the overall valuation of the company, and I agree with what they are doing.

Q: WHAT ARE THE BIGGEST MISTAKES THAT BUSINESS SCHOOLS MAKE WHEN IT COMES TO PREPARING THEIR STUDENTS FOR A BUSINESS CAREER?
A: My concern with business education today is the practice of requiring four to five years of career experience before allowing people to qualify for admission to MBA programs. I feel that, if given the chance and if programs are organized properly, many people could work summers and succeed by pursuing their MBAs sooner.

Q: ALL THINGS CONSIDERED, DO YOU LEARN MORE ABOUT HOW TO BE SUCCESSFUL IN CORPORATE LIFE IN SCHOOL OR ON THE JOB?
A: On the job, without a doubt.

Q: YOU ARE WELL-KNOWN FOR HAVING A BLUNT MANAGEMENT STYLE. IS THAT SIMPLY A FUNCTION OF YOUR PERSONALITY, OR DO YOU BELIEVE THERE IS INSUFFICIENT CANDOR IN CORPORATE MANAGEMENT? COULD YOU OFFER ANY EXAMPLES?
AThere are many models of leadership. I have a 10-point model that outlines my views on this subject, (see Knight’s Keys to Business Leadership, p. 38) and one important point is, “Be tough but fair in dealing with people.” In the 1970s, James Michaels, who was then editor of Forbes, wrote an introduction to an article about Emerson, and he titled it, “Not Brutal—Tough.” Michaels pointed out that the dictionary definition of “tough” was “having the quality of being strong or firm.” He went on to say that toughness, in that sense, is what it takes to run a company efficiently.

I agree, and I believe people want to be held accountable. But they also want to know that the environment is fair, that people have room to do their jobs well and that they have the opportunity to fail. We try to provide that side of the equation, too.

KNIGHT’S KEYS TO BUSINESS LEADERSHIP

SOME SOLUTIONS FOR MINIMIZING SUPPLY CHAIN INEFFICIENCY.

Be commited to success. 6 Develop and maintain a strong sense of urgency.
Set proper priorities. 7 Pay attention to detail.
3 Set and demand high standards of excellence. 8 Provide for the ability to fail.
4 Be tough but fair in dealing with people. 9 Be personally involved.
5 Concentrate on positives and possibilities. 10 Have fun.