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Leading in times of change can be exhilarating, challenging and very satisfying. However, it requires simple, clear and decisive leadership in which speed is of the essence.
The role of the business leader in turbulent times centres on four critical areas, all of which must be executed well in order to deliver success. Because of this imperative, all other tasks should be delegated to others in the organisation. The four areas are:
This chapter examines this leadership challenge in the context of the turnaround of Orica Limited, an Australian multinational company that came back from the brink in 2001 to be one of Australia’s most successful companies. The lessons, however, apply to any organisation, big or small, private or public, that aspires to succeed and out-perform in an uncertain world.
Business leaders should always be looking to change, to improve and to set new records. This is the way that value is created in business, which, in turn, leads to continual improvements in the standard of living of all people in the community.
Change and turbulence are always with us and business is like a race where the moment you stand still all of your competitors run past you. Therefore, the lessons of leading in times of change are really the generic lessons of business leadership under all conditions.
In 2001, I was appointed Chief Executive of Orica Limited at a time when the company’s share price had fallen from $13 to $4. A hostile party had started to buy our shares, the company’s cash flow had reduced to a point where we were in danger of having our bankers withdraw their support, and competitors were beginning to significantly erode our market share in our major business.
This was a classic turnaround situation that required action in days, not months, and that called for substantial and radical change.
The story that followed is an inspiring one in which 11 000 people, across 45 countries, significantly changed the way they approached their jobs, in the process turning Orica from near destruction to one of the success stories of Australian business.
There are three main planks to value creation in business:
These planks became the basis of the revival at Orica and this chapter will examine each of them in turn with a particular emphasis on culture, which, in my opinion, is the most important of the three. I will also discuss communication and relationships, which are major areas of leadership responsibility. However, before doing so, I’d like to say a quick word about value creation.
Value creation is the reason businesses exist. At its most simplistic, value creation is about earning more money for the owners of a business than they could make by leaving their money in a bank. In achieving this goal over a sustained period of time, successful businesses must create value for their customers, for the community and for their employees. If any of these three groups deserts the business, it will fail. By successfully creating value the owners, customers, community and employees will all benefit, prosper and grow together.
It is surprising how many business managers lose sight of this simple reason for the existence of businesses. The game of business in a free market is played by particularly ruthless rules, and businesses that neglect the need to create value will quickly be destroyed by their competitors or taken over by other companies that see the potential existing managements have lost sight of.
This chapter, ‘Leading in times of change’, is written in the context of a large public company but the lessons apply equally to small companies that are faced with the same cash-flow and market-share challenges.
In 2001, Orica was like an aircraft plummeting towards the earth. There was no time to wonder if this was the right aircraft — in other words, whether the current assets or strategies were the correct ones. The prime objective was to pull out of the dive, fix the immediate problem, stem the cash flow bleeding, increase productivity and improve the businesses that we already had.
In the years leading up to that point, the company had tried to expand its component businesses too rapidly. It poured capital into the business and grew market share without concentrating on the return it was getting on the cash it kept tipping in. Our first move was to stop pouring in the cash. In fact, we turned off the money tap and concentrated on improving the return on the funds already in the business. We set a target — an 18 per cent return on net assets. Each of the business units was required to achieve that return or we would either sell that business unit or close it down.
At the start of the process, only one of Orica’s 14 business units was achieving an 18 per cent return. Two years later, almost all 14 businesses were exceeding that target.
I believe one of the secrets of business success is to start with the answer and work backwards. Let me explain what this means.
In our example, the 18 per cent return represented our view of the minimum return that investors in the company would require in order to remain committed to Orica. The figure of 18 per cent was based on the following logic.
Example: a simple, easily understood and highly effective short-term performance measure
Let us assume that you buy a company with assets which are worth $100. You might fund, say, 35 per cent of that purchase through a loan from your bank and you, as the shareholder, would put in the other 65 per cent.
If the business earns an 18 per cent return on its $100 worth of assets, the $18 of profit would be distributed as follows.
In this example, interest costs, minimal running costs, tax and inflation are all givens, which simply must be covered. Therefore, if the business produces less than 18 per cent, the only place that the shortfall can come from is by giving a lower return to the investors. In a public company, investors will then sell their shares and put their money elsewhere. This was the core of Orica’s problem in 2001. So the demand for each of the business units to earn an 18 per cent return was not an aspirational target but a compulsory one. By running through the simple logic described above, every employee on the Orica team, including shopfloor factory workers, could understand why that target was mandated and could work towards achieving it in their part of the business.
In business we too often start with what we have and then see how much we can improve it by. Human nature being what it is, people tend to be cautious in their predictions and the resulting outcomes are often insufficient. By working from the answer backwards, people may be presented with targets that seem very difficult to achieve and yet, when it is explained clearly that there is no option but to achieve these targets, it is amazing how people will find a way to reach the goal. In Orica’s case, we were asking our people to improve profitability by over 400 per cent! It was important that they understood why that demand was being made before they could be expected to truly commit to achieving it.
In our first year of the Orica turnaround, the efficiency targets that came from working backwards from our 18 per cent goal were daunting; however, we achieved them, and our underlying profit improved from $60 million in 2001 to $270 million two years later.
In addition, most of the improvements came from the only area we could truly control ourselves, which was our internal costs. In a rapid turnaround situation, there is no time to worry about market share, the economy or long-term strategy — these come later. Short-term help centres on self-help. Most of the early productivity improvement at Orica was, therefore, a result of cutting overheads and excess levels of bureaucracy. While this inevitably involved job losses, which included making tough and painful decisions, the result was a freeing up of the company and the empowerment of the remaining employees to take control of their own responsibilities. This inspired people and led to greater enthusiasm and motivation throughout the group.
In terms of the pace of change at Orica, we had completed most of our efficiency initiatives and were well into the cultural-change program within the first 100 days of the turnaround.
The imperative for short-term performance is always with us. Remember the example of the business race — we can never rest on the oars. It is easy to take our eyes off the target and suddenly two or three months have drifted by and we are in trouble again. In a successful business, results are not negotiable. Don’t ever fall for the old line that ‘a poor result plus a good excuse is an acceptable outcome’. It isn’t! To avoid this problem in Orica we assembled a full-time team devoted to ensuring each part of the business achieved its monthly target. As soon as a business unit started to drift off the mark, this team was available to bring all the resources of the organisation to bear in helping them to get back on track.
In looking at short-term performance, I believe the role of the leader is to stretch the organisation. People love to be challenged — to reach the unreachable goal. It invigorates them and builds their self-confidence. In pursuing performance improvements, the big lesson I have learned in my career is to be bold and to make big-step changes but to involve your people in setting those targets. Challenge your people’s potential and go for it!
In summary, the role of the leader in terms of short-term performance, is three-fold.
The request to stretch performance goals means nothing if the people in the business are not aligned, motivated and contributing towards those outcomes, which brings us to what I regard as the most important task of the business leader — culture. I believe culture is the most unrecognised area of leadership in business today.
So what is culture? It is simply the important behaviour and principles that are necessary for people to follow in order to deliver the organisation’s strategies and goals. The way people behave in any organisation is often not talked about but I believe there is great power in making the required behaviour explicit. This means that people are quite clear as to what the company expects of them and what they can expect of the company. It also means that outside of the required behaviour, people are free to pursue their jobs in their own way according to their individual preferences. Once people are clear about these issues, it builds trust and develops ownership and alignment among all employees. This is important in any organisation but is absolutely vital in a diverse global business like Orica. Whether people are working in Mexico or Estonia, Chicago or Gladstone, they must be on the same page and a defined culture helps them achieve that. In addition, trust and clarity make it easier for people to share ideas and resources with their colleagues. This breaks down silos and adds significant value to the organisation.
How can a common culture be achieved across an organisation? Let me say at the outset that changing a culture is a long, hard road. It takes a lot of time and resources to get it right. It can’t be done with a seminar over a weekend or by a couple of emails from the CEO. These normally get filed in the waste bin! There may even be blood on the carpet because people who don’t adopt the agreed behaviour will need to leave the organisation.
The key to ensuring commitment to the culture is to involve all employees in formulating that culture. For example, I spent three of my first six months as CEO of Orica going around the company across the world and asking our people: what do we do well and what don’t we do well? If we want to be the best company in the world, what are the three or four things that we have to get right? The answers were surprisingly consistent across and up and down the organisation. This is not surprising because everyone in any type of organisation knows the answers to those sorts of questions, particularly the one about what the organisation doesn’t do well!
We assembled this huge amount of data then took a representative vertical slice of employees who came together and distilled that data into four types of behaviour. The behaviour we came up with in Orica is outlined below, as part of Orica’s ‘deliver the promise’ culture.
Orica’s ‘deliver the promise’ culture
Principle 1: safety, health and environment (about ensuring our future given that Orica operated in parts of the chemical industry)
Behaviour: no injuries to anyone ever. Value people and the environment.
Principle 2: commercial ownership
Behaviour: run the business as if it is your own.
Principle 3: creative customer solutions
Behaviour: think differently, deliver swiftly and capture the value.
Principle 4: working together
Behaviour: success as a team and success as an individual.
These types of behaviour are unique to Orica and a different organisation would, of course, choose its own set of behaviour relevant to its particular circumstances.
None of the Orica behaviour was in any way unusual; however, what was important was that they were derived from within the organisation and therefore had a very strong sense of ownership from all employees. This was their culture. The power of asking people their opinion should not be underestimated. For many of our employees, it was the first time the CEO had asked their view on anything, let alone acted on it. We were treating them with dignity and respect, and they repaid the organisation many times over.
Of all of the behaviour, the one that led to the greatest change within Orica was the concept of ‘running the business as if it is your own’. To illustrate the changed mentality, I recall years ago working in another organisation where we endured a two-week strike because there were only two flavours of ice-cream in the canteen. Would you stop work for two weeks over ice-cream flavours if it was your own business? In Orica, people took responsibility for delivering the outcomes and became incredibly creative and resourceful because they truly saw the company as their own.
In Orica’s case, our culture of ‘running the business as if it is your own’ tied in with our efficiency and short-term performance goals. Both required a substantial reduction in bureaucracy, which of course is an ongoing battle in a large organisation. We formed a ‘bureaucracy busters’ team, which was constantly looking to eliminate unnecessary reports, clunky systems and complex approval mechanisms throughout the company. It is amazing how many thick reports are generated that never get read.
To make long-term progress, to get real traction, there is a need to mesh the culture with the performance-management system. This is where the rubber really hits the road. It is important to hold people accountable, both in a positive and negative sense, because, after all, what gets measured gets made. People truly dislike working in an organisation where non-performers get away with it or where there seems to be no fairness in the reward system.
An effective performance-management system includes both behaviour and outcomes as performance measures. An individual would need to score well in both areas in order to progress his or her career. The classic case is an individual who delivers outstanding results but whose behaviour is poor and in direct conflict with the organisational culture. In many organisations these types of individuals are tolerated, but it is extremely important if a strong culture is to be established in an organisation, and if it is to be taken seriously by the other employees, that these individuals leave the organisation — as hard as that decision may be.
All this sounds like a big effort, but I believe that in leadership you should concentrate only on the few important things but go over the top in ensuring they are delivered. Commitment and perseverance are the absolute keys to success.
Having done all that, give your people freedom and let them get on with it. At the end of the day culture is all about the people in an organisation taking ownership and accountability for their jobs. This is the key to unlocking their genius and enabling them to achieve extraordinary things. That, in turn, is the key to leadership.
I believe that the change in Orica’s culture was the main reason the company turned around so successfully, as reflected in the share price, which rose from $4 to $20 within three years.
This brings us back to the concept of speed. Why is culture so important to enable rapid change? I believe that change in modern society occurs so quickly that individuals must be empowered to react to differing circumstances without always having to check back through some cumbersome bureaucratic system.
To illustrate the point, there is an apocryphal story about a person sitting on an aeroplane next to Red Adair, a man who built a worldwide reputation for extinguishing out-of-control fires in oil wells. At the end of the conversation, the two exchanged business cards. Red’s card simply had his name and a telephone number on it. When the other traveller asked him about this, Red replied, ‘If you need Big Red, you don’t have time to write!’
I think change in modern business can sometimes be like an oil-well fire. People on the spot must act quickly and decisively to take advantage of the change in the situation. If they are clear about the behaviour and the performance targets required, they are free to act without uncertainty. A clear and well-articulated culture helps enormously in these situations.
In terms of the pace of change at Orica, we had completed the meetings with thousands of employees across the company, analysed the data and brought the focus group together to create the ‘deliver the promise’ principles within six months of the start of the turnaround. The company now had its short-term performance goals and required behaviour in place, and was fully ready to deliver the remarkable recovery that followed.
My own discovery of corporate culture as a leadership tool occurred when I was at North Limited, a global Australian mining company. I was looking at ways to boost our performance and was given a copy of the book Built to Last, by Jim Collins and Jerry Porras.1 This excellent book contains the results of a study into companies that had survived and outperformed their peers over a very long period of time, often a century or more. The concepts of stretch targets (in Collins and Porras’s terms ‘big hairy audacious goals’) and culture (Collins and Porras use the term ‘values’) are convincingly set out in this book and formed the basis of the North Limited culture that we introduced in that organisation with outstanding results. I was helped in our cultural-change process by Peter Clark and Ted Hummerston who, together with their talented consulting team, had built a highly effective change-management process that we subsequently used to great effect at Orica.
For those interested in cultural change, Built to Last and the follow-up book by Jim Collins, Good to Great, make excellent reading.2
Having fixed the short-term performance issues and embedded a strong culture in the organisation, the final plank in our successful turnaround was to determine the long-term strategy for the company.
Strategy may involve a major change in direction but in Orica’s case the existing businesses were basically sound, which meant there was no need for urgent action on the fundamental make-up of the portfolio. Our strategy was therefore built around three main principles:
Again these growth principles were not rocket science; they were based on common sense and could apply to any business.
Orica before 2001 was focused on growth rather than the economic performance of its existing businesses. Surprisingly, a lot of companies fall into this trap. They go on expanding, presumably in the hope that they will create value on the bigger business. However, they end up simply swimming below the waterline and do not provide a satisfactory return to shareholders. The management of a poorly performing business will often buy another business in the hope that the increased revenue will provide a life raft but, as they say, two rocks tied together still don’t float. At Orica, our initial strategy was to ensure that businesses achieved a satisfactory return (in our case the 18 per cent return on net assets) before we invested additional money in growing that division. In other words, businesses had to earn the right to grow.
In terms of market leadership, the statistical evidence shows that a business is far more likely to be successful from a leadership position, even if it is leadership in a low-growth industry, than from being a follower, even in a high-growth industry. All of the businesses in the Orica portfolio were, and still are, leaders in their chosen markets. Orica is the global leader in providing commercial explosives for use in mining, quarrying and construction. It is the Australian leader in the manufacture of fertiliser for farmers. It provides the chemicals that purify most of Australia’s drinking water and is the Australian market leader in paint and home-decoration products with well-known brands such as Dulux, Berger, British Paints and Selleys. In essence, Orica is a niche chemical company. It has niches either geographically or in a particular industry sector where it can take a leading position and achieve good margins.
If you are the leader in your industry, you should be able to outspend your competition on research and development, marketing, and capital expenditure and thus enjoy the lowest-cost position, which enables you to be more competitive in your market pricing. That, essentially, is the power of market leadership.
I believe this principle of finding niches where it is possible to become a leader in that field is particularly important for a global company. One of the reasons some Australian companies do not do well offshore is that the global markets are so much larger than the Australian ones, meaning that often it is only possible for those companies to buy the number four or five position in those markets. This, together with the unfamiliarity of the new competitive environment, puts them at a significant disadvantage. In Orica’s case, our commercial explosives business operated in a world market that was relatively small; therefore, we were able to establish ourselves in the number one position.
The third growth principle at Orica was growing close to the core of business. Research shows that focusing on related growth close to the core of existing businesses is a far more successful strategy than large step outs into unrelated businesses. Again, this makes common sense: growing what you know is always going to be less risky than buying into a completely unknown area of business where your competitors are likely to have far more market knowledge than you. Indeed, large step-outs are more often than not giant leaps into the abyss rather than leaps to greatness.
Thus, Orica started to grow its existing businesses through plant expansions, industry rationalisations, bolt-on acquisitions and moving into new geographies. For example, we merged the two major Australian fertiliser businesses, Incitec and Pivot, and more recently the company has purchased a significant portion of its main global commercial explosives competitor Dyno Nobel. The other business units have also pursued incremental, value-adding growth in accordance with these three growth principles.
A lot of strategy work tends to be qualitative but it is important to remember that long-term value creation in the end comes down to numbers, so again it helps to work from the answer backwards. In order to survive over the long term, statistics show that it is necessary to consistently be in the top third, or even the top quartile, of performers in terms of total shareholder returns (profit plus dividends) compared with other companies in the market. This implies total shareholder returns of above 15 per cent per annum or, for top quartile performance, above 20 per cent per annum. It is extremely challenging to grow a business at these rates year after year. Again, bold, innovative and urgent action is required to ensure that new projects or business-improvement ideas are in the pipeline to provide new revenue growth and productivity opportunities down the track. Often the emphasis on short-term performance, important as it is, can cloud the need to address the long term and the company can be faced with no long-term future unless this matter is continually being attended to.
Clearly, the role of the leader is to ensure that this work gets done and to choose from the various strategic options that will emerge. In an environment of cost-cutting, the leader must remember to spend money for the long term, even when that puts short-term strain on achieving targets.
The leader must articulate the strategy — and the reasons for it — to everyone in the organisation so that people know the context in which they are working.
I was helped in devising our strategy by Paul Calthrop and his outstanding team at Bain International Inc., and it is often useful to have an external source that can bring a dispassionate and unbiased view to the table.3 Other firms such as AT Kearney and LEK Consulting also helped us considerably.4 Ram Charan’s excellent book Profitable Growth is worthwhile reading for those interested in pursuing this area in more depth.5
Again, the strategy a particular organisation might follow will be unique for that business. Often there are a number of different ways forward and it does not much matter which one is chosen. As the Buddhists say, ‘the peak of the mountain is indifferent to the route by which one climbs’. In Orica’s case, the summit is long-term value creation and there are many ways to achieve this. In times of change it is often necessary to change a strategy. The key is to choose a sensible strategy and to execute it well. Good execution is fundamental to business success.
In turbulent times, clear and simple communication from the head of the organisation is essential to prevent the company falling into confusion or losing its way and to provide a beacon for people to head towards.
A large amount of a leader’s time is spent communicating and building relationships with the key parties whose cooperation is necessary for the business to succeed. I have already talked about the necessity of being crystal clear when communicating the company’s expectations to employees. Other audiences that require constant communication are:
The principles of communication are that it be simple, consistent, honest and often. Never assume that people will have gained knowledge about the company and its priorities from other sources. Even if they have, they will often want to hear it from the leader and hear the same message repeated consistently. Communication, and the relationships that flow from it, can take up to half of your time as a business leader but is absolutely vital in ensuring that the company is headed in the right direction and that all the stakeholders are on board and supportive of that direction.
Symbols can also be powerful in getting a message across. For example, when we were going through the difficult cost-cutting exercises at the beginning of the Orica turnaround, one of the things we did was sell the art collection in the corporate office. In my office alone there was over $2 million worth of art on the walls, and I thought it was an important symbol to dispose of that luxury at a time when we were imposing austerity across the business. Although in dollar terms this sale was not significant, it sent a powerful message about the intentions of the company and remained a talking point both inside and outside the business thereafter.
In essence, the approach to leading in times of change is pretty simple.
Firstly, business is all about creating value: creating value for shareholders, for customers, for employees, and for the community.
Secondly, this core purpose of value creation sits on three legs:
Thirdly, the role of the leader includes communicating these performance requirements, culture and strategies to all stakeholders, both within and outside the organisation.
In pursuing excellence in times of turbulent change it is important to be bold, to make big-step changes, to listen to your people, and to set them clear, simple objectives — but hold them accountable — and be focused on and committed to delivering those objectives. Above all, it is about moving fast.
The illustration I have used of the turnaround at Orica was based on these principles; they helped make Orica a great business and a great place to work as well as an organisation that delivered significant value for all involved and which will continue to do so into the future.
However, the principles can apply to any organisation. I have a friend in the New York Police Department who commands a precinct in that great city. His short-term performance targets have to do with crime reduction in the context of a zero tolerance long-term strategy, but the cultural and communication imperatives are otherwise very similar.
At its best, business is creative, it is fun and it is very satisfying. Whatever your approach may be, be focused on it, be bold, keep at it and enjoy the contribution you are making to a better organisation and a better world.
A list of practical hints
As Managing Director and CEO of Orica from 2001 until September 2005, Malcolm Broomhead led a global business that controlled interests in more than 45 countries. Under Malcolm’s leadership the strong performance of the company saw the Orica share price rise from $4 to $20, reflecting a major focus on efficiency and a performance-based culture as well as an acquisition and divestment program centred on strict financial criteria.
When he took up the position in 2001, Malcolm came with extensive experience in the resources industry, as well as considerable depth in finance, investment and construction activities. He has worked in management positions with Halcrow (UK), MIM Holdings, Peko Wallsend, Industrial Equity and North Limited, where he was Managing Director and CEO prior to his move to Orica.
Malcolm holds degrees in Civil Engineering and a Master of Business Administration from the University of Queensland. He is a Fellow of the Australasian Institute of Mining and Metallurgy, a Fellow of the Institution of Engineers Australia, a member of the Institution of Civil Engineers (UK) and a member of the Australian Institute of Company Directors. He is also a past Director of the Business Council of Australia.
Malcolm was the Chartered Accountants and Zurich Australian Business Leader of the Year in 2004.
His interests are family, golf and skiing. He is married with four children and lives in Melbourne.
© 2006 Management Press, a division of the Australian Institute of Management Queensland & Northern Territory