1: DuPont CEO Ed Breen has been celebrated for his boldness.
Earlier this week, we looked at his aggressiveness in conquering the multi-billion dollar cable set-top market while serving as CEO of General Instruments and later in pursuing a merger with Dow Chemical, as detailed in Carolyn Dewar, Scott Keller, and Vikram Malhotra‘s powerful book CEO Excellence: The Six Mindsets That Distinguish the Best Leaders from the Rest.
But boldness is not the same as recklessness. Ed says: “One thing I always study the most is the downside scenario. If I don’t get this perfectly the way I think it’s going to go, what is my downside scenario? And can I live with it?
“I always feel angst over that more than anything,” he reflects. “I would never make a decision where I was risking too much. But if I can live with the downside scenario and I still end of being better off, that’s a good risk/reward.”
2: One of the traits that the best CEOs demonstrate is the ability to understand fully the potential downside of a possible big strategic move.
Ecolab’s former CEO Doug Baker puts it this way: “Which mistake can I afford to make?
“Most of the time, you’re making strategic decisions with imperfect information,” Doug relates. “If you wait until you have everything you want to know, then you’re likely to miss the opportunity. More often than not, you have to make calls with incomplete information.”
While we will never have all the information we want, we can carefully consider the downside. We can ask: What if this move doesn’t work?
Doug decided to build a $75 million new plant in China to manufacture water treatment solutions. Why was he confident it was the right move?
Yes. Because even if the market disappeared, the investment wouldn’t kill the enterprise.
A nautical metaphor that captures this way of thinking is “above the waterline” vs. “below the waterline”: If a missile hits a ship above the waterline, it will be damaged but survive. If a missile hits a boat below the waterline, it will likely sink.
In January 2011, during the World Economic Forum in Davos, Switzerland, Doug met with the CEO of Nalco, a global water treatment company. Doug and his leadership team had decided that water technology, Nalco’s primary business, would be a strategic priority going forward.
“The CEO was worried about his debt,” Doug recalls. “He brought it up four times in our brief conversation. I thought, ‘Maybe we should go look at this company.’ ”
So that’s what they did. Ecolab ended up purchasing Nalco in a deal worth $8.1 billion. Which at the time was equal to 75 percent of Ecolab’s market cap.
Before moving forward, Doug had carefully considered the downside. “One thing that reduced the risk of the deal,” Carolyn, Scott, and Vik write, “was that he knew that his biggest competitor was being acquired, which would give Ecolab some room to move while the competitor was in disarray.”
Doug also knew he could spin off parts of Nalco to reduce the overall risk.
Understanding the downside and taking action to minimize risk allows the best CEOs to make big moves confidently.
“The worst mistake I can make,” Doug says, “is to throttle back—it’s essential to keep growing, keep investing, keep moving, but to do do in a way that increases the company’s odds of success.”
Doug’s approach paid off handsomely. In his sixteen-year run as CEO, Baker increased Ecolab’s market capitalization 8X while increasing revenue from $4 billion to $15 billion.
3: One strategy Delphi CEO Rod O’Neal uses as part of his decision-making process is to be intentional about considering unintended consequences.
“That’s the way we avoided disaster,” Rod notes.
“If we make a given decision, we can’t just consider the first domino we trip, which is probably a good outcome,” he says. “What could be the second-, third-, fourth-, fifth-, sixth-, and seventh-order consequences? We would go down the decision tree and see what outcomes could occur as things played out.”
Rod says: “If we came across one that, no matter how remote it was, we couldn’t survive if it showed up, we made another decision. We didn’t play the game of saying, ‘Oh, man, that’ll be a disaster if it shows up, but it probably won’t, so let’s try it anyway.'”
Danaher and later GE CEO Larry Culp learned some important lessons early in his career: “In the early days, we very much had a deal mindset,” he recalls. “We weren’t at all discriminating as to what we’d buy. The math was the first hurdle and everything else was secondary.”
Which is how he came up with his three specific hurdles for making an acquisition.
First, “we’ve got to like the space and the company,” he says.
Second, “we’ve got to be able to add value.”
And third, “the math of the deal has to work.”
The key, he believes, is considering them in that order.
“Because if we flip it the way most bankers want us to, we’re going to get in trouble. We were quite candid with ourselves as to where we could add value and if we were the best owner.”
Using this approach, Larry grew Danaher’s market capitalization from $20 billion to $50 billion while revenue increased 5X.
The best CEOs learn to apply the right analytics. This was the focus when Abode considered moving all its customers to the cloud.
“We intuitively knew migrating our products to subscription was the right vision,” says Adobe CEO Shantanu Narayen.
“To test this conviction,” he recounts, “we literally covered the boardroom with pricing and unit models, predictions for how quickly perpetual licenses would fall off, and how quickly online subscriptions would ramp up. We spent hours knee-deep in modeling output.
“It really takes guts, but through this discussion we saw that we could manage through it and that Adobe, our customers, and our shareholders would benefit in the long run.”
More tomorrow.
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Reflection: What is my process for making an important strategic decision? What can I learn from the CEOs profiled above?
Action: Write down my process for making big decisions.
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