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Book Extract: Turning around the top team

How Pieter Nota revived Philips Consumer Lifestyle. An extract from McKinsey Quarterly

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This summer, Pieter Nota, CEO, Philips Consumer Lifestyle, sat down with Mckinsey partners Udo Kopka and Michiel Kruyt to discuss the journey and lessons he and his team have learned along the way.

The Quarterly: As an outsider to Philips, how did you determine what the most serious issues were?

Pieter Nota: One of the first things I did when I joined, in late 2010, was to write an open letter to about 700 people - basically, the group we call the Consumer Lifestyle leadership and a layer below them. I invited them to tell me what they thought was working well in the business and what wasn't. This gave me a pretty good idea of what was cooking and a lot of useful insights: the sense that two of our biggest businesses, small domestic appliances and consumer electronics, were not functioning well together; the frustration with the lack of investment and innovation, particularly in domestic appliances; and empowerment issues in the sales organizations. All that came out of this exercise.

The Quarterly: What were your initial actions as the new CEO?

Pieter Nota: Consumer Lifestyle was the biggest of Philips' three businesses at the time, and it was not performing well. The business environment was flat, and we were challenged on both sales and profits. It became clear quite quickly that we might have to divest the TV business. Given TV's central place in the group's history, this was pretty drastic. The emotional response was how I imagine it would be if Unilever were to suggest getting out of detergents.

The Quarterly: How did you find morale in the top team-and in the organization more widely?

Nota: I inherited a large and diverse top team of 15 people, representing various businesses, geographies, and functions, with team members from Europe, the United States, and Asia. Morale was pretty low. For example, the two very distinct businesses in Consumer Lifestyle-consumer electronics and small domestic appliances-each had very different rules of the road. There was a lot of tension and friction, since we were structured to manage them as one business. Financial performance was poor, and there had been a reluctance to invest during the financial crisis of 2008. Nor did it help when, in mid-2.011, we had to issue a profit warning for the TV business, a unit we retained until late 2012, when a majority stake was sold to TPV Technology. For all these reasons, the team was insecure and couldn't understand why things were going so badly. The top-team survey we did in May 2011, in preparation for our first off-site meeting, exposed some of the challenges - it showed how misaligned we were on the direction of the business, the poor quality of our discussions, the lack of trust, the lack of confidence in our ability to implement strategy, and the perception that we were ineffective at making change happen.

The Quarterly: How and when did you go about starting to rebuild the team?

Nota: In retrospect, I think our first big off-site meeting- in May 2011, at Huizen, in the Netherlands - was significant. This is where we put the issues on the table. Two things remain clearly etched in my memory. One is a no-holds-barred conversation on team loyalty, which emphasized the importance of our values, our core purpose, and the essential notion of trust. The second is the introduction of some critical new thinking on how to improve the quality of our operations and implementation capabilities.

On the first, I knew that I did not have all my team members on board and that this needed to be addressed. Even after my predecessor had gone, some who had been in his very close circle were continuing to have conversations with him. During the opening of the off-site meeting, this topic had already come up. We ended up spending three hours talking about the past, clearing the air, and gaining a better understanding of each other. At the end, everyone got to the point where they could decide whether they wanted to be in or not. That was a pivotal moment.

The other discussion was aimed at breaking down the silos that had developed between central marketing and product development, on the one hand, and the regional market units, on the other. We wanted to move from a functional organization to an organization built around customer-focused business-market combinations. These were to become the performance units in which the central business folks - marketing and product development - and the regional market folks would plan and deliver results as a team. They were to be jointly responsible for the results, so they could no longer point fingers at each other.

In this way, we created more transparency and accountability around the performance of individual business-market-combination units and improved resourcing decisions across them. We pioneered this idea in Consumer Lifestyle as part of the company's wider Accelerate! transformation program-the program launched in 2011 by Frans van Houten, the group's CEO, to unlock the full value of Philips. There are now roughly 150 business-market combinations in Consumer Lifestyle at Philips, and they are the vital conduit through which we allocate our resources, drive the business, and run granular performance

The Quarterly: How receptive was the team - and the organisation - to these ideas?

In mid-2011, this was all still new. People didn't under­stand it, and the team members' first reaction was to say I did not trust them and wanted to micromanage the business. It was a year before we really started implementing business-market combinations effectively and before the market and business folks on the team started to gel. Once the members of my team began to act as role models for this new form of collaborative accountability, the idea started to trickle down to the rest of the organization as well.

The Quarterly: Given the dissension in your top ranks, many CEOs might have fired half the team. Why didn't you do that?
Nota: I take the view that structure follows strategy, so for me it was important, first off, to know where we were going with the businesses before changing the team. That said, I did take early action on a few team members who could not let go of the past. Once the new strategy became clear, I made some specific appointments in the team to support the new direction. For example, I moved the headquarters of our Domestic Appliances businesses from Amsterdam to Shanghai - China was our biggest growth region - and appointed an Asian leader. In the time I have been with Consumer Lifestyle, the size of the team has fallen from 15 to 12, but on the whole I'd characterize what's happened as evolution and not a big bang. It is always important to have a balance between old hands with domain expertise and new people.

The Quarterly: It seems that by the time of the second survey - a year into your tenure-things were starting to improve. Why?
Nota: We were starting to gain more team cohesion. And our strategic alignment was improving. In this respect, the strategy paper we prepared for our Capital Markets Day, in September 2011, was another turning point because it showed explicitly the transformation route from a consumer-electronics business toward a personal-health and well-being business. It showed that the audio/ video business was a separate animal and made people realize that we would probably exit this activity as well as TV. In the end, we completed this portfolio shift in early 2013.

What was equally clear from the second survey, though, was that the business-market-combination initiative wasn't gaining enough traction. People still didn't know clearly enough what the implications were at the operating level. Nor were we yet sufficiently willing to have the sorts of tough conversations that would allow us to make the necessary trade-offs and hold each other accountable with the help of increased transparency through business-market combinations. That said, we managed to put in a decent financial performance in Q4 of 2011, admittedly from a low base - something reflected in what was then a rare positive reference to Consumer Lifestyle results in the subsequent Philips earnings press release.

Adapted from McKinsey Quarterly, Copyright (c) 2014 McKinsey & Company.

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First Published: Mon, February 16 2015. 00:14 IST