The Leadership Factor


Because they are victims of short-term economic pressures and "parochial politics," most American companies critically lack the one factor proven effective in winning competitive advantage: leadership. Thus argues John P. Kotter in this, his third large-scale work on leadership, which continues and complements the work begun in his influential The General Managers and Power and Influence. With compelling evidence, Kotter demonstrates why most American firms do not have the leadership capacity they currently need...

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Because they are victims of short-term economic pressures and "parochial politics," most American companies critically lack the one factor proven effective in winning competitive advantage: leadership. Thus argues John P. Kotter in this, his third large-scale work on leadership, which continues and complements the work begun in his influential The General Managers and Power and Influence. With compelling evidence, Kotter demonstrates why most American firms do not have the leadership capacity they currently need and explains what they must do to correct this damaging problem.

Using comprehensive data from 900 senior executives in 100 American corporations, as well as in-depth interviews with 150 top managers in fifteen successful companies, including General Electric, Citicorp, IBM, Hewlett-Packard, and Coca-Cola, Kotter singles out the practices that develop superior leadership. He identifies both the specific personal attributes and general leadership qualities needed in today's corporations. And, with the spotlight on such individuals as Lee Iacocca at Chrysler and teams like the top management at Johnson & Johnson, he vividly illustrates the four factors that create outstanding leadership in both private and public sector senior and middle level managers.

Professor Kotter underscores his argument with glaring examples of managerial failures in firms like ITT, providing eye-opening evidence of damage -- inability to control sagging productivity and poor records in customer service, quality control, and the development of new products -- caused primarily not be poor R&D or labor problems, but by a weak leadership capacity. Filled with dozens of case histories, The Leadership Factor reveals an all-too-common picture of companies which, unable to recognize or develop leadership talent and utilize it, create a pervasive gap in corporate planning and personal management.

Progress has been made in improving quality management, but is has been limited. Kotter is hard-hitting in his assessment that even American companies which achieve a superior level of success in the leadership area -- IBM, DuPont, Dow Jones, Hewlett-Packard, and Anheuser-Busch, for example, must do even better to match efforts of foreign competitors. In showing how leaders are made, not born, he provides a realistic program structured to help attract, retain, and motivate dynamic, capable leaders in executive and middle management positions. Following Kotter's advice, companies can build strong managerial teams necessary not only for growth -- but also for survival itself.

In his third large-scale work on leadership, Kotter gives a hard-hitting assessment of the bottom-line difference leadership makes, noting that it is critically absent in most American companies. Provides a realistic program to attract, develop and keep dynamic and capable leaders.

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Editorial Reviews

Library Journal
In General Managers ( LJ 5/15/82) and Power and Influence ( LJ 7/85), this highly respected author studied the personal and interpersonal skills necessary for effective managers. In this third book, Kotter discusses the need for leadership at all levels of management and describes the kind required for the United States to remain competitive. He explains how business is changing and the impact of these changes on leadership, makes recommendations based on research findings, and unlike other writers on this subject, shows how to implement the recommendations step by step. Strongly recommended.Grace Klinefelter, Ft. Lauderdale Coll., Fla.
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Product Details

  • ISBN-13: 9780029183311
  • Publisher: Free Press
  • Publication date: 12/10/1987
  • Pages: 161
  • Product dimensions: 6.37 (w) x 9.57 (h) x 0.70 (d)

First Chapter

Chapter 1 The Changing Business Environment: Why Effective Leadership Is Increasingly Important Today

Leadership has always been, and probably always will be, an important factor in human affairs. But recently both the need for leadership in managerial jobs and the difficulty of providing effective leadership in those jobs have grown considerably more than most people realize. Two fundamental shifts in the business environment are responsible.


The more recent and dramatic shift is a significant increase in what might best be called "competitive intensity." In some cases, that is because strong foreign firms have invaded other people's domestic markets. The consumer electronics, automobile, and steel industries are obvious examples. Sometimes it is due to deregulation; in the United States we see this in airlines, telecommunications, insurance, trucking, and banking. The emergence of new technologies is having a similar effect. Microprocessing, for example, has allowed a number of firms to enter the once oligopolistic computer industry as strong new competitors. In still other cases, the new intensity is the result of market maturity or overcapacity, which forces established competitors to fight it out in order to avoid stagnation.

Whatever the source, the new competitive intensity has destabilized companies and even whole industries. It has turned a few cozy oligopolistic arenas into battlefields. It is forcing some firms that practically owned their markets to have to compete once again for customers. It is pushing more and more organizations to pay better attention to changing consumer preferences and new technological developments, and then to adapt, innovate, or risk falling prey to a corporate raider. Overall, it is creating a level of turbulence that is sometimes extraordinary, especially when compared to the 1950s and 1960s.

The case of General Motors is instructive. One doubts if the people who ran GM during the 1950s and 1960s thought they were living in an era of stability and benign competition. But compared to recent years, they surely were. In 1955, GM had two or three real competitors and a growing market. Today the firm has nearly a dozen credible competitors, mostly from outside the United States, a market that is often flat, and an industry plagued by overcapacity. Those shifts in its business environment have created a surge in competitive intensity, which in turn is forcing an often reluctant (and often very clumsy-looking) GM to try to change its ways. And in the recent past, the attempts at change have come big and fast:

* To improve its ability to compete, in 1984 GM initiated its first major reorganization since Alfred Sloan set up the basic corporate/divisional structure in the early 1920s (sixty years with one structure!!).
* Also in 1984, the firm acquired EDS, H. Ross Perot's com-puter company, shifted thousands of GM employees into the EDS organization, and then started trying to add and redo computer systems throughout the entire corporation (one can only begin to imagine the chaos created by Perot and his troops). * About the same time, GM set up a joint venture with archrival Toyota in which it essentially turned over an ailing plant in Fremont, California, to Toyota management (GM had not needed joint ventures before).
* In 1985, the firm acquired Hughes Aircraft at the unprecedented cost of more than five billion dollars (it also didn't use to have to buy technology and diversified growth opportunities). * During the same period GM established a new subsidiary (Saturn) which it hoped could develop a car of the future and a whole new approach to car-making (the old methods were not working very well any more).
* After years and years of developing and fine-tuning an incredibly complex system of vertical integration, the firm started shutting down some internal component-making units and buying those components from outside suppliers (they found it was sometimes cheaper to buy parts than to make them themselves).
* After decades of increasing the size of the salaried work force, GM began in 1986 the process of eliminating more than 10,000 of those employed in its North American operation (the pressures to reduce costs have grown stronger and stronger).

The GM situation is interesting precisely because it is not that unusual. Hundreds of firms and dozens of industries have been (or are being) forced to go through major restructurings.

Consider airlines. For years, there was great stability in the U.S. industry, created mostly by government regulation. Route structures generally changed slowly and in orderly ways. Prices changed incrementally and across the board. Acquisitions and start-ups were rare. New concepts about the product were even rarer. Then suddenly, in 1978, when the industry was deregulated, the rate of change took off like a rocket.

Since 1979, dozens of airlines have come into existence, have been acquired, or have gone bankrupt. The fare structure of the industry has changed in very fundamental ways, and specific fares seem to continue to change almost daily. Routes have shifted considerably, and in some cases, so have wages. New ideas, like frequent flier programs, have been developed and institutionalized.

The life insurance industry enjoyed an even longer period of stability than airlines and automobiles. For most of the last century, products and marketing methods changed little or slowly. Firms grew with the population and the economy. If there were a time machine that could transport a life insurance salesman from the turn of the century into 1965, it probably would not require much extra training to make him productive once again. But if he were sent into 1985, it would be an entirely different matter.

Today, the life insurance industry is caught up in the financial services hurricane. Thousands of entities, in addition to traditional life insurance companies, now offer some form of life insurance. Thousands more offer products that are alternatives to life insurance. In an effort to adapt to the new competition, insurance firms are adding new products at an unprecedented pace, acquiring related businesses, changing distribution systems, and trying to become less fat and bureaucratic. The latter often requires laying off central office staff, something that some firms have never done since their beginnings more than a century ago.

Bankers are caught up in a similar set of pressures. Suddenly the competition is no longer a familiar entity or two down the block. Suddenly the competition is Sears, Merrill Lynch, Citicorp (even outside of New York), American Express, a number of Japanese banks, and even General Electric. (Yes, G.E. It made more money in financial services in 1985 than every bank in the United States except for three.)

The same basic changes can also be seen in health care. It seems as if everyone associated with this business in the United States prospered in the 1950s, 1960s, and early 1970s as the industry experienced tremendous growth. Fueled by Medicare, Medicaid, and increasingly generous corporate health insurance plans, health care expenditures went from 4.4 percent of GNP in 1955 to 10.7 percent in 1983. But recently that has changed. Growth of funding has slowed, or in some areas stopped, forcing some firms to rethink completely their methods of doing business.

Autos, airlines, insurance, banking, health care -- in industry after industry, the basic pattern is similar. After two or more decades of relative calm in which competition was muted, the intensity of competitive activity has heated up. And in some industries, it will probably get a lot hotter than it is even today. Indeed, as this is being written, a number of Korean firms are planning their invasion of U.S. markets. In Europe, the European Commission is pushing to break up the airline cartel and to decontrol the capital market. In Argentina, President Raul Alfonsin is trying to privatize hundreds of firms that the government owns entirely or partly, in order to make them more competitive. In the Philippines, President Aquino is said to be on a similar path.

All this activity is forcing firms nearly everywhere to reconsider traditional strategies, policies, and routine methods of doing business. As a result, thousands and thousands of managers and executives are being asked to develop new products, new distribution channels, new marketing methods, new manufacturing processes, new financing strategies, and much more. And literally millions of people are being called upon to help implement those new ideas. Figuring out the right thing to do in an environment of uncertainty caused by intense competitive activity, and then getting others, often many others, to accept a new way of doing things demands skills and approaches that most managers simply did not need in the relatively calm 1950s, 1960s, and early 1970s. It demands something more than technical expertise, administrative ability, and traditional (especially bureaucratic) management. Operating in the new environment also requires leadership.


A peacetime army can perform its functions adequately with good administration and good management, as long as there is some sound leadership at the very top. During war, an army still needs competent administration and management up and down the managerial hierarchy, but it cannot function without lots of good leadership at virtually all levels. No one has yet found how to administer or manage people into battle.

In a very similar way, thousands of corporations worldwide are discovering that they need more managers who can help them deal with the economic warfare created by increased competitive intensity. As one perceptive officer in a major U.S. corporation recently said:

It was a whole lot easier to be an executive thirty years ago. Back then, there were lots of opportunities for growth. Today, there is more competition and our markets are much more mature. When I first joined the company in 1952, we actually had monthly "allocation meetings" in our division, meetings in which we decided which customer got our products. Can you believe that?

Today, we need many more and better leaders than back then, broad people with vision and self-confidence. Without these people, there is no way we will continue to prosper. In some of our businesses, without them we won't even survive.

Evidence supporting that assertion can be found nearly everywhere. Look at manufacturing operations. Not long ago, many plant managers were being asked to get a product out the door on a predictable schedule and at a historically reasonable cost. That required some detailed operational planning, a sensible organization clearly defined, and lots of controls (in other words, good management). Today those same executives are sometimes being asked to reduce costs significantly, introduce productivity-saving technologies, experiment with Japanese-like labor relations techniques, set up new satellites in countries with lower labor costs, shorten the time required to get new products into the manufacturing process, and still more. That is, they are regularly being asked to find new ways of doing things, sometimes even approaches that have no precedent. They are also being asked to get others to make the personal sacrifices necessary to implement those new ways, others who no longer have immigrant mentalities or a general inclination to be compliant in front of authority figures. In those circumstances, good management and administration are no longer sufficient. More and more the need is for leadership in manufacturing.

The same change can be seen in staff operations. "Personnel administrators," who twenty years ago were asked to administer the personnel system and help solve minor personnel problems, are now being asked to provide leadership on human resource issues. They are needed to assist corporate executives who are trying to change their firms' cultures to make them more competitive. They are required to find and implement entirely new compensation systems that will encourage managers to think longer term. They are urged to collaborate with manufacturing executives to try to establish a new climate of labor relations.

More and more, the need for leadership doesn't stop at the executive level either. Corporations are finding that even lower-level managerial, professional, and technical employees sometimes need to play a leadership role in their arena. Competition, for example, is demanding that more and more young project engineers coordinate groups of manufacturing, marketing, and sales managers (people outside of their engineering hierarchy) in developing new products. That, in turn, always requires some leadership from those project engineers. Similarly, competitive pressures are pushing older foremen to help create that new climate of industrial relations; one doesn't change adversarial relationships built up over decades simply with administration or management. Those same pressures are requiring that middle-level managers find and implement ways to cut levels and fat from their staffs. Getting people to accept genuine sacrifices is rarely possible without some leadership from those managers. Lloyd Reuss, an executive vice president at GM, sums up the challenge facing more and more corporations today: "We need more leaders at every level of our organization, from entry-level jobs at our factories right on through the car division general managers and the executive committee."

This is almost a radical shift from only a decade ago, much less two or three decades. In the relatively stable and prosperous 1950s and 1960s, lots of leadership was rarely necessary in personnel, manufacturing, or anywhere. Too much leadership, back then, could actually create problems by disrupting efficient routines. Sayings were even invented to signal that what was needed was stability and control, not bold new initiatives (e.g., "If it ain't broke, don't fix it").

Just as leadership in the government and the military becomes more important in war than in peacetime, leadership in business becomes more important when warfare breaks out in the economic sphere. Increased competitive intensity has created just that kind of warfare.


At the same time that increased competitive intensity has been producing the need for more leadership at almost all levels in many organizations, a second set of less dramatic forces has been steadily increasing the difficulty of providing effective leadership. They are the forces of growth, diversification, globalization, and technological development, which have been making businesses more and more complex.

PepsiCo is not unusual in that regard. In 1955, the Pepsi Cola Company was a $60-million-a-year soft drink firm that sold its product mostly in the United States and employed around 1,900 people. Twenty-five years later, it was a $6-billion-a-year corporation, with more than 100,000 employees, that sold soft drinks, snack foods (Frito-Lay), fast food (Pizza Hut and Taco Bell), transportation services (North American Van Lines and Lee Way Motor Freight), and sporting goods (Wilson), and that derived a significant amount of money from more than a hundred markets outside the United States. Providing effective leadership to the business in 1955 was probably not easy by any reasonable measure. But providing effective leadership in 1980 was definitely more complex by orders of magnitude.

Digital Equipment Corporation didn't even exist in 1955. In 1985, it sold more than $6 billion worth of products and services to thousands of customers in dozens of different industries. It had 45,000 shareholders, 100,000 employees, and operations worldwide. The National Cash Register Company, today known as NCR, was a relatively low-tech maker of cash registers and related equipment in 1955. By 1985, its business was not only bigger, but it also employed the same numerous high technologies as does Digital (and IBM and others). American Express has had an overseas presence for years now; in 1950 it had 186 offices in thirty-one countries. But that has grown to the point where by 1985 it had more than a thousand offices in 130 countries. In many ways, the different services the firm offers have grown even faster (e.g., investment banking, insurance).

A 1950s-to-1980s comparison at most corporations, even at relatively small corporations, would reveal a similar picture.

Dealing with the typical leadership challenges created by competitive intensity -- getting costs down, increasing productivity, improving customer service, keeping quality high, getting new products developed faster -- is rarely easy. Dealing with those issues always means producing change. Change creates uncertainty, anxiety, winners, and losers. The resistance generated by anxious people or employees facing real losses is seldom easy to overcome, even in simple situations. But simple is not the order of the day any more. And dealing with those challenges in complicated settings can be enormously difficult.

It is one thing to improve customer service in a sales force that employs twenty people, all working out of the same office. It is a totally different challenge if they number 2,000 (or 20,000) and they work in one hundred (or 1,000) offices spread all around the world. It is one thing to improve productivity significantly if one fundamental technology is used in a manufacturing or service operation. It is a different ballgame altogether if one's efforts must be diffused over dozens or hundreds of different technologies. Getting new products developed and to market presents one set of problems if the market is a relatively homogeneous one (e.g., people living in the Midwest United States). A different and far more complicated set of problems present themselves if there are dozens (or hundreds) of markets that are different in some important ways (e.g., Brazil versus Sweden). Getting most anything changed is far easier if the employee population is reasonably homogeneous. Trying to communicate well to people of many nationalities, to young and old, to MBAs and engineers -- that's much more difficult.

The leadership challenge at the very top of complex organizations appears sometimes to be almost overwhelming. Establishing and implementing sensible strategies for businesses is rarely easy. But in many situations today, the technological, competitive, market, economic, and political uncertainties make strategic decision-making horrendously complicated. Conflicts of interest inside the firm, between what is good for the American division versus the European group or the traditional bankers versus the new investment banking department, can also make implementing any strategy a most perilous adventure. Yet, unlike 1955, thousands of executives around the world are facing just those kinds of challenges today.


Both changes in the business environment -- the growing competitive intensity and the increasing complexity of firms -- are important by themselves. Each is independently having a formidable impact today. The first has been increasing the need for leadership in more and more jobs. The second has been making the leadership challenge in those jobs more and more difficult to handle well. But it is the cumulative effect of the two changes that is so powerful. Put them together, and the consequences of both adequate and inadequate leadership are taking on a whole new dimension today (see Exhibit 1-1).

In environments where competition is limited by regulation or a cozy oligopoly (or whatever), leadership sometimes seems not to make much difference one way or the other. Factors that economists and sociologists call "structural" are often key. But in an intensely competitive environment, where the capacity to identify and implement intelligent change and to motivate superior performance is central to corporate results, the capacity of management to provide leadership takes on new meaning.

There are, of course, people who think (or rather hope) that the world will quickly revert to the simpler and more stable days of twenty years ago. Among other things, they point to growing protectionist sentiment in some countries, to the problems caused by deregulation, and to corporate downsizing efforts as supporting evidence for their beliefs. They ignore all the forces pushing in the other direction.

The rate of technological development, for example, is not going to slow in the immediate future and may even accelerate, producing even more turbulence in some industries. Multinational corporations are not going to disappear or retreat to home ground. Many will probably become increasingly international in scope, forced by slowed growth in their domestic markets (e.g. Japanese firms). And if the Chinese ever get their economic organizations working well, they could make the "Japanese invasion" of the world, in the 1970s, look small by comparison.

For the rest of this century, we shall probably continue to see a world of business that looks fundamentally different from the 1950s and 1960s. It will be a world of intense competitive activity among very complex organizations. It will be a world in which bureaucratic managers are increasingly irrelevant and dangerous. It will be a world in which even the best "professional" managers are ineffective unless they can also lead. In general, it will be a world in which the leadership factor in management will become increasingly important -- for prosperity, and even survival.

It will be a world for which, at least today, most corporations are not prepared.

Copyright © 1988 by John P. Kotter, Inc.

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