Competitive Performance: Master Metric For An Evolving Global Economy
Kenneth T. Derr, Chairman of the Board and Chief Executive Officer
"Tenth Durland Lecture"
Cornell University, Ithaca, New York
When I agreed to give this lecture more than a year ago, little did I know that "corporate America" -- and C.E.O.s in particular -- would become headline news.
We've seen tremendous criticism from the media, from some politicians, from some employees . . . and from the general public as well.
But perhaps this is all good -- because it may lead to a better public discussion of the role of American business and I'd like to initiate some of that today.
In preparing for this talk, I looked back at the last speech I gave at Cornell to the graduating class of the Johnson School in 1985.
I made a few comments that turned out to be fairly accurate. I observed that the "Age of Information" seemed to be upon us, and that American industry had reached "some kind of crossroads."
That was a real understatement.
But being from one of the most basic industries, I was having a hard time buying the concept of a future economy based only on services, and information, and consultants.
Clearly, U.S. manufacturing has grown stronger during the past decade. But I think my remarks that day reflected a general feeling of uncertainty, not only for me, but for a great many executives.
Although inflation had finally cooled to about 4 percent from the destructively-high levels of a few years earlier, "merger-mania" was in full swing. And American companies were taking a lot of criticism for failing to adapt to the emerging global economy.
Back then, the term "Japanese dominance" seemed less like a temporary trend and more like a foregone conclusion.
Still, I wanted to offer the graduates something they could use. That's the whole idea of a commencement speech.
So I advised them that reacting positively to constant and rapid change was critical. And I said they should place the highest value on flexibility and problem-solving skills.
As things turned out, that was a pretty good call, because we've seen dramatic change in U.S. industry since 1985.
But one big difference stands out for me between that last address and this one today.
This time I don't feel the uncertainty.
This time I feel the opposite.
Inflation, interest rates and unemployment today are low by historical and world standards. And U.S. companies are the strongest players in the growing markets throughout the world.
In fact, they're meeting the challenges of global competition. And they have probably never been better prepared to face the future.
Our economy has just enjoyed a significant expansion, and American corporations remain the envy of the world.
They have met adversity and changed.
This should perhaps be a cause for celebration, not a barrage of criticism.
Despite consistent reports about growth in new jobs, it's still popular to label America's corporate leaders as the heartless architects of downsizing who receive huge compensation while employees are losing their jobs.
I fully recognize the pain and dislocation to many people caused by the restructuring of American companies in recent years.
It has not been fun for any of us. But the point to remember is that this restructuring was necessary to allow us to become globally competitive.
It's also important to recognize the steps that many companies have taken to ease the impact of downsizing.
Unfortunately, business has not done a good job explaining this to the public. And so our efforts have largely gone untold -- or they've been dismissed as a token gesture.
At Chevron, we directly employ about 38,000 people world-wide -- and that's down by about 13,000 over the past four years.
We've tried very hard to handle downsizing with sensitivity, and although we undoubtedly haven't always succeeded, I can tell you our efforts have been sincere -- and I think they've been caring.
First, we essentially stopped outside hiring for several years to allow attrition to help minimize the surpluses.
About 20 percent of our reduction came from this normal attrition. Another 30 percent came through voluntary early retirement programs and about 15 percent resulted from asset sales, with many of the employees going to work for the acquiring company.
Finally, 20 percent left through involuntary severances, and those were the toughest situations. However in all cases, we had outplacement services available, which helped many people find jobs.
Departing employees received generous severance packages and, usually, large blocks of company stock from our profit-sharing plans.
Throughout the period, we emphasized filling all open jobs from within Chevron. To make that work better, we created an internal redeployment program to match open jobs with surplus people, and about 1,500 employees found new jobs in the company under this program.
The fact is, most companies have learned that the way they treat employees who lose their jobs strongly influences the performance of those who remain on board.
Clearly, we all have a lot more to learn about managing the "people issues" of the global economy.
But I believe it's also clear that despite the disruption of re-engineering, U.S. companies and their employees and our economy are all better off for having faced the realities of a global marketplace in transition.
Ultimately, I believe history will judge most American business leadership during this period as realistic, decisive and also sensitive to the human needs of their employees.
One observer recently explained the changes of the past decade simply as the "triumph of free-market ideology."
But I think it's more useful to try to view things from the standpoint of competitive performance.
This is the master metric of the global economy.
The need to perform better against competitors has confronted us with growing urgency.
Stockholders and consumers are of course driving much of this strong emphasis on performance . . . and enjoying the yield.
And we know their expectations will remain high.
More people today depend on equities, not just through pension funds and other institutions, but in their own retirement portfolios. And all of us -- we're all consumers -- will continue to seek the best deals for our dollar.
The fact is, we each have a bigger stake today in the total fitness of the companies that make our economy happen.
And if we can fully appreciate the value of competitive performance, we can begin to see today's global economy in a different, more positive light.
How did U.S. companies change over the last decade and become globally competitive? I can respond to that by using the example I know best -- Chevron.
Then I'll also offer some ideas on how U.S. companies can sustain the competitiveness they've worked so hard to achieve -- and move forward to pursue aggressive growth in the future.
At Chevron, we've tried to embrace the metric of competitive performance as a guiding philosophy, and I'm certain that this has changed us permanently for the better.
In 1989, we set a five-year goal to achieve the highest rate of stockholder return among our peer competitors in the oil industry. We told everyone from stockholders to employees, and we adopted a pledge to be "Better Than The Best."
A lot of people thought we were crazy to openly adopt this objective. What would we say if we didn't meet it?
Fortunately, we didn't have to face that day. When 1993 ended, we were No. 1, with an average return of 18.9 percent per-year for the five years starting in 1989.
I assure you, it wasn't easy. But setting the performance goal and setting it publicly made all the difference. And the intense focus on competitive results transformed Chevron into a different company.
What we achieved is only part of the story, however.
The real question is: how did we achieve it?
Certainly nothing during this past business decade stands out quite as much as the Quality Revolution. For us, this started about eight or nine years ago in our chemicals company. And I'll admit I was one of the earliest skeptics. But once we began to understand Quality's potential, it really took-off at Chevron.
Thousands of our employees took formal Quality training, and virtually every organization started using the tools. Ultimately, Quality taught us how to invent both the vision and the "vision metrics" for our entire corporation. We can also thank the Quality Revolution for re-inventing the institution of "the customer." And today, "customer focus" is widely accepted not just as a priority, but as a total operating philosophy.
A good example in our gasoline retailing business is our plan to build hundreds of shared locations with McDonald's restaurants throughout the Sunbelt and the West. Both companies are excited about this alliance to better serve our common customers and also reduce operating costs.
In another example, we formed a new global lubricants company in order to better serve our customers' worldwide requirements from one company rather than from several regional units.
I should add that Quality opened our eyes to the value of alliances. Our "supplier quality improvement process" has developed into a terrific alliance-building tool.
The effect of customer focus inside Chevron has been nearly as dramatic as outside. In particular, our service organizations are much better focused on their customers.
When we restructured our corporate staffs back in 1992, we assigned everyone to identify their work products and find out what their internal customers used them for. Some people never found a customer for their work output. And obviously, that was the easy work to eliminate.
Today, Quality has infused all service organizations with customer focus. Our businesses pay for all corporate services so they can determine whether they're needed or not.
Related to that, people seem to understand the need to find the most cost-effective services. And where outsourcing is cheaper, that's the way we have to go.
And that's just one way that Quality is paying-off on one of our highest priorities, which is cost management.
The old way to reduce costs was to set a goal and a deadline. The outcome was often just spending less and doing less -- or spending less but still doing a job the wrong way.
But the Quality approach looked for ways to improve a work process and its end result, and thereby reduce its costs. That is changing the way we do our work.
I've seen Quality at work in my own company -- and I've learned that an improved work process creates a sustainable gain instead of just a temporary savings.
Since 1991, Chevron has reduced absolute operating costs by more than one-and-a-half-billion dollars a year.
Hold that up against our two-billion dollars in operating income last year and you can see where we'd be if we hadn't attacked our costs with Quality tools.
In hindsight, our success in cost management was made possible by Quality-driven changes put in place well before we launched a company-wide drive to cut costs four years ago.
Starting in 1989, we began to strongly emphasize greater decentralization and delegation of authority -- and consistent with that, greater empowerment for employees.
That same year, we officially made the internal shift from a traditional functional structure to strategic business units -- or "S.B.Us."
Every unit and its people began to take responsibility for their performance as a free-standing enterprise.
The power of this concept helped drive a lot of major changes at Chevron.
For example, we used to hold interests in 3,500 different U.S. oil and gas fields. Today it's less than 400. We've kept the ones yielding over 95 percent of our U.S. upstream profits and sold the others.
This made sense for a lot of reasons, but mainly, it allowed us to focus our engineers' efforts in oil fields that would make a difference to the bottom line. It also helped us simplify our organizational structure.
Our emphasis on worker empowerment and delegation of authority has also been a strong driver for removing unnecessary layers of management.
Chevron has eliminated hundreds of so-called middle-manager positions in recent years.
Now we're seeing self-directed work teams -- and they're helping us learn how ownership of work really can replace supervision.
We're still fine-tuning a lot of these changes, but I don't think anyone wants to go back to a time when we had a lot of people on the payroll checking and reviewing the work of others.
In fact, people are finding that flatter organizations can be more interesting places to work.
Their jobs involve broader responsibility and they are connected to real results, and that makes every job more meaningful.
So where has all this change left us today?
Massive re-engineering has made us globally competitive. And that's a tremendous achievement. But the benefits of this change will come only when we turn our performance towards growth. And I mean real growth.
At Chevron, we want over 10 percent earnings improvement in an industry growing at two percent per year. Obviously, we'll have to get our gains from performance.
So before we open it up for questions . . . let me discuss three areas which I feel are essential for growth in the future.
- A strong emphasis on global business skills;
- A sustained focus on Quality principles and particularly on managing knowledge;
- And the renewal of employee morale and the building of employee commitment.
International business has always valued personal, diplomatic and language skills.
And I'm sure many of you here today will capitalize on your ability to appreciate -- and move within -- different cultures.
But the general ability to deal comfortably with international situations -- whether the sensitivities are ethical or ethnic -- got a lot more valuable over the past 10 years.
Countries which once closed their borders are now opening them to new partners.
Doing business in these countries can be extremely demanding. But we're talking about truly outstanding prospects. And approaching them with sensitivity and sophistication can give you a significant competitive advantage.
When I spoke to the Johnson School graduates in 1985, I said that ethics would always remain a fundamental element of good business. If I had to restate that for today, I would say that this is especially true in international business.
And in light of recent geopolitical changes and the rapid growth of enormous new markets such as Southeast Asia, I'd say ethics have probably never been more important.
Anyone who sets a consistent example for fair and honest business practices and fair competition . . . does a service to themselves . . . to their employer . . . and to their partners.
Dealing with the wide range of cultures and partners and governments around the world, it might just be up to you to find the right way to set that example.
These situations fully test all your global business skills.
The first time I met the president of Angola, his country was in the midst of civil war.
I thought we were going to talk about our oil-development projects. But he looked me straight in the eye and said: "Why is your government providing money and arms to my enemies?"
It was an understandable question, and my only option was to respond strictly as a business partner and try to steer clear of the relationship between our respective governments.
This was consistent with Chevron's position on South Africa in the days when apartheid was still in place and some stockholders wanted us to divest our interests there.
Independent of politics, we believed then, and believe now, that Chevron's presence as a business partner in developing nations is a far more positive than negative influence.
More recently, how many of us were ready for the collapse of the former Soviet Union? This event and the wide-spread disintegration of centrally-planned economies has changed the course of history.
Many of our people have faced the greatest personal challenges of their careers working on Chevron's big joint venture to produce the Tengiz oil field in Kazakhstan.
Take my word for it: you really can't imagine what happens when pure capitalists and former life-long communists sit down to try to make a deal.
In my case, it helped to know that Tengiz had the long-term potential to literally double our company's total worldwide crude oil reserves.
Kazakhstan is an outstanding example. But there are lots of others.
Now, on the issue of sustaining Quality in the future, the main point I want to make is that continuous improvement never ends.
It's tempting sometimes to assume that Quality's major gains have all been harvested. But every time I've thought that way, I've been proven wrong.
This is why I feel so strongly that managing knowledge will be a key success factor for all of us in the future. The rate of change of technology in all areas -- but especially in communications -- is almost scary (especially to people in my generation). A key part of managing knowledge in business is the sharing of "best practices" throughout our organization, and that means using all the new communications tools we can find.
It also means commitment from everyone. I've made sharing of best practices one of my highest personal leadership priorities in Chevron. And I take every opening to encourage not just sharing more, but sharing faster, because every day that a better idea goes un-used is a lost opportunity.
Let me talk finally about employee commitment.
Chevron has eight strategic intents. And the first is to "Build a Committed Team" to accomplish the corporate mission.
We've made this one of our key drivers for achieving the objective of outperforming our competitors.
The committed team concept is also the basis for our company values, which we've distributed to all employees through a document called The Chevron Way.
And "employee pride" is the first of five elements of our company's vision to be Better Than the Best.
So I think we've got our priorities straight. But we're also coming to realize how hard we're going to have to work to achieve employee commitment.
People have been through a lot these past several years. Fear and commitment don't mix. And employees are wondering what will replace the old model of job security.
The fact is: we can't replace it. But companies can demonstrate their own commitment to people by valuing them as partners instead of managing them as overhead.
This means dealing with employees with honesty and integrity so that we can increase the level of trust.
According to a 1995 study by Gemini Consulting, 86 percent of executives feel the "lack of trust" within their companies is a serious obstacle to "energizing" their employees and getting them focused on growth.
The study also cites a great need for something called "employee renewal."
I think those kinds of findings mean we've got our work cut out for us if we're going to have committed employees.
One area of major potential is creative compensation.
Recently, we began offering all employees the chance to earn bonuses and stock options if we outperform our peer companies and hit our targets for profits and stock price.
We're going to keep working on ways to link performance with incentives. And I think this will be the case throughout corporate America.
We must also continue to address work and family issues such as flexible hours.
And very importantly, we must invest in employee development, training and workplace technology.
But there's going to be more to it than that. Let me just read a small section from our list of Committed Team Values in The Chevron Way:
“We accept individual responsibility . . . in partnership with the company . . . for the success of the business . . . and for our personal development.”
This is what we've got to have, and it's long way from the "old contract" mind-set of job security for life.
So as people begin to move in this direction, companies must make sure we recognize it and provide rewards for the behaviors that can take the company forward.
How hard will that be?
The Gemini study said four out of five executives believe that the right behaviors are not being rewarded.
And that's just one of the things we have to change if we're going to achieve employee commitment and enjoy the benefits that it can bring.
Employee commitment will truly become the key success factor in future competitive performance.
We don't really know for sure what lies ahead.
But we do know there is no economic reward more valuable than having a shot at growth.
The contenders for this prize will be: those who have faced the realities of the global marketplace and made the hard decisions and unavoidable changes to meet that standard; those who meet the tests of global business skills, of sustained Quality and of employee commitment; and those who embrace the master metric of competitive performance.
Updated: April 1996