Announcer
Welcome to the Decoding Innovation Podcast series, brought to you by the EY-Nottingham Spirk Innovation Hub, where we explore the innovative technologies, business models and ideas that are shaping the future of industries. During each episode, we meet with stakeholders at the cutting edge to discuss innovations in their space, challenges they need to overcome, and their outlook on the future.
Mitali Sharma
Hello and welcome. I’m your host, Mitali Sharma, and today’s topic is leadership and innovation. Our guest is Bob Nardelli. Bob really doesn’t need much of an introduction. In his 50 years of experience, he’s led companies like GE, Home Depot, Chrysler, and is known and widely recognized as one of the best operating executives in the world. Currently, Bob leads XLR-8, a company he founded that he gives investment and advisory help to Fortune 500 and public and private clients. Bob, welcome to the show.
Bob Nardelli
Thank you, Mitali. I’m excited to be with you today.
Sharma
Bob, let’s start with your personal journey. You started with GE straight out of college, right, and worked there for 30 years. Tell us how that experience shaped you.
Nardelli
Well, you’re exactly right. I graduated from college in 1971, and the job market then was very, very tight. And unlike the year before, a lot of my roommates were getting four or five, six offers, traveling all across the country, and interviewing. So, when I graduated, again, it was a tough market, and it’s kind of a fun story. I interviewed and took the test to sell Metropolitan Life Insurance and then I interviewed to become part of a management training program with Ponderosa Steakhouse. And finally, God looked down upon me and felt sorry. And I really hit the jackpot. I was hired by General Electric as a manufacturing engineer on the shop floor in Louisville, Kentucky, in the refrigeration department. And it was the best thing that ever happened to me. You know, many times I’m asked that question. And also, “Well, Bob, what was your salary when you started?” And I say, well, $9,600. And a lot of the MBA students would say, you mean a week? I said, no, a year. And that averages out to about $4 an hour when I started in 1971. But again, it was such a great experience. And the fundamentals, the fundamentals that I learned on the shop floor in that factory, it really served me well throughout my career.
Sharma
Thank you for that. How was it like working with Jack Welch?
Nardelli
Well, again, I was very fortunate to meet Jack Welch in the early seventies, when he became a sector vice chairman on his way to replace Rick Jones as the chairman and CEO of General Electric. And I met Jack at a technology fair, an innovation fair. And I was introducing a new technology at the time called sublimation, and sublimation basically replaced the old silk-screening technology that was used heavily in the appliance business, particularly in refrigeration and home laundry, etc. And of course, there were a lot of chemicals that were used in silk screening, there was a lot of scrap and rework, and sublimation was a very simple project. And at the technology fair, the innovation fair, Jack and I hit it off. He was very impressed with the technology and my ability to talk about it and more importantly, implement it in a very cost-effective way. And we became good friends, and the rest of the story progressed over the next 30 years, as I either was in every division, ran a number of divisions, and including was on GE Capital Board with Jack.
Sharma
Bob, you went from a conglomerate like GE to a retail giant, like Home Depot, to Chrysler Automotive Company, vastly different organizations. How did you adapt your leadership style?
Nardelli
Well, it’s just a great question. Again, I was very fortunate to develop a lot of my leadership skills at General Electric, and they have served me extremely well over the 53 years now. And the portability of those skills were tremendously helpful as I moved from position to position not only at General Electric and then a short stint at Case Construction Equipment, and then on to Home Depot, Chrysler, as you said, and basically, each of those transitions, I had a playbook of introduction, and it was interesting, you know, when I went to Home Depot, I was asked many times, well, Bob, what do you know about retail? And of course, you know, my last assignment at GE, we were about a US$40 billion business selling power plants around the world, whether it was combined cycle, we put in the last two nuclear plants in Taiwan, 3500 megawatts. So, I kind of had some experience in selling things to customers and understood the importance of market-focused customer-back kind of centricity. And so, when I went to Home Depot, I took all of those management skills and were able to then apply those in the retail business. And I kind of developed, again, this process where I would immerse myself in the business, kind of like a dry sponge in a bucket of water, if I can use that analogy. And it was important for me to have a vertical learning curve, because the slower I learned the business, the less effective I could be in making decisions and setting strategy and really trying to enhance the culture.
So, when I went to Home Depot, I was able to do that. We went through new manager assimilation with the leadership staff. What do you know about me? What do you want to know about me? What’s my hot buttons? I want to know about you. And then I would make a point of going to each of the leadership team’s office. Rather than them coming to me, I ask them questions about, you know, what’s your aspiration? Tell me about your family. Tell me about what you like here. Tell me what you don’t like here. Where do you think we could make improvements? And I think that takes down some of the anxiety between those – that leadership team and myself. And I couldn’t be – gosh, I was so pleased with the leadership team at GE Power Systems Group, with Home Depot, Chrysler – at those businesses, to be honest with you, I got very careful because when we would talk about doing something, they were so powerful and so effective in the implementation and execution of, it was always how to versus why not? And the energy! I’ll give you one example. Jack always flew down and we spent a full couple of days going through an HR review where he would talk with me, my leadership team, skip level meetings, etc., and I remember very vividly at Power Systems. At the end of the day, he paid us a compliment that could never be one-upped, if you will. He said, Bob and team, I took the plane down here from Fairfield to Schenectady, but I won’t need a plane to fly back because you have energized and enthused. You know, the enthusiasm here, was just so contagious and the organization, you could just feel the chills go up and down their spine at that compliment – compliment coming from someone of Jack’s stature, who is running one of the largest conglomerates in the world, unbelievably successful. And so, that power of a recognition and reward stuck with me throughout my career at Home Depot, Chrysler, XLR-8, etc. And I think it’s important to reward and recognize performance and encourage people to really reach for things they otherwise may not have been able to reach for with that kind of support.
Sharma
Bob, in your vast experience, what do you regard as the most important job or jobs of a CEO?
Nardelli
Well, look, that’s really a penetrating and a great question. Let me share with you and the audience at least the things that I have prioritized over, again, my 53 years. I think, again, I would not prioritize these vertically. I like to prioritize things horizontally, because I think they have to be done concurrently, not sequential. Okay? So, when I talk about these priorities, again, it’s on a horizontal basis.
So first of all, one of the things – I have this saying we’ve talked about is you either innovate or you evaporate. And innovation has been at the heart of the success we’ve had in all of these businesses. For example, when I moved to Home Depot, we were doing about US$40 billion in revenue and five years later we’re doing US$91 billion in revenue. And that came purely through tremendous innovation – innovation and implementation. We opened 1,000 stores over that period of time, so we’re opening a new store every 24 to 48 hours and each store carried with it a level of new innovation from lighting, from way signs, to even the details of acid etching the floor so that we got increased reflectivity to make the products bounce and look better when we presented those, we knew on an innovative basis that the pro customer was fundamental to our growth and our success. So, we went about creating Home Depot Supply. We did 50 acquisitions in 18 months and went from 0 to US$12 billion. It was noted, Home Depot, as a do-it-yourself store, but customers would come in and say, Bob, we’d be happy to do it, but I am not going to buy power tools to do one project. Bingo. Innovation. Let’s open up a tool rental store. So, I could go on and on. I mean, if you think about some of the products that your favorite products in Home Depot – Rigid, Hampton Bay, Glacier Bay, Husky, Workforce, etc., those are all innovative brands, house brands that we basically disintermediated a supplier and gained about 30 points of margin and we did that through, again, a very focused energy and team of people that drove innovation. We had a 100,000-square-foot bunkered facility where we would actually test, bring focus groups in to really examine these new products and make sure not only the product but the line set the planograms down to every detail. We would test everything in that center before we rolled it out across over 2,000 stores. So those are that’s one example on innovation.
My favorite quote from Peter Drucker, “Culture eats strategy for breakfast.” Culture is critically important to be able to attract, motivate and retain superior workforce from top to bottom, from bottom to top. Very, very important that you create a culture of innovation. You create a culture of how to versus why not? You create a total culture of team. I always like to say we play more for the brand on the front of our jersey than the name on the back of the jersey, if I can use the football analogy.
And then one final one would be capital allocation. And here’s how I think about capital allocation. When you invest in physical capital, from the time you bolt it down, it starts to depreciate, right? When you invest in human capital, there’s a double entendre there. First of all, the person you’re investing in has a sense of appreciation. And beyond that, their personal wealth, their personal knowledge, also appreciates. Now, you hope that that stays with the company, but if it doesn’t, you still have invested in a person that will go out and do great things, maybe even better things than they would have been able to do within that organization. So again, innovation, right? Culture, capital allocation.
And then, I think one of the final ones was I’m a big supporter of Net Promoter Score, but I don’t use one to ten, Mitali. I think that’s too big a range. I go down, it’s either you will promote us, or you won’t promote us. The maybes are probably a non-promoter if they can’t make up their mind whether they will or won’t, they probably won’t. So, we created a program that at the register you’d be able to be a promoter or a non-promoter, and if not, why not? And then we would try to follow up with it.
So those – obviously there’s several more that you could get into about public relations, new technologies, etc. But I think those are probably the fundamentals I’d like to share with your group out there today.
Sharma
That’s very interesting and a lot to unpack there. Let me start with one of the first things you mentioned, which is innovation. As a CEO, what do you see your role as like a cheerleader of innovation? Are you sort of a, you know, a champion? Are you somebody who’s driving the train?
Nardelli
Well, again, depending on the business, depending on the innovation, there’re multiple answers to that. If I go back to GE transportation business, which is the locomotive business. Again, we, by the time I left and moved on to Power Systems, we were doing over 800 locomotives a year. When I got there, you basically had an order of 25 from Norfolk Southern, and we brought a ton of innovation. We improved track of effort to make sure you go from what was called a six-pack of locomotives to a four-pack. So, when you’re pulling a coal train of 150 cars out of the Powder River Basin, you could do it much more efficiently at a lower operating cost. We set up a long-term service agreement, which was two minors and a major overhaul over 15 years. We opened up our own repair and return shop, which was unbelievably service-oriented to the railroad to make sure their downtime was minimized, but also represented a tremendous margin improvement in our ability to service those locomotives. Then we went global.
So, one of the things I’d like to think about with that is, is again, a fundamental – when I had to present a strategy and technology innovation to 350,000 associates, I had to be able to do that on one sheet of paper. So, how did we convey the importance of innovation, culture, capital allocation going forward? So, we had a very simple approach. We must – we must enhance the core of our business. So, enhance the core, right. And then you had to extend the business. New products, new innovation, new technologies, and then you had to expand the market. Like with Home Depot, again, I was in Mexico with my family on vacation, and I’m seeing all of these retail stores. I didn’t see a Home Depot. All our team, they came down while I was on vacation, and we started looking for opportunities to make an acquisition. We bought basically a small home improvement chain, and it went from zero to number one in Mexico. So that in itself was huge technology innovation, right? By being able to not only enhance, extend, but expand our markets. We did the same in Canada. But here was really the nugget in doing it. We love the fact we were number one there, but then we were able to transport products that were known to the Latino Hispanics, etc. and move those into strategic markets in the US and Canada, where that was most, where the heaviest population was of that ethnicity. And so, they felt very comfortable coming into the store and acquiring those products. They knew the cleaning capability. They knew the aromas, the smells and the familiarity of the brand. So everywhere you turn, you have to be, ever so vigilant of opportunity, seize opportunities to innovate, create and to expand your markets.
Sharma
It’s fascinating how you talk about innovation. Most companies, when they think of innovation, it’s R&D, it’s product, and then they kind of stop. When you’re talking of innovation, it’s very wide lens, it’s product, it’s culture, or at least cultural grounding of a product. It’s new market opportunity. So, tell me a little bit about how you characterized a successful innovation.
Nardelli
Yeah, Well, it’s interesting. I want to pick up on one point you made there. I had a discussion with Jack. We had what we call corporate research and development: CR&D. And I talk with Jack one day. I said, you know, we really need to change the name of that. Jack, what were you talking about? I said, well, it really ought to be research, development and commercialization. Right. It’s not CR&D, it’s RDC – research, development and commercialization, because to put just technology on the shelf is self-rewarding for the PhDs and the doctors. But the real nugget there is to be able to get the return on investment and the commercialization. So that’s another point I wanted to make with you, a little bit of inside baseball there on some of the things that we talked about.
So, every time we made an acquisition to your question, every time we brought a new product out, every time we innovated – and we did a ton of innovation at GE Power Systems, we went from just the stodgy power plants to portable power. For example, we were doing all of the major league baseball teams; football, concerts, and anything that needed auxiliary power. And we also bought a company called Stewart and Stephenson, which allowed us to take three trailers, mount an LM 6000, which is a jet engine derivative, and we would basically stand up 35 megawatts of power to a city that maybe just went through a horrific hurricane, tornadoes or something. So, my measurement of innovation is in the bottom line and make sure that we do post-mortems on everything we do. A lot of times, there’s these very elaborate pro formas that are presented on why we should do something. But then there’s no follow-up on did we do what we said we would do and how do we learn from that experience to make the next one better? How do we develop a playbook? I always said that acquisition integration, if it’s a core competency, it’s a huge competitive advantage. So, we developed a textbook, if you will, on how to acquire, innovate, and then make sure that we get tremendous productivity of synergies through those acquisitions. And those are some those are just some fundamentals. I don’t know that we’re unique, but those are fundamentals that we live and work by every day.
Sharma
It’s fascinating, again. You mentioned two interesting things that I want to pick on. One is this whole notion that innovation is not just what’s invented in the four walls of the company. You’re looking at acquisition as part of that innovation strategy or part of that growth strategy. So, it’s like one cohesive thinking process that you’re applying. And then the second thing that you mentioned was the whole idea of iterative approach. You talk about a playbook constantly going back and looking at what you got and thinking what can you do better and learn from? So, talk to us a little bit more about how you implemented that in public organizations, which are typically very risk-averse.
Nardelli
Yeah. Well, again, some of my little one-liners here, you know, change is the only constant and speed is a tremendous advantage. First mover in the market, a tremendous advantage. So, you know, we would look at an acquisition and sometimes – you know, every organization kind of has like to think first among peers, like GE was engineering, Home Depot was all about the merchants. Chrysler was all about the design dome and touch, feel, fit, and finish of the vehicles. So invariably, you know, we’d look at making an acquisition and a team would come to me say, “Bob, why are you buying that? We can do that.” And I say, “Well, no, I know you can. You guys have proven to me extremely competent, but let me ask you to be able to do that, what would it take?” “Well, we could do it in about two years. We’d need a maybe 300 engineers, couple of million dollars in design, expertise, in prototypes, etc.” And I said, “well, we can have that tomorrow.” And I think speed to market, to be able to bring that additional technology like in a power plant, we bought water treatment because it’s fundamental to a power plant and we got it overnight. Our team could have done it. But now what I want my team to work on is how do we enhance it, how do we make it better, how do we make it more efficient? How do we make sure we’re delivering on our commitment to our customer?
Key point. How do we have see-through accountability to our customer’s customer. In the turbine business, I went to the factory down in Greenville. And how are we doing? Well, we’re done. The turbine’s on the dock. I’d say, you’re not done. What do you mean? Well, you aren’t done until it’s delivered, it’s up and running and delivering electricity to our customer’s customer commitment to make sure the price, the reliability. So, part of Six Sigma to me was having that see-through accountability to our customer’s customer. Could we sell a power tool? Yeah. Is it working? Is it performing as we touted it would be based on the specifications and the performance being the quality aspect. So when we when we either sold one or went through tool rental, we wanted to make sure that our customer’s experience was enhanced by the products and services that we delivered.
So those are some of the things that I think you have to really think about on innovation. And innovation is everywhere around us, right? I agree with you. It’s not singular in focus. Sure, there’s research and development. Sure, there’s some of those things. But again, bringing that to the market and being able to get a return on that investment and to be able to gain a competitive advantage in the marketplace. Like I said, change is the only constant. If you’re not moving forward, you’re backing up in today’s world. My experience.
Sharma
Let’s break it down further. Let’s talk about balancing the timeline, short term versus long term.
Nardelli
Well, again, one of the real lessons learned with Jack at General Electric is if you ever said, well, Jack, what do you want me to do? Short-term focus or long-term focus? He’d say, well, Bob, what do you want me to do – give you quality or cost? They’re inseparably linked. Short term allows you to do long term. If you don’t enhance the core, you can’t do the enhance and extend. Right? So, I really learned at an early age that it’s important to focus on the short term and be able to deliver on your commitments that basically build towards a longer-term strategy. If we didn’t have innovation, if we didn’t create culture, if we didn’t deliver on our numbers, how would we ever be able to do year two, three, four or five? And so it’s like building a home or a high rise; if the foundation isn’t right, if you haven’t done that core drilling to create the proper foundation and you haven’t gone to bedrock, for example, in some areas, then you know you’re going to tip over when you try to reach for the stars. Right? So, you have to have that concrete foundation. You have to do things at the very basic level to be able to drive that innovation going forward and to be able to recognize, reward and encourage the organization towards going – what I found was by doing that, people achieve things they otherwise may not have achieved because they’re willing to get that. And how do you stretch just a little bit than you normally would have?
And you mentioned earlier, a lot of organizations – and I see it in private equity, too – are kind of lifestyle businesses. What do I mean by that? People are pretty comfortable. I got a good job. I don’t need to rock the boat. I don’t need to take risks. Not taking risks. Not taking risks is the biggest risk you’ll take. I found that at Chrysler. When we were going through the financial meltdown across the country, when the banks were basically imploding, not exploding, imploding. We had to make some really dramatic decisions. And the decisions, yeah, we’re costs, but we also put the brand-new Challenger out in 18 months, followed by the Charger. We basically redesigned the RAM Truck – Motor Trend truck of the year. We repositioned Jeep, which then became the most popular SUV in the auto industry. We did all those things while we were still trying to restructure from a market that had 17 million autos a year. That’s – They call it the SAR, or seasonally adjusted rate – down to 9.6. So, we had to take our break-even point down to where we could be successful at something that was lower than post-World War II on an inflation-adjusted basis. So, we did that. We had to do major restructuring, gut-wrenching decisions on displacing families, not employees. These aren’t numbers. These are families you have to affect. We had to basically shrink our brand offering. We weren’t making enough money on some. We were losing US$500 on the hood on some of these vehicles. And then you had to repurpose factories.
So again, you had to do all of that simultaneously while you were driving innovation to really beat the competition, who maybe were in the foetal position trying to get through this tough period. So, we had to make some tough decisions, take some risks, and it ended up saving Chrysler during that bankruptcy time.
Sharma
So that is a very specific and a wonderful example of innovation or management in a crisis situation.
Nardelli
Yes.
Sharma
As you mentioned before, a lot of brands are in the lifestyle business. In other words, they’re happy where they are. Nothing on the horizon looks like it’s really challenging them in a situation like that, how do you enable an organization to look beyond and take some risk and make some decisions?
Nardelli
So, here’s one of the ways I approach it.
It starts with how do we attract, motivate and retain a high-performance workforce? So, what do I look for in an individual? I look for somebody that has a tremendous amount of energy. I look for someone that has the ability and a track record where they can really convince me that they have been able to energize an organization. Right? So, they have energy, the ability to energize. You’re going to get my four E’s here. Also, that they have a childlike curiosity about everything, an entrepreneurial spirit inside a very large and challenging, complex conglomerate. So, a lot of people think conglomerates have gone out of style. I think the ability to lead a conglomerate has gone out of style in practice. I’m a strong believer that conglomerates are one of the biggest competitive advantages you can have based on the cyclicality, the various segments that you’re in, etc. So, energy, energize, entrepreneurial spirit, and then most importantly, execution – the ability to energize, have the energy, energized, entrepreneurial and execution. So, you can see it always comes down, you with me? To performance implementation against some target, the competition, the economy, whatever you want to pick. We got to be better than, not as good as. Otherwise, you’re backing up on this thing.
So, those are the four E’s that I look for in how I try to create an environment and a culture, by populating it with people that have that competitive spirit, that always want to do better, that love the ability to be recognized and rewarded for that kind of performance – whether it’s financial, whether it’s just publicity, whether it’s personal notes, whether it’s a pat on the back, whatever it takes. Each individual has their own prescription of what’s important to them. So, you got to know what that is, and then you got to be responsive to them.
Sharma
So, Bob, how did you think about the long-term versus short-term piece of the innovation, especially as you think about capital allocation and getting the right people in the right positions?
Nardelli
Yeah, it’s a great question, because that’s right at the root of success and the responsibility of leadership. So, when I think about capital allocation, I think about it in a couple of different dimensions.
First of all, what capital do we need in the short term? In many cases it was to improve or enhance a problem. What kind of capital do we need to apply to our technology? What capital do we need to apply to our product innovation? So, we would go through and we’d have multiple sessions. What can we afford? What kind of capital can we afford this year based on cash flow and depreciation or a whole number of things that go into the financial evaluation. But I would look at what do we need in the short term to make sure that this engine continues to run? And then I would look at is that capital allocation also building towards the future? Year two, three and four? Is it building towards a product that we would roll out, but then we could enhance with further capital allocation.
So, I look for that and then you’re going to have some capital allocation that basically is taking a risk. it’s a calculated risk. It’s not just a flagrant risk, but then you’re going to put some money into capital allocation that’s going to pay off in year three. And I’m working with a company right now, a publicly traded company that’s doing exactly that, where we’ve made capital allocations. And again, it’s going to pay off big time in year three for medical devices in medical applications.
So those are the ways I think about that, Mitali, if that’s answering your question. I think it has to be a very thoughtful, healthy debate between the operating people and the leadership team on capital allocation, because it’s not infinite. There’s only so much you can spend per year based upon your return on capital investment and also your borrowing rates, etc. So that’s how I think about it. So very granular, very grind it out, very heavily debated allocation of capital for short term, mid-term and longer term.
Sharma
And how often do you revisit it?
Nardelli
Oh, yeah, we revisit that all the time. We would go through, just like we would do program reviews. Are we on schedule? Are we not on schedule?
And let me take a side rail for a moment, because sometimes you go in and everything’s perfect. Everything’s perfect. You go around the table, you have your red, yellow, green kinds of charts that go out there with your KPIs. And I look around, everybody’s green, Mitali. Everybody except me. I was the only one that had a red chart. And I said, this can’t be right. It can’t be right. So, let’s get honest, right? You just got to get people to be honest. And if we’re putting capital into something and in fact, maybe there are legitimate delays, sometimes it just was a bad decision. The sooner you tell us, the better we can redeploy that. And a lot of people fear being honest because they’re concerned. Well, my reputation, I may not get a promotion, my salary may be docked – if they’re working against the plan we’ve all agreed to, if for some reason it wasn’t right, you shouldn’t criticize that person, he or she, they’re doing they’re doing what we asked them to do. They’re doing the best of their talent, we assess. And so, there shouldn’t be any criticism or negativity reflected on it. Sometimes, we just make a bad decision. The sooner we find out, the better. So we’re not wasting precious capital and we could redeploy it.
Sharma
Very interesting. I really picked up on one fact while you were describing it. You were talking about accountability, but not penalization. Tell me more about that.
Nardelli
Too many times I’ve seen chairmen and CEOs do a lot of barking, do a lot of delegating. I call it abdicating, not delegating, because you delegate, you’re going to monitor and you’re going to keep in touch with those things. The only way you can work things concurrently is you have to energize your staff. You have to delegate that, not abdicate it. But then you got to monitor, you got to follow religiously the progress; you can’t launch and leave. And that’s been one of the things I’m most proud of in my career. Working with the various teams is we had that kind of relationship where I would empower them to do what we agreed to and then monitor them and make sure that we’re staying on course. Sometimes you make midcourse corrections, but are we moving in the right direction? If not, then let’s pause and reevaluate. Did we have the right facts? Do we have the right plan? If not, then let’s shut this thing down and move these good people to something that’s going to be more productive and have a better return on our investments.
Sharma
So not launch and leave. I love that.
Sharma
Bob, this has been a fascinating conversation.
Nardelli
Thank you very much.
Announcer
The Decoding Innovation Podcast series is a limited production of the EY-Nottingham Spirk Innovation Hub based Cleveland, Ohio. For more information, visit our website at ey.com/decodinginnovation. If you enjoyed this podcast, please subscribe, leave a review wherever you get your podcasts and be sure to spread the word.
