Chuch Knight – CEO of Emerson Electric
Article published in Harvard
Several assumptions underlie our management process. We believe, for example, that
profitability is a state of mind.
“Emerson is renowned for achieving consistently high profit margins. We strive for consistent
high profitability because it is essential to creating shareholder value...During the past two
decades, our average profitability, measured as earnings before interest and taxes as a
percentage of sales, has run 30 percent higher than that of a group of peer companies...We’ve
done this through good times and bad, continually finding ways to maintain profit margins in
spite of pricing pressures, competition, inflation, the dilutive impact of acquisitions ( most of
which ha d lower margins than Emerson), the costs of maintaining technology leadership and
other factors. Our ability to deliver high profits consistently is a function of operational
excellence”
Experience tells us that if management concentrates on the fundamentals and constantly
follows up, there is no reason why we can’t achieve profits year after year—even in
manufacturing businesses that many observers consider mature and unglamorous.
Emerson has a strong action orientation; we see to it that our strategies get implemented
properly.
A third belief is that the “long term” consists of a sequence of “short terms.” Poor performance
in the short term makes it more difficult to achieve strong performance in the long term.
The basis of management is management from minute to minute, day to day, week to week.
Finally, it is crucial to “keep it simple.” While effective management is simple in theory, it’s
difficult in practice. As Peter Drucker has noted, managers seem naturally inclined to get caught
up in complicated ideas and concepts—ideas that look great on paper but just don’t work.
A corporation has to work hard to have a simple plan, simple communications, simple
programs, and simple organizations. It takes real discipline to keep things simple.
Through our Best Cost Producer Strategy, we have spent more than a quarter of a billion dollars
on restructuring and now have best cost positions in all of our major product lines.
The driving force behind all that change is a simple management process that emphasizes
setting targets, planning carefully, and following up closely. The process is supported by a longstanding history of continuous cost reduction and open communication and is fueled by annual
dynamic planning and control cycles. Finally, it is nourished by strongly reinforced cultural
values and an approach to organizational planning that is as rigorous as our approach to
business planning. It is an environment in which people at all levels can and do make a
difference.
In my view, the job of management is to identify and successfully implement business
investment opportunities that permit us to achieve the financial targets we set. That definition
is carefully phrased, and it constitutes the foundation of our approach to management.
The first step is to “set financial targets,” since almost everything we do is geared toward
reaching our financial objectives.
Consistent high performance requires ambitious and dynamic targets. Every year we reexamine
our growth targets to see whether they remain valid, and we have recalibrated our growth
objectives several times because the business environment has changed, or Emerson has
changed, or we’ve learned something that causes us to see the world a little differently.
But we regard our finances strategically: maintaining a conservative balance sheet is a powerful
competitive weapon. When we see an opportunity that we can finance only by borrowing, we
have the capacity.
Once we fix our goals, we do not consider it acceptable to miss them. These targets drive our
strategy and determine what we have to do: the kinds of businesses we’re in, how we organize
and manage them, and how we pay management. At Emerson, this means planning. In the
process of planning, we focus on specific opportunities that will meet our criteria for growth
and returns and create value for our stockholders. In other words, we “identify business
investment opportunities.”
From a management standpoint, the most important decision a company makes is the level at
which it plans and controls profits.
Our division presidents are responsible for identifying business investment opportunities and
planning and controlling profits by product line.
Once we identify business investment opportunities, the next step is to “successfully
implement” them.
At Emerson, the people who plan are the people who execute. They have ownership and
involvement; it’s their plan, not a corporate plan. That ownership makes all the difference.
The structure and everyday operation of Emerson embodies this basic approach: set tough
targets, plan rigorously to meet them, and follow through on the plans.
Two Underlying Principles
The first pieces of our management process were put in place during the 1950s, when my
predecessor, W.R. “Buck” Persons, established two fundamental principles—continuous cost
reduction and open communication—as central to everyday management.
The first of the two has correctly been described as a “religion” and “a way of life” at Emerson.
Every year for the past three-and-a-half decades (in good times and bad), the company has set
cost-reduction goals at every level and required plant personnel to identify the specific
measures necessary to achieve those objectives.
Our present cost-reduction goals, developed by each division, average about 7% of the cost of
goods sold.
We identify the programs that will give us 70%to 80% of our cost-reduction targets before the
year starts. We know exactly what we’re going to do: we’ll install this machine tool to
streamline that process, saving two-and-a-half man-years; we’ll change this design on that part,
saving five ounces of aluminum per unit at 75 cents a pound; and so on. Division and plant
management report every quarter on progress against these detailed targets. Although this
entire saving does not reach the bottom line, without this program combined with price
changes, we would not be able to stay ahead of the inflation that affects our costs, and our
margins would drop.
As a measure of communication at Emerson, we claim that every employee can answer four
essential questions about his or her job:
1. What cost reduction are you currently working on?
2. Who is the “enemy” (who is the competition)?
3. Have you met with your management in the past six months?
4. Do you understand the economics of your job?
Best Cost Producer
Continuous cost reduction and effective communication became two central elements of
Emerson’s Best Cost Producer Strategy, which we developed during the early 1980s to meet
global competition. The four other elements of this strategy are: an emphasis on total quality, a
thorough knowledge of the competition, a focused manufacturing strategy, and a commitment
to capital expenditures.
The Best Cost Producer Strategy begins with a recognition that our customers’ expectations for
quality, broadly defined, are getting higher every day. To remain competitive, we have to meet
or exceed the highest standards in the world for product performance, on-time delivery, and
service after the sale. In this context, for example, the ideal of “zero defects” is not some hightech dream: we’ve gotten to the point where defects are counted in parts per million—and I’m
not just referring to electronic products. For example, on one of our electric motor lines, we
have consistently reached fewer than 100 rejects per one million motors.