For most companies, economic turmoil struck in 2008. By then, appliance maker Whirlpool Corporation was already coping with a full set of economic challenges, notably stiff competition from several of their global competitors and severe commodity inflation. In the United States, Whirlpool’s largest market, the collapse of the housing bubble had sharply cut into demand for new appliances long before the official start of the Great Recession.
Jeff M. Fettig, who became Whirlpool’s chairman and chief executive officer in 2004, is a believer in the adage that the best thing to do with lemons is to make lemonade. He has used this rolling series of economic shocks to dramatically reduce the company’s costs, while maintaining its global presence and commitment to innovation. Whirlpool’s senior leaders quickly seized control and narrowed the company’s focus—and almost as quickly delegated responsibilities to middle and line managers through rapid and frequent communication.
One of the lessons of the last year has been that Whirlpool must be far quicker to respond to uncertainty and fast-moving events. The company is now able to react more swiftly to change than it was just a few years ago.
In a conversation with Grant Freeland, senior partner and managing director of The Boston Consulting Group, Fettig shares his insights on leadership during the downturn and beyond. Excerpts follow.
Could you describe your approach to leadership and define a few characteristics of leadership?
Every role that you have throughout your career helps build that foundation of leadership. You learn the business and the industry and build your network. You also have different experiences that shape your core leadership beliefs. Leadership is earned, not given. It’s hard to be a leader if you have no followers. The respect that you earn over time enables you to lead.
Everyone has different definitions of leadership. For me, leadership is the ability to be a catalyst for positive change. Each of those words is important. You need to be a catalyst or a change agent for the company. You need to be positive and not lead by fear. And change is a constant in any organization. If you are not changing, you are probably falling behind. People who take initiative, who strive for positive outcomes for the organization, and who enable and motivate an organization to change are leaders.
Are those characteristics of leadership perennial?
Although the conditions change, I think the fundamental traits of leaders have not changed. Leaders deal with reality. Leaders initiate and help drive change, which leads to a positive outcome in their organization. Leaders inspire others to achieve. Leaders enable others to achieve. And as a whole, the organization achieves. Those fundamental principles are true in tough times and in good times. In times when leadership is most tested, those characteristics show up the most. Your top leaders emerge in tough times.
Could you describe what Whirlpool experienced over the last 18 months of the Great Recession and the leadership actions that you took?
Our industry was already going through several challenges prior to the financial crisis—specifically globalization and commodity inflation. The cost of steel, oil, and precious metals doubled, tripled, and even quadrupled from 2004 through 2008. The housing boom in the United States was a bubble and peaked in 2005. We had already experienced negative demand in 2006, 2007, and 2008 prior to the recession.
So, by September 2008, we were facing three things: an incredible cost shock that began several years earlier, a new demand shock caused by financial destabilization, and a currency shock as investors fled to what were perceived as safe currencies. We could not forecast how this was going to play out, but we did believe that this worldwide financial deleveraging would have a profound impact on every aspect of business.
In September 2008, U.S. appliance demand dropped more than at any time since World Wars I and II. Our models didn’t work, our experience was not relevant, and we were in new, undefined territory. We tried to step back and take a very critical view of the business.
The first thing we did was narrow our focus. The most critical thing a business has is liquidity. So our number-one priority was cash. What did we need to do to generate cash, preserve our liquidity, and ensure sufficient funding? The second thing we instituted was radical cost reduction. We needed to lower our breakeven point faster than sales were falling. We will take out two times more costs in 2009 than we ever have before.
The third thing we did was respond to a different consumer environment in North America and Europe. We diverted our consumer-advertising spending to the point of sale. We believed that we were not going to attract consumers to the market to buy appliances through advertising. This was going to be a replacement market, so we wanted to ensure that when consumers visited a store they would buy our appliances.
I am glad to say that all three approaches are working. So by narrowing the focus, we have been able to adjust our business to levels we would not have thought possible two or three years ago.
During crises, it’s rather common for leaders to want to take firmer control of the business. Did you do so? Did you change your leadership style in other ways during this period?
For us, the first step was to institute greater control. By narrowing our focus, relying on the right metrics, and doing a good job communicating with our top 800 leaders, we have been able to focus on the things we can control. But the second step was to deploy that control. Every employee in the company has a personal cost-reduction objective. Everyone who touches any aspect of our cash chain has a cash objective. It is crystal clear to every salesperson in the world what we are trying to accomplish. In terms of pure execution, 2009 is the best year we have ever had.
During this period, did your board of directors become more interested in what was going on? Have you been spending more time with the board?
Just as we did with our employees, we increased the frequency of communication with our board. In a normal cycle, we have six face-to-face board meetings a year. Beginning in October 2008, we also scheduled telephonic board meetings every other month, so we were meeting every month until August 2009. This frequent communication helped us execute faster when a decision required board approval.
Do you think that your relationship with the board has permanently changed, or will it revert to the way it was five or six years ago?
I would say more timely communications with the board is a new norm—and frankly, a good norm.
Has your relationship with other senior leaders changed?
Not really. We probably had more meetings for the first six months, but we have the same operating style and use the same management systems to help us review the businesses and our priorities.
What did you do over the last year or so to keep your employees informed about how things were going?
We share the results of our cost-reduction program every quarter with employees. This year, 50 percent of everyone’s bonus worldwide is based on achieving our cost-reduction goals, so it’s of very high interest to all our employees.
It can be difficult to keep people motivated over a long period by just focusing on cost. If you look out two or three years, how will you keep your employees motivated?
I would say it’s hard to keep employees motivated when you’re not delivering good results. Dealing with cost in this environment is a key to delivering better results, but it is not the only thing we’re doing. We’re still investing in great new-product innovations. We have not reduced our research-and-development or product-development expenses. I think 2010 will be the biggest year ever for us when it comes to new-product launches in the marketplace.
What about the importance of brands in the future? You have been focused on the point of sale in this environment. Are you going to move back to more general advertising?
The mediums through which we reach consumers today are so radically different from those of five to ten years ago. We are continuously looking at all the different ways of reaching consumers, including television and online advertising. But the point of sale will always be important. Appliance consumers are usually in the market for less than two weeks, so it is important for us to be strong at the point of sale. Over the past year, it was especially important, because we did not think we were going to attract people to the market who were not ready to buy anyway. We trained salespeople very well and have done an even better job of communicating benefits to the floor. We’re converting those consumers when we have an opportunity.
As we get into a more normal environment, consumer advertising and online activities certainly will be part of the mix. Our distribution of mediums will be more balanced. But in the current environment, we feel pretty good about where we are directing our investments.
Are you resetting your business in response to the recession?
It’s pretty profound what’s really going on around the world right now. In Europe and the United States, I think there will be a slow and long recovery, and we need to reset our expectations for demand. At the same time, the recession appears to be long over in Brazil, India, and China. We’re seeing growth rates that we’ve never seen before in these markets.
Our business is not just driven by the United States anymore. We are operating in a truly global economy in which volatility and the speed of change have radically increased.
We are moving from a plan-forecast-and-deploy model to a read-and-react model. You cannot predict a lot of this stuff, but you better be good at reading market signals and reacting really fast.
How are speed and volatility changing how you lead your company?
It’s more important than ever to have great leaders throughout the organization who understand local markets. We have been in Brazil for more than 60 years. Through the country’s ups and downs, we’ve always made money because we have always had great general managers there. I used to tell our Brazilian employees that some day, as the country emerges as a market, it will become more like the United States or Europe. The reality is that the rest of the world is becoming more like Brazil. Volatility is harder for people in North America and Europe to handle than it is for people in an emerging market. We need to be able to radically reposition our business in three months rather than three years or five years.
Can speed and volatility be catalysts for change rather than negative influences?
I think that’s the only positive way to look at it. You can either choose to be a victim of the environment or you can take advantage of changes in the environment. Volatility can mean opportunity, and speed of change—if your company is faster than others—can be a competitive advantage.
Speed and volatility are realities. The first thing a leader has to be able to do is face reality. In the past, speed and volatility have probably had a negative impact on our business, but we have learned. We have parts of the business that excel in these environments. Increasingly, we see speed and volatility more as opportunities than as detriments to our business.
Is working globally part of the new norm?
Absolutely. You have to be comfortable doing business in the United States or China or India or Brazil. There is no substitute for seeing what’s actually going on in China, India, or Brazil. To do that, it’s best to work in one or two other parts of the world at some point in your career. Of course, you can’t work everywhere. I personally would not profess to have a great understanding of the Indian consumer, but I know we have the processes, the market research, and the approach to brand management and product development to capture consumer insights anywhere in the world.
Executive compensation is a hot issue. Is Whirlpool rethinking how it compensates its executives?
We’ve always believed that aligning executive compensation with shareholders’ interest is the right thing to do. We have a heavily weighted pay-for-performance system for executives. Short-term bonuses and long-term incentives are both tied to specific shareholder metrics. If we succeed in delivering on those metrics, we are rewarded. If we do not, we are not. Last year is a great example. Both of our bonus plans paid out at only 25 percent of their targeted payouts. It was the right thing to do, given that we did not meet our performance metrics. Of course, we will watch and listen and learn from what others are doing or proposing to see if we can improve, but overall I feel very comfortable that our plans line up well with our shareholders’ interest.
Ethics has also been a big issue in the press. Some companies and some sectors in particular have been hit very hard by ethical issues. Are you doing anything differently in this arena?
We have had a long history, dating back to the beginning of the company, of being a very ethical and morally responsible company. It is part of our culture. We evaluate people on ethics. We have a very broad compliance and training program. We have a saying at Whirlpool: There’s no right way to do the wrong thing. At the same time, we are a big global company. We have 70,000 people in 170 different countries. You always worry that someone somewhere could do something that is not appropriate.
Is Whirlpool experiencing greater government regulation and intervention?
Without a doubt. Historically, depending on the business or country, government involvement could have more or less of an impact on your business. But over the last five years, it has been increasing. In China, any investment has a level of government involvement. In places such as the United States and Europe, governments are becoming more involved. Energy regulation, efficiency, and compliance are all large issues that have been positively supported by government incentives or consumer labeling systems.
More broadly, in the United States and Europe, it is uncertain what role government will play in businesses at large—whether the issue is taxes, health care, or fundamental costs of doing business. But in my 28 years at Whirlpool, the government has never been more involved than it is today, and I think that involvement will increase.
Has the nature of competition changed over the last five years or so, and what has that meant for leadership?
Over the last ten years, we’ve seen a move from regional competition to global competition. There are four, five, or six global companies that are getting bigger and stronger. The growth of the Asian market has spawned a handful of Asian companies that are very competent global competitors. We have European competitors, and we are certainly the largest U.S.-based competitor. But we are all global companies. In Brazil or Russia or China or India, we are going to face those same competitors. In the end, I think it’s leadership, talent, and execution—as well as the strength of the brand and business model—that will determine who succeeds and who fails.