I thought I knew what good management was
William H. Peace

Appointed general manager and challenged to turn a synfuels research division into a business, the author spent most time on strategy and very little on people. Yet he soon found he had inherited a number of knotty human resource problems, with middle managers and employees who distrusted each other and — more seriously - the motives of their new top management. In this McKinsey Awardwinning article, he chronicles the events that led him to realize that, without open communication to foster employee trust and display management commitment, even the most sophisticated strategy can come unstuck. In August 1980,1 was named general manager of the newly created Westinghouse Synthetic Fuels Division (SFD). The division's nucleus was a department engaged in coal gasification research and development and supported, in part, by the US Department of Energy. The technology was highly regarded, and the outlook for syntbetic fueis was promising. Oil prices v/ere continuing to rise; worldwide oil shortages were forecast, as were crude oil prices of $100 per barrel; and the Carter administration had just created the Synthetic Fuels Corporation to stimulate the production of synfuels from domestic resources and reduce US dependence on imported oil. Before my assignment at SFD, I had been general manager of a division that marketed turbine generators and related services
H. Peaci is v'icc president and general manager of KKW Kncrgy Systems Inc., fbrmi^rjy the Westin^^houst.' Synthetic Kuels Division.. This article, which vv'on a McKinsey Foiind.;ition Award as one ofla.st year's outstanding contributions to thv Harvard Biisin,css Rvriea\ is reprinted by special permission from the M.arch-April I'^tSH issue. Copyright i'(") 19H6 by the President and Fellows of f!.;M-vard College. All "ights res(;rved.

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worldwide. My 16 years with Westinghouse had been spent selling complex, high-technology systems to sophisticated customers. My charge from the president of Westinghouse's Power Systems Company (then my boss's boss) was straightforward: "We think we have a very promising coal gasification technology - maybe one of the best in the world. See what you can do to make it into a good business. You may conclude that we can't, and that's an okay answer. See what you can do. I'm always available to consult and help. Keep me informed." First impressions When I first arrived at SFD, I had mixed feelings. The Waltz Mill site, located 35 miles south-east of Pittsburgh and set in rolling hills dotted with small farms and houses, was (and is) beautiful. At the time, about 100 people worked on the site, which included the coal gasification pilot plant, its support buildings and offices. An additional office building and a test facility were under construction. Looking around the site, I felt both the challenge of a great opportunity and the threat of a situation that in many respects, notably technology and market, was foreign to me. (In fact, it took me nearly four years before I could feel comfortable discussing the technology with a knowledgeable customer.) My first impressions of the people at SFD were also mixed. Some employees made me feel welcome; with others, 1 sensed skepticism, perhaps even resentment of my intrusion. And in a way I felt like a hired gun, an outsider brought in to win a position for a group I barely knew. Further, while the technical people were highly competent, I thought the marketing, financial and personnel functions were underdeveloped. So, early in the assignment, I brought in a new controller and new marketing and human resource managers. They, in turn, bolstered their staffs to develop the organization's commercial capability. Other than staff, what concerned me most was the need for a strategic plan to transform our promising, fledgling technology into a competitive, profitable business. Accordingly, I spent much of my first year learning the business and beginning to formulate a transition plan with my staff. (A chronology of key events at SFD appears in the Exhibit.) We concluded that a full-scale demonstration project that would prove the technical and economic feasibility of the fiuid bed gasifier was an essential stepping-stone. By late 1981, we had identified a partner with the technical and financial muscle to supplement our strengths and make the demonstration a success.

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THE McKINSEY QUARTERLY

Chronology of events at Synthetic Fuels Division ISFD)

1980

Augu;;t December

Peace appointed gentiral nanayer New staff apipointments complete Demonstratron project (SASOL) first discussed SFD strategic plan preipared 'Peace talks" begin Initial agrHe-nent on SASOL project SASOL. project restructured Keystone project pioposod to Synthetic Fuels Corporation (SFCI SFC drops Keystone as twtfinically immature SASOL. contract signed (Consultants brought in V'andalism incident; employee surveys Flevised Keystone project proposed to SFC, consultants present finding; Change in Westinghouse top management Westinghouse decides to divest SFD SASOL project abandonefl SFC declares Keystone technically mature SFC drops Keystone because equity commitment lacking Kellogg Rust acquires SFD Keystone project again proposed to SFC

19B1

February March May June

19B2

April May July August October November

1983

January February April June October December

1984

April June

September S34 million contract signed with Department cil Energy 1985 July Keystone meets SFC equity commitment requirements

September Contract drafts prepared for SFC assistance to Keystone

After much soul-searching as to what customers wanted, what Westinghouse could accept, and what had a reasonable chance of yielding good financial returns, we chose a system supply concept to approach the market. We would sell coal gasification systems in much the same way that Westinghouse sells nuclear steam supply systems; we would design them to satisfy the customer's coal resources and application; Westinghouse would build the proprietary components; and we would buy the balance of the hardware outside. We would provide some construction, start-up and training services, but others would be responsible for many of the field manhours and bulk materials. Thus my assignment, as I saw it in 1980, was to tackle a set of business issues: to develop a strategic plan that would position the business technically and commercially and to become profitable in a
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new and unfamiliar environment. That there might be people problems that were even more challenging didn't occur to me. After all, if there were such problems, someone would have told me about them. Trouble brewing An employee attitude survey taken several months before my arrival at Waltz Mill seemed to confirm this reasoning. Compared with other attitude surveys I had seen, it didn't look particularly unfavorable. Most of the issues, like the need for better communication and for a site cafeteria, seemed resolvable, and my staff and I drew up plans to address them. We then prepared a presentation for all the employees to air the survey findings and our plans. At several of these sessions, which were held in small groups to foster discussion, I was struck by the employees' attitudes - they seemed distrustful of management, perhaps even hostile. I found this hostility difficult to understand. It seemed inappropriate, ungrateful. "Can't the employees see," I thought, "that Westinghouse is trying to do something with this business, to make it good for everyone, including them? Can't they see the forest for the trees? Why all the petty complaining?" Still, the problem didn't seem pressing, and I had too many other things on my mind to look for trouble. By the fall of 1982, however, I was beginning to wonder. We had signed a contract in August to build a commercial scale demonstration project, and successful performance of that project could be our doorway to future commercial markets. But to move tbrough this doorway, we needed to think more competitively, to get closer to our customers, to develop new business skills, and to take new risks. In other words, the employees had to change the way they thought about themselves and their jobs. From my perspective, that was looking more and more difficult. For one thing, not all the employees supported the change from an R&D venture to a commercial enterprise. Probably the commercial enterprise seemed riskier since the organization now had to be competitive, and each task had to be done right the first time. For another, rifts were appearing in the organization: between the "oldguard" technology developers and the "new-guard" financial, marketing and human resource staff; and between "upper-site" office professionals and the "lower-site" technicians at the coal gasification pilot plant.
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These rifts were apparently based on each group's assumption that its opponents had a secret agenda. For example, the old guard suspected that the new guard would give the technology away to get the division on a commercial footing, while the new guard was concerned that the old guard would cling to the same old R&D and resist the changes needed to carry the organization into the future. Peace talks There were some grains of truth in these fears, of course. But they were exacerbated by poor communication and an uncertain and rapidly changing environment: synthetic fuels were becoming less and less attractive economically, and doubts were proliferating about Westinghouse's willingness to give us the management commitment and financial resources we needed. At the time, however, I assumed that we had resolved the rifts in my staff meetings. Only in retrospect did I realize how often we had been shadowboxing. And with hidden agendas left unchallenged, there was ample opportunity for suspicion and distrust to develop, particularly at the lower 1 evels of the hierarchy. To ease the transition from lab to business, I had instituted biweekly meetings with small groups of employees. At first, these were homogeneous groups of technicians, engineers, or managers; later, they were representative cross-sections of employees selected by Human Resources. We had no agenda; rather, we discussed whatever issues the attendees wanted to raise. I called these get-togethers "employee meetings"; the employees called them "Peace talks." Whatever the name, the meetings were eye-opening. As problems that I thought had been resolved kept recurring, I began to see that my managers weren't using the same agenda I was. Employees often complained, for example, that their innovative ideas were vetoed by their management as being too risky, too expensive, or too impractical. This lack of management follow-through annoyed me. I knew that the goals and objectives of the business plan had been well articulated, and I felt that the managers were simply fighting the system. I held quarterly meetings with all of them to review progress on key plans, discuss issues of management style, and answer questions. Evidently, I wasn't getting through to them. Looking back, I can see that the Peace talks themselves created problems, since only a few employees got the word from any one
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meeting, and some managers felt bypassed (even though one of their peers usually attended). So today, we give every employee a copy of each session's questions and answers. This practice doesn't alleviate managers' anxiety about loss of control, but it does ensure that everyone gets the same version of what has been said. Trouble erupts The undeclared war within the division might have gone on indefinitely had an act of vandalism not brought matters to a head. In November 1982, several unidentified people (reportedly lower-site employees) slashed tbe tires of two managers' cars while they were parked off-site. The only explanation we were given was that some employees resented the managers' tight-ship discipline and ironfisted style. Clearly, things were getting out of hand. During the next week, I met with a great many people, including all the lower-site managers and em^ployees. The picture that emerged from these meetings shocked me even more than the vandalism incident. Morale at the lower site was abysmal. Cliques of technicians had formed, some of which, Mafia-like, made the real decisions about what would be done. Pranks and hazing were common and, to some extent, managers felt captive: if they enforced discipline, the "Mafia" would retaliate, or, worse yet, upper management might not support their disciplinary measures. First-level supervisors usually knew who was responsible for problems but found it difficult to catch the culprits in the act. (In one rare case, when two employees were caught stealing, the manager told them to return the goods and failed to take disciplinary action. I I was furious. I didn't understand how things could have gotten so far out of kilter. Yet much as I disliked what I was hearing, I knew it was true. I saw that I was no more in control than lower-site management was. But I was going to put a stop to that! Every manager agreed that the hazing and pranks had to stop. I met with all the employees and told them in plain terms that damaging personal or corporate property would be grounds for immediate dismissal. My position was clear, and it got results. The pranks stopped immediately, although hostilities lingered for a time. The boss The second image was harder to deal with: it had to do with me - and my management style. As far as the lower-site technicians were concerned, I just didn't care about them or SFD. They thought I had
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lost interest in everything but the demonstration project, and they accused me of forgetting that they were the people who had made the technology what it was. They also saw me as using my position as a stepping-stone to corporate headquarters at Gateway. "After all," went the reasoning, "he's tbe executive vice president's fairhaired boy, and he lives in that fancy neighborhood." These impressions stung, but I could see where they came from. Take my alleged lack of interest in the lower site: today, I spend at least an hour on the lower site almost every week, walking around, listening, observing, asking questions. But I didn't do that then. I had forgotten a lesson I'd learned years beibre when, as chief engineer of a US Navy destroyer, I could often be found in the fire room or engine room, dressed in coveralls, talking to the enlisted men and watching their work, In every category, that destroyer had the highest engineering readiness score of any ship in tbe squadron; we won everything. Commitment, which was central to the steppmg-stone issue, is hard to measure from a distance, but I surely wasn't as committed to SFD in 1980 as I was in 1982 or 1984. My commitment grew the more I believed in our business plan, the more attached I felt to the people, the more successes were achieved in the face of adversity, and the more I saw the business as my child. In any case, the employees were astonished when 1 told them in November 1982 that I had turned down a vice president's job to be their general manager. I wanted them to understand that SFD wasn't just a stepping-stone for me and that I really appreciated the opportunity to turn a technology into a business. But I had never before said that unambiguously. Organizational problems As I struggled with these images, a consultant from the University of Pittsburgh added another piece to the puzzle. I had sought his help soon after the Peace talks began because I saw that my efforts to improve morale weren't working and because I thought that my staff was part of the problem. He and his assistant had interviewed about 40 employees (a representative cross-section of the division), and in early December, just after the vandalism incident, he presen ted the fi ndi ngs to me and my staff. He reported that our people wanted to work and to contribute and that they were dedicated to the technology and believed it was the best available. But they also felt frustrated by "the system" and by what they saw as management's lack of commitment.
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The severity and extent of the problems he described surprised all of us. The charge that top management didn't follow through bothered me for days, and I kept thinking about the examples the employees had given and how they looked from my side: Inconsistent goals. We had to reorder our priorities as projects were on or off, or as customers' (or Westinghouse's) priorities changed. No results from the Peace talks. I saw these meetings more as a chance to exchange views than as a vehicle for correcting problems. The employees simply saw them as ineffective. Quality-circle recommendations ignored. It's true we didn't have a reliable mechanism for reacting to quality-circle recommendations. At times, in fact, my staff and I responded in ways that reinforced the employees' distrust of us. For example, we had waffied months before when the engineers' quality circle made design recommendations for an office building that was nearly complete. Rather than tell the group, which included a contingent of bright, vocal and aggressive professionals, that it was too late to accept any changes (or else prepare ourselves for some expensive last-minute redesign), we let them put forth their ideas and then shot them down. The office was completed on time and budget, but the quality circle broke up and the employees had continuing reason to dislike their new office and distrust management. Looking back now, I understand a lot more about how these impressions arose. Even so, I suspect that one of the most important factors behind the employees' attitude toward me was a belief not mentioned in the interviews - that SFD was a stepping-stone for me. But in any case, it was clear that we needed to improve the ways we communicated, both individually and as an organization. When the consultants presented their findings to all the employees in January 1983, most superiors thought the problems overstated, while subordinates found the presentation right on target. My own view was that the presentation accurately reflected the employees' perceptions; I was still trying to understand how management's perceptions and the employees' perception had gotten so far apart. Changing our ways During the early months of 1983, we made a large-scale effort to change the way things were done at SFD. For example, we asked aimost everyone in the division to describe the way the people they
32 THEMcKINSEYQUARTERLY

worked with behaved and the way they would like them to behave. Then they met together in their work groups to discuss the discrepancies and prepare action plans to correct them. The consultant also worked with all the managers together to review some basic principles of psychology, communications, decision making and problem management. This group learning process refiected our commitment to apply these principles, which many of our managers had long since forgotten or else had never learned, and it paid off. For example, one manager told me that completing an exercise with the Myers-Briggs Type Indicator had taught him how fundamentally different people are.* "Before examining my own style," he explained, "I could never understand why our program manager was so hard to deal with. I knew he was bright, but he just couldn't see things the way I did. Now I realize that he wants data and that the intuition that works for me is pretty much irrelevant for him." Lastly, the consultant gave me and my staff feedback from the employees. He also spoke with managers who were clearly having style problems and with those who were simply curious. In some cases, this one-on-one session with the consultant was the first step of a painful experience, since it's hard to be objective when it's your behavior that's being interpreted. One manager met repeatedly with his people, for example, to try to reconcile his belief that he let them participate in key decisions with their belief that he was autocratic. Not surprisingly, he admitted at the time that he didn't sleep well for several weeks At first, many employees viewed these efforts with suspicion: "Do we need this?" "Where's the hidden agenda?" "Shouldn't management change first?" "Is Peace really committed to this?" "What if I don't want to change?" But as the problems became clearer, so did the benefits of change. As one manager put it, "The process exposed a lot of tunnel vision." People recognized that dramatic actions were needed to break down old walls of distrust. This recognition created a lot of anxiety, but it also led to lighter moments: one manager came to work without his toupee as a way of saying, "I'm going to be different." For me, tbese months were a breath of fresh air. I could see and feel the changes from day to day. "Finally, we're getting our act
* This instrument identifies 16 distinct personality styles according to categories like one's preference Forthinkingorfeelingandthe useofintuition.

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together," I thought. "Tbis is what I wanted all along." I had mixed feelings, though, about the pain I saw in the organization. I wished it could be avoided; but I also saw it as confirmation that people were learning and changing. For my part, 1 kept trying to reconcile how I saw myself with the way my people saw me. I also tried to understand what I could have done differently to keep the mistrust and hostility from building. Celebrating success During this period of introspection, 1 found that the comments of one of my managers gave me lots to think about. While discussing the vandalism incident, she had pointed out that I wasn't very good at giving recognition. "I hope you don't mind my saying this," she said, "but you really ought to make a special effort to celebrate people's accomplishments. There's not enough hoopla any more." 1 agreed. I admitted I wasn't at ease in situations that called for hoopla, and I told her I had asked my staff to help me out. "The problem," she said, "is that all of you were brought up to take meeting objectives for granted; only outstanding accomplishments are supposed to be noted." She was right, but there was more to it than that. In our culture, men - particularly ambitious, successful men - become adept at staying out of touch with their feelings. We believe that we can withstand enormous pressure and ambiguity, that we can make decisions using logic alone, and that we are immune to emotion. Tbe problem is that human beings are emotional creatures (whether executives like it or not). Maintaining tight control of our emotions (or being out of touch with them) isn't a skill, it's a weakness. Today, we at SFD are better about celebrating accomplishments, not because we have a formal recognition program, but rather because everyone is a lot more people-oriented. Our employees tend to acknowledge one another's special efforts spontaneously, while I find I enjoy celebrations now that I'm more relaxed about expressing my emotions. In addition, I have come to see that during my first two years at SFD I focused too much on myself and my goals. As a result, my pride demanded that I defend my image of myself as competent, intelligent, successful. As I listened more intently to others, however, and cared about their goals, I found I had less need to be defensive. In effect, I have become a leader who serves others by making them successful.
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In April 1983, Westinghouse decided to sell the Synthetic Fuels Division. To me, the decision seemed capricious. I thought I had made considerable progress in fulfilling my charge to make a business out of the technology. Unfortunately, the president of the Power Systems Company, who had given me that charge, had just elected to take early retirement. Headquarters seemed to have little concern for our people problems or our problems in finding a buyer. That's a perception, of course, our perception; perceptions at headquarters were doubtless different. But little effort was made to resolve these differences: trust was supplanted by anger. A time of trauma The divestiture process was little short of traumatic for me and many of my staff felt the same frustration, anger and bitterness I did. Moreover, my anger at being abandoned after having done what was asked of me only reinforced my by then strong commitment to SFD. Convinced that SFD should be sold and not shut down (a likely possibility as potential buyers failed to appear), 1 put everything I had into finding and courting prospective buyers while trying to keep nervous (and valuable) human resources from deserting what appeared to be a sinking ship. SFD circulated repeatedly. The rumors were false, but they conveyed the employees' sense of the situation. Even on the lower site people felt that "management may not be able to sell this place, and I may end up on the street if they don't, but I know they're giving it all they've got." By then, it was okay (pretty much) to talk to management again. By early 1984,1 was exhausted physically and emotionally. Preparations were under way to close the Synthetic Fuels Division when Westinghouse accepted an offer from Kellogg Rust Inc., one of the Signal Companies, to purchase 80 percent of SFD (now known as KRW Energy Systems Inc.) At the meeting to announce the sale, I received two plaques from the employees as thanks for "saving our jobs." One is a collage of photographs of everyone at SFD; tbe other, from the lower-site technicians, is a religious message engraved on brass. Those plaques mean a great deal to me because they refiect the changes throughout our company. Not everyone has changed his or her beliefs, of course, but the consensus on how we should behave has shifted dramatically. At every level, our employees are far more supportive

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of one another, more communicative, more patient, and more trusting. As one manager later said, "If it hadn't been for these efforts, SFD would never have survived: there would have been nothing left to sell." Looking back I can now see several reasons for our problems at SFD. First, people tend to develop ways to resist change and uncertainty. Yet uncertainty was about our only given, and we had to undergo a large-scale strategic redirection. Second, some of our managers were not well trained. They adopted short cuts like cursory performance evaluations, which made the job of managing easier in the short run but were counterproductive in the long run. Assuming that knowledge is power, they communicated little to their employees. (Today, by contrast, we have a nosecrets approach to information which we try to share widely among those who can use it.) And they tended to treat employees like children, conveying a "we know what's good for you" attitude that employees resented and distrusted. That they often weren't sure whether the managers were acting in the company's best interest or their own only heightened this distrust. Finally, as people began to defend themselves against their bosses, change, or "the system," trust broke down. Employees and managers alike assumed the worst about one another and acted accordingly. And as suspicion built on itself, the organization's goals took a backseat to turf and survival. Quality, productivity and customer satisfaction meant very little. Showing commitment For me, the central issue was commitment: my commitment and how it was perceived. One key manager later told me, "You didn't really change - our perception of you did." But that's not true; certainly perceptions changed, but if I too hadn't changed, we would have failed. In the summer of 1980,1 was a kind of hired gun committed to the challenge I'd been given by my boss to make a business out of the technology. In the fall of 1982,1 was a general manager under siege. We were on the brink of building our first commercial project, but I had lost the people. My commitment then was to the technology and to making it a commercial success.
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By the spring of 1983,1 was in a life-or-death struggle. I had been stung by the charge that 1 wasn't committed, and I was angry with the change in Westinghouses's commitment. By that time, I was committed to the people, to the technolog3^ and to their mutual success. More than my commitment changed, however. Two years of unremitting stress changed me as a person. It may seem paradoxical, but I'm more at ease with myself than ever before. Seeing my own needs and motivations more clearly gives me a broader perspective, and in a fundamental sense, I'm more in control of my life. In 1980, 1 thought I was in control and that I made only logical choices. Now I can see the emotional forces that drive all of us toward the choices we later justify logically. I find that I laugh more easily and enjoy people (their virtues and even their faults) as never before. I'm sure Tm helped, too, by feeling that if I could survive that I can survive anything. Other lessons I learned from these experiences have to do with perceptions, communications and trust. Perceptions form around tiny bits of data and become stronger as supporting evidence accumulates; they are never completely accurate, nor are they completely wrong. Staying in touch with others' perceptions is difficult, however, partly because these may not be wholly conscious and partly because only the tip of what may be a large, threatening iceberg will be known to any one employee. So managers must piece together the overall picture for themselves by listening hard for the tone, or context, or shading that doesn't quite match their own perceptions. Moreover, managers (particularly those at high levels) must consider carefully how their decisions will be perceived. If a decision is right in some business sense but wrong (for whatever reason) from the employees' perspective, its implementation will be erratic at best. Importance of trust The chain of command is an inefficient communication system. Although my staff and I had our goals, tasks and priorities well defined, large parts of the organization didn't know what was going on. Frequent, thorough, open communication to every employee is essential to get the work out and keep walls from building within the company. And while face-to-face communication is more effective than impersonal messages, it's a good idea to vary the medium and the format so that no one (including top management) relies too much on "traditional" channels of communication.
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Trust in organizations is like love in a marriage; it holds people together and makes them effective. From my experience, we have two ways to build trust in us as individuals. First, we can make ourselves vulnerable by setting aside the masks we usually wear and disclosing our true selves. (The fact is, our employees know we're human - regardless of the executive cloaks we wear — and they forget only briefiy that we're "the boss.") And second, we can take real risks on behalf of our employees. As an example, let me tell you one last story. About two years ago, top management ordered that all merit increases scheduled for the fourth quarter be rescinded as an economy measure. I felt that the edict was unfair to employees unfortunate enough to have their raises fall in that quarter. Moreover, we had already told them what merit increases to expect during the year as part of their performance appraisals. We didn't implement the edict, nor did we publicize our insubordination. But employees found out about both. That risk, while it might have cost me my job, went a long way toward building the trust we needed.

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