Innovation Leadership

Mega Train

What do a submarine, an engine remanufacturing facility, and a steel factory share in common, and how does it drives innovation and profitability?

Let’s start with a submarine. The US Navy serves its mission to protect its home country by operating a fleet of several hundred ships. Due to the congressional mandate of full operational readiness, managing risk at the Navy comes down to enforcing battle-tested operational procedures. There is a manual for everything, and anyone who deviates from the strict operating procedures faces severe disciplinary actions for a reason. Human mistakes during a fire exercise can kill people; therefore, safety remains paramount. The Navy tracks several performance metrics to sustain the fleet performance and ranks all its ships accordingly. Captains who continuously deliver top metrics usually advance to higher ranks.

What if a captain takes over the worst-performing submarine in the entire fleet? Captain David Marquet began treating his crew as leaders, not followers, and giving them control instead of examining control. His mantra, “It’s your ship,” forced his team to take ownership and responsibility. Still, more importantly, it caused the team leaders further to propagate the notion of ownership in the hierarchy. Countless subsequent improvements were applied in all areas, and at some point, the operational effectiveness surpassed the wildest expectations of the Navy inspectors during the annual performance review.

The US Santa Fe went from “worst to first,” achieving the highest operational standings in the Navy and winning several awards. Meanwhile, David Marquet has left the Navy and offers consulting service, yet the US Santa Fe still operates at peak performance thanks to the leadership instilled in the entire team.

Going from the depth of the sea to the dry land, in 1983, International Harvester was close to insolvency when Jack Stack tried to save the failing company’s engine remanufacturing facility. Eventually, the team secured a bank loan at an excessive 18% interest rate and faced the challenge of paying back just the interest rate. Jack did the unexpected, opened the book for everyone, and quickly realized that nobody understood accounting or corporate finance. No wonder the company was in trouble. In response, Jack required one hour of training in corporate finances just before the weekly financial results presentation. Gradually, the workforce connected their actions to the bottom line and realized that they impacted the company. To revitalize the team spirit, a series of mini-games involved anyone applying gradual improvements. The “price” was job security in the first place, a contribution to the bottom line, and a nice bonus.

The engine remanufacturing facility fully recovered, paid back the bank loan, and refocused its business. Today, the SRC Holding Corporation operates 14 striving companies with annual revenue of $600 million. Regarding normalized profit growth rate, open-book companies exceed industry leaders by a wide margin. The fundamental culture shift from command and control to empowering through financial education requires a complete leadership commitment.

Speaking of leadership commitment, when a newly formed business conglomerate is barely staving off bankruptcy, one thing is sure: leadership and commitment are required to move out of the danger zone. When Ken Iverson took over the failing Nuclear Corporation in 1965, he did just two things:

  1. Sold or closed any division that was losing money
  2. Expanded the only profitable division, an unassuming producer of metal stabilizers made out of scrap metal, better known as rebar, perhaps the cheapest product in the entire steel industry.

When the business gradually recovered, a new way of distributed leadership was born due to operating several smaller steel facilities. Each facility has vast freedom in running its operations and meeting its customers’ needs.

The small facilities improved continuously, and when it was time to move forward, the company was renamed Nucor and set to become the largest steelmaker and recycling conglomerate in the US. These days, Nucor employs over twenty thousand people and operates the entire enterprise with fewer than 100 managers. More strikingly, the technical academy for engineers and the development center for managers are central to sustaining success. Nucor enjoys unrivaled productivity and innovation because its entire workforce operates with an owner mindset and leadership skills. Meanwhile, competitors are a footnote in history while Nucor’s profit is soaring yearly.

Answering the initial question: What shares a Navy submarine, an engine remanufacturing facility, and a steel factory in common, and how does all this relates to innovation and profitability?

All three found a way to innovate under seemingly impossible circumstances, and yet all three used the same three principles:

  1. Treat a team as leaders: Give control and demand full ownership
  2. Educate and enable people to drive operational effectiveness
  3. Distribute ownership and trust your leaders are going to succeed

When I was responsible for coordinating a course in Academia, I applied these principles and experienced a strong interrelation between operational effectiveness and innovation. The deployed continuous improvement system sustained peak productivity, and as a result, the team spent more time developing new methodologies for effective teaching and better leadership development. Propagating these principles one step further, graduated students continuously co-create the course, driving a continuous feedback loop that regularly sparks innovative ideas. From my experience, automating the mundane and inviting everyone to co-create the venture unleashes a collective genius I rarely see. For me, operative effectiveness remains the single pre-eminent hard requirement for innovation leadership.

First hand, I witnessed the unreasonable effectiveness of the fifth discipline (organizational learning), distributed ownership, and a nearly exponential progress caused by every hour of training provided. The craziest thing, though, is that these three things do not incur costs to the organization, but instead gradually added to the bottom line. From conversations with various small to medium company owners, though, the general response is that these are nice ideas, but they will not be applied because people are already doing business doing their daily work. The irony, though, is that the same line of reasoning prevents these companies from stepping up from merely good to unquestionable great.

And maybe there is a hidden truth to uncover: What do people fear more: change or the consequences of actually stepping up?

Marvin F. L. Hansen

History:

  • First published: Mar 7, 2018
  • Republished: Jan 2, 2023 on Medium.com
  • Moved to personal blog on March 16, 2024

Sources:

Marquet: Turn Your Ship Around

Jack Stack: The Great Game of Business)

Nucor

Extreme Ownership

Level 5 Leadership