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 / Second Quarter 2002 / Issue 27(originally published by Booz & Company)


Yellow-Light Leadership: How the World’s Best Companies Manage Uncertainty

Accepting what everyone else asserts to be true about the future is, perhaps, the most dangerous forecasting error a leader can make. In late 2000, Hewlett-Packard Company’s Carly Fiorina put in place a major restructuring of her company, arguing that revolutionary change was occurring in all of industry that required, she said, “nothing less than reinventing business in fundamental ways.” Believing this, Ms. Fiorina was driven to the conclusion that HP had no choice but to get into e-business by acquiring PricewaterhouseCoopers. The merger was never completed.

She might have avoided getting embroiled in that bid had she read the environment the way Lou Gerstner did at approximately the same time: He saw a process of evolutionary change effected through an ongoing process of fine-tuning, improving, and realigning at IBM. The ability to break ranks with lemmings and stay calm when others panic has been a hallmark of Mr. Gerstner’s tenure at IBM. Shortly after he assumed office in 1983, Fortune called IBM “a company in crisis.” But when interviewed by the magazine, Mr. Gerstner was quick to say, “I don’t have a sense of crisis.”

When Carlos Ghosn took the reins at Nissan in 2000, the company was hemorrhaging so much red ink that many industry observers thought his first act should be to panic and engage in major surgery. Instead, he calmly introduced a phased revival plan, which included cost reductions and improvements in margins and asset effectiveness. He put in place a new operating model and a global organization to implement these changes and increase accountability. When his competitors announced zero-interest loans to kick-start demand for new cars, Mr. Ghosn quietly demurred, saying that, even in bad times, companies shouldn’t mortgage their futures. Analytical leaders like Messrs. Gerstner and Ghosn demonstrate both discipline and patience — their confidence in their ability to read the operating environment allows them to stick with a strategy long enough to give it a chance to work.

For many of the same reasons, the highly analytical leaders of Capital One, CEO Richard Fairbank and COO Nigel Morris, have been able to steer through the recession with greater assurance than many of their competitors. For example, during good times their lending model was premised on bad times. Hence, they disciplined the organization not to pursue some 33 million potential customers because they had been identified as “default candidates” during a recession.

Determining whether their own companies are healthy is one of the most difficult assessments leaders must make during a recession. In effect, they must ask, Is this an epidemic, or are we the ones who are sick? From what we have observed, many nonanalytical leaders’ first instinct is to blame external factors for declining performance. Although such factors almost always play a part in corporate setbacks, to leaders at IBM, Nissan, and Intel, an adverse business environment is not an acceptable excuse.

Since there are both high and low performers in every period of the economic cycle, the quality of leadership counts, and all leaders have options. In times of adversity, yellow-light leaders look at their own operations objectively to assess where they are weak and what the causes are. This knowledge allows them to act more selectively than simply calling for a 15 percent reduction in costs across the board, which could, in the long run, weaken business areas that need to be strong in order for the entire company to recover. At Nissan, for example, Mr. Ghosn is carefully maintaining, or increasing, investment in areas designated to be engines of future growth, even as he cuts costs. We have found that such disciplined self-diagnosis increases the effectiveness of austerity medication.

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  1. Bruce A. Pasternack, “Leadership: Dreamers with Deadlines,” s+b, Fourth Quarter 2001 Click here.
  2. Gary Hamel, “What CEOs Can Learn from America,” Fortune, November 12, 2001 Click here.
  3. Jerry Useem, “What It Takes,” Fortune, November 12, 2001 Click here.
  4. James O’Toole, Leadership A to Z: A Guide for the Appropriately Ambitious (Jossey-Bass Inc., 1999)
  5. Alec Levenson, Leveraging Adversity for Strategic Advantage, Working Paper, March 2002, Center for Effective Organizations, Marshall School of Business, University of Southern California
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