Successful Leadership Teams and the Energy / Entropy Balance
by Ronald A. Norelli and Ashleigh B. Finley
In 2002, we first introduced the concept of assessing the strategic health of a business through the interaction of certain attributes that collectively comprise “Corporate Energy” and “Corporate Entropy” (Exhibit 1).
“Corporate Energy” represents the sum of a company’s core competencies, competitive strengths and human capital. “Corporate Entropy” depicts the business’s propensity and capacity to change. The intersection of Corporate Energy and Corporate Entropy and the resultant impact on an organization’s health and outlook is presented in The Corporate Energy / Entropy Matrix TM (Exhibit 2).(1)
A vibrant business, well-positioned because it combines impressive strategic assets and the right capacity to drive change doesn’t come about by chance. It takes the right leadership mix, depth and management processes under-girding the business itself. Applying this framework specifically to the human capital backbone of a successful enterprise leads to a companion version of Exhibit 2.
LEADERSHIP ENERGY AND ENTROPY
Components of “Leadership Energy” comprise several categories: (1) technical and functional knowledge, experience and competence; (2) performance expectations and standards, and (3) skillful communication of vision and direction. Specific attributes in an organization with high “Leadership Energy” include (a) identifying, recruiting, developing, retaining, and rewarding exceptional talent across all functional areas; (b) setting very high standards, which tend to get higher; (c) defining and rewarding success based upon outcomes rather than effort and good intentions; (d) demonstrating superior execution skills, being impatient with excuses; (e) defining and relentlessly communicating core values, purpose and direction; and (f) setting the example from the top for openness, honesty, work ethic and passion for the business.
The classic definition of entropy coming out of the mid 19th to early 20th centuries is a measure of (1) a system’s capacity to undergo spontaneous change, or (2) the disorder in a system.(2, 3, 4) Attributes displayed within an organization with high “Leadership Entropy” include (a) a high tolerance for risk; (b)an irreverence for the status quo; (c) disdain for rules and structure; (d) exceptional creativity; combined with visionary out-of-the-box thinking; (e) an appreciation of the need for “right-brain thinking”; and (f) a certain tolerance for ambiguity.
Entropy’s Dark Side
It stands to reason that “Leadership Energy” is always best in high doses. The same, however, cannot be said for “Leadership Entropy”. There is yet a third definition of entropy: the energy dissipated (and unrecoverable) in a system undergoing change. Thus, leadership displaying too much entropy is prone to wasted time and energy and squandered opportunities. Conversely, the team acting with too little “Leadership Entropy” is at least as bad, with possible consequences ranging from management inertia and missed opportunity to complacency and even permanent loss of competitive vitality. Hence, some amount of “Leadership Entropy” must be part of a management team’s DNA for an organization to move forward amidst external changes.
THE LEADERSHIP ENERGY / ENTROPY MATRIX TM
The Leadership Energy / Entropy Matrix TM (Exhibit 3) suggests what might characterize various leadership teams based upon particular energy and entropy combinations.
The authors invite readers of Leadership Excellence to consider their own examples of organizations that may demonstrate, or have demonstrated, certain combinations and the resulting implications for action.
BALANCED V. UNBALANCED ENTROPY
Last year Merrill Lynch announced an historic $7.9 billion write-down as a result of its overinvestment in subprime mortgages. Many have wondered how this could have happened in an industry so renowned for and dependent upon its capabilities with respect to risk-return modeling. The Board held then-CEO Stanley O’Neal accountable and reportedly forced his resignation.(5) Looking beyond Mr. O’Neal, what else can be said for the management team that participated in the execution of an overly risky strategy? While Merrill Lynch, as a company, certainly possessed high “Corporate Energy” (financial resources, human resources, brand name, etc.), would the excessive investment in subprime mortgages have occurred if “Leadership Entropy” had been kept in check? The authors think not. It could be argued that it was management’s overindulgence in “entropic” behaviors – namely excessive risk-taking and irreverence – that led to the multi-billion dollar losses.
Let’s look now to a company that is maximizing “Leadership Energy” while keeping “Leadership Entropy” in balance: FedEx. The company excels at capturing and retaining “Leadership Energy” attributes. The strength of its human capital (courtesy of its “people-first philosophy”) has been a key driver in keeping FedEx on such lists as FORTUNE’s “Most Admired Companies” and “Best Companies to Work For”.(6) And while FedEx’s business is fraught with ongoing risks – fluctuating fuel prices, geopolitical unrest and attempts at unionization, just to name a few – the leadership team, under legendary founder Frederick Smith has been notably effective in mitigating these risks while enjoying accolades of peers and employees alike.
LEADERSHIP EXCELLENCE AMIDST INCREASING COMPLEXITY
Exceptional leadership teams, demonstrating high energy, medium entropy approaches to their craft do exist. Rather than long for yesterday’s simplicity, these teams acknowledge and understand increasing external complexity. Top-line oriented, these great teams drive internal change while creating cultures as effective counterweights to surrounding disorder. Good at quantifying and managing risk, they can change specific strategies without losing focus and discipline while appreciating that strong organizational foundations are needed in those things that stay constant. Nonetheless, relentless forces of commoditization are adding to the challenge.
Not long ago, CEOs at Procter & Gamble and GE, A.G. Lafley and Jeffrey Immelt, together warned that organic growth must accelerate, requiring human attributes not traditionally at the forefront in large organizations. Innovation, design, creativity and risk tolerance would have to coexist as equals beside cost control, productivity improvement and management discipline.(7)
LEADERSHIP “STEAM SHOVELS”… LEADERSHIP “ORCHIDS”
Others have echoed Lafley and Immelt. An “odd couple”, author Daniel Pink and former labor secretary Robert Reich, separately have posited the rising importance of industrial design, creative differentiation, brand building and “story telling” aptitudes…talents harder to find (and keep) than the more traditional quantitative and sequential thinking skills in the conventional comfort zone of Fortune 500 companies. Lafley and Immelt labeled it “ambidextrous leadership”.(8, 9)
Though these two words were likely not intended to suggest that such renaissance talents could be harnessed in any one person, one such historical leader does come to mind. Heading north on a steamship in November 1906, Theodore Roosevelt penned a remarkable letter to his son reflecting upon what he had just experienced on his only trip to Panama. Juxtaposed against the physical marvel of the men atop huge steam shovels accomplishing their “epic feat”, his words shifted to the wonder and beauty of the butterflies and orchids in the jungle across the isthmus. TR perceived that both… energy and entropy… were necessary to grasp the significance of the extended scene.
Ron Norelli is founder and President of Norelli & Company,a strategic change and transition management firm. Ashleigh Finley is a Senior Norelli Associate.
(1) "Entropy," Norelli & Company, Strategy FOCUS, Vol. XVI - Number 1, 2002.
(3) Berlinski, David. The Advent of the Algorithm: The Idea That Rules the World. United States of America: Harcourt, Inc. 2000. Chapter 12.
(4) Greene, Brian. The Fabric of the Cosmos: Space, Time and the Texture of Reality. United States of America: Vintage. 2005. Chapter 6.
(5) Moyer, Liz. "Merrill Lynch Needs A Plan (And A New Leader)." Forbes. 30 October 2007.
(6) "FedEx Among 'Best Companies to Work For,' says FORTUNE Magazine." Reuters. 22 January 2008.
(7) Colvin, Geoff. "Lafley and Immelt: In Search of Billions." FORTUNE. 11 December 2006: 70-82.
(8) "Orchids & Steam Shovels: Part Two," Norelli & Company, Strategy FOCUS, Vol. XVII, Number 2, 2007.
(9) Colvin, Geoff. "Lafley and Immelt: In Search of Billions." FORTUNE. 11 December 2006: 70-82.
(10) "Orchids & Steam Shovels: Part Two," Norelli & Company, Strategy FOCUS, Vol. XVII, Number 2, 2007.