Although classified in the glamorous high-tech sector, semiconductor production is essentially a highly competitive, cost-intensive activity. Computer chips and potato chips have a lot in common, economically. Both come in a variety of flavors, but both are essentially commodities. At the same time, product features can represent points of differentiation (baked or barbeque flavor, for instance). It's been a fact of life in the semiconductor world that competition pushes for ever smaller, faster, transistor-dense devices. Companies must innovate or go out of business. Innovation creates better, more effective chips, and manufacturing efficiency ensures that they get to market at the lowest possible cost. The best semiconductor makers thus have the rare opportunity to inflict a competitive double-whammy on their rivals.

Cost competitiveness in the semiconductor business has conventionally been viewed as a classic learning-curve situation. Learning-curve theory says that cost per unit produced declines as the cumulative number of units increases (that is, as manufacturers amass learning about how to do it right). A theorist of classic learning curves will tell you that accumulating experience requires a gain in market share. Become the dominant producer and your greater production experience will yield insights that can make you more efficient than your competitors.

But piling up manufacturing experience isn't the only way to create a learning-curve advantage. A study by Nile Hatch and Jeffrey Dyer of the Marriott School at Brigham Young University showed that the ways firms manage their human capital can also reshape the learning curve—make it decline faster (as cost per unit goes down) and stay at a low, flat level longer than the rivals' curves. Hatch and Dyer studied the experiences of thirty semiconductor fabrication plants operated by sixteen different companies. They found that:

In other words, even in a technology-heavy business, people matter as much as process.

While talking with the managers of the semiconductor companies they studied, Hatch and Dyer observed that, over time, the equipment operators developed a stock of specific knowledge about the intricate processes they use. Savvy managers put this human capital to good advantage by assigning equipment operators to troubleshooting teams. The teams could then implement quality-improvement processes, allowing the fabs to reduce semiconductor defects dramatically. Hatch and Dyer said, "Effective deployment of human capital integrates the entire manufacturing staff into one large problem-solving organization."^[78] Effective deployment happens, in turn, when managers encourage growth in knowledge and skill and look for ways to help employees spread their learning around the organization.

Some of the knowledge transfer involves production factors so small that they seem trivial. For instance, while studying quality differences between two identical tools in different Intel factories, someone discovered that one group was cleaning the tool by wiping a towel in a circular motion. Another group wiped back and forth. The back-and-forth motion went against the grain of the metal, spreading debris particles rather than removing them. Circular polishing became the adopted procedure, and quality improved. Transferring these kinds of procedural insights is the responsibility of what Intel calls "seeds." These are technicians designated by their managers to transfer and replant manufacturing know-how from one Intel chip factory to another. Though the company prohibits willy-nilly changes, Intel managers encourage workers to present ideas to boost productivity or improve chip features.^[79] Through this process, managers not only give employees valued control over key production decisions, but also help transform human capital into knowledge capital that others can use. The embedded wisdom about the big and small drivers of efficiency supports Intel's cost advantage.

Increasingly, however, innovation at Intel means more than just faster chips or lower production cost. Under CEO Paul Otellini, Intel is in the process of transforming itself from an engineering-driven organization (where, according to former CEO Andy Grove's famous aphorism, "only the paranoid survive") into a place where innovation requires heightened collaboration. In the past, engineers worked on creating speedier chips and letting marketers try to sell them. Now, cross-discipline teams (engineers, developers, marketers, and market specialists) work together to create compelling offerings. The organization has reached well outside the technical disciplines—to the medical profession, for example—to attract people who can work on technologies for health monitoring and data tracking. Although Intel has historically struggled to break into markets outside of PCs and server computers, the company has made a commitment to bringing out new chips for cell phones, consumer electronic products, and manufactured goods like cars. All of these will require Intel to make a change in the performance of its products.^[80]

Intel managers must play their part in executing a strategy combining product differentiation, market expansion, collaborative product development, and cost efficiency. We would observe that, to succeed, they must perform well in four areas:

These themes foreshadow elements of what we believe is a comprehensive model of manager performance. We will see them repeated, in different forms, in the next two company examples.

Though it competes in an entirely different business, Southwest Airlines also pursues an efficiency-focused business strategy. To achieve and maintain a cost advantage, the company must do many things right—which it has for three and a half decades. Through 2009, Southwest had recorded thirty-seven consecutive years of profitability, a feat unequalled in the commercial airline business.^[81] What does the airline do so well? Simply put, Southwest keeps things simple. The company flies one plane type (the Boeing 737), employs a pared-down boarding process, and gives no-frills (albeit friendly) service. This focus on streamlined operations has found favor with fliers. Southwest routinely scores among the better performers in on-time arrival, avoiding mishandled baggage, and minimizing customer complaints.^[82] In effect, Southwest double dips—tactics that support operating efficiency also produce results that please customers.

Southwest has also implemented a set of practices that keep its planes in the air, where they earn revenue, rather than on the ground, where they don't. Many factors, and contributions from an array of employee groups, make this kind of performance possible. An analysis conducted by Jody Hofer Gittell, then of the Harvard Business School, identified coordination among those groups as one critical factor. Gittell and her team studied how airport supervisors in nine different work groups at four major U.S. airlines make connections among ticket agents, gate agents, baggage handlers, ramp agents, and operations agents. These are the folks who get you onto the plane, get your suitcases loaded, and get the aircraft off the ground. When they move quickly and in sync, you and your baggage have a much higher chance of reaching your destination on time, and at the same time. Sometimes it's as simple as a baggage service planner's anticipating a late flight and requesting a second set of stairs. This allows arriving passengers to exit from the front of the plane while departing passengers board using the rear stairs, accelerating the aircraft's turnaround. For that strategy to work, the baggage service planner must alert the lead gate agent, who can then manage the onboarding/offboarding procedure.

The researchers focused particular attention on this kind of cross-group teamwork, which they called relational coordination. Relational coordination encompasses elements like sharing knowledge within and across functions, mutual problem solving, establishment of shared goals, and assistance with tasks when time pressure becomes a concern. Southwest supervisors stand out for their performance in forming relational connections within and across work groups. When necessary, they work side-by-side with their teams. This gives them the legitimacy and knowledge they need to provide effective coaching and feedback. Southwest supervisors also spend more time advising and jointly solving problems with employees than do supervisors from the other airlines in the study.^[83] In this way, Southwest managers achieve a human capital and employee engagement trifecta: increase employee involvement in decision making, help them build the skills and knowledge required to make those decisions effectively and, through both channels, enhance employees' rational and emotional engagement in their work.

The Southwest supervisors who participated in the analysis had a remarkable term for the people who reported to them. Not employees, subordinates, associates, team members, or even "most important assets." They referred to their people as their internal customers. At Southwest, the airport supervisor's main job is not to direct, monitor, assign blame, or ensure compliance, but rather to serve. Said one supervisor, "We are accountable for what the agents do ... the agents are our customers. We are here to help them do their jobs."^[84] Little wonder people want to work for this airline. In 2009, Southwest received more than 90,000 résumés and hired 831 new employees.^[85]

It came as no surprise to the researchers that, across the nine airport groups studied, the two Southwest groups generally outperformed teams from the other major carriers on a variety of performance measures. By one estimate, for example, Southwest can turn a plane around from landing to takeoff in 23 minutes. That's about half the time it takes other airlines.^[86] This kind of performance enables Southwest to produce consistently superior financial results. Indeed, even among other low-cost carriers, Southwest's advantage stands out. On an arcane measure called average monthly revenue aircraft minutes per full-time equivalent employee, Southwest hit 256 as of the first quarter of 2007. The overall average for low-cost carriers was 238.^[87] In other words, in part because its supervisors keep airport teams informed, connected, and supported, they perform efficiently. Their efficiency, in turn, enables the airline to generate more flight-time revenue per employee than do most of its peers.

Managers at Southwest act in some noteworthy ways to help give the airline its clear and sustained performance advantage. Three areas stand out:

SAS, a leader in business intelligence software, relies on innovation and tight relationships with customers to carve out a marketplace advantage based on product superiority and customer focus. In 2008, the company's fraud management software (which helps banks score individual transactions, including those at the point of sale, to catch credit cheaters) won a Technology Innovation of the Year Award from Frost & Sullivan, a research and consulting firm.^[88] The company's success has produced impressive marketplace results: a nearly 100 percent subscription renewal rate among customers and thirty-three consecutive years of revenue growth through 2009.^[89] Dr. Jim Goodnight, CEO of SAS, attributes the company's success to its development and investment of what he calls "creative capital." He means the innovative thinking and new ideas generated by engaged employees.

Over the past three decades, SAS has developed a creativity-management framework that incorporates three key principles:

To play their role in the creative process, SAS managers do a few simple things: bring groups of engineers together to encourage the exchange of ideas and spur innovation, handle some of the hands-on work themselves, and ask a lot of questions. Getting work done but not controlling it requires managers to find the sweet spot between being too distant and too involved. As one SAS director put it, "If you tell everyone, 'Here is how to do it,' then all you are really measuring is their typing skills."^[91] Instead, managers create an environment in which technically skilled employees can take on substantial decision-making authority. Our research consistently shows that this is a key stimulus of engagement in high-technology companies. Managers also clear obstacles by acquiring the resources employees need to keep the creative energy flowing. Employees must trust that managers will get them what they need to do their work without putting them through a burdensome process of requests and requisitions. A manager heading up an SAS software testing team described this aspect of his job as "Go get it, go get it, go get it."^[92] In turn, managers must trust that employees won't ask them to pay for something that doesn't contribute directly to performance.

SAS engineers forge connections with customers, and get direct customer feedback on product functionality, at the company's annual users' conference. There, consultants and technical support staff collaborate with users to define new products. This is how SAS developed its award-winning fraud management product, in collaboration with the global bank HSBC. The company says that 80 percent of the product improvements that customers suggest most frequently find their way into product offerings. Customer loyalty and repeat purchases are so high that the company can economize on customer acquisition investments, such as advertising and promotion. SAS puts the money it saves (about 30 percent of revenue) into research and development that drives innovation. The average for high-tech companies is about 10 percent. The stimulating, highly connected work environment pays off in another way: annual turnover at SAS runs between three and five percent, compared with a software industry norm of more like 15 percent. In other words, the company holds on to the human capital it builds.^[93]

In a knowledge-intensive organization like SAS, the managers' job is essentially to help build human capital and then get themselves (and all other potential encumbrances) out of the way of its profitable investment. They accomplish this by:

This element comprises planning work, clarifying job-related roles, structuring specific job tasks, monitoring performance, and making the necessary adjustments to ensure that work meets organizational needs and supports business strategy. Overseeing task execution is, in many ways, the most traditional aspect of the manager's job. Of the four performance categories, it focuses most directly on the asset deployment, process oversight, and systems implementation elements that most people think of as integral to managing. Task execution comprises the fine-grained aspects of a manager's efforts to help a unit plot a path toward, and achieve, its strategy-contribution goals.

A manager's task-execution responsibilities will naturally take different forms in different organizations. When it comes to task execution at Intel, for example, managers stop short of solving quality problems for equipment operators. Instead, they let the operators work out their own solutions, making problem solving a core part of the job. Managers also involve people in making decisions about how their work will be done. They extend this job element to the organization more broadly by identifying efficiency advocates who can promulgate the organization's "copy exactly" philosophy. Managers structure work to move quickly from idea to implementation. At Southwest, managers know that to meet the competitive requirements of fast aircraft turnaround you need savvy people whose jobs are part of a team structure. Therefore, Southwest managers keep people focused on finding and executing the most efficient work processes. They build well-coordinated teams that make hand-offs smoothly and with minimal wasted time, effort, and resources. Managers at SAS create a work environment in which software designers can focus their efforts on creativity and customer familiarity. They encourage teamwork so employees can draw on each other to meet customer needs. They also provide flexibility for individuals, teams, and units to respond to customer needs, even in ways that may extend outside conventional operating procedures. Thus, even when the descriptors sound similar (all three organizations encourage teamwork, for example), the expectations and goals of task-execution approaches will vary: teams at Intel share quality improvement ideas; teams at Southwest scramble to serve customers; teams at SAS work with users to create new products.

The next element of the performance model calls for managers to create opportunities for each employee to add to her storehouse of human capital. In doing so, managers create the ability for people to carry out their jobs and achieve their goals. Intel managers leverage diversity of thought and encourage the sharing of new, even unconventional, ideas around the organization. They ensure that on-the-job learning occurs consistently, so that equipment operators can play their roles on problem-solving teams and become almost-engineers. Their learning makes significant contributions to improved quality and lower production cost. Southwest managers focus learning on both individual task elements and on cross-functional training so that people understand fully what others do and so the team as a whole can function better. In the innovation-intense world of SAS, managers bring together teams of both engineers and customers to share ideas and make everybody smarter. They also give engineers substantial latitude to apply what they know, allowing them to approach their work in the way that yields the best performance.

Managers' roles in fostering learning and building performance capability will appear similar regardless of the competitive strategy adopted by their companies. Nevertheless, what seems common across strategy categories will exhibit important, if sometimes subtle, strategy-specific variations. Take learning and knowledge transfer approaches as an example. In a differentiation-intensive organization, learning programs will incorporate knowledge acquisition to keep people at the technical edge of their respective crafts. Companies with a differentiation strategy can't afford for their people to be left behind by market advancements. In a company that competes on cost control and efficiency, on-the-job learning efforts will often emphasize cross-training to ensure staffing efficiency and smooth interfunction handoffs. When customer focus is the driving strategic theme, managers will work to ensure that service delivery employees continuously improve their understanding of customers and their ability to anticipate and respond to buyer requirements ever more accurately.

Managers play a central role in brokering the exchange of each employee's investment of human capital for the portfolio of financial and nonfinancial, intrinsic and extrinsic rewards that constitute a return on that investment. We refer to this reciprocal arrangement as the deal between employee and enterprise.

Intel, Southwest, and SAS all understand the importance of providing an appealing deal to employees as compensation for their contributions to strategic success. Naturally, financial rewards play a part in the organizations' overall reward portfolios. The Intel jobs Web site, for example, proudly tells prospective candidates about the organization's incentive philosophy: "Bonuses are the major element of Intel's variable pay and are central to Intel's approach to compensation. Our philosophy is to offer a greater portion of variable pay than the market average, because this provides a strong link between employees' compensation and company performance."^[101]

But people work at companies like these for reasons that go much deeper, energized by intrinsic motivations that financial rewards can't address. Historically at Intel, intrinsic fulfillment came from being part of an organization that continuously innovated in technical ways. If you were an Intel engineer, you were inspired and energized by the chance to build ever-faster chips. In the evolving, marketing-oriented Intel, your internal motivation may come from helping to build a more diversified array of compelling consumer products. A manager who gets you involved in this kind of opportunity has made an important contribution not only to your personal satisfaction, but also to your career trajectory.

If you work at Southwest, what energizes you is the chance to exercise your individuality in serving customers. "One of the most important and significant freedoms we allow our employees is the freedom to be an individual," said Colleen Barrett, former Southwest president.^[102] It takes astute, observant, and caring managers to encourage freedom but still keep people focused on what the customer needs and will pay for. Moreover, Southwest trusts employees' judgment not only in handling customers, but also in operating efficiently. The airline considers employees experts in how to save money, for instance. Pilots know the routes that save on fuel consumption; flight attendants make suggestions to economize on in-flight operations (such as using regular trash bags rather than logo-imprinted ones); IT technicians suggest that building computers is less expensive than buying them. It's all part of an environment in which contribution is rewarded not just with pay, but also with personal satisfaction and recognition.^[103]

SAS rewards its employees with a variety of impressive benefits. They include an on-site exercise facility (where they launder your sweaty workout clothes and return them ready for use the next day); on-site child care; no limit on the number of sick days employees can take; and a seven-hour workday. But there's a strategic rationale for all this apparent largesse: to make it impossible for people not to do their work. And what if people took unfair advantage of the policies, and spent all day on the treadmill or playing Ping-Pong instead of working at their desks? Says John Sall, owner of one-third of SAS's equity, "I can't imagine that playing Ping-Pong would be more interesting than work."^[104] According to one employee, "You're given the freedom, the flexibility, and the resources to do your job. Because you're treated well, you treat the company well. When you walk down the halls here, it's rare that you hear people talking about anything but work."^[105]

In effect, SAS operates on the belief that intrinsically interesting work leads to satisfaction, superior performance and, ultimately, better products. Unlike most technology organizations, SAS offers no stock options, and never has. But the company is known for going to uncommon lengths to find the right intrinsic motivation for its employees. Software developers, for instance, value the opportunity to create elegant programs. The company sends them to technology conferences where they can hone their skills and create contacts within their professional disciplines. Sales people respond to the thrill of the hunt and the adrenaline rush from closing a big deal. For them, SAS created a technical support position to answer staff questions and solve engineering problems. This allows sales reps to spend more time finding prospects and making sales.^[106] Managers have responsibility for bringing these kinds of intrinsically fulfilling elements into alignment with what the organization needs to achieve strategic success.

Effective managers look ahead in time and outside the boundaries of their units and their organizations to anticipate and respond to environmental shifts and to envision, plan for, and create the future. Sometimes, this requires managers to respond to change that is imposed and unavoidable—reorganization, strategic redirection, or downsizing, for example. In other cases, innovation and creativity may spark the change, as people develop new offerings or find better ways to work. These forms of change call for varying levels of reactivity or proactivity, adaptability or resilience.

At Intel, innovation-inspired change historically emphasized balancing new technology and chip performance features with a constant search for ways to cut production cost and raise quality. The definition of innovation has broadened to include new offerings in consumer product categories that have been, until recently, foreign to Intel. Managers must now combine technical intelligence with social intelligence to create ways for employees to master their design and production challenges and share their wisdom with their (sometimes unfamiliar) teammates. In effect, energizing change has morphed from a technical challenge to an organizational and social one. Within the Southwest Airlines organization, managers must build efficiency-improving relationships among employee teams, and then reinforce the results with one-on-one employee coaching. Managers at SAS promote change by fostering social learning with stakeholders from the company's external environment. Managers and employees also make external connections to ensure that new product designs meet evolving customer needs.

These examples chiefly emphasize affirmative, forward-looking (though not necessarily gentle or easy) forms of change. But change has a dark side as well, when economic conditions, competitor success, or unexpected shifts in customer behavior make change a requirement merely for survival. In those scenarios, the manager's job calls for building employee resilience and flexibility. We will go more deeply into both aspects of change in Chapter Eight.

We believe this four-part model—executing tasks, developing people, delivering the deal, and energizing change—balances individual interests with those of the group. We think it also reconciles operational realities with social requirements and acknowledges the possibility that what worked yesterday can be improved upon. Although the four performance components represent discrete categories, the boundaries between them are highly permeable. For example, in performing their task-related responsibilities, managers can help people craft jobs that contribute to skill-building and, often, to customer relationships. Likewise, managers can ensure that employees' developmental efforts focus on the creation and implementation of new and improved work systems and technologies. Learning opportunities can also be framed as rewards in themselves, especially for high-performing employees who want to get ahead. Managers who recognize a particular employee's risk-seeking propensities can provide opportunities for the individual to introduce changes that bring about radical new ways of doing the unit's work.

Our four-element manager performance structure needs just one more component: a foundation.

The discussion to this point has presented an outside-in look at the manager's job. We've described manager performance requirements that employees, and the rest of the organization, would observe and experience. But effective managers don't define themselves and their roles solely through the eyes of others. Instead, each looks as well to an internal, self-defined standard of acting and speaking to which he holds himself, regardless of the requirements imposed by the external world. This notion, which scholars of leadership call authenticity, forms an attitudinal and behavioral foundation for the manager performance model.

Two ideas—that high-performing supervisors and managers both develop self-knowledge and adhere to high standards of integrity in thoughts, words, and deeds—constitute the underpinnings of authentic behavior. Researchers who study authentic conduct define it with four components. We list them here and elaborate further in Chapter Nine:

Adherence to high standards of authenticity endows managers with the humility, intellectual honesty, interpersonal sensitivity, and behavioral consistency required to perform effectively across all core elements of the manager model. For instance, a manager can demonstrate self-awareness in the way she steps back from a do-it-yourself approach and allocates more fulfilling work to her subordinates. Her efforts to provide honest, constructive, but accurate performance feedback to an employee can demonstrate relational transparency. The ability to make a balanced consideration of all available input, including information that challenges current ways of doing things, can help a manager decide that it's time to change a traditional work process. A manager who accepts blame for a performance shortfall, perhaps because of unclear direction to employees, is demonstrating a strong moral perspective.

Much as authenticity and trust together form a behavioral foundation for the manager performance model, authenticity itself acts as a basis for establishment of a trusting relationship between manager and employee. Trust denotes the faith we have that another will act reliably in ways consistent with, and supportive of, our best interests. People who trust each other are willing to be vulnerable. They know that their trusted partners will not exploit their vulnerability.

Like other aspects of the social interaction among people, trust exists for a simple reason: it benefits those who exercise it. As he applied game-ending pressure on the Soviet Union, "Trust, but verify" (an old Russian proverb) became one of Ronald Reagan's favorite phrases. He incorporated it into his comments at the December 1987 signing of the Intermediate-Range Nuclear Forces Treaty, prompting the exasperated Mikhail Gorbachev to complain, "You repeat this phrase every time we meet." Reagan reportedly replied, with characteristic confidence, "I like it." Reagan knew that if we could trust the Soviets (and they us) to reduce investment in nuclear weapons, everyone would gain from the redirection of military resources and the reduced danger of global annihilation. "No nasty surprises" is the expected outcome of a trusting relationship.

Managers who demonstrate trustworthiness produce valuable benefits for their organizations. Researchers who studied a group of restaurant workers discovered that employee trust in their managers correlated significantly with higher restaurant sales, higher profits, and somewhat lower employee turnover. Employees who trusted their managers—and whose trust was consistently reciprocated through behaviors like delegation and broadening of employee decision authority—were more likely than others to acknowledge the legitimate needs of the organization and the individual unit. They also expressed a higher inclination to take on challenging and important jobs, cooperate with their peers, and display creativity and resilience in the face of change. As a result, customer service improved, waste and theft declined, and turnover dropped. The researchers concluded, "A (restaurant manager) who can garner higher trust from the firm's workforce gains a competitive advantage over rival firms."^[108]

Managers can build trust with employees in ways that span all aspects of the performance model. Keeping people honestly informed about the unit's task performance builds manager credibility. Using consistent performance assessment standards from period to period and person to person gives people confidence in the manager's predictability and reliability. Managers who pay close attention to what motivates individuals and drives their engagement can make insightful decisions about individuals' jobs and rewards. And managers who let go of their comfortable, dearly held ways of doing things when it's time to change can demonstrate their authentic willingness to sublimate self-interest for the greater good.

Exhibit 3.1 illustrates the full manager performance model.

Figure 3.1. The Manager Performance Model

We constructed the details of our manager performance model using data from our 2010 global workforce study. The analysis encompassed data from a total population of more than twenty thousand employees in twenty-two countries. We performed a factor analysis to determine whether the manager effectiveness items in our survey would yield one coherent manager performance factor with high internal reliability. We found that a cluster of manager effectiveness items did indeed adhere together to form a strongly coherent index consistent with the performance model we've described.^[111] Examples of those items appear in Table 3.1.

In some cases, the gaps between item scores for highly rated managers and those with lower ratings are remarkable. For example, among respondents who say they have an effective manager, 81 percent also agree that the manager consistently assigns tasks suited to the individual's skills and talents. Among those who disagree that their managers are effective, only 27 percent say their managers effectively match tasks with employee abilities (a gap of 54 percentage points). Several such gaps exceed 60 percentage points. These results suggest that the categories in our performance model do indeed define manager effectiveness and provide a way to differentiate between managers who do their jobs well and those who don't.

We also used the survey data to determine whether frequency of manager contact with employees was correlated with perceived manager effectiveness. As Table 3.2 indicates, we found a remarkable result: more frequent manager contact was associated with higher effectiveness ratings.

Manager effectiveness, in turn, was correlated with greater employee comfort in working autonomously. This finding suggests, paradoxically, that employees who have more manager contact feel more capable than other employees working with less manager oversight. Evidently, more manager contact (an element commonly included in the definition of micromanagement) isn't necessarily bad. Some managers, it seems, are particularly effective at using the time they spend with employees to create the circumstances and ability for individuals to work with high independence and self-determination. How do effective managers use this time? We think a close examination of our performance model will answer that question.