3 August 3, 2016
The Coca-Cola Company has a long history of innovation and development. The company was founded in 1886 by a recipe concoction created by pharmacist John S. Pemberton (Coca-Cola, n.d.). The beverage enjoyed moderate success until Pemberton passed away, and several businessmen worked to ensure the trademark drink would become a world famous flavor. In the early 1900s the product expanded rapidly from its roots in the southeastern United States across the country, and the cause of all of this growth can be traced back to successful leadership in terms of management and innovation. The purpose of this case study is to understand how the changing leadership styles of Coca-Cola executives have damaged the company’s reputation and stock price, in comparison to the leadership style of more successful CEOs.
Coca-Cola executives have been renowned for setting the bar that other companies should follow to remain successful. Once the Woodruff family bought the company in the 1920s, sales began to take off. Robert Woodruff, president of the company from 1923 until 1954, made the decision to sell Coca-Cola to US servicemen for 5 cents, regardless of the cost to the company (Bolton & Thompson, 2013). Coca-Cola ensured that there would be a bottling plant wherever US servicemen were located, helping to craft Coke into a US icon. This decision also helped expand production around the world.
Coca-Cola is also famous for the innovative style of other CEOs. One of the most recent, and most famous, was Robert Goizueta. Goizueta came from humble beginnings in Cuba, and would eventually go on to transform the image of the company in terms of stock price and company branding. Goizueta’s leadership completely transformed the company, and unfortunately for Coca-Cola, his style was not emulated by subsequent CEOs. Later CEOs damaged the company’s brand name and reputation of global success through mismanagement and poor executive decisions, which were in large part due to low oversight and poor leadership techniques. In order to understand the issue, it is important to understand how the CEOs of Coca-Cola were different and why individual issues arose to begin with.
Goizueta came to America with nothing. Born in Cuba in 1931, he was born into a wealthy family that owned a sugar refining business. He received a splendid education, as he graduated from Yale with a degree in chemical engineering (Raiz, 2008). When he returned to Cuba, he took an entry level job at Coca-Cola working as a chemist. He eventually rose to become the chief technical director of five bottling plants, displaying his work ethic at an early stage. When Fidel Castro took over, Goizueta and his family escaped to Miami, where he received a job at Coca-Cola’s new office. Over the years, Goizueta worked hard and rose in the ranks of the company, and eventually became the vice-chairman of the company.
He befriended Robert Woodruff, who was still the de facto patriarch of the company. Woodruff recognized the talents of Goizueta. Woodruff convinced the other members of the board to name him CEO and chairman after J. Paul Austin stepped down, which was scandalous because Austin recommended someone else (Donald Keough). Goizueta named Keough as the Chief Operating Officer, and the two worked closely together.
Goizueta redefined the company’s investment mission. When Goizueta took over, Coke was invested in a wide range of businesses that did not relate to the beverage industry at all. Goizueta sold many of the companies Coke owned due to their continued underperformance and focused on its own brand and a few other brand names it sold, like Minute Maid and Sprite. This allowed the company to refocus its vision and goals on what was directly related to the company itself. Coca-Cola also began consolidating its bottling companies, and devised the “forty-nine percent” solution, where struggling bottlers were bought out by Coca-Cola and combined into Coca-Cola Enterprises.
Thus, Goizueta helped organize Coca-Cola’s capital distribution and centralized it. Goizueta’s strategic mission was to take risks, and under his leadership, Coca-Cola borrowed billions to make investments that reaped substantial profits. Many have claimed that Goizueta pioneered the economic value added (EVA) method of investing. Goizueta, by using EVA techniques and the redistribution of its bottling factories, grew the value of the company’s stocks from $4.3 billion in 1981 to $152 billion in 1997 (Schwartz, 1997). This was in large part because Goizueta was not afraid to purchase assets and often times sold them for large profits, as it did with Columbia Pictures in 1989 when it sold the company to Sony.
Despite Goizueta’s tremendous success overall, he did involve the company in a huge marketing failure. In order to counter Pepsi beating Coca-Cola in taste tests, Coke introduced “New Coke”, which bombed. Loyal consumers demanded the old formula be brought back, and Goizueta realized that the real strength of a beverage company lies in brand imaging and marketing, not solely in its taste. Goizueta learned from this mistake quickly, and reversed course.
Goizueta passed away in 1997 due to cancer. He was replaced by his selected heir, Douglas Ivester. Ivester was the CFO under Goizueta, and had helped plan and formulate Coca-Cola’s policies for years. Ivester was thought to be the rational choice, but in the first few weeks, he made some radical changes and destroyed the management capability of the company. Ivester sent his competitor for the CEO position, E. Neville Isdell, to head a bottler in Britain. Former COO Donald Keough lost his consulting position and his place on the board. Senior vice-president Carl Ware was demoted. Ivester was known for working every day of the week, and placing an emphasis on increasing the scope and breadth of Coca-Cola’s reach in new markets, and in markets the company was already in. Ivester did not solicit the advice of upper level management, and instead focused on entry-level information gathering. Essentially, he focused on gathering information from venders and lower-level employees. Many accused Ivester of micromanaging the company, at all levels.
Ivester helped improve several aspects of the bottling system, but ultimately alienated upper leadership and the executive board. This is partially because of his poor delegation abilities and the decrease in value of Coca-Cola stock (Morris & Patricia, 2000). Senior level investors forced Ivester out after two years. Under Ivester’s tenure, stock price fell by 12%, which was a remarkable departure from Goizueta’s time as CEO (Raiz, 2008). The next CEO was Douglas Daft, someone who had little overall leadership experience and who claimed he was never groomed to be CEO.
Daft immediately cut 5,200 jobs, and it was not seen as having a specific purpose. Daft was widely criticized for not being able to think globally. Turnover among executive members of the company remained high, but Daft did allow Keough to return to consulting and his advisory role. Daft did much to increase the scope and field of Coca-Cola, but he was unable to handle a few crises that erupted, as he lacked a decisive quality in his decisions. Adding to this, Coke was accused of misreporting income on its financial reports (bizjournals, 2004). This all led to the board’s decision to remove Daft.
The Effects/Alternatives
These issues Coca-Cola had were in large part due to the leadership styles and leadership failings of Goizueta’s successors. The negative performance of Coca-Cola were a direct result of the failures of executive staff at the CEO level, as it is directly their responsibility to fix management issues. Thus, the board has several decisions it can make. First and foremost, it can do nothing at all. No changes to policy and no changes in decision making might mitigate future poor selections, but if so, it will only be by pure luck. Executive leadership has already demonstrated its recent consistency in choosing poor candidates for the job, implying that a lack of action will only result in the same systematic failure. The board can actively work on changing how the CEOs of the company are selected and the criteria surrounding their selection, which would likely ensure that the next CEO is more qualified. The board can also help ensure future CEOs will be selected following certain core competencies, using a benchmarking process to select the best suited for the job. Lastly, the executive leadership can focus on forcing the CEOs to comply more with their will and increase oversight. These four strategies are the primary concerns that Coca-Cola is dealing with right now, as it should be; frequent underperformance on the part of upper echelon leadership has damaged the reputation of Coca-Cola and increased investor speculation.
Analysis
The first alternative mentioned was to do nothing. While clearly the easiest option to follow, doing nothing would solve nothing. Coca-Cola has a proven issue with selecting corporate leadership, as Ivester and Daft have proven. Ivester alienated management and Daft could not plan long term; if the board did nothing, the same trend of mismanagement would likely continue. There are no known benefits to this choice, though it seems to be the prevailing decision among board members.
The second alternative is to focus on the selection process. Ever since Goizueta was chosen as CEO, former influential members of the company have played a large role in determining who would become the next CEO. Robert Woodruff cherry-picked Goizueta, and used his influence to sway the board. Former COO Keough helped influence the board to select Ivester and Daft both, though he no longer held a direct leadership position inside the company. While outside influence gave Coca-Cola one of the best CEOs it ever had, it also gave the company the opposite. Giving the board sole influence in selecting the next CEO would help it make unbiased, impartial decisions that are likely to be in the best interest of the company. The only risk is that the board has a chance of alienating influential people in the short run.
The third alternative is to integrate core competencies into the selection process, regardless of how the selection is carried out. This means that a benchmarking process would determine who the next CEO would be. Ideally, this would be carried out regardless, as every company should have specific criteria for determining who will lead the company. The board must upgrade its selection criteria, as it has the final say regardless of outside influence, and past criteria have not been enough. Indeed, the board factored in experience with the company, and although Ivester and Daft had been with the company for decades, they did not measure up to par. This decision has zero ramifications, unless limiting the number of unqualified candidates is considered bad.
The fourth alternative is to ensure management policies are carried out directly via the board, meaning that the CEO is under intense scrutiny. This is inevitable after a string of poor performing CEOs damage the company, but it would have little overall benefits. The CEO is meant to be relatively independent so that he/she may focus on increasing the value of the company. Micromanaging the CEO can be dangerous, as it will stifle innovation and initiative overall.
Decision
Goizueta was definitely a visionary leader, perhaps even a strategic one; Goizueta rarely went directly into the field, but instead set the long term goals of the company in its Atlanta headquarters. Goizueta also allowed other executives to perform their duties in a more laissez-fair environment, preventing them from being micromanaged at every turn. Subsequent CEOs were far more interested in being more managerial, especially Ivester. Forbes directly correlates leadership strategy with business performance (Bersin, 2012), and Coca-Cola’s experiences provide evidence for why this is the case. Managerial leadership is not nearly as effective at the uppermost echelon of a business or corporation. Rather, they belong working in tandem with their visionary/strategic counterparts, as the Goizueta/Keough team did, which revolutionized the business and the industry.
The board’s decision should be to remove third party influences to ensure that they can elect a strategic leader. In a world where contacts determine business leaders, it is difficult to ensure that the best leader can rise to the top. Because of the few weaknesses associated with removing third party influence, this course of action makes the most sense in ensuring that future CEOs are prepared for the challenges ahead of them. In these decisions, the only opinion that should matter is that of the investors, represented by the board anyway.
Additionally, the board should refine its criteria. The benchmarking process has proven weak in the long run, as time in the company and who-you-know appears to be the primary source of selection. This has led to leaders who do not work well with their peers, or who lack the decision making capabilities of their peers. Thus, to ensure the best are chosen for the job, the board must make key changes in its criteria. There are no drawbacks to increasing the scope of requirements to be selected as CEO.
Action Plan
Changing the ethical environment of selecting a CEO will not be immediately easy. The board must make it clear to all how CEOs are selected and what the board will look for. This will also help investors understand how the next CEO will interact with employees, customers, and investors. The board should also refine their benchmarking process; no longer will experience and personal connections be a sign of merit. The board should look for professionals who have a history of success in their chosen fields, but more importantly, have already developed extensive leadership experience in a field that demands effective communication and interaction. Furthermore, all candidates should be able to display that they have worked well with other executive staff before, overturning Ivester’s failures previously.
The reason for this last point is that it is vital for a CEO to have an effective team, one in which they must select. The success of the Goizueta/Keough pair came directly from the fact that Keough was more managerial, allowing for Goizueta to focus on strategic planning. If a benchmarked candidate does not display the ability to select and also benchmark other leaders himself, he should not be considered.
The board must also implement an increased examination process for each potential CEO. Ivester proved that top level experience as CFO was no qualifier to become CEO, though many CEOs are pulled from CFO positions. Daft showed how dangerous a dark horse candidate from outside the main leadership sphere could be overall, though he was arguably not nearly as bad as Ivester. The board must add additional criteria by searching for potential, not just experience. Key factors in the decision making process must include not only leadership experience, but innovation experience; all candidates should be able to demonstrate that they have the ability to innovate and have done so in the past, and that their uniqueness proved to be successful. Additionally, they should be examined for how well they delegate and work with subordinates and their peers, as that is the key to determining business culture.
Works Cited:
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Bolton, B., & Thompson, J. L. (2013). Entrepreneurs: Talent, temperament and opportunity (2nd ed.). Boston: Elsevier Butterworth-Heinemann.
Raiz, S. (2008). STRATEGIC LEADERSHIP AT COCA-COLA: THE REAL THING. Ivey Management Services
Schwartz, J. (1997, October 19). Roberto C. Goizueta, coca-cola chairman noted for company turnaround, dies at 65. U.S. Retrieved from http://www.nytimes.com/1997/10/19/us/roberto-c-goizueta-coca-cola-chairman-noted-for-company-turnaround-dies-at-65.html?pagewanted=all
Morris, B., & Patricia. (2000, January 10). What really happened at coke Doug Ivester was a demon for information. But he couldn’t see what was coming at the showdown in chicago. - January 10, 2000. Retrieved August 3, 2016, from fortune.com, http://archive.fortune.com/magazines/fortune/fortune_archive/2000/01/10/271736/index.htm
bizjournals. (2004). Coca-Cola Chairman and CEO Doug Daft to retire. Retrieved August 3, 2016, from http://www.bizjournals.com/atlanta/stories/2004/02/16/daily38.html
Bersin, J. (2012, July 30). It’s not the CEO, it’s the leadership strategy that matters. Forbes. Retrieved from http://www.forbes.com/sites/joshbersin/2012/07/30/its-not-the-ceo-its-the-leadership-strategy-that-matters/
Charan, R. (2012, August 8). Why boards fail to choose the right CEO. Retrieved August 3, 2016, from Leadership, http://fortune.com/2012/08/08/why-boards-fail-to-choose-the-right-ceo/
