Phebe Novakovic, WG’88, puts you at ease with her genuine, friendly manner. When asked about her memory of Wharton, she laughs, “It was a challenge!” One might not guess that she leads a company leading aviation and national defense, not to mention 90,000 employees. Phebe rose through a nontraditional path to become Chairman and CEO of General Dynamics on January 1, 2013. Since Phebe took the helm, General Dynamics’ stock price has more than doubled to about 150 and stayed there for over a year. Her practice is to eschew the spotlight, letting results speak for themselves, but she was happy to share her thoughts here. She received the 2016 Joseph Wharton Award for Leadership.
What does General Dynamics do?
We engineer, design and manufacture high-end business aviation platforms and high-end national security programs. Three-quarters of our business is national security-oriented. We design and make tanks, combat vehicles, ships and submarines. We also participate in cybersecurity programs and IT services. General Dynamics is one of several large U.S. defense firms that do some of the most high-end manufacturing in the U.S. today.
You are recognized for turning around General Dynamics in 2013. How do you lead your executives to be more effective, to do more with less?
You have to define the culture and the fundamental moral character of the organization. We defined a set of principles by which we live: transparency, honesty, trust and alignment. Establishing that cultural environment is the first step toward success in any institution. Then, we defined our mission — ours is to create value for our shareholders, our customers, our employees and our community. Once you define your prime directive, then you have to execute it.
In my mind, simplicity is critical to communication. We have a value creation equation that we are committed to: Strong operating performance, coupled with the wise deployment of capital, creates value. Of course, there are complex moving parts that contribute to the equation.
But at the end of the day, it’s a simple message about value creation, which when combined with our common culture, and mission, allows us to execute effectively.
How do you drive that culture throughout your organization?
Once the senior leadership has determined the prime directive, then it’s about execution. To accomplish our operating performance, we think about four terms: increased earnings, margin expansion, return on invested capital and cash generation. Each individual needs to understand how he or she contributes to that value proposition. If you’re in contracts, the terms you write into the contract impact the operating performance of that contract.
If you’re on the manufacturing shop floor, producing a product, you need to continuously improve your processes. Every process that anyone in this company touches, they need to think how to make it better. We are committed to all of these elements of the value creation equation, and we push them down to the lowest competent denominator. It’s not enough for senior leadership to be sitting in an ivory tower issuing dicta. All 90,000 employees need to understand where we are headed and why. And by the way — it doesn’t always work perfectly!
How do you make important decisions? Do you prescribe a decision-making process to your executives?
My experience is that a team brings diversity of thought, which is what solves complex problems. First, we need to make sure we have identified the problem, and that is not always easy. Once we have the metes and bounds of the problem defined, then we approach how to fix it. Our leadership is made up of engineers, finance professionals and operators, and I’m a liberal arts person. So we all bring our perspectives and experiences to a problem.
I also rely on intuition and judgment to ferret something out. I think, “OK, this is a sticky wicket. How are we going to fix it?” I remember learning at Wharton that a complicated problem will come to you with no clear genesis — and time is wasted in trying to understand the prime contributor to that problem. So we need to confront and ask, “What is the real issue here?” Sometimes, it’s not knowable, and that’s where judgment can help.
And how do you decide what to pay attention to?
Sooner or later — if you have a good financial system — everything will show up in your finances. If you are a person who gets lost in the details, then you will struggle in a senior-level position. I’m lucky because I’m less interested in minutiae, but you need to be careful. In that sense, you need to set your own agenda. Lastly, if you’re not sure what to pay attention to, ask yourself, “Does this add value? Is my participation in this moving us forward? Does it drive our prime directive?”
What lessons from your parents helped you?
They gave me a value system. I learned to have a great love and respect for our nation, and I feel privileged to serve it any way I can. My parents taught me to be courageous and humble, and to work hard. Those attributes, I think, lead to a successful human experience, right? Those values have defined me.
How would you counsel young alumni as they leave Wharton?
Well, I don’t presume to be the Oracle of Delphi. I’ve found that it’s good to do the job that’s in front of you, and to not worry about being the next guy. Do your job, be a good person and play well in the sandbox — and a lot of success will take care of itself.
What role has Wharton played in your life?
It gave me an understanding of the fundamental components of U.S. business. The concept I walked away from Wharton about how American enterprises function was helpful to me. And the lexicon that I picked up in microeconomics, corporate finance and managerial accounting, helped me be comfortable in business.
And I loved operations research! Wharton gave me that intellectual foundation. And then, when you graduate from a school with a fine reputation, there is a presumption that you must be capable, that at least helps get your foot in the door. Then, it’s up to you to prove yourself.
Excerpt from Phebe Novakovic’s acceptance speech at the 2016 Joseph Wharton Awards Dinner.
This award is special for me, because six of the many Wharton and University of Pennsylvania alumni among our 96,000 employees, are here with us tonight.
The intellectual foundation that Wharton provided was pivotal. The superb grounding in economics, finance and managerial accounting gave me a lens to understand American commerce. That understanding of American commerce is essential to the ability to create value for our shareholders. The tools by which we create that value, in addition to common sense, are rooted in accounting, corporate finance, tax and capital return.