Letters from ex-Yahoo!s

Over the last few weeks, I've received hundreds of letters from current and former Yahoo!s who are sympathetic with "Plan B." Here is a sampling. You can't write this stuff.

Dear Eric,

I have zero Yahoo! shares but I know your feeling about what's happening inside Yahoo! for the last 4 years. I've worked at Yahoo! for X years and I've warned the VPs about their mistakes. Of course, no one listened but then I figured out with the peanut butter manifesto that no one ever listens to anyone.

There are no problems with the engineers or producers, they are great. They could develop everything that Google ever wanted to be in less than a year and I know they do want it, more than any manager or director - or even the board - because they are geeks, just like me, and we want to do the best we possibly can, all the time.

The whole structure was compromised. Not only Semel, not only the board or the
vice-presidents, everything. So I left Yahoo!

But, weirdly enough, I still care for Yahoo! And I hate to see such a huge effort wasted.

The main problem at Yahoo! is that, long ago, they stopped caring about the user.

They care about Ads, and think that revenue will come from showing more Ads to the user at the same time (more banners) and forget that if they had more users they wouldn't need to put more banners and that more banners means less users.

They care about the development process, creating zillions of internal tools to give a better environment to the developers forgetting that all those tools are already available (most of them for free) and that developers could focus more in delivering good software for their users instead of themselves.

They care about having the longest list of products in the Internet but they forget that less is more! Google made that amount of money because they had one, and only one, technology available to their users. They had focus!

They care about buzz, paying fortunes to be in the media but they forget that having a very good product makes more buzz that any media company can make, the real users! The mouth to mouth buzz is much stronger, more durable and efficient than any advertise, promotion or interview in the local media because it is personal, it is global and free.

Finally, they try to care for their people, but they fail miserably. They build gyms, coffee shops, water fonts, have stock options, health insurance but they forget to thank a night spent working, they forget to acknowledge individual efforts, they forget to listen their co-workers, specially if they come from below your current position.

So, Eric, if you really want to change the game take that into account. Make the user, Yahoo!'s primary objective, a happy user browse more, come back later, click on your banners and give you money.

Focus on key products, spend the "extra dividends" into *real* Labs (not Ad-driven), expect results in medium and long term, give some small treats to employees (better than giving a big treat to one on a promotion), thank (properly) all technicians, engineers, producers, managers, etc for their extra effort but make clear that it's not the rule and stop them if they continue, build a company that people will
go happy to work, because this is not reality at Yahoo! today.

Yahoo! forces the costumer to "buy goods" once he/she enters the site like going to Virgin and being forced to buy at least one CD to get out of the shop. No one likes to be treated like this, no one will ever come back after that and we've learned it the hard way and some at Yahoo! haven't learned that yet, as you can see.

I'm tired to read the same bullshit every time: "this new search have a better Ad platform than the previous". For Christ sake, which user is interested in that?! They want answers, and for that, Google have, by far, the best answers. Google has smacked all Yahoo!'s key products and did more, while we were sitting ducks!

I have much more to say if you're really interested, together with some old but still undone ideas that only Yahoo! has the power to do today. Feel free to reply.

cheers,

----------

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Yahoo PR Spin

It was predictable that the Yahoo! corporate PR department would shift into high-gear to defend Terry Semel in the wake of yesterday's finalized "Plan B" which was submitted to them.

When they were able to finally get back to Riva Richmond of Dow Jones last night at 11:03pm with a response to her question about their reaction to "Plan B," they stated that the company has:

"a clear strategy to create shareholder value," through aggressive pursuit of its ongoing efforts to improve its ability to make money from search advertising, expand its lead in display advertising and secure leads in emerging areas like social media, video and mobile services.

"Under Terry Semel's leadership over the past five years, Yahoo! has achieved tremendous growth, consistent profitability and impressive returns for shareholders, with our stock price rising four fold, " she said. "As the Internet continues to grow and evolve rapidly, Yahoo! is in a strong competitive position to be a leader in this transformation and to capitalize on the huge growth opportunities ahead for the Internet. We intend to do just that."

Yahoo!'s stock price is up 4 times from its $7 all-time low. However, that low was hit under Mr. Semel's leadership. To be completely accurate, Yahoo! should acknowledge that, from Mr. Semel's May 1, 2001, start date, Yahoo!'s stock is up 229% through yesterday's close.

Here's an excerpt from the finalized "Plan B" on why that 229% is not acceptable, given what return Yahoo! shareholders should have received:

Terry Semel and his defenders will argue that Yahoo!’s stock price has gone up 227% since his start date of May 1, 2001 through today. However, if you properly analyze his tenure, there have been three distinct periods:

May 2001 – December 2002: Yahoo! drops 7% in value.

January 2003 – December 2004: Yahoo! grows by 355% in value.

January 2005 – Present: Yahoo! drops 14% in value.

There has only been one period in which Yahoo!’s valuation has increased under Terry Semel’s watch and we would argue that this had to do with a general recovery in the Internet Advertising market, which benefited Yahoo! and its two main rivals – Google and Microsoft – during this time. The rising tide lifted all boats/companies which were dependent on the ad market for the majorities of their revenues. As Yahoo! also had amassed enough cash before Mr. Semel’s arrival, it had the fortitude to go through the Internet Advertising drought which claimed the lives of many pre-Bubble competitors (e.g., Excite, Lycos, etc.). The only credible remaining search players post-Bubble were Yahoo!, Google, and Microsoft and advertising dollars could only go to these three players after the general market recovery began to happen. Yahoo! benefited from this rising tide (especially in display ads), for a while.

Yahoo!’s market share has been flat and steadily eroding over the past 4 years, while Google’s has dramatically accelerated. Yahoo! had a 28.9% share in February 2003 (according to Neilsen NetRatings[10]), compared to 29.5% for Google. However, Yahoo!’s share had dropped to 19.5% as of December 2006, and Google’s had increased to 65.4% (according to Bank of America Equity Research). The total ad market has increased from $1.4B in 2002[11] to $15B annually today (and growing at 50% per annum)[12]. Had Yahoo!, under Terry Semel, been able to grow its share to even 30% today, Yahoo! shareholders would have received an additional $1.6B in revenues last year – or 25% higher than their reported $6.4B in revenues, but still well below Google’s $10.6B in revenues last year.

The bottom line is that – in the most relevant and direct comparison to its arch-rival, Google – since Google’s IPO in August 2004 through today, Google’s stock price is up 336% versus Yahoo!’s stock price being up only 16%. Google has grown its shareholder value 21 times more efficiently than Yahoo! over this time period, when the Internet ad market has been booming. We don’t believe that any CEO should keep his/her job when your #1 competitor is 21 times as successful as you over an extended period of time.

Conclusion: Yahoo!’s board needs to immediately remove Mr. Semel – who is 64 – and begin a search process to find a new Chairman and CEO. This Chairman and CEO search should examine all qualified internal and external candidates.

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Yahoo Shareholders Submit "Plan B"

From yesterday's BusinessWeek.com /AP by Riva Richmond of Dow Jones:

Eric Jackson, the minor Yahoo Inc. shareholder who has been leading a Web effort to organize dissident investors, on Friday submitted the group's strategic "Plan B" for the company while also nominating himself to the board.

Jackson, who owns only 45 Yahoo shares, said he delivered the plan to Yahoo and intends to present it at the company's annual meeting in May. He also submitted a formal request to have his name added to the slate of potential directors up for vote at that meeting. Yahoo didn't immediately respond to a request for comment.

Using community-building tools that have grown popular on the Web, Jackson has assembled a group of shareholders -- who together own 911,666 Yahoo shares worth about $29 million -- to push for the plan. His organizing drive began in early January and has employed a blog, YouTube video appeals and a wiki, a collaborative Web site that allows supporters to take part in creating the alternative strategic plan.

Jackson said he has lobbied half of Yahoo's largest institutional holders to join the group.
"While none will publicly support our Plan B, they all have vowed to review it thoroughly and vote independently," Jackson wrote on his Breakout Performance blog Friday.

Jackson announced the finalized plan online beside a picture of Martin Luther King Jr. delivering the "I Have a Dream" speech. In a YouTube video, he promised to "campaign" for the plan by using the Web, since he doesn't have the funds to wage a traditional proxy fight, which he said would cost $200,000.

"I'll be kissing some babies. I'll be kissing some gray-haired money managers," Jackson said.

The group's nine-point plan calls for Terry Semel to be replaced as chairman and chief executive, citing "strategic missteps" that include his failure to acquire Google Inc. in 2002. The plan also faults Semel for loss of search-market share to Google and outsized compensation despite a 14 percent share-price decline since January 2005.

The plan also calls for the ouster of six other directors, the shuttering of Yahoo's media group and Los Angeles offices, additional investment in technology research and development, reduced product overlaps, pay-for-performance compensation for managers, stepped-up stock buybacks, a cash dividend, and elimination of antitakeover measures.

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Yahoo Gets a Copy of Jackson's Plan B

From yesterday's Globe & Mail and WebProNews by Mathew Ingram. It's also on Mathew's blog.

Like many shareholders of Yahoo — whose stock has climbed somewhat in the past few months, but is still well below where it was at the beginning of last year — blogger and management consultant Eric Jackson has been less than pleased with the company’s performance over the past year or so.

Although the Internet “portal” and search company has finally rolled out enhancements to its search-related advertising system, in an attempt to compete with the more successful platform run by you-know-who (hint: it starts with a G), Yahoo is still seen by many as lagging when it comes to its online strategy, or perhaps lacking one altogether. But rather than just complain, Mr. Jackson wrote a blog post back in January in which he tried to rally other disgruntled shareholders to his cause.

He described a refocused strategy for Yahoo that he called Plan B (including the removal of Terry Semel as CEO), and posted a video of himself outlining the idea to both his blog and to YouTube. As he put it in his original post

“Yahoo! is drifting; and its board and management have been too slow to act to this fundamental problem. As shareholders, we don’t have to sit by and watch this. Activist Investing has principally been the domain of hedge funds — well, no longer. With the help of the web, blogs, and wikis, I’m asking all current and future retail investors in Yahoo! to join me in pushing for a change.”

Eric’s campaign has been written about at TheStreet.com and the Internet Outsider blog, which belongs to former Wall Street technology analyst Henry Blodget, as well as Red Herring magazine.

And over the past couple of months, he has gotten a substantial amount of support from other Yahoo shareholders, including a couple of fairly large institutional shareholders whom he says would rather remain anonymous. In all, he says he has $29-million worth of Yahoo stock behind him, and recently filed the required papers to be nominated for the company’s board of directors.

“Some have told me I will need $200,000 to run a “proxy contest” to get elected to the Yahoo! board and — even with that — the odds are stacked against us, as most institutional shareholders tend to be “pro-management,” he says on his blog. “I don’t have $200,000, but I have a love for Yahoo!, the great employees who work there, and we have a plan that has merit — thanks to your input.”

Best of luck, Eric.

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Finalized "Plan B" Sent to Yahoo! Today

Today, I submitted a finalized version of our "Plan B" for Yahoo! to their Corporate Secretary as nine points of business that I will ask to bring forward at this May's Yahoo! annual meeting of shareholders.

As you know, on January 7th, I first asked fellow Yahoo! shareholders to contribute your ideas towards a "Plan B" that we could present as an alternative to Yahoo!'s Board, Management, and Shareholders. You have responded with very thoughtful and creative advice, as well as with your support of the Yahoo! common shares you own.

I have spoken to half of Yahoo!'s largest institutional holders since then and, while none will publicly support our "Plan B," they all have vowed to review it thoroughly and vote independently. All acknowledge that they are aware that Google has performed 21 times as well as Yahoo! since Google's August 2004 IPO (+336% vs. +16%).

As of this morning, our group of stockholders collectively owns 911,666 shares worth $29MM. We aim to grow that group between now and the May annual meeting.

Today, I also put my name forward to the Yahoo! Corporate Secretary to be included on the slate of possible directors to be elected at the annual meeting by shareholders. I am running on this "Plan B" and because of your support.

Some have told me I will need $200,000 to run a "proxy contest" to get elected to the Yahoo! board and -- even with that -- the odds are stacked against us, as most institutional shareholders tend to be "pro-management." I don't have $200,000, but I have a love for Yahoo!, the great employees who work there, and we have a plan that has merit -- thanks to your input. We'll see what happens.

Thanks again for your support. Here's the plan....

Finalized Version of "Plan B":

1. Terry Semel should be Immediately Replaced as Yahoo!’s Chairman and CEO

We believe that Yahoo! requires a new Chairman and CEO and Terry Semel no longer deserves these key two jobs.

During his tenure, Terry Semel has made the following strategic missteps:

· Failing to buy Google in 2002. Mr. Semel claims that he could have done this in 2002 for $3B[1]. It would have been a bargain, compared to Google’s current $144B market capitalization today.

· Destruction of Yahoo! Shareholder Value in Past 2 Years. Yahoo!’s stock price is down 7% for the past 2 years, compared to Google’s 151% increase and NASDAQ’s 20% increase over that same time period. This decrease for Yahoo! still includes the 14% increase in its stock price since our “Plan B” campaign of shining a light on Yahoo!’s underperformance which began on January 7th, 2007.

· Continued Loss of Share in Search. While Yahoo! has hastily pushed out the new Panama platform in the last month, partly in response to criticism from our stockholder group and other critics, there is no denying that it has lost critical momentum and share in the battle for search advertising dollars. In fact, according to numbers from Banc of America Analyst Brian Pitz, Yahoo! lost share faster than Microsoft in the last quarter and year vis-à-vis Google.[2] Even with a better ad platform running, more and more users are turning away from Yahoo! for their search needs.

· Costly creation of Yahoo! Media Group and Burbank Campus. This entire investment has been a write-off for Yahoo!’s shareholders. Lloyd Braun was hired to lead this group in November 15, 2004.[3] The company announced it was setting up stakes in Burbank on January 15, 2005.[4] Braun left Yahoo! on December 6, 2006.

· Missing the Need to Overhaul the Overture Platform at a Critical Time in its Drive to Compete with Google. According to Fred Vogelstein’s Wired article last month: “When Yahoo decided it was going to buy Overture in 2002, Overture dominated search-related advertising; its revenue was two times Google's. By the time the deal was actually announced in 2003, the two companies were neck and neck. Two years later, Google's revenue was 2.5 times Overture's.”[5]

· Failing to buy YouTube in 2006. Google purchased this in late 2006 and Yahoo! has yet to define a credible video offereing.

· Failing to buy MySpace in 2005. MySpace recently surpassed Yahoo! for total page views.[6]

· Outsized Compensation for Small Shareholder Return. Mr. Semel’s first 4 years’ total compensation was $258.29MM[7]. In 2005, he received $56.8MM in compensation[8]. According to the 2006 proxy, Mr. Semel had $235MM in unexercised stock options, for a total of $550MM in total compensation, to date.[9]

Bob Nardelli started as CEO of Home Depot on December 1, 2000, and collected approximately $300MM in compensation for his 6 year tenure with a $210MM severance package. Thus, his combined compensation for his time at Home Depot was $510MM. Terry Semel is already ahead of Mr. Nardelli, before mr. Semel receives any severance/retirement package.

Last June, Yahoo!'s compensation committee set Mr. Semel's annual salary to $1 for the next 3 years. However, it included an annual grant of 1MM shares (which would amount to approximately $30MM at today's stock price) with further options that can be exercised above $31. A guaranteed $30MM a year is not the same as being paid $1.

Terry Semel and his defenders will argue that Yahoo!’s stock price has gone up 227% since his start date of May 1, 2001 through today. However, if you properly analyze his tenure, there have been three distinct periods:

May 2001 – December 2002: Yahoo! drops 7% in value.
January 2003 – December 2004: Yahoo! grows by 355% in value.
January 2005 – Present: Yahoo! drops 14% in value.

There has only been one period in which Yahoo!’s valuation has increased under Terry Semel’s watch and we would argue that this had to do with a general recovery in the Internet Advertising market, which benefited Yahoo! and its two main rivals – Google and Microsoft – during this time. The rising tide lifted all boats/companies which were dependent on the ad market for the majorities of their revenues. As Yahoo! also had amassed enough cash before Mr. Semel’s arrival, it had the fortitude to go through the Internet Advertising drought which claimed the lives of many pre-Bubble competitors (e.g., Excite, Lycos, etc.). The only credible remaining search players post-Bubble were Yahoo!, Google, and Microsoft and advertising dollars could only go to these three players after the general market recovery began to happen. Yahoo! benefited from this rising tide (especially in display ads), for a while.

Yahoo!’s market share has been flat and steadily eroding over the past 4 years, while Google’s has dramatically accelerated. Yahoo! had a 28.9% share in February 2003 (according to Neilsen NetRatings[10]), compared to 29.5% for Google. However, Yahoo!’s share had dropped to 19.5% as of December 2006, and Google’s had increased to 65.4% (according to Bank of America Equity Research). The total ad market has increased from $1.4B in 2002[11] to $15B annually today (and growing at 50% per annum)[12]. Had Yahoo!, under Terry Semel, been able to grow its share to even 30% today, Yahoo! shareholders would have received an additional $1.6B in revenues last year – or 25% higher than their reported $6.4B in revenues, but still well below Google’s $10.6B in revenues last year.

The bottom line is that – in the most relevant and direct comparison to its arch-rival, Google – since Google’s IPO in August 2004 through today, Google’s stock price is up 336% versus Yahoo!’s stock price being up only 16%. Google has grown its shareholder value 21 times more efficiently than Yahoo! over this time period, when the Internet ad market has been booming. We don’t believe that any CEO should keep his/her job when your #1 competitor is 21 times as successful as you over an extended period of time.

Conclusion: Yahoo!’s board needs to immediately remove Mr. Semel – who is 64 – and begin a search process to find a new Chairman and CEO. This Chairman and CEO search should examine all qualified internal and external candidates.

2. Terry Semel, Robert Kotick, Roy Bostock, Ron Burkle, Eric Hippeau, Arthur Kern, and Gary Wilson should be Immediately Replaced on Yahoo!’s Board of Directors.

Terry Semel ultimately reports to Yahoo!’s board of directors. The board must be held accountable for the numerous missteps outlined above. Of the 10 directors, we believe 7 should resign or Yahoo! shareholders should withhold votes for them at Yahoo!’s 2007 annual meeting of shareholders.

We are in favor of only Jerry Yang (a Yahoo! co-founder), Ed Kozel, and Vyomesh Joshi returning. The latter two recently purchased shares directly in Yahoo!, while the other Yahoo! directors have only exercised stock options of late.

3. Shutter the Yahoo! Media Group and campus in Los Angeles.

The Yahoo! Media Group has been a failure. There are no meaningful outputs from the group to speak of which have had any positive shareholder value-creating impact. Yahoo! shareholders should not incur additional investments in this group and repatriate key employees back to Sunnyvale, while eliminating other positions.

4. Make additional R&D investments in the Technology Group.

"Plan B" is about accountability to Yahoo! shareholders. The last two years have not delivered the appropriate value to shareholders compared to Yahoo!'s competitors. Partly, this is due slowness to respond in the technical area of the business. While we continue to think that the company has some of the most talented engineers in the tech world, we believe that improvements need to be made within the Technology Group. Cost savings from shuttering Yahoo! Media Group and other internal efficiencies (see next point below) should be plowed back into R&D investment in the underlying Yahoo! Technology Group.

5. Reduce Overlapping Internal Divisions within the Company.

The Peanut Butter Manifesto[13] was one of the first internal recognitions that more efficiencies could be created within Yahoo! from streamlining the various groups. The del.icio.us group (coming from an external acquisition) is still a distinct group from the home-grown MyWeb. Flickr (another external acquisition) is still a distinct group from the original Yahoo! MyPhotos group. No justification can be made from keeping them as separate internal groups. This must be corrected immediately to improve the profitability of the organization. It would also help to clarify who, within Yahoo!, has distinct ownership and accountability for key deliverables – most notably as head of the Audience Group.

6. Institute a ‘Pay-for-Performance’ Plan for all Yahoo! Management.

At the same time as the new CEO is hired, the Yahoo! board should introduce a ‘pay-for-performance’ plan for all Yahoo! management. Bonuses should be tied to preset goals for increases in revenues, cash flow, and EPS.

7. Step up the Pace of the $3B Stock Repurchase Plan Announced in October 2006.
In October 2006, in conjunction with its disappointing Q3 earnings, Yahoo! announced that its board had authorized a $3B stock repurchase over the next 5 years.[14] Yahoo!'s stock price bottomed out this same day at just under $23. The stock is up over 14% since we first announced our "Plan B" for shareholder value creation on January 7, 2007. We believe that there is considerable upside in the company's valuation – especially if the points in this plan are enacted. Therefore, we strongly wish to see evidence that the board of directors is accelerating the share repurchase now, rather than when the stock increases in value substantially further months down the road.

8. Begin a Modest Cash Dividend Immediately.

Fast-growing companies like Yahoo! typically pay no dividend, in favor of spending all cash on internal growth purposes (e.g., R&D). However, examples of tech companies growing and paying a dividend include National Semi, TI, and HP. Yahoo! needs to use its $3B cash position wisely to effectively compete and succeed for the long-term. Yahoo! should introduce an immediate annual dividend of 5 cents a share, which would only amount to $40MM a year (therfore, not inhibiting the company's ability to compete effectively). More important than the cash to shareholders (which does increase value in and of itself), the dividend would be an additional discipline to Yahoo! management to spend its cash wisely. It would also symbolize management's confidence in the business, moving forward, that it will plan for and can sustain this dividend to shareholders.

9. Remove Anti-Takeover Provisions which are not Shareholder-Friendly.

In the most recent Yahoo! 10-Q filing with the SEC[15], the final Risk Factor facing the company cited is: “Anti-takeover provisions could make it more difficult for a third party to acquire us.” The filing goes on to detail how the board of directors can thwart a takeover of the company by diluting shareholders, if necessary. These anti-takeover provisions are not shareholder-friendly. They do not serve shareholders' interests, but management's. They should be swept aside immediately.

[1] http://www.newyorker.com/videos/060511onvi_video_semel
[2] According to Pitz: “In December 2006, worldwide search query share for Google was 65.4% (+51 bps M/M, +294 bps Q/Q, +647 bps Y/Y), compared to Yahoo!’s search share of 19.5% (+24 bps M/M, -140 bps Q/Q, -167 bps Y/Y) and Microsoft’s share of 7.9% (-29 bps M/M, -71 bps Q/Q, -155 bps Y/Y).”
[3] http://yhoo.client.shareholder.com/press/ReleaseDetail.cfm?ReleaseID=147133
[4] http://news.com.com/Yahoo+heads+for+Hollywood/2100-1027_3-5550361.html
[5] http://www.wired.com/news/wiredmag/0,72497-3.html?tw=wn_story_page_next3
[6] http://gigaom.com/2006/12/11/report-myspace-passes-yahoo-in-page-views/
[7] http://www.forbes.com/lists/2006/12/XC25.html
[8] http://news.zdnet.com/2100-9588_22-6079650.html
[9] http://www.sec.gov/Archives/edgar/data/1011006/000104746906005177/a2169174zdef14a.htm
[10] http://www.metricsmarket.com/metrics/searchengines.html
[11] http://www.businessweek.com/magazine/content/03_12/b3825085_mz063.htm
[12] http://www.wired.com/news/wiredmag/0,72497-0.html
[13] http://online.wsj.com/public/article/SB116379821933826657-0mbjXoHnQwDMFH_PVeb_jqe3Chk_20061125.html
[14] http://online.wsj.com/article/SB116109591333995174.html?mod=yahoo_hs&ru=yahoo
[15] http://www.sec.gov/Archives/edgar/data/1011006/000110465906071213/a06-21898_110q.htm#Item1a_RiskFactors_030032

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Why Brickhouse Will Work Where Others Have Failed

Corporate history is rife with examples of how internal "skunkworks" have failed miserably in creating innovations that have translated into huge profits for the corporate "mothership" later on. The best example is likely Xerox PARC.

Robert Burgelman of Stanford has studied and written eloquently and convincingly about how to avoid the trap of bureaucracy causing this (at GE and others).

Brad Horowitz (pictured above) and Caterina Fake of Yahoo! have decided to step into the potential innovation minefield with the recent launch of "Brickhouse" whose purpose is to create great new ideas that hopefully turn into winning services for Y! They've wisely chosen a physically separate locale from the Sunnyvale corporate complex in gritty downtown San Francisco and eschew all reminders of the purple-and-gold brand from which they came and to which the fruits of their labors will return to. They aim to let a 1000 web services bloom and see what sticks to the wall.

What's new about "Brickhouse" compared to Xerox PARC and other corporate innovation initiatives is how quickly and cheaply they can test new services with their audiences. It would be like NBC Universal throwing up 1000 pilots for review/comments and seeing which are future "Lost"s and which are future stinkers (that's not a bad idea and I'm sure we're not far away from that). Corporate bureaucracy and so-called internal experts won't get a vote; users will. And, it won't be a simple "yes/no" but -- more likely -- a dialogue helping further improve the "Pipes" of the world.

Horowitz and Fake deserve credit for being among the first within many relevant corporations to recognize this and capitalize on some trends coming together to easily allow for this testing. Let's now see what they come up with and which other companies are next to follow.

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Sue Decker's First Act in her new Role

As reported yesterday in TechCrunch and elsewhere, Sue Decker has sent out her new Org Chart/Org Design for the newly created Advertising Group which she now heads up (in addition to her CFO duties until Yahoo! hires her successor).

The email is long and detailed. Mike Arrington complained that there was too much "corporate-speak" in it. But it is polished, thorough, and politically sensitive. So, my congratulations to Sue on this initial step.

My biggest two suggestions for her continued leadership development is:

(1) Watch the acronyms and the over-referencing to the various Yahoo! departments. Sue, as indicated in her memo but also in the last analysts' call, is very bright and moves at a fast pace. She has a tendency to fall into over-using the acronyms and having listeners (like Arrington) get lost with the references to the various different Yahoo! groups. She always needs to be clear that she's explaining what the various groups do and how they are delivering value to Yahoo!'s customers/users/shareholders, so that we all understand it.

(2) Slow down. Sue speaks very quickly. This can accentuate issue 1 above. She needs to slow down to more effectively communicate.

She will obviously be judged over the coming months for her ability to have Advertising deliver the goods. I predict she will be successful.

Her memo demonstrates what's lacking in the Audience group without a leader in place. However, Yahoo! is better off in the long-run to take the time to find the right person rather than have had Dan take the spot. I hope they'll announce someone very soon.

I would finally encourage Sue to consider giving up her board seats with Intel and Costco. While they signify how highly regarded she is by these two companies, as a Yahoo! shareholder, I don't understand where she finds the time to effectively do her new job, still do her old job, and also do the paperwork required to sit on those two boards. Yahoo! and its shareholders would be better off if Sue Decker had one job and could focus solely on that.

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Why Smart Swedish Executives Fail

Why do smart executives fail? It's a question dealt in some detail by Dartmouth Tuck School Professor Sydney Finkelstein (who is also a business partner of mine) in "Why Smart Executives Fail."

He recently received some great coverage in a Swedish business periodical. My Swedish is a little rusty, but I know we have some readers from Sweden, so thought I would provide a link to the article.

To read the full article, in Swedish, go here.

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Smart Leadership: The Key to Breakout Strategy

Breakout Performance comes from organizations who have smart leadership, smart strategy, and smart internal processes (including culture, structure, and communication). My partner, Dartmouth Tuck Professor Sydney Finkelstein, just published a great book diving into how to design Breakout Strategy and execute in order to deliver sustainable double-digit growth. Breakout Strategy is co-authored with Professors Charles Harvey and Thomas Lawton and is available for purchase here.

Without the right leadership, no strategy will be successful. Therefore, Syd has graciously made the book's ninth chapter -- specifically on the keys to smart leadership -- available for Breakout Performance readers.

Click on the following link to read the chapter.

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Raising Women to Be Leaders

From Monday's Wall Street Journal:

Raising Women to Be Leaders

The Four Sullivan SistersLearned to Work Early, Aim High and Try Again

February 12, 2007; Page B1

Denise Sullivan was nine years old and her sister Maggie was eight when they organized their first carnival to raise money for muscular dystrophy. They mobilized friends on their block to build game booths in their backyard in Elberon, N.J. They rode their bikes to other neighborhoods to post signs advertising the carnival and collected used toys for prizes. One year, they raised $25, charging a penny a game.

"We discovered we liked handling money and liked being in charge," says Maggie.

They have been bouncing business ideas off one another ever since, handling more and more money as they have taken charge of bigger and bigger enterprises. Denise Sullivan Morrison, 52 years old, is president of Campbell USA at Campbell Soup Co., having advanced through a variety of high-octane jobs at Nestlé SA, Nabisco, Kraft Foods Inc. and other food giants. Maggie Sullivan Wilderotter, 51, is chairman and CEO of Citizens Communications Co., a $2 billion telecommunications company.

Their two younger sisters also are executives. Colleen Bastkowski, 45, is a regional vice president of sales at Expedia Inc.'s Expedia Corporate Travel. Andrea Doelling, 42, a champion horse jumper now devoting time to equestrian competition, most recently was senior vice president of sales at AT&T Wireless.

It is rare for four brothers to achieve such levels of success. The fact that they are sisters is striking. Half of all managers in the U.S. are female, but most are stuck in midlevel staff jobs. In senior posts, men outnumber women by almost six to one.

The Sullivan sisters, as they were known growing up, beat these odds, in large part because of their upbringing. Their father, an AT&T Inc. executive, wanted to share everything he knew about business with his girls, including talking to them, while they were still in grade school, about setting profit-margin goals. Their mother taught them that ambition is a part of femininity.

Dennis Sullivan, a Korean War veteran who started his career at New Jersey Bell, expected to raise at least one son. When he had four daughters, he imbued them with his intense work ethic and encouraged them to be independent and determined, and to cultivate big goals. "He didn't have sons to mentor so he was stuck teaching us," says Maggie.

He brought home models of the Princess Trimline phone when it was being developed and talked about marketing. He took the girls to his office decades before the launch of "bring your daughters to work day." And he showed, through his own climb, how getting ahead requires changing jobs frequently to gain broad experience. From New Jersey Bell, he moved to New York Telephone, then to AT&T, back to New York Telephone and AT&T, to Ohio Bell, to AT&T again, and finally to Cincinnati Bell, where he was chief financial officer.

"I tried to inculcate them with what the business world is like -- how products get launched, customers sampled -- and about all the interesting people I met, and how they could be part of that," says Mr. Sullivan. "I'd ask them what their goals were and when they told me, I'd add a few more to their list."

Mr. Sullivan told each of his daughters to read at least one book a week and then write a report about it. He also expected them to get A's in school. When President Kennedy promoted the Royal Canadian Air Force fitness regimen, he woke his family at 6 a.m. to exercise together. " 'Rise and shine,' he'd shout to us and we'd all have to do leg lifts," says Denise.

Connie Sullivan, his wife of 54 years, was equally disciplined. A self-professed perfectionist who still wakes up at 4:30 every morning, she designed her daughters' Halloween costumes by August each year, dressed stylishly and enjoyed decorating her home. But she wasn't a traditional housewife. She became a Realtor when her youngest daughter started school and soon earned a spot in her employer's million-dollar club -- selling $28,000 homes. "Money was tight then," she says, and she was able to boost her family's income.

The Sullivans expected their daughters to choose activities they liked and to figure out on their own how to excel at them. Aim high, they said, and if you don't get what you want, analyze what went wrong and try again.

When Denise, the eldest sister, didn't make her high-school cheerleading team at 14, she quickly set her sights on becoming a baton twirler in the marching band. A teacher tried to dissuade her, saying she didn't walk gracefully. But Denise talked to her mother and concluded, "I think what the teacher is saying is I'm a little pigeon-toed," recalls Connie Sullivan.

Denise worked to correct the problem by taking long walks. She became captain of the team and the first twirler in her school to perform with a fire-lit baton. Her mother worried she might get hurt, but instead of stopping her, sewed her a fireproof twirling outfit.

Maggie, "the one who was always pushing the envelope," she says, was elected to student government and raised money for community causes. In ninth grade, she was summoned to the principal's office to take a call from the White House. An assistant to President Nixon told her the president appreciated her invitation to a local benefit for Vietnam Veterans but couldn't attend. "Isn't he at least going to pay for the dinner tickets I sent?" Maggie asked. The president's check arrived the next week.

Several years later, when Andrea asked her parents to buy her a horse, her father -- who was being transferred from Cleveland back to New Jersey -- told her to figure out what that would cost. Andrea, who was 13, called horse breeders, trainers and moving companies, and concluded it would be most economical to buy a horse in Ohio and transport it east in a van owned by a Cleveland race track. She showed her father her cost analysis -- and got the horse.

By then, their father was being transferred frequently for work. Colleen attended three high schools and learned to make new friends quickly by developing a unique sense of humor. She created her own stand-up comedy routine. "I learned to not get upset or bothered by change and to be able to adapt to new situations," she says.

Wherever they were, the sisters had to earn their allowance. Every Saturday, each chose a slip of paper from a big glass jar their parents called "the job jar," on which was written a chore: washing and drying the dishes, for example, or shoveling snow. They could negotiate with one another and swap chores, but had to do something. As teenagers, they also found paying jobs.

The teamwork their parents expected at home evolved into a support network, despite their competitiveness with each other at times. "Sure we fought, sometimes like cats and dogs, but we didn't float in the same circles, so we could give each other a different perspective," says Maggie.
When their younger sisters started working, Denise and Maggie encouraged them to take jobs in sales, where individual performance is quantifiable. Colleen and Andrea both advanced in sales at AT&T and AT&T Wireless. Colleen sought her sisters' advice about her compensation contract when she was hired at Expedia.

"We call ourselves the Network because we each have different skills that we draw on," says Colleen, who calls Andrea every day and usually talks with her older sisters once a week. "Denise is the strategist, Maggie the networker, Andrea the communicator and I'm the competitive one," says Colleen. She started out as a secretary at AT&T. When given a chance in sales, she brought in so many new accounts she was promoted to management.

Denise and Maggie were "the pioneers who paved the way for us," says Andrea. They were among the first generation of women to seek management jobs. Both went to Jesuit colleges -- Denise to Boston College and Maggie to Holy Cross. Both worked part time to help pay their tuition and married soon after they graduated. They chose different business paths: Denise took a sales job at Procter & Gamble Co.'s paper-products division in Boston and Maggie accepted an accounting job at a start-up in California. Both were often the only women at business meetings in the late 1970s.

When Denise became the first woman in her P&G division to become pregnant, her boss warned her she would be fired if she didn't return from maternity leave in six weeks. She tried to humor him, saying, "Just pretend I broke a leg and can't walk around the stores for a while."

She never tolerated being held back. When her husband got a job in New York, Denise asked for a transfer within P&G and was told she would have to take a lower-level position -- even though she was leading her division's top sales team. She declined and found a better job at PepsiCo Inc. "I learned then to manage my own career -- and that loyalty to people counts more than loyalty to any one company."

Maggie had an easier start in Silicon Valley's start-up culture. She followed her husband, an Air Force pilot, to Sacramento and joined Cable Data, a software company with 300 employees. Founder Bob Matthews went out of his way to advance and retain women, offering Friday night baby-sitting services, free dry cleaning and other perks.

In her 12 years there, Maggie held 14 different jobs, including a stint as manager of regional operations. The job gave her profit-and-loss responsibility, "something a lot of women never get," she says.

Always pushing to expand her business network, Maggie went after a seat on the National Cable Television Association's board. Ten board seats were held by CEOs of the top cable companies, her biggest customers. Two seats were reserved for vendor companies such as Cable Data.
Maggie called every vendor to try to get votes -- just as she had done in high school when she called every attorney in her local phone book until she found one willing to hire her as a typist.
She lost her first attempt to get on the board but made a successful bid the following year. Her fellow directors were shocked, she says. "I was a vice president of a tiny company and this was a CEO club," she says.

She and Denise supported one another's decision to keep working after they had children, agreeing they didn't want to quit careers they loved. When Maggie was nine months pregnant with her first child, she jumped on a plane because a customer refused to sign a contract unless she was there in person. When her two sons were young, she and her husband, who bought a vineyard after retiring from the Air Force, agreed he would be the one to stay close to home.

Denise divorced and remarried in her early 30s. She and her second husband, who also has a daughter, blended families and shared parenting. All the while, she analyzed her career moves to see what experience she needed to advance. She kept a chart, recording her tenure in each job, how much money she was responsible for, how many people she supervised and what she had accomplished.

When her husband told her he wanted to run a fruit farm in Bakersfield, Calif., Denise, who had joined Nestlé, told her boss, "The good news is I want to stay at Nestlé and the bad news is I have to move to Bakersfield."

"Where's Bakersfield?" he asked.

She reminded him that Carnation, which Nestlé had just acquired, had an ice-cream plant in Bakersfield. She set up her office there and made it Nestlé's national sales office for frozen/chilled foods.

But it took close to 20 years before Denise became general manager in charge of a business -- and she had to create the business she ran. A top sales executive at Nabisco by then, she wrote a business plan proposing a single-serve line of snacks. Former Nabisco CEO Jim Kilts liked the plan and put Denise in charge of what became known as the Down the Street devision. This single-serve snack division is now run by Kraft, which acquired Nabisco.

While Denise preferred the reach of big corporations, Maggie felt less pigeonholed and able to advance faster in smaller companies. "I didn't get stuck in any one area like finance or sales, which would have driven me crazy, and I could skip a few rungs at a time," says Maggie. So, in the late 1990s, she became CEO of Wink, a small start-up that was 10% owned by Microsoft Corp. But when Wink was sold, she was recruited by Microsoft CEO Steve Ballmer to expand the computer giant's government and educational markets.

She stayed just two years, then in 2004 once again was helped by her contacts to jump to the corner office at Citizens, based in Stamford, Conn. She knew five of Citizens' directors because she had served on a board with them a decade earlier. Since taking charge, she has helped to recruit five women and an African-American to what had been an all-white, all-male board, "so it better reflects our customers," she says.

She and her husband now keep homes on both coasts. The Sullivan sisters all are married to men who accommodate their wives' careers and don't seem threatened by their spouses' achievements or job demands. Denise followed her husband to California, but he followed her back to the East Coast when she joined Nabisco. Colleen's and Andrea's spouses also moved with their wives as promotions took them around the country. Neither couple has children.
When the sisters are traveling for business, they sometimes stay at each others' homes. Denise is based in New Jersey; Maggie commutes between Connecticut and Northern California, where Colleen also lives; and Andrea is in Denver.

In the workplace, the sisters have had to outperform men, take jobs men didn't want and draw on the perseverance they learned as children. Andrea's chance to be a regional sales manager took her to Birmingham, Ala., when it was AT&T Wireless's worst-performing region. Three prior male managers had failed there. She went on sales calls with employees and purchased a ship captain's bell for the office. "Anytime anyone sold something, they rang the bell -- and even though it seemed hokey at first, it made people feel like winners," she says. In 10 months, the region went from last to first place.

The sisters continue to make their own opportunities, another lesson learned from their parents. When Denise was recruited to Campbell Soup in Camden, N.J., four years ago as head of global sales, she wouldn't sign on until she was assured she would soon be in line to head a big division.

Denise is now in charge of Campbell's $3 billion soup, sauces and beverage division in the U.S., the company's largest business, and her challenge is to revitalize old brands. She has reshuffled her senior team and is rolling out shopping carts of new products.

Known by some employees for having "an iron fist in a velvet glove," she never ends a meeting until her managers agree on a plan and deadlines. "I want to see volume growth in the next few weeks," she told the head of sales at a recent meeting.

What she really wants is to be CEO of a Fortune 500 company. It is a job just 10 women currently hold and one that would put her a notch ahead of Maggie, one of 23 women heading Fortune 1000 companies. "I've been preparing to run a big company all my life," says Denise.

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The Best Idea Yahoo! has had in Years: Brickhouse

Congratulations to Brad Horowitz and Caterina Fake for launching Brickhouse: the best idea Yahoo! has had over the last few years. My prediction is that it will be highly successful. We'll be watching. May the best ideas succeed. Good luck.

More on Brickhouse is here.

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What A Difference A Month Makes

A month ago, I sat down to record a message to Yahoo! shareholders. In it, I asked for your support to revise a "Plan B" to propose to Yahoo!'s Board and Management that would increase shareholder value for all.

Current and ex-Yahoo! employees, casual investors, widows, a few orphans, and several sophisticated institutional investors have responded. The pent-up frustration that Yahoo! underperforming the market for 2 years was not acceptable was finally uncorked.

We now collectively own $5MM worth of Yahoo! stock and we still believe -- as passionately as ever -- that better days lie ahead for one of the greatest companies in the world.

We're also all happy that, since our activism began one month ago, Yahoo!'s stock price is up 5.8% compared to the NASDAQ being up only 1.53% and Google being down 3.22%.

Congrats to the men and women of Yahoo! who have worked tirelessly to bring Panama onstream. You guys are the stars. However, I want to thank the "Plan B" community and say that our grassroots/netroots efforts have shone a light on problems at Yahoo! which still need to be addressed. In activist investing, sunlight is truly the best disinfectant.

One thing I've learned from this effort so far is that the best ideas trump all at the end of the day. You can have money and power, but, if you don't have the best ideas, it's difficult to refute others who do.

The best ideas for Yahoo! haven't come from me, but from our community. And that is the power that blogging/community tools/wikis gives us.

Keep up the fight for "Plan B." Our work is just starting. Keep signing up.

It's satisfying to know that the results so far are worth the effort.

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What's the Strategy Inside Yahoo!?

Time Magazine's Jeremy Caplan (and Jeff Ressner) recently profiled the latest news on Yahoo! with the full article here.

For it, Yahoo! was complicit in allowing Timothy Archibald access for some artistic signs within the Yahoo! campus (of the basketball court and sign directing the Yahooligans to the cafeteria). It's clear that there are other points Yahoo! wanted to get across in the article.

What I find discouraging as a Yahoo! shareholder are intimations in the article that Yahoo! could join forces/be bought later this year with Microsoft, AOL, or Bertelsmann. This possibility is attributed to "analysts," including blogger and commentator Paul Kedrosky and is reiterated later in the full article, and not directly to Yahoo! management. Yet, it doesn't seem to be an accident that it's there.

Of course, there's nothing wrong with increased shareholder value and one way for this to happen would be for one of these companies (or any other) to come in and pay a 40% premium to take over the company. Since proposing a "Plan B" for Yahoo! a month ago, my primary goal was to raise shareholder value for all Yahoo! shareholders.

(I'm pleased that, since the activism began --exactly one month ago today -- Yahoo!'s stock price is up 5.8% compared to the NASDAQ being up only 1.53% and Google being down 3.22%. This has more to do with Panama being rolled out sooner than anticipated than our activism itself, but it's hard to argue that our shining a light on the areas where the company can unlock value has attracted interest in how undervalued it is, given its stable of assets.)

Yet, I do have a big problem with the fact that Yahoo! (and therefore, Terry, and ultimately the Board) has failed to articulate a clear strategy about how the company will be dominant for years to come independently. Better monetizing search is not a company strategy, it's a tactic. Improving a lead in graphical ads is not a strategy, it's a tactic. Doing lots of ankle-biter acquisitions is not a strategy (although I like and use MyBlogLog, Flickr, del.icio.us.... haven't tried Bix yet, but I think Terry mentioned during the last call that it's a site that does 'ka-ro-kee'). Getting snapped up by Microsoft and assimilated into MSN is not a strategy.

I would like to hear one. Jeff Weiner has proudly stated that Yahoo! now has a mission: "Connecting people with their passions, communities and the world's knowledge." Stewart Butterfield has given this his seal of approval, because "A year and a half ago there wasn't a satisfying articulation of what the mission of the company was." I'm still waiting for the articulation for the strategy. The company, investors, and employees need one and deserve one.

Happy One-Month Birthday, 'Plan B.'

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Investor to Fill Home Depot Board Seat

Ralph Whitworth and Relational Investors were able to accomplish their goal of obtaining a board seat at Home Depot, so that they can continue to push for increased shareholder value, as reported in today's WSJ.

Investor to Fill Home Depot Seat

By ANN ZIMMERMANFebruary 6, 2007; Page A10

Home Depot Inc., in an effort to avoid a proxy battle, named activist investor David H. Batchelder to its board.

Mr. Batchelder, 57 years old, is a principal and co-founder of Relational Investors LLC, a San Diego investment fund that was a leading critic of Home Depot's performance under former Chief Executive Robert Nardelli. The new chief executive, Frank Blake, has been reaching out to investors since taking the reins of the nation's largest home-improvement retailer early last month.

In return, Relational Investors dropped a proxy battle to gain at least one board seat.
Relational Investors strongly opposed Mr. Nardelli's efforts to diversify by purchasing wholesale companies that sell building supplies. Ralph Whitworth, a Relational Investors principal and co-founder, said Home Depot should instead be focused on fixing its home-improvement stores, which have been plagued by anemic sales. Mr. Blake, while saying he intends to stay in the supply business, has pledged to make its Home Depot stores a priority.

Mr. Batchelder, who would join the Home Depot board Feb. 22, will be appointed to the company's leadership-development and compensation committee and its audit committee. In addition, Home Depot will nominate and support Mr. Batchelder or another Relational Investors recommendation to the board for each of the next three years as long as the investment fund continues to own a significant stake in the company. It presently owns about 1.3% of Home Depot's shares. In turn, Relational Investors would support each slate of directors nominated by the board.

In December, Relational Investors informed the home-improvement retailer that it planned to launch a proxy battle for at least one board seat if the company didn't form an independent committee to reassess its business strategy and management.

At the time, Home Depot said its board fully supported the company's management and business direction. On Jan. 2, Mr. Nardelli stepped down after he refused to curb his compensation package significantly. Relational Investors said at the time that Mr. Nardelli's resignation wouldn't deter it from seeking board representation.

Two weeks ago, Messrs. Batchelder and Whitworth met with Home Depot's Mr. Blake and two other board members in Los Angeles. The two sides continued to negotiate after the meeting. In exchange for Mr. Batchelder joining the Home Depot board, Relational Investors agreed to withdraw a resolution asking the company to establish an independent committee.

Relational Investors and Home Depot reached agreement on other issues. For example, when Mr. Nardelli stepped down, Home Depot said it was waiving mandatory retirement for a year for three directors who otherwise would have to step down because they are past 72 years old.
The company now has agreed to not extend their retirement past the May 2008 annual meeting, when Home Depot co-founder and board member Ken Langone will also hit the mandatory retirement age.

Mr. Batchelder is currently a director of Washington Group International Inc. and ConAgra Foods Inc.

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Inside Yahoo: Behind the Purple Curtain

Time Magazine came out yesterday with a special on "Inside Yahoo: Behind the Purple Curtain." Here is one of the articles in the special mentioning our dissident shareholder activity.

T H E B I G S E A T

Analysts expect that if CEO Terry Semel succeeds in wringing profits out of the company's new Panama advertising system, the project could be his last hurrah as leader. "Terry has no plans to leave the company and is energized about the future," says Helena Maus, Director of Corporate Communications. But others expect a change. "It looks like Sue [Decker] is going to get the prize when Terry decides to leave," says Youssef Squali, Internet analyst for Jeffries & Co. "My best guess is Terry puts Yahoo! on the growth path on the search side, sees the stock react favorably, and then he leaves. When? By the end of this year, or early next year." Dissident shareholder Eric Jackson says if the company looks beyond Decker for a leader from outside, other candidates could include Jonathan Miller, formerly of AOL, or Tom Freston, former Viacom CEO.

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Manager Shortage Spurs Small Firms To Grow Their Own

The article below is an excellent example from yesterday's Wall Street Journal on how the current and pending demographic shift is forcing middle-sized firms to take dramatic steps to deepen their management ranks for succession purposes. This is the niche advisory/consulting business Jackson Leadership has been in for 18 years. If you would like to discuss what is needed to set up your own executive development program at your firm, let's chat.

By ERIN WHITEFebruary 5, 2007; Page B1

MARSHALL, Minn. -- Kristy Griffin was a manager in a Kansas frozen-pizza factory when her bosses decided she was destined for greatness.

In 2002, executives at Schwan Food Co., maker of Mrs. Smith's pies and Red Baron frozen pizzas, invited Ms. Griffin to join an intensive development program for "high-potential" managers. Since then, she's earned her M.B.A., moved her family twice, helped engineer an acquisition, and taken posts in marketing and research, in which she'd had no prior experience.

Schwan is one of many U.S. companies paying more attention to grooming their next generation of leaders. Selected employees typically enter multi-year programs involving management classes, coaching sessions and so-called stretch assignments that throw them into big, unfamiliar challenges.

Such programs are old hat at corporate giants such as General Electric Co., PepsiCo Inc., and Bank of America Corp. Now, smaller companies, like closely held Schwan, with annual sales of about $3.5 billion, are also adopting or expanding such programs in the face of a shortage of seasoned managers.

Management consultants cite several reasons. The tight labor market puts a premium on retaining top talent and raises the cost of outside hires. And leaner corporate structures make it harder for managers to naturally hone their skills through incremental steps up the ladder; companies must instead formally teach them. Demographics play a role, too: The looming retirement of baby boomers is forcing companies to think about replacements.

"There's a huge shortage of leaders," says Ravin Jesuthasan, a managing principal at Towers Perrin, the consulting firm. For smaller companies in a fierce competitive landscape, "growth rates and expectations for growth have ratcheted up, requiring you to be much more diligent and proactive and structured in how you manage the flow of talent." Mr. Jesuthasan says that he has seen smaller companies in the energy, software, pharmaceutical and consumer-products industries begin or expand programs to identify and develop strong managers.

Schwan's program is the brainchild of M. Lenny Pippin, who in 1999 became the first outsider hired as CEO. Founded as an ice-cream delivery business in 1952 by Marvin Schwan, the company sells frozen foods to grocers and retailers such as Wal-Mart Stores Inc. and Target Corp.; to schools, hospitals and restaurants; and by delivery truck to homes. The retail business is the fastest-growing, though the home-delivery unit is larger. The company says that many customers trust the driver-salesmen so well they leave their doors unlocked.

Before Mr. Pippin arrived in 1999, the company had been run by Marvin Schwan's brother Alfred, who took over after Marvin died in 1993. Mr. Pippin, a food-industry veteran who started his career at Kraft Foods Inc., had previously been a senior executive at several family-owned businesses. At Schwan, he found employees were hard-working and loyal, but accustomed to following orders rather than innovating on their own.

Mr. Pippin set out to sharpen the management skills of Schwan employees. He also sought outside talent, though that would be a challenge. Marshall, three hours west of Minneapolis in rural Minnesota, wasn't a recruiting magnet. When Mr. Pippin first visited, he stepped off the company jet and wondered, "What on earth have I done?"

His solution was what he calls the Senior Executive Development Program. Launched in 2002, it now has about 35 participants, including Ms. Griffin. This year, Schwan plans to create a similar program for lower-level managers that would add roughly 50 others.

Participants in the senior program are thrown into new jobs, take business classes, and are given mentors and coaches for support. They're also assigned to team projects with other program members. Participants must be willing to change jobs and relocate whenever the company asks.

Mr. Pippin says the program has created a more worldly and self-confident work force. It also has developed a roster of potential future leaders -- unlike when Schwan reached outside to hire him, Mr. Pippin says. "I can go to the board, and I can talk to them about succession and the future leadership of this company for many years to come," he says. "Eight years ago, we didn't have that."

There have been bumps. Some people have dropped out or declined invitations because they didn't want to have to move. Mr. Pippin says the company initially didn't give participants enough support. A sales vice president shifted to run European operations struggled, and Schwan lost market share. When Mr. Pippin tried to move the executive into another job, he quit. "We can't put them out there without a safety net," Mr. Pippin realized. He assigned participants more mentors and coaches. He also scheduled more frequent evaluations to catch problems sooner.

Now, top executives give participants frequent feedback. For instance, two participants assigned to help launch a joint venture in Mexico met recently with chief operating officer John Beadle. Mr. Beadle, who previously ran Schwan's global retail business, asked whether the Mexican warehouse was large enough. Brian Rademacher, who has worked for Schwan for 16 years in the U.S., said the warehouse "should cover us beyond our needs" and could be expanded. Mr. Beadle also suggested smaller package sizes, because freezers in Mexican homes tend to be smaller.

The program has helped attract outsiders. Raquel Lacey Nelson spurned other offers to join Schwan after completing her M.B.A. in 2003. Even without a guarantee she would join the program, she was enticed by the prospect of rotating through different jobs. She joined the development program in December. The same week, she left a human-resources post in Marshall to manage Schwan's account with Target in Minneapolis.

When Ms. Griffin was selected for the program in 2002, she had spent 10 years climbing through operations jobs at Schwan's frozen-pizza factory in Salina, Kan., where she grew up and lived with her husband and two children. In 2003, she moved her family to Minneapolis for a job in marketing, in which she'd had no prior experience, and started studying for her M.B.A.

It was a whirlwind. At first she didn't understand the alien marketing culture, which she found more hierarchical and formal. Approving a new package design required four meetings. "I couldn't understand why," says Ms. Griffin, who is now 37 years old.

Next, she shifted to the home-delivery unit, where she was asked to improve retention of customers and salespeople. She again had to navigate a new culture, dominated by veterans skeptical of a newcomer. To gain trust and learn the business, she accompanied drivers on routes, visited their depots and attended their training sessions.

In April 2006, she moved to another unfamiliar role, as senior vice president overseeing research and development, food safety and quality, and new-product strategy. She tried to apply lessons from what worked in the home-delivery unit. Instead of imposing her own strategy, she met with managers and staffers one-on-one and in small groups. "I did not want to give everybody the impression that there's a new leader in town who's going to change everything," she says.

In addition to her regular jobs, she has also served on a special project team with about six other program members. Mr. Pippin asked the team to devise a strategy for Schwan to enter the fancy-appetizer business. The team recommended that Schwan buy a business rather create its own. In early 2006, Schwan bought Florida-based Holiday Foods, which makes the Greek spinach pie spanakopita and bacon-wrapped scallops, among other items.

Program members still serve as directors of the Holiday unit. Ms. Griffin chairs the group, giving her a look at running an entire business. "That has been the real-life model of running your own company," she says.

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