Lessons from America's Best-Run Companies

Introduction

One of the main clues to corporate excellence has come to be just such incidents of unusual effort on the part of apparently ordinary employees.

Excellent companies seem to take all sorts of special trouble to foster, nourish, and care for what we call 'product champions'-those individuals who believe so strongly in their ideas that they take it on themselves to damn the bureaucracy and maneuver their projects through the system and out to the customer.

The excellent companies require and demand extraordinary performance from the average man.

Society... is a vehicle for earthly heroism.... Man transcends death by finding meaning for his life.... It is the burning desire for the creature to count.... What man really fears is not so much extinction, but extinction with insignificance... Ritual is the technique for giving life. His sense of self worth is constituted symbolically, his cherished narcissism feeds on symbols, on an abstract idea of his own worth. [Man's] natural yearning can be fed limitlessly in the domain of symbols.

Men willingly shackle themselves to the nine-to-five if only the cause is perceived to be in some sense great. The company can actually provide the same resonance as does the exclusive club or honorary society.

Part One: The Saving Remnant

Chapter 1: Successful American Companies

An organization chart is not a company, nor a new strategy an automatic answer to corporate grief.

The crucial problems in strategy were most often those of execution and continuous adaptation: getting it done, staying flexible.

It is attention to employees, not work conditions per se, that has the dominant impact on productivity.

Innovative companies not only are unusually good at producing commercially viable new widgets; innovative companies are especially adroit at continually responding to change of any sort in their environments.

As the needs of their customers shift, the skills of their competitors improve, the mood of the public perturbates, the forces of international trade realign, and government regulations shift, these companies tack, revamp, adjust, transform, and adapt. In short, as a whole culture, they innovate.

The excellent companies were, above all, brilliant on the basics. Tools didn't substitute for thinking. Intellect didn't overpower wisdom. Analysis didn't impede action. Rather, these companies worked hard to keep things simple in a complex world. They persisted. They insisted on top quality. They fawned on their customers. They listened to their employees and treated them like adults. They allowed their innovative product and service 'champions' long tethers. They allowed some chaos in return for quick action and regular experimentation.

McKinsey 7-S framework: structure, systems, style, staff, skills, strategy, shared values

8 attributes that emerged to characterize most nearly the distinction of the excellent, innovative companies:

A bias for action

Do it, fix it, try it

Instead of allowing 250 engineers and marketers to work on a new product in isolation for fifteen months, they form bands of 5 to 25 and test ideas out on a customer, often with inexpensive prototypes, within a matter of weeks.

Close to the customer

“It's a shame that, in so many companies, whenever you get good service, it's an exception.” - Francis G. Rodgers

Many of the innovative companies got their best product ideas from customers. That comes from listening, intently and regularly.

Autonomy and entrepreneurship

“Make sure you generate a reasonable number of mistakes.” - Fletcher Byrom

Productivity through people

Every worker being seen as a source of ideas, not just acting as a pair of hands.

Hands-on value driven

Thomas Watson, Jr., said that “the basic philosophy of an organization has far more to do with its achievements than do technological or economic resources, organizational structure, innovation and timing.”

Watson and HP's William Hewlett are legendary for walking the plant floors.

McDonald's Ray Kroc regularly visits stores and assesses them on the factors the company holds dear, Q.S.C. & V. (Quality, Service, Cleanliness, and Value).

Stick to the knitting

“Never acquire a business you don't know how to run.” - Robert W. Johnson

“This company has never left its base. We seek to be anything but a conglomerate.” - Edward G. Harness

While there were a few exceptions, the odds for excellent performance seem strongly to favor those companies that stay reasonably close to businesses they know.

Simple form, lean staff

The underlying structural forms and systems in the excellent companies are elegantly simple. Top-level staffs are lean; it is not uncommon to find a corporate staff of fewer than 100 people running multi-billion-dollar enterprises.

Simultaneous loose-tight properties

The excellent companies are both centralized and decentralized. For the most part, as we have said, they have pushed autonomy down to the shop floor or product development team. On the other hand, they are fanatic centralists around the few core values they hold dear.

“Almost everybody agrees, 'people are our most important asset.' Yet almost none really lives it.” - Rene McPherson

Above all, the intensity itself, stemming from strongly held beliefs, marks these companies.

The expectation of regular contributions was different. The love of the product and customer was palpable.

Far too many managers have lost sight of the basics, in our opinion: quick action, service to customers, practical innovation, and the fact that you can't get any of these without virtually everyone's commitment.

Associated with almost every excellent company was a strong leader (or two) who seemed to have had a lot to do with making the company excellent in the first place.

Part Two: Toward New Theory

Chapter 2: The Rational Model

Whereas unionized shops with 10 to 25 employees average 15 lost time days from labor disputes per 1,000 employees per year, facilities with 1,000 or more employees lost on average 2,000 days, or a multiple of 133.

A researcher concluded recently that research effectiveness was inversely related to group size: assemble more than seven people and research effectiveness goes down. Our stories of ten-person 'skunk works' out-inventing groups of several hundred are corroborative.

He won't allow plants to run much above 1,000, principally 'because something just seems to go wrong when you get more people under one roof' - John Mitchell

The complaints against American management seem to fall into five main categories: (1) the business schools are doing us in; (2) the so-called professional managers lack the right perspective; (3) managers don't personally identify with what their companies do; (4) managers don't take enough interest in their people; and (5) top managers and their staff have become isolated in their analytic ivory towers.

So much of excellence in performance has to do with people's being motivated by compelling, simple-even beautiful-values.

Treating people-not money, machines, or minds—as the natural resource may be the key to it all.

Japanese management keeps telling the workers that those at the frontier know the business best.... A well-run company relies heavily on individual or group initiatives for innovation and creative energy. The individual employee is utilized to the fullest extent of his creative and productive capacity.

“As a regimen, as a discipline for a group of people, planning is very valuable. My position is, go ahead and plan, but once you've done your planning, put it on the shelf. Don't be bound by it. Don't use it as a major input to the decision-making process. Use it mainly to recognize change as it takes place.” - Fletcher Byrom

The numerative, analytical component has an in-built conservative bias. Cost reduction becomes priority number one and revenue enhancement takes a back seat. This leads to obsession with cost, not quality and value; to patching up old products rather than fooling with untidy new product or business development; and to fixing productivity through investment rather than revitalization of the work force.

“'Professional' management today sees itself often in the role of a judge who says 'yes' or 'no' to ideas as they come up.... A top management that believes its job is to sit in judgment will inevitably veto the new idea. It is always 'impractical.'” - Peter Drucker

“It is inherently easier to develop a negative argument than to advance a constructive one.” - John Steinbruner

Today's version of rationality does not value experimentation and abhors mistakes.

Advancement takes place only when we do something: try an early prototype on a customer or two, run a quick and dirty test market, stick a jury-rig device on an operating production line, test a new sales promotion on 50,000 subscribers.

The excellent company response to complexity is fluidity, the administrative version of experimentation. Reorganizations take place all the time. If you've got a problem, put the resources on it and get it fixed. It's that simple.

The rationalist approach does not celebrate informality. Analyze, plan, tell, specify, and check up are the verbs of the rational process. Interact, test, try, fail, stay in touch, learn, shift direction, adapt, modify, and see are some of the verbs of the informal managing processes. We hear the latter much more often in our interviews with top performers. Intel puts in extra conference rooms, simply to increase the likelihood of informal problem solving among different disciplines. 3M sponsors clubs of all sorts specifically to enhance interaction.

It turns out that the informal control through regular, casual communication is actually much tighter than rule by numbers, which can be avoided or evaded.

General Motors pioneered the idea of internal competition sixty years ago; 3M, P&G, IBM, HP, Bloomingdale's, and Tupperware are its masters today, Division overlap, product-line duplication, multiple new product development teams, and vast flows of information to spur productivity comparison-and improvements-are the watchwords.

It is true that costs of product-line duplication and nonuniformity of manufacturing procedures can be measured precisely. But the incremental revenue benefits from a steady flow of new products developed by zealous champions and the increment of productivity gains that comes from continuous innovation by competing shop floor teams are much harder, if not impossible, to get a handle on.

Business management has at least as much to do with pathfinding and implementation as it does with decision making. The processes are inherently different, but they can complement and reinforce one another.

If America is to regain its competitive position in the world, or even hold what it has, we have to stop overdoing things on the rational side.

Chapter 3: Man Waiting for Motivation

All of us are self-centered, suckers for a bit of praise, and generally like to think of ourselves as winners. But the fact of the matter is that our talents are distributed normally-none of us is really as good as he or she would like to think, but rubbing our noses daily in that reality doesn't do us a bit of good.

We are creatures of our environment, very sensitive and responsive to external rewards and punishment. We are also strongly driven from within, self-motivated.

We act as if express beliefs are important, yet action speaks louder than words. One cannot, it turns out, fool any of the people any of the time. They watch for patterns in our most minute actions, and are wise enough to distrust words that in any way mismatch our deeds.

We desperately need meaning in our lives and will sacrifice a great deal to institutions that will provide meaning for us. We simultaneously need independence, to feel as though we are in charge of our destinies, and to have the ability to stick out.

We like to think of ourselves as winners. The lesson that the excellent companies have to teach is that there is no reason why we can't design systems that continually reinforce this notion; most of their people are made to feel that they are winners. Their populations are distributed around the normal curve, just like every other large population, but the difference is that their systems reinforce degrees of winning rather than degrees of losing. Their people by and large make their targets and quotas, because the targets and quotas are set (often by the people themselves) to allow that to happen.

Label a man a loser and he'll start acting like one.

The systems in the excellent companies are not only designed to produce lots of winners; they are constructed to celebrate the winning once it occurs. Their systems make extraordinary use of non-monetary incentives. They are full of hoopla.

Mere association with past personal success apparently leads to more persistence, higher motivation, or something that makes us do better.

'In a study of school teachers, it turned out that when they held high expectations of their students, that alone was enough to cause an increase of 25 points in the students' IQ scores.'

Negative reinforcement will produce behavioral change, but often in strange, unpredictable, and undesirable ways. Positive reinforcement causes behavioral change too, but usually in the intended direction.

Positive reinforcement not only shapes behavior but also teaches and in the process enhances our own self-image.

The way the reinforcement is carried out is more important than the amount. First, it ought be specific, incorporating as much information content as possible. Second, the reinforcement should have immediacy. Third, the system of feedback mechanisms should take account of achievability. The fourth characteristic is that a fair amount of the feedback comes in the form of intangible but ever-so-meaningful attention from top management. When you think about it, with management's time being as scarce as it is, that form of reinforcement may be the most powerful of all. Finally, Skinner asserts that regular reinforcement loses impact because it comes to be expected. Thus unpredictable and intermittent reinforcements work better—the power of walking the shop floor again.

We see many evidences of the use of social comparison by the excellent companies. Among them are regular peer reviews (the mainstay of the TI, Intel, and Dana management systems); information made widely available on comparative performance (sales groups, tiny productivity teams, and the like); and purposefully induced internal competition (for example, among P&G brand managers).

Edward Deci finds that people must believe that a task is inherently worthwhile if they really are to be committed to it.

“You more likely act yourself into feeling than feel yourself into action.” - Jerome Bruner

Almost all the proprietors behaved in a tolerant fashion, but they expressed an intolerant attitude when questioned by letter.

“Doing things” (lots of experiments, tries) leads to rapid and effective learning, adaptation, diffusion, and commitment; it is the hallmark of the well-run company.

“If we hope to live not just from moment to moment, but in true consciousness of our existence, then our greatest need and most difficult achievement is to find meaning in our lives.” - Bruno Bettelheim

Without exception, the dominance and coherence of culture proved to be an essential quality of the excellent companies. Moreover, the stronger the culture and the more it was directed toward the marketplace, the less need was there for policy manuals, organization charts, or detailed procedures and rules.

In general the excellent company values almost always stress being close to the customer or are otherwise externally focused.

Whether the subjects are adults or college sophomores, they overestimate the odds of succeeding at an easy task and underestimate the odds of succeeding at a hard one.

We need to succeed and stick out-desperately-so we overestimate the possibility of doing the easy task. And to preserve face and ensure security, we underestimate the possibility of getting the difficult task done.

Even in situations in which industry economics seem strongly to favor consolidation, we see the excellent companies dividing things up and pushing authority far down the line. These companies provide the opportunity to stick out, yet combine it with a philosophy and system of beliefs that provide the transcending meaning—a wonderful combination.

Leadership is many things. It is patient, usually boring coalition building. It is the purposeful seeding of cabals that one hopes will result in the appropriate ferment in the bowels of the organization. It is meticulously shifting the attention of the institution through the mundane language of management systems. It is altering agendas so that new priorities get enough attention. It is being visible when things are going awry, and invisible when they are working well. It's building a loyal team at the top that speaks more or less with one voice. It's listening carefully much of the time, frequently speaking with encouragement, and reinforcing words with believable action. It's being tough when necessary, and it's the occasional naked use of power-or the “subtle accumulation of nuances, a hundred things done a little better,” as Henry Kissinger once put it.

“Transforming leadership”— leadership that builds on man's need for meaning, leadership that creates institutional purpose.

He is both calling forth and exemplifying the urge for transcendence that unites us all. At the same time, he exhibits almost boorish consistency over long periods of time in support of his one or two transcending values. No opportunity is too small, no forum too insignificant, no audience too junior.

“(Transforming leadership) occurs when one or more persons engage with others in such a way that leaders and followers raise one another to higher levels of motivation and morality. Their purposes, which might have started out separate but related, in the case of transactional leadership, become fused. Power bases are linked not as counterweights but as mutual support for common purpose. Various names are used for such leadership: elevating, mobilizing, inspiring, exalting, uplifting, exhorting, evangelizing. The relationship can be moralistic, of course. But transforming leadership ultimately becomes moral in that it raises the level of human conduct and ethical aspiration of both the leader and the led, and thus has a transforming effect on both.... Transforming leadership is dynamic leadership in the sense that the leaders throw themselves into a relationship with followers who will feel 'elevated' by it and often become more active themselves, thereby creating new cadres of leaders.” - James MacGregor Burns

“We have slowly discovered that our most effective goal is to be best at certain things. We now try to get our people to help us work out what these things should

be, how to define best objectively, and how to become best in our selected spheres. You would be surprised at how motivating that can be.” - James Brian Quinn

“It has been well said that the effective leader must know the meaning and master the technique of the educator.... The art of the creative leader is the art of institution building, the reworking of human and technological materials to fashion an organism that embodies new and enduring values.... To institutionalize is to infuse with value beyond the technical requirements of the task at hand.” - Philip Selznick

Part Three: Back to Basics

Chapter 4: Managing Ambiguity and Paradox

“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.” — F. Scott Fitzgerald

The main point seems to be that the simple act of paying positive attention to people has a great deal to do with productivity.

Douglas McGregor termed Theory X “the assumption of the mediocrity of the masses.” Its premises are “(1) that the average human has an inherent dislike of work and will avoid it if he can, (2) that people, therefore, need to be coerced, controlled, directed, and threatened with punishment to get them to put forward adequate effort toward the organization's ends and (3) that the typical human prefers to be directed, wants to avoid responsibility, has relatively little ambition, and wants security above all.” McGregor argued that Theory X is not a straw man, “but is in fact a theory which materially influences managerial strategy in a wide sector of American industry.”

Theory Y, by contrast, assumes: (1) that the expenditure of physical and mental effort in work is as natural as in play or rest-the typical human doesn't inherently dislike work; (2) external control and threat of punishment are not the only means for bringing about effort toward a company's ends; (3) commitment to objectives is a function of the rewards associated with their achievement—the most important of such rewards is the satisfaction of ego and can be the direct product of effort directed toward an organization's purposes; (4) the average human

being learns, under the right conditions, not only to accept but to seek responsibility; and (5) the capacity to exercise a relatively high degree of imagination, ingenuity, and creativity in the solution of organizational problems is widely, not narrowly, distributed in the population.

Organizational values and purpose are defined more by what executives do than by what they say.

Basic human needs in organizations: (1) people's need for meaning; (2) people's need for a modicum of control; (3) people's need for positive reinforcement, to think of themselves as winners in some sense; and (4) the degrees to which actions and behaviors shape attitudes and beliefs rather than vice versa.

(1) The notion of companies, especially the excellent ones, as distinctive cultures; and (2) the emergence of the successful company through purposeful, but specifically unpredictable, evolution.

“Profit is like health. You need it, and the more the better. But it's not why you exist.”

We found that companies whose only articulated goals were financial did not do nearly as well financially as companies that had broader sets of values.

We need new language. We need to consider adding terms to our management vocabulary: a few might be temporary structures, ad hoc groups, fluid organizations, small is beautiful, incrementalism, experimentation, action orientation, imitations, lots of tries, unjustified variations, internal competition, playfulness, the technology of foolishness, product champions, bootlegging, skunk works, cabals; and shadow organizations. Each of these turns the tables on conventional wisdom. Each implies both the absence of clear direction and the simultaneous need for action. More important still, we need new metaphors and models to stitch these terms together into a sensible, coherent, memorable whole.

“[We] need to supplement the technology of reason with a technology of foolishness. Individuals and organizations need ways of doing things for which they have no good reason. Not always. Not usually. But sometimes. They need to act before they think.” - James March

It is the inventor or small guy who makes the big leap, even in stodgy industries like steel and aluminum in which one wouldn't expect to find many inventors around. Moreover, our own investigations indicate hardly less—that most of the big new business breakthroughs, from McDonald's (breakfast menu items pulling in about 40 percent of the business) to GE (engineered plastics and aircraft engines) have come from small bands of zealots operating outside the mainstream.

Chapter 5: A Bias for Action

“Eighty percent of success is showing up.” - Woody Allen

“But above all try something.” - FDR

“Ready. Fire. Aim.” - Executive at Cadbury's

An excellent company attribute that seems to underpin the rest: action orientation, a bias for getting things done.

Complexity causes the lethargy and inertia that make too many companies unresponsive.

The excellent companies are a vast network of informal, open communications. The patterns and intensity cultivate the right people's getting into contact with each other, regularly, and the chaotic/anarchic properties of the system are kept well under control simply because of the regularity of contact and its nature.

The intensity of communications is unmistakable in the excellent companies. It usually starts with an insistence on informality.

“We aren't really sure what structure is best. Al we know for certain is that we start with a remarkably high degree of informal communication, which is the key. We have to preserve that at all costs.” - HP

Rich informal communication leads to more action, more experiments, more learning, and simultaneously to the ability to stay better in touch and on top of things.

We have come to believe that the key success factor in business is simply getting one's arms around almost any practical problem and knocking it off—-now.

'Chaotic action is preferable to orderly inaction.' 'Don't just stand there, do something.'

Learning and progress accrue only when there is something to learn from, and the something, the stuff of learning and progress, is any completed action.

The most important and visible outcropping of the action bias in the excellent companies is their willingness to try things out, to experiment.

At Activision, the watchword for video-game design is 'build a game as quickly as you can. Get something to play with. Get your peers fooling with it right away. Good ideas don't count around here. We've got to see something.'

David Ogilvy says there is no more important word than 'test.'

Management has to be tolerant of leaky systems; it has to accept mistakes, support bootlegging, roll with unexpected changes, and encourage champions.

The experimenting process is almost revolutionary. It values action above planning, doing above thinking, the concrete above the abstract. It suggests, in a very Zen-like fashion, going with the flow: doable tasks, starting with the easiest and most ready targets, looking for malleable champions rather than recalcitrant naysayers.

John Steinbeck once said that the first step toward writing a novel is to write a one-page statement of purpose. If you can't get the one page clear, it isn't likely you'll get far with the novel.

P&G has been deepening the grooves of its one-page communications system for forty years.

There is no more important trait among the excellent companies than an action orientation.

People can only handle a little bit of information at one time, and they thrive if they perceive themselves as even somewhat autonomous.

Ready. Fire. Aim. Learn from your tries. That's enough.

Chapter 6: Close to the Customer

“Probably the most important management fundamental that is being ignored today is staying close to the customer to satisfy his needs and anticipate his wants. In too many companies, the customer has become a bloody nuisance whose unpredictable behavior damages carefully made strategic plans, whose activities mess up computer operations, and who stubbornly insists that purchased products should work.” - Lew Young, Editor-in-Chief, Business Week

The excellent companies really are close to their customers. That's it. Other companies talk about it; the excellent companies do it.

“There's one thing that I do that a lot of salesmen don't, and that's believe the sale really begins after the sale-not before.... The customer ain't out the door, and my son has made up a thank-you note.” - Joe Girard

“IBM Means Service.” I have often thought it was our very best ad. It stated clearly just exactly what we stand for. We want to give the best customer service of any company in the world . IBM's contracts have always offered, not machines for rent, but machine services, that is the equipment itself and the continuing advice and counsel of IBM's staff.

“An IBM salesman always sells the cheapest product that will get the job done.”

With service as their top goal, they said that “profitability naturally follows.”

Nemeroff makes the important connection that “customer relations simply mirror employee relations.”

Even in higher technology businesses, reliability was always preferred over sheer technical wizardry. The star performers consciously sacrifice an unproven technology for something that works. We call the phenomenon “second to the marketplace and proud of it.”

The excellent companies are better listeners.

If the product is not immediately matched with a customer need and developed in full partnership with a customer, they drop it. “If we can't find an interested customer to work with us early on, the idea is sure to be a loser.”

Chapter 7: Autonomy and Entrepreneurship

“Champions of new inventions display persistence and courage of heroic quality.” - Edward Schon

The most discouraging fact of big corporate life is the loss of what got them big in the first place: innovation.

Small firms produced about four times as many innovations per research and development dollar as medium-sized firms and about twenty-four times as many as large firms.

Creativity is thinking up new things. Innovation is doing new things.... A powerful new idea can kick around unused in a company for years, not because its merits are not recognized, but because nobody has assumed the responsibility for converting it from words into action. Ideas are useless unless used. The proof of their value is only in their implementation. Until then, they are in limbo.

There is no shortage of creativity or creative people in American business. The shortage is of innovators. All too often, people believe that creativity automatically leads to innovation. It doesn't. Creative people tend to pass the responsibility for getting down to brass tacks to others. They are the bottleneck. They make none of the right kind of effort to help their ideas get a hearing and a try.

Idea men constantly pepper everybody with proposals and memorandums that are just brief enough to get attention, to intrigue and sustain interest-but too short to include any responsible suggestions for implementation. The scarce people are the ones who have the know-how, energy, daring, and staying power to implement ideas.... Since business is a 'get-things-done' institution, creativity without action-oriented follow-through is a barren form of behavior. In a sense, it is irresponsible.

The champion is not a blue-sky dreamer, or an intellectual giant. The champion might even be an idea thief. But, above all, he's the pragmatic one who grabs onto someone else's theoretical construct if necessary and bullheadedly pushes it to fruition.

Our observations have led us to identify three primary roles: the product champion, the executive champion, and the godfather.* (We've intentionally left out the technical innovator, or inventor, because we don't view the initial technical work, the idea work, as a principal variable in innovating. The constraint on innovation, we believe, is almost always the absence of a product champion, executive champion, or godfather. Mostly, we are convinced of the importance of the executive champion and the godfather.)

The product champion is the zealot or fanatic in the ranks whom we have described as being not a typical administrative type. On the contrary, he is apt to be a loner, egotistical and cranky. But he believes in the specific product he has in mind.

The successful executive champion is invariably an ex-product champion. He's been there-been through the lengthy process of husbanding, seen what it takes to shield a potential practical new idea from the organization's formal tendency toward negation.

The godfather is typically an aging leader who provides the role model for championing. A young engineer or marketer simply does not step out and take risks because of some 'good feeling' in the gut. He steps out and takes risks because the history of the institution supports doing so as a way of life that leads to success. And he does so despite the certainty of repeated failure.

The crystal-clear message is that no matter how small the odds are of any one thing's working, the probability of something's succeeding is very high if you try lots of things.

The only way of assuring more 'hits' is to increase the number of 'at bats.'

We're really not sure exactly how the innovative process works. But there's one thing we do know: the easy communications, the absence of barriers to talking to one another are essential.

Communication systems are informal.

Communication intensity is extraordinary.

They make a presentation, and then the screaming and shouting begin. The questions are unabashed; the flow is free; everyone is involved. Nobody hesitates to cut off the chairman, the president, a board member.

And how that contrasts with the behavior of most companies we encounter! Senior people, who have sometimes worked together for twenty years or more, won't attend gatherings unless there are formal agendas. They can't seem to do anything other than watch presentations and then politely comment on the contents. At the extreme, people whose offices are on the same floor communicate only in writing.

Intel executives call the process 'decision making by peers,' an open, confrontation-oriented management style in which people go after issues bluntly, straightforwardly. The main reason people need not hide is that they talk all the time. A meeting is not a rare, formal-and thus political-event.

Communication is given physical supports.

'How do people talk to each other and exchange ideas without blackboards everywhere?'

'I got rid of the little four-person round tables in the company dining room, replaced them with army mess tables-long, rectangular ones. It's important. At a little round table, four people who already know each other will sit down and eat lunch with each other day in and day out. With long mess tables, strangers come in contact. Some scientist gets talking to some marketer or some manufacturer from some other division. It's a probability game. Every little bit enhances the odds of important idea exchange.'

If people are more than 10 meters apart, the probability of communicating at least once a week is only to about 8 or 9 percent (versus 25 percent at 5 meters).

The would-be champion gains encouragement from the panoply of heroes' tales: don't kill ideas; scrounge; failure is OK; years and years are expected to pass before a raw idea makes it in the marketplace; and so on.

It typically works this way: The champion, as his idea moves out of the very conceptual stage and into prototyping, starts to gather a team about him. It grows to, say, five or six people. Then, suppose (as is statistically the likely case) the program hits a snag. 3M will probably cut it back quickly, knock some people off the team. But as the mythology suggests, the champion—if he is committed-is encouraged to persist, by himself or perhaps with one co-worker, at, say, a 30 percent or so level of effort. In most cases, 3M has observed that the history of any product is a decade or more long before the market is really ready. (A decade sounds like a long time, but formal study after formal study reveals that the average space between idea and commercial deployment in virtually any field, high or low technology, is ten to twenty years.) So the champion survives the ups and downs. Eventually, often, the market does become ripe. His team rebuilds.

Chapter 8: Productivity Through People

The man who gave us this said there was but one key to a people orientation: trust. Some will abuse it. 'Three to eight percent, he says, with a smile at the precision of his estimate. Nonbelievers will give you 'an infinite number of reasons why workers can't be trusted. Most organizations are governed by rules that assume the average worker is an incompetent ne'er-do-well, just itching to screw up.'

Treat people as adults. Treat them as partners; treat them with dignity; treat them with respect. Treat them—not capital spending and automation-as the primary source of productivity gains.

'IBM's philosophy is largely contained in three simple beliefs. I want to begin with what I think is the most important: our respect for the individual. This is a simple concept, but in IBM it occupies a major portion of management time. We devote more effort to it than anything else. This belief was bone-deep in my father.' - Thomas J. Watson, Jr.

There was hardly a more pervasive theme in the excellent companies than respect for the individual.

These companies give people control over their destinies; they make meaning for people. They turn the average Joe and the average Jane into winners. They let, even insist that, people stick out. They accentuate the positive.

We are talking about tough-minded respect for the individual and the willingness to train him, to set reasonable and clear expectations for him, and to grant him practical autonomy to step out and contribute directly to his job.

We were astounded, as we did our research, by the sheer number of people programs we encountered and the frequency with which they are replenished or refurbished. And these programs are neither lip service nor gimmicky. We found rich systems of monetary incentives; but we expected that. We also discovered an incredible array of non-monetary incentives and an amazing variety of experimental or newly introduced programs. No one device- even in the best institutions—is likely to be effective indefinitely. The point is to treat the problem as one would the new-product challenge. The pipeline must always be filled with the next score of candidate programs, most of which will turn out to be duds, just as do new-product ideas. If job enrichment doesn't work at the Milwaukee plant, try seven other programs that are working in other plants, or that have worked in other companies.

If you see a man without a smile, give him one of yours.

People rarely succeed at anything unless they enjoy it.

The HP Way: is the policies and actions that flow from the belief that men and women want to do a good job, a creative job, and that if they are provided with the proper environment they will do so. It is the tradition of treating every individual with consideration and respect and recognizing personal achievements.

We had better start admitting that the most important people in an organization are those who actually provide a service or make and add value to products, not those who administer the activity.

'The way you stay fresh is you never stop traveling, you never stop listening. You never stop asking people what they think.'

Many of the best companies really do view themselves as an extended family. We found prevalent use of the specific terms 'family,' 'extended family,' or 'family feeling' at Wal-Mart, Tandem, HP, Disney, Dana, Tupperware, McDonald's, Delta, IBM, TI, Levi Strauss, Blue Bell, Kodak, and P&G.

Mason Haire said, 'What gets measured gets done.' He argued that the simple act of putting a measure on something is tantamount to getting it done.

Finally they put up a huge, visible board with everybody's name on it and posted a gold star next to each name when people came to work. Absenteeism dropped dramatically-almost overnight.

As we did this research, we were struck by the wealth of non-monetary incentives used by the excellent companies. Nothing is more powerful than positive reinforcement. Everybody uses it. But top performers, almost alone, use it extensively. The volume of contrived opportunities for showering pins, buttons, badges, and medals on people is staggering at McDonald's, Tupperware, IBM, or many of the other top performers. They actively seek out and pursue endless excuses to give out rewards.

When the number of awards is high, it makes the perceived possibility of winning something high as well. And then the average man will stretch to achieve.

Many companies do believe in special awards but use them exclusively to honor the top few (who already are so highly motivated they would probably have done their thing anyway). More vital are the ribbons for a good show by the common man. As McPherson states, the real key to success is helping the middle 60 percent a few steps up the ladder.

Small is productive.

'People can be themselves only in small, comprehensible groups.' - E. F. Schumacher

The excellent companies have a deeply ingrained philosophy that says, in effect, 'respect the individual,' 'make people winners,' 'let them stand out,' 'treat people as adults.'

Chapter 9: Hands-On, Value Driven

Figure out your value system. Decide what your company stands for. What does your enterprise do that gives everyone the most pride? Put yourself out ten or twenty years in the future: what would you look back on with greatest satisfaction?

Every excellent company we studied is clear on what it stands for, and takes the process, of value shaping seriously.

Ironically, the companies that seemed the most focused-those with the

most quantified statements of mission, with the most precise financial targets-had done less well financially than those with broader, less precise, more qualitative statements of corporate purpose. (The companies without values fared less well, too.)

Values are not usually transmitted through formal written procedures. They are more often diffused by softer means: specifically the stories, myths, legends, and metaphors.

A few basic values:

A belief in being the 'best'

A belief in the importance of the details of execution, the nuts

and bolts of doing the job well

A belief in the importance of people as individuals

A belief in superior quality and service

A belief that most members of the organization should be in-

novators, and its corollary, the willingness to support failure

A belief in the importance of informality to enhance communication

Explicit belief in and recognition of the importance of economic growth and profits.

David Ogilvy notes, I'want al our people to believe they are working in the best agency in the world. A sense of pride works wonders.'

'Set and demand standards of excellence. Anybody who accepts mediocrity—in school, in job, in life—is a guy who compromises. And when the leader compromises, the whole damn organization compromises.' - Charles Knight

'We want to give the best customer service of any company in the world.' - Thomas Watson, Jr.

'We believe that an organization should pursue all tasks with the idea that they can be accomplished in a superior fashion. IBM expects and demands a superior performance from its people in whatever they do. I suppose a belief of this kind conjures up a mania for perfection and all the psychological horrors that go with it. Admittedly, a perfectionist is seldom a comfortable personality. An environment which calls for perfection is not likely to be easy. But aiming for it is always a goad to progress.' - Thomas Watson, Jr.

'We have learned from experience that the best new-product ideas and competitive strategies are wasted if we don't execute them effectively. In fact, in our kinds of businesses, executing extremely well is often more productive--and practical-than creating fresh ideas. Superb execution is at the heart of many of our most remarkable successes, such as Frito-Lay in snacks and Pepsi-Cola in grocery stores.' - Andrall Peason, president of PepsiCo

If you don't constantly monitor how people are operating, not only will they tend to wander off track but also they will begin to believe you weren't serious about the plan in the first place. So, management by wandering around is the business of staying in touch with the territory all the time.

You start out by being accessible and approachable, but the main thing is to realize you're there to listen.

'Do not summon people to your office— it frightens them. Instead go to see them in their offices. A chairman who never wanders about his agency becomes a hermit, out of touch with his staff.' - David Ogilvy

What I was trying to do was create the feeling that the chief executive officer of the company was an approachable guy, someone you could talk to.... If you maintain good. working relations with the people in line positions you shouldn't have any trouble. Whenever I picked up some information, I would call the senior officer of the division and say that I had just gotten back from visiting Oakland, Reno and Las Vegas, and here is what I picked up.

Chapter 10: Stick to the Knitting

Diversification was not positively related to profitability in any way.

Organizations that branch out somewhat, yet still stick very close to their central skill, outperform all others.

An overly simple business-one that depends on a single, vertically integrated combine-is, in fact, invariably a poor performer. We see, rather, that businesses that pursue some diversification— a basis for stability through adaptation-yet stick close to their knitting, tend to be the superior performers.

The excellent companies don't test new waters with both feet. Better yet, when they stuck a toe in new waters and failed, they terminated the experiment quickly. As a general rule, the top performers moved out mainly through internally generated diversification, one manageable step at a time.

'Never acquire any businesses that you don't know how to run.' - Robert Wood Johnson

'This company has never left its base. We seek to be anything but a conglomerate.' - Ed Harness

Chapter 11: Simple Form, Lean Staff

The excellent companies also appear to be reorganizing all the time.

It appears to us that there is only one crucial concomitant to the excellent company's simple structural form: lean staff, especially at the corporate level.

Decades ago Americans got hooked on the notion of optimal spans of control. We conventionally believe that no one can control more than five to seven people. The Japanese think that is nonsense. At one bank, more than several hundred branch managers report to the same person. The flat organization is possible.

There are five levels between the chairman and the first-line supervisor at Toyota, Ford has over fifteen.

The heart of the entrepreneurial pillar is 'small is beautiful.' And the way to stay small is constantly to hive off new or expanded activities into new divisions. In this scheme of things, smallness is viewed as a requisite for continual adaptiveness. The cost is occasionally some efficiency; but as we have seen time and again, the efficiency advantage is usually vastly overrated.

By reorganizing regularly, we mean: (1) a willingness regularly to 'hive off' new divisions as old divisions get big and bureaucratic; (2) a willingness to shift products or product lines among divisions so as to take advantage of special management talents or the need for market realignments (3M is particularly masterful at this, and turf fights seldom ensue when a product is moved from one division to another); (3) a willingness to take the top talent and bring it together on project teams aimed at solving a few central organizational problems or at executing a central organizational thrust, always with the notion that such an accommodation is temporary; and (4) a generic willingness to reorganize and reshuffle the boxes (while maintaining the integrity of the basic, central form) as needs arise.

Chapter 12: Simultaneous Loose-Tight Properties

Most have rigidly shared values. The action focus, including experimentation itself, emphasizes extremely regular communication and very quick feedback; nothing gets very far out of line. Concise paperwork (P&G's one-page memo) and the focus on realism are yet other, nonaversive ways of exerting extremely tight control. If you have only three numbers to live by, you may be sure they are all well checked out.

The focus on the outside, the external perspective, the attention to the customer, is one of the tightest properties of all.

Autonomy is a product of discipline. The discipline (a few shared values) provides the framework. It gives people confidence (to experiment, for instance) stemming from stable expectations about what really counts.

Too much overbearing discipline of the wrong kind will kill autonomy. But the more rigid discipline, the discipline based on a small number of shared values that marks a 3M, an HP, a J&J, or a McDonald's, in fact, induces practical autonomy and experimentation throughout the organization and beyond.

The 'rules' in the excellent companies have a positive cast. They deal with quality, service, innovation, and experimentation. Their focus is on building, expanding, the opposite of restraining; whereas most companies concentrate on controlling, limiting, constraint. We don't seem to understand that rules can reinforce positive traits as well as discourage negative ones, and that the former kind are far more effective.

We found that the excellent companies are not really 'long-term thinkers.' They don't have better five-year plans. Indeed, the formal plans at the excellent companies are often marked by little detail, or don't exist at all (recall the complete absence of corporate level planners in many of them).

There is a value set—and it is a value set for all seasons. (Remember the content areas: quality, innovativeness, informality, customer service, people.) However, it is executed by attention to mundane, nitty-gritty details. Every minute, every hour, every day is an opportunity to act in support of overarching themes.

The smart-dumb rule. Many of today's managers—MBA-trained and the like-may be a little bit too smart for their own good. The smart ones are the ones who shift direction all the time, based upon the latest output from the expected value equation. The ones who juggle hundred-variable models with facility; the ones who design complicated incentive systems; the ones who wire up matrix structures. The ones who have 200-page strategic plans and 500-page market requirement documents that are but step one in product development exercises. Our 'dumber' friends are different. They just don't understand why every product can't be of the highest quality. They just don't understand why every customer can't get personalized service, even in the potato chip business. They are personally affronted (remember the Heineken story) when a bottle of beer goes sour. They can't understand why a regular flow of new products isn't possible, or why a worker can't contribute a suggestion every couple of weeks. Simple-minded fellows, really; simplistic even. Yes, simplistic has a negative connotation. But the people who lead the excellent companies are a bit simplistic. They are seemingly unjustified in what they believe the worker is capable of doing. They are seemingly unjustified in believing that every product can be of the highest quality. They are seemingly unjustified in believing that service can be maintained at a high standard for virtually every customer, whether in Missoula, Montana, or Manhattan. They are seemingly unjustified in believing that virtually every worker can contribute.

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