Eight Lessons for American Corporations

BY JAMES FALLOWS
IN SEARCH OF EXCELLENCE: Lessons From America’s Best-Run Companies
by Thomas J. Peters and Robed H. Waterman, Jr. Harper & Row, $19.95.
THIS IS ONE of the most useful books to appear in a long while. It is a study of contemporary American business that, surprisingly enough, is fundamentally optimistic.
The authors are management consultants, and like other students of the international economy, they observed that many American firms had lost their competitive edge. They wanted to find out why. The effort to answer that question has led many writers to an inspection of the Nippon Electric Company or of Mitsubishi. Peters and Waterman looked instead to American firms. From industries as diverse as hamburger franchising and heavy-equipment manufacture, they selected a list of companies that had risen above the norm; whether measured by market share or by technical reputation, they had demonstrated sustained “excellence,” of the sort other firms were grasping for. In Search of Excellence is intended to explain what makes these companies different from the rest.
Why has Delta Airlines prospered, in the same regulatory environment that has driven Braniff into the grave? Why is Procter & Gamble so impregnable in the markets for soap, toothpaste, and shampoo? How can Maytag command a price for its washing machines that is 15 percent higher than the competition’s? What might IBM, Bechtel, Boeing, and the McDonald’s hamburger chain have in common as specimens of business success? (The fifteen “excellent” companies Peters and Waterman studied most closely are Bechtel, Boeing, Caterpillar, Dana, Delta Airlines, Digital Equipment, Emerson Electric, Fluor, Hewlett-Packard, IBM, Johnson & Johnson, McDonald’s, Procter & Gamble, Texas Instruments, and 3M. They also draw their illustrations from a score of other firms, such as Schlumberger, and Mars, Inc., and General Motors, which they say has proven the most resilient of the imperiled auto companies. The authors do not claim that these companies’ past successes will be indefinitely repeated, nor that they are immune to disaster. But they do contend that these companies have proven so successful through the past few decades that their records would deserve study even if they went bankrupt next year.)
At one level, corporate success has mundane sources. Delta has done better than other airlines because it has a more efficient route structure. IBM sells so many machines because the hundreds of thousands it has sold in the past create a built-in market. But to suggest such answers is only to raise new questions; Why did these companies make the right choices in the first place? Many economists might emphasize technical or financial advantages. Peters and Waterman insist that the difference is the distinct internal culture that typifies an “excellent” company. The ingredients of this culture may be as hard to define as the ingredients of a stable marriage or a superb classroom, but, according to the authors, they are nonetheless real. In their years of surveying varied industries, Peters and Waterman found that certain patterns of behavior recurred among the strong companies but were notably missing from the weak. Specifically, they identified eight traits shared by excellent companies. In the authors’ nomenclature, they are:
A bias for action; a preference for doing something—anything—rather than sending a question through endless cycles of analysis and committee reports. In the oil-wildcatting business, according to the authors, the probability of hitting oil in an established field, with the benefit of the best geological advice and the most advanced technical support, is about 15 percent for each well drilled. “Without all these pluses, the success ratio dips to around 13 per cent. That finding suggests that the denominator— the number of tries—counts for a great deal.”
Staying close to the customer; an obsession (a word the authors frequently use in describing the excellent firms) with understanding the customer’s preference and learning from his response.
Johnson & Johnson’s credo is that the customers come first, the shareholders last. The authors cite a study that inquired into the sources of eleven fundamental innovations in the modern scientific-instrument business; they were all the result of customers’ suggestions.
Autonomy and entrepreneurship: breaking the company into “inefficiently” small units and then encouraging them to compete with each other, offering extraordinary latitude and rewards to “champions” who will scheme and bend the rules to get their ideas accepted. “Most of the big new business breakthroughs . . . have come from small bands of zealots operating outside the mainstream .... no major IBM product introduction in the last quarter century has come from the formal system.”
Productivity through people: a determination to give all employees in the firm, not just the executives in the profit pool, a reason to believe that their best efforts are essential and that they will share in the company’s success.
Hands-on, value driven: another obsession, in this case with keeping executives in touch with the firm’s essential business. Excellent companies are often led by people who started in the operating divisions, rarely by imported lawyers or accountants. The companies demand ferocious loyalty to the two or three values judged essential to their success—cleanliness and consistency for McDonald’s, high-quality products for Procter & Gamble, infallible delivery schedules for Frito-Lay.
Stick to the knitting: staying with the business the company knows. The successful companies have no ambitions to become conglomerates. When they expand, they do so by adding logical offshoots of their original products. 3M, for example, continually explores new applications for adhesives and abrasives. They do not dissipate their capital in efforts to take over department stores or oil firms. They fear acquiring a business they do not know how to run.
Simple form, lean staff: few administrative layers, few people at the upper levels. The best companies resist establishing permanent “task forces” or “staff advisers”; they move people around for temporary assignments. According to the authors, the companies follow a “rule of 100” and rarely have more than 100 people in corporate headquarters, even though their total work force may number in the tens of thousands.
Simultaneous loose-tight properties: a climate dominated by a fierce dedication to the central values of the company, yet infused with tolerance for all employees who accept those values. Thus do Procter & Gamble and Digital Equipment resemble the U.S. Marine Corps.
Stated in this form, with the little touches of managementese (“hands-on,” etc.), the principles may seem platitudinous and, above all, “soft.” There is no way to express in numbers the degree of closeness to the customer that a company should have, or to specify on an organization chart the proper balance between “loose” and “tight.” Yet the authors contend that when you start
with the “hardest” of possible indicators—things such as compound asset growth, or average return on total capital—you are ultimately led back to the soft realm of culture and values. They say that this is frustrating to the lesssuccessful companies, because they are often looking for one-time changes of course. But the “obsession” of the excellent companies is very different from getting a shove in the right direction and then being allowed to roll. What is special about these companies, Peters and Waterman say, is that they have created climates in which employees feel they are engaged in a daily struggle to defend the company’s values.
As prescriptions for business excellence, these principles are very different from what is taught in most management schools—an implication on which the authors dwell. They point out that the Japanese industrial miracle occurred in a country that has no management schools at all. The American companies that compete most successfully, against the Japanese and against anyone else, routinely violate the basic rules of rational modern management.
They do not believe in “economies of scale.” They break a company into small, independent units; they build a new factory, in a different city, rather than expanding an existing site. “When a plant starts to edge toward fifteen hundred people, somehow, like magic, things start to go wrong,” the president of Motorola said. They typically rely for their most innovative research on free-wheeling groups of ten or twelve.
The excellent companies give only modest emphasis to traditional division of labor. Instead, they encourage deliberate overlap, internal competition, interchangeability among management tasks. They rely less than the unsuccessful firms on careful, before-the-fact economic analysis in deciding which new products they should try to sell. They rely more on Darwinian contests inside the firm. “You invariably have to kill a program at least once before it succeeds,” a 3M executive said. “That’s how you get down to the fanatics, those who are really emotionally committed to finding a way—any way—to make it work.”
These same companies invest “irrational” amounts of money in the qualities that reflect their central values: “Ten years’ trouble-free operation” for Maytag; “Forty-eight-hour parts service anywhere in the world—or Cat pays” for Caterpillar. According to the conventional wisdom, they should cut costs by reducing these “overcommitments.” These companies concentrate instead on increasing their revenues.
BUT THESE DEPARTURES from the norm are less fundamental than another difference Peters and Waterman found among the excellent companies. That was their concept of how human effort should be motivated and rewarded.
Most companies in the authors’ survey bear the imprint of the few titanic figures who stayed in command for a period of decades and created the kind of atmosphere that inspired achievement. These are men such as Thomas Watson, Sr., of IBM, Ray Kroc, of McDonald’s, William Hewlett and David Packard, of HewlettPackard. What made these men unusual was not their own level of effort; executives of mediocre companies may have worked just as hard. Their achievement was to inspire the average employee to give his best. In their treatment of the average salesman or production worker, they somehow conveyed the message that the well-being of the company depended on how well each employee did his job.
Behind this accomplishment, according to the authors, was an appreciation of human motives that embraced many factors besides the (important) one of material reward. The managers described in this book reveal, through their actions, an understanding that people like to be held to certain standards—but that they also like to succeed. Thus IBM sets its quotas at such a level that 70 to 80 percent of the sales force meets them. Other, less successful, firms set quotas that leave most of their employees feeling they have failed.
The excellent companies distribute their financial rewards more broadly than most other firms do. But they also recognize that nearly all human beings seek meaning in their work and a measure of control over their daily activities.
Profit-and-loss statements cannot provide that meaning for most employees, but the “values” of the firm can. Driving a potato-chip delivery truck is uninspiring and cannot command dedication if it is thought of as nothing more than that. But if it is an enactment of the tradition that Frito-Lay people always get through, despite storm, breakdown, or flood, it can be done with pride.
It can be done with pride, that is, if one other condition has been met. Of all the intangible qualities that distinguish the culture of the excellent companies, Peters and Waterman place most emphasis on respect, not simply for the jobs performed at each level of the enterprise but also for the people who do them. Many companies issue high-minded statements about the dignity of labor; the unusual companies foster dignity through their actions.
At a number of the firms described in this book, workers are called something other than “workers.” They are “associates” at J.C. Penney, “hosts” in the Disney empire. At nearly all of the successful companies, leaders spend inordinate shares of their time and ingenuity hacking down the barriers of status and hierarchy that seem to spring up automatically in large organizations. Delta’s executives traditionally pitch in as baggage handlers at Christmastime. Hewlett-Packard and United Airlines apply a philosophy known as “management by wandering around.” McDonald’s and several others like to promote their managers from within, opening up opportunities to those who start without credentials. One company switched from small lunchroom tables to large ones so that people are more likely to encounter others they do not already know. (Compare all this with the practice of the U.S. government, which specifies the size and type of desk each worker may have, depending on his or her GS rank.)
In short, by attempting to remove unnecessary distinctions—those that have nothing to do with the firm’s real task— they hope to concentrate attention on the standards of performance on which the company’s survival depends. This might sound like a preachment from the Whole Earth Catalog were it not derived from the experience of the champions of American capitalism.
“We felt different ourselves, walking around an HP or 3M facility watching groups at work and play, from the way we had in most of the more bureaucratic institutions we have had experience with,” Peters and Waterman say. “It was seeing an HP division manager’s office ($100 million unit), tiny, wall-less, on the factory floor, shared with a secretary .... It was very far removed from the silent board rooms marked by dim lights, somber presentations, rows of staffers lined up along the walls with calculators glowing, and the endless click of the slide projector as analysis after analysis lit up the screen.”
In view of the widespread assumption that American managers must either imitate the Japanese or succumb to them, this gallery of home-grown business heroes presents a hopeful message. The examples for industrial renewal are close at hand. Whether they will be followed the authors cannot say. □