In Search of Excellence

Key Concepts

The eight attributes of excellent, innovative companies

1. “A bias for action, for getting on with it.” (p. 13)

2. “Close to the customer.” (p. 14)

3. “Autonomy and entrepreneurship. The innovative companies foster many leaders and many innovators throughout the organization.” (p. 14)

4. “Productivity through people.” (p. 14)

5. “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.’” (p. 15)

6. “Stick to the knitting. Robert W. Johnson, former Johnson & Johnson chairman, put it this way: ‘Never acquire a business you don’t know how to run.’ Or as Edward G. Harness, past chief executive at Procter & Gamble, said, ‘This company has never left its base. We seek to be anything but a conglomerate.’” (p. 15)

7. “Simple form, lean staff. [...] The underlying structural forms and systems in the excellent companies are elegantly simple.” (p. 15)

8. “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.” (p. 15)

Being too analytical can get in the way of great strategy

“But the problem is not that companies ought not to plan. They damn well should plan. The problem is that the planning becomes an end in itself. It goes far beyond Byrom’s sensible dictum to use it to enhance mental preparedness. Instead, the plan becomes the truth, and data that don’t fit the preconceived plan (e.g., real customer response to a pretest market action) are denigrated or blithely ignored.” (p. 41)

“For one, 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. A buried weakness in the analytic approach to business decision making is that people analyze what can be most readily analyzed, spend more time on it, and more or less ignore the rest.” (p. 44)

“To be narrowly rational is often to be negative. Peter Drucker gives a good description of the baleful influence of management’s analytic bias: “‘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.’” (p. 46)

“SIMPLICITY AND COMPLEXITY”

“One of the key attributes of the excellent companies is that they have realized the importance of keeping things simple despite overwhelming genuine pressures to complicate things.” (p. 63)

“But, as is so often the case, the excellent companies seem to have found ways of coping with this problem. For one thing, they intentionally keep corporate staffs small. Then there aren’t enough corporate staff around to generate too much confusion down the line. Emerson, Schlumberger, and Dana, for example, are $3 billion to $6 billion top-performing corporations; yet each is run with fewer than 100 bodies in corporate headquarters. Ford, meanwhile, has seventeen layers of management, while Toyota (and the 800 million–member Roman Catholic Church) has five.” (p. 65)

“As another coping device, the excellent companies focus on only a few key business values, and a few objectives. The focus on a few key values lets everyone know what’s important, so there is simply less need for daily instructions (i.e., daily short-term memory overload).” (p. 65)

Strategy comes from doing

“The implications of this line of reasoning are clear: only if you get people acting, even in small ways, the way you want them to, will they come to believe in what they’re doing. Moreover, the process of enlistment is enhanced by explicit management of the after-the-act labeling process — in other words, publicly and ceaselessly lauding the small wins along the way. “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.” (p. 74)

“Moreover, our excellent companies appear to do their way into strategies, not vice versa. A leading researcher of the strategic process, James Brian Quinn, talks about the role of leadership in strategy building. It doesn’t sound much like a by-the-numbers, analysis-first process. He lists major leadership tasks, and the litany includes amplifying understanding, building awareness, changing symbols, legitimizing new viewpoints, making tactical shifts and testing partial solutions, broadening political support, overcoming opposition, inducing and structuring flexibility, launching trial balloons and engaging in systematic waiting, creating pockets of commitment, crystallizing focus, managing coalitions, and formalizing commitment (e.g., empowering “champions”). The role of the leader, then, is one of orchestrator and labeler: taking what can be gotten in the way of action and shaping it — generally after the fact — into lasting commitment to a new strategic direction. In short, he makes meanings.” (p. 74)

The companies achieve innovation by tolerating inefficiency like creating smaller teams and having overlaps

“We believe that one major reason for this, only recently of concern to the management theorists, is intentionally seeded evolution within the companies. The excellent companies are learning organizations. They don’t wait around for the marketplace eventually to do them in; they create their own internal marketplace. (One analyst noted that IBM’s real management magic in the days of 90 percent market share was creating, almost from whole cloth, the specter of competitors.) Intriguingly, the top companies have developed a whole host of devices and management routines to stave off calcification. They experiment more, encourage more tries, and permit small failures; they keep things small; they interact with customers — especially sophisticated customers — more (all functions of the organization); they encourage internal competition and allow resultant duplication and overlap; and they maintain a rich informal environment, heavily laden with information, which spurs diffusion of ideas that work.” (p. 110)

“We believe we are breaking some important theoretical ground here. We observed more “chunking,” more breaking things up into manageable units than others professedly have. In theory to date, the small is effective idea is usually limited to discussions of innovativeness by small firms. In most of the excellent companies, however, we see various approaches to chunking as a main tenet of effective management practice. Interestingly, the more we look at the phenomenon, the more we see it as a vehicle for enhanced efficiency as well as a vehicle to foster adaptation and survival.” (p. 113)

“Tidiness is sacrificed and efficiency is gained. In fact, more than efficiency is gained. Through chunking, a corporation encourages a high volume of rapid action. The organization acts, and then learns from what it has done. It experiments, it makes mistakes, it finds unanticipated success — and new strategic direction inexorably emerges. We strongly believe that the major reason big companies stop innovating is their dependence on big factories, smooth production flow, integrated operations, big-bet technology planning, and rigid strategic direction setting. They forget how to learn and they quit tolerating mistakes. The company forgets what made it successful in the first place, which was usually a culture that encouraged action, experiments, repeated tries.” (p. 114)

“A Bias for Action”

“The line officer who has headed one of Exxon’s Asian affiliates for the last ten years made a presentation on “strategy” at a recent top management meeting. He reported a remarkable tale of improvement. Was it a tale of shrewd foresight and bold strategic moves? Not in our view. It was a story, instead, of a series of pragmatic actions. In almost every one of the ten years, some single problem had been knocked off. One year a blitzkrieg group came through from regional headquarters and helped him get receivables under control. Another year, the attack was aimed at closing down some unprofitable segments. In another year, a further blitz effort helped work out a novel arrangement with distributors. It was a classic example of what we have come to call the “theory of chunks.” 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.” (p. 125)

“There is an underlying principle here, an important trait of the action orientation that we call chunking. That simply means breaking things up to facilitate organizational fluidity and to encourage action. The action-oriented bits and pieces come under many labels — champions, teams, task forces, czars, project centers, skunk works, and quality circles — but they have one thing in common. They never show up on the formal organization chart and seldom in the corporate phone directory. They are nevertheless the most visible part of the adhocracy that keeps the company fluid.” (p. 126)

“The task force reporting level, and the seniority of its members, are proportional to the importance of the problem. If the problem is a big one, virtually all members are senior people and the task force reports to the chief executive. It is essential that the people have the charter to make stick whatever they recommend.” (p. 129)

“The most important and visible outcropping of the action bias in the excellent companies is their willingness to try things out, to experiment. There is absolutely no magic in the experiment. It is simply a tiny completed action, a manageable test that helps you learn something, just as in high-school chemistry. But our experience has been that most big institutions have forgotten how to test and learn. They seem to prefer analysis and debate to trying something out, and they are paralyzed by fear of failure, however small.” (p. 134)

“Just as we said that the ad hoc devices, such as task forces, won’t work unless the environment supports fluidity and informality, experimenting won’t work if the context is wrong. Management has to be tolerant of leaky systems; it has to accept mistakes, support bootlegging, roll with unexpected changes, and encourage champions.” (p. 147)

“Close to the Customer”

“The good news from the excellent companies is the extent to which, and the intensity with which, the customers intrude into every nook and cranny of the business — sales, manufacturing, research, accounting. A simple message permeates the atmosphere. All business success rests on something labeled a sale, which at least momentarily weds company and customer. A simple summary of what our research uncovered on the customer attribute is this: the excellent companies really are close to their customers. That’s it. Other companies talk about it; the excellent companies do it.” (p. 156)

“Of another aspect of top management style, Nemeroff makes a crucial and surprisingly subtle point: ‘Interviewed executives believe they must maintain a long-term view of service as a revenue builder.’ This point is all too often missed in big American companies. Profit objectives, while very necessary, are internally focused and certainly do not inspire people by the thousands way down the line. Service objectives, on the other hand, are almost without fail meaningful to down-the-line employees. A strong sense of personal accountability among down-the-line employees is crucial. And one knows that has been accomplished when someone in the field says, as did one of Nemeroff’s respondents, ‘Each one of us is the company.’” (p. 166)

“Whether or not they are as fanatic in their service obsession as Frito, IBM, or Disney, the excellent companies all seem to have very powerful service themes that pervade the institutions. In fact, one of our most significant conclusions about the excellent companies is that, whether their basic business is metal bending, high technology, or hamburgers, they have all defined themselves as service businesses.” (p. 168)

Autonomy and Entrepreneurship

“It eventually became clear that all of these companies were making a purposeful trade-off. They were creating almost radical decentralization and autonomy, with its attendant overlap, messiness around the edges, lack of coordination, internal competition, and somewhat chaotic conditions, in order to breed the entrepreneurial spirit. They had forsworn a measure of tidiness in order to achieve regular innovation.” (p. 201)

“Most corporations fail to tolerate the creative fanatic who has been the driving force behind most major innovations. Innovations, being far removed from the mainstream of the business, show little promise in the early stages of development. Moreover, the champion is obnoxious, impatient, egotistic, and perhaps a bit irrational in organizational terms. As a consequence, he is not hired. If hired, he is not promoted or rewarded. He is regarded as “not a serious person,’ ‘embarrassing,’ or ‘disruptive.’” (p. 206)

“In the excellent companies, there are five attributes of communication systems that seem to foster innovation:”

1. “Communication systems are informal.” (p. 218)

2. “Communication intensity is extraordinary.” (p. 219)

3. “Communication is given physical supports.” (p. 219)

4. “Forcing devices.” (p. 222)

5. “The intense, informal communication system acts as a remarkably tight control system, even as it spawns rather than constrains innovation. 3M is a leading example: “Of course, we are under control. No team can spend more than a few thousand dollars without a whole bunch of people looking over their shoulders, not kicking them around, but being genuinely interested in how it’s going.” We believe that similar “controls” throughout the excellent companies are the truly tight ones. You can’t spend much time at one of these companies without lots of people checking up informally to see how things are going. In some other companies we know, where controls are more “rigid and formal,” you can spend $5 million without bending the first piece of tin and no one will know — as long as you fill out the forms correctly and on time.” (p. 223)

“Productivity Through People”

“For us, the very important message of the research that these actions spawned, and a theme we shall return to continually in the book, is that it is attention to employees, not work conditions per se, that has the dominant impact on productivity.” (p. 5)

“In retrospect, what our framework has really done is to remind the world of professional managers that ‘soft is hard.’ It has enabled us to say, in effect, ‘All that stuff you have been dismissing for so long as the intractable, irrational, intuitive, informal organization can be managed. Clearly, it has as much or more to do with the way things work (or don’t) around your companies as the formal structures and strategies do. Not only are you foolish to ignore it, but here’s a way to think about it. Here are some tools for managing it. Here, really, is the way to develop a new skill.’” (p. 11)

“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 nonmonetary incentives. They are full of hoopla.” (p. 58)

“The old adage is “Nothing succeeds like success.” It turns out to have a sound scientific basis. Researchers studying motivation find that the prime factor is simply the self-perception among motivated subjects that they are in fact doing well.” (p. 58)

“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.’” (p. 236)

“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. These are fundamental lessons from the excellent companies research. In other words, if you want productivity and the financial reward that goes with it, you must treat your workers as your most important asset.” (p. 238)

“There was hardly a more pervasive theme in the excellent companies than respect for the individual. That basic belief and assumption were omnipresent. But like so much else we have talked about, it’s not any one thing — one assumption, belief, statement, goal, value, system, or program — that makes the theme come to life. What makes it live at these companies is a plethora of structural devices, systems, styles, and values, all reinforcing one another so that the companies are truly unusual in their ability to achieve extraordinary results through ordinary people.” (p. 238)

“Hands-On, Value-Driven”

“A second attribute of effective value systems is the effort to inspire the people at the very bottom of the organization.” (p. 284)

“The specific content of the dominant beliefs of the excellent companies is also narrow in scope, including just a few basic values: 

1. “A belief in being the “best” 

2. “A belief in the importance of the details of execution, the nuts and bolts of doing the job well

3. “A belief in the importance of people as individuals 

4. “A belief in superior quality and service

5. “A belief that most members of the organization should be innovators, and its corollary, the willingness to support failure 

6. “A belief in the importance of informality to enhance communication 

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

“Simultaneous Loose-Tight Properties”

“Organizations that live by the loose-tight principle are on the one hand rigidly controlled, yet at the same time allow (indeed, insist on) autonomy, entrepreneurship, and innovation from the rank and file.” (p. 318)

“But at the same time, a remarkably tight — culturally driven/controlled — set of properties marks the excellent companies. 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. A predominant discipline or two is in itself another crucial measure of tightness. The fact that the vast majority of the management group at 3M consists of chemical engineers, at Fluor of mechanical engineers, is another vital assurance of realism, a form of tight control.” (p. 320)

“The nature of the rules is crucial here. 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.” (p. 322)

The smart-dumb rule

“We will conclude with one strange contradiction that may really hold. We call it 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.” (p. 324)

“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.” (p. 324)

“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 suggestions regularly. It is simplistic. But it may be the true key to inducing astonishing contributions from tens of thousands of people.” (p. 324)

Quotables

“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.” (p. 82)

“The transforming leader is concerned with minutiae, as well. But he is concerned with a different kind of minutiae; he is concerned with the tricks of the pedagogue, the mentor, the linguist — the more successfully to become the value shaper, the exemplar, the maker of meanings. His job is much tougher than that of the transactional leader, for he is the true artist, the true pathfinder. After all, 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.” (p. 82)

Moreover, [James March] suggests that “[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.” (p. 107)

“At GE, one term for experimenting is “bootlegging.” (The parallel term at 3M is “scrounging.”) There the tradition of squirreling away a little bit of money, a little bit of manpower, and working outside the mainstream of the organization is time-honored.” (p. 144)

“While there are differences among industries, we did find a striking commonality: the excellent companies tend to be more driven by close-to-the-customer attributes than by either technology or cost.” (p. 186)

“A top executive at Allen-Bradley notes, ‘We won’t try anything unless we find a user who will cooperate with us in an experiment.’” (p. 195)

“In early interviews at 3M, we heard that the average length of a new-product plan was about five pages and were amazed at such brevity. One of us commented on that finding in a speech. A 3M vice president was a speaker, too. He got up and, though generally supportive of our 3M analysis, said: ‘You’re all wet on that one.’ We waited for the other shoe to drop: Did 3M have 200-page new-product proposals like most of the companies we’ve worked with? He went on: “‘We consider a coherent sentence to be an acceptable first draft for a new-product plan.’” (p. 231)