In Search of Excellence

Emily Tian
Nov 6 · 11 min read

Lessons from America’s Best-Run Companies by Thomas Peters and Robert Waterman

8 Principles for the Best-Run Companies

1. Bias for Action

  • Get shit done mentality and avoid endless cycles of analyses and hundreds of pages of committee reports
  • Substantially increase informal communication: physical space configuration and office design, management’s open door feedback policy
  • The top companies have an extreme intensity with communication and whiteboard informal gatherings between different teams / functions
  • Use ad hoc devices, such as 4–10 people task forces or project teams, to get quick action and keep the organization fluid. These task force teams consist of volunteers, are of limited duration (< 6 months MAX), and set their own goals. Follow up is swift. Documentation is informal, often scant. No assistants and staff are assigned, nor is there a formal process for bringing the group together. Limit bureaucracy and produce solutions instead. The task force reporting level and member seniority are proportional to the importance of the problem. If the problem is a big one, virtually all members are senior and the task force reports to the CEO
  • Critical factor is an environment and set of attitudes that encourage experimentation and treat ad hoc behavior as normal
  • Testing prototypes with the customer earlier and faster is 1) cost effective for cheap learning (spend $10K now vs. $100K over-intellectualizing and theorizing), 2) leaves room for creativity and failure (lower level of abstraction), 3) guarantees speed (and knowing when to fold). The customer, especially the sophisticated customer, is a key participant in most successful experimenting processes. Test with a user, on a user’s premises

“There is no more important word than test. Test your promise. Test your media. Test your headlines and your illustrations. Test your level of expenditure. Test your commercials. Never stop testing and your [business] will never stop improving.”

  • Retail example: Select one branch whose manager seems interested in innovation and progress. Work with a team of sales people to increase sales on a few selected lines, perhaps in only some selected market sectors, by a specific percent in a matter of a month or six weeks. As they see tangible results, expand the test. Hone and hone until doable tasks emerge
  • Simplify systems: 1 page statements and memos. Remove 5-year planning systems and focus on monthly / quarterly. Focus on one or two closely watched numbers (Emerson’s division presidents are responsible for 3 items — inventories, profits, and sales). Each manager has 1 milestone per quarter (you can expect someone to get one thing done…), or 3–5 objectives per division or BU per year

2. Staying Close to the Customer

  • Excellent companies are obsessed and overcommitted to some form of quality, reliability, or service. Winners are maniacally focused on the revenue-generation side

“The sale really begins after the sale — not before…Getting the order is the easiest step; after-sales service is what counts!”

“We want to give the best customer service of any company in the world… The best salesman answer every customer complaint within 24 hours.”

  • Tie compensation to customer satisfaction scores: IBM measures internal and external customer satisfaction on a monthly basis. These measures account for a large share of incentive compensation, especially for senior management. Employee attitude surveys are taken every 90 days, and employee perceptions on customer service are monitored (systems in place to monitor retention and react immediately)
  • McDonald’s store manager compensation is heavily indexed to store Quality, Service, Cleanliness, and Value (QSC&V) to guarantee consistency and meet standards
  • Account executives are docked, out of bonus and salary, if customer retention drops, regardless of whether the original commission was paid to a previous sales representative
  • Basic sales training is comprehensive (up to a year to ramp): 70% in branches, 30% classroom with easy instruction booklets, 1-page toolkits
  • Effective service requires 1) active involvement from senior management, 2) entrusting people in the organization, and 3) high intensity and constancy of measurement and feedback

“Service objectives, are almost without fail meaningful to down-the-line employees. A strong sense of personal accountability among down-the-line employees is crucial…Customer relations simply mirror employee relations.”

  • Managing employee relations requires continuous preparation via incentive programs, training programs, or simple hoopla: formal and informal rewards from management giving individuals compliments; recognition at meetings, team dinners, division beer busts; awards ceremonies, special plaques, pen sets, free dinners, free trips… Think promoting internal competition and peer pressure mechanisms
  • Top managers solicit feedback frequently, visit installations, talk with customers to learn first-hand customer needs and competitive moves
  • Top managers also update their teams regularly and transparently with the latest figures on shipments, sales, and profits
  • 5 attributes to staying close to the customer through niche strategies: 1) astute technology manipulation (new niche solutions), 2) pricing skill (once dominate the niche, increase pricing), 3) better segmenting, 4) problem-solving orientation, 5) willingness to spend to discriminate
  • Startup Garage lessons: the user is a generator and tester of ideas. Successful innovators innovate in response to market needs, involve potential users in the development, and understand user needs better
  • The best companies clearly do more and better competitor analysis, but the work is not done in ivory tower staffers, reading or producing abstract reports. Every rep and manager is generating competitor / market analysis with constant feedback from users and direct customers

“If we can’t find an interested customer to work with us early on, the idea is sure to be a loser…The best companies are pushed around by their customers, and they love it.”

3. Autonomy and Entrepreneurship

  • Incubating a startup within a company requires a zealous, volunteer champion to power through implementing the idea, not just generating it, someone who can take a theoretical construct and bulldoze ahead. After that comes market potential and project economics
  • These small project 4–6 people teams are usually resource constrained and need to design a simpler product in the first place
  • Championing systems require 3 primary roles: 1) product champion, the zealot; 2) executive champion ex-product who protects the others from the bureaucracy, a coach or mentor; and 3) godfather, an aging leader who provides the role model for championing
  • Innovation success is a numbers game: probability of something succeeding is higher if you try lots of things. Law of Large Numbers! *Book does not address how to avoid a spray tactic basket approach. How do you know when to fold? At 3M, if a program hits a snag, the spending is cut back, team size is reduced, but the champion is encouraged to persist by himself or with one co-worker at 30% or so level of effort

“If I’ve got $1 billion of pharmaceutical sales, I’d be a lot happier with 10 businesses at $100 million than two at $500 million.”

  • Small is beautiful: smaller divisions and spinning off or “hiving off” new, growing divisions are more nimble, more adaptable. *Book recommends each division have its own accounting, personnel activities, quality assurance, product support…does this approach make sense? What about corporate synergies?
  • In the creation of new divisions, spinning things off rather than seeking higher sales volume for one’s division is the time-honored path to success. At 3M, each division has an ironclad requirement that at least 25% of its sales must be derived from products that did not exist 5 years ago
  • Rule of thumb for excellent companies: the top performers keep division sizes between $50-$100 million with a maximum of 1,000 employees each. Regardless of industry, it seems that more than ~500 people under one roof causes substantial and unanticipated problems
  • At 3M, compensation and performance measures are tied with the new venture: if annual sales hit $1M, it will automatically become a full-fledged product and champion’s job title and salary range change. $5M is the next threshold. If the product reaches $20M, it becomes an independent product department and he is the key technical person, becoming “manager of engineering or R&D” for that department

“If the product idea can meet financial measures of growth, profitability, and the like, 3M is happy to have it whether or not it’s in the dominant field of business.”

  • Retail example for internal competition: At Bloomingdales, merchandising VPs, buyers, and fashion coordinators engage in an unending tussle for scarce floor space. At P&G, brand managers are not given information about what’s going on with other P&G brands (except what’s publicly available) and are encouraged to compete
  • Examples of experimentation: At TI, marketers and product engineers go straight to the customer to make the first sales presentation of new prototypes. At Bechtel, every project manager spends 20% of his time experimenting with new technologies

4. Productivity through People

  • People respond well to being treated as grownups. People will flood you with ideas if you let them. Trust is the key to people
  • Top companies give people control over their destinies. They make meaning for people. They turn the average Joe and Jane into winners. They have a 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
  • Top companies have a rich system of people programs — monetary and non-monetary incentives — that are frequently replenished or refurbished (e.g., open forums and open door policy; Monday staff meetings to review all company programs, problems, finances, after which SVPs bring department heads up to date over lunch)
  • Example: Wal-Mart refers to its people as “associates,” not employees. Walton is known to get everyone involved. His best ideas came from the clerks and stockboys. At Texas Instruments, every worker is “seen as a source of ideas, not just acting as a pair of hands.”
  • Dana’s 1-page people philosophy reads:

“Nothing more effectively involves people, sustains credibility or generates enthusiasm than face to face communication.

We have an obligation to provide training and the opportunity for development to our productive people who want to improve their skills, expand their career opportunities or simply further their general education.

It is essential to provide job security for our people.

Create incentive programs that rely on ideas and suggestions, as well as on hard work, to establish a reward pool.”

  • Peer comparison / peer pressure is a powerful tool. for instance, at Dana, machine operators can check on their output and compare to peers. Individual, team, and unit results are available to everyone
  • Peer pressure example to curtail absenteeism: At an AT&T plant, the level of absenteeism wouldn’t go down, so management put a huge, visible board with everybody’s name on it and posted a gold star next to each name when people came to work. Almost overnight, absenteeism dropped. Another employee started writing production results, after a shift, in chalk on the floor in the machine area. Competition between shifts surfaced and quickly turned intense. Productivity leaped
  • Other incentive programs: At Mars, every employee gets a weekly 10% bonus if he comes to work on time each day that week. At IBM, a “gold circle” for the top 10% of salesmen are announced each month. Other companies offer special awards exclusively to honor the top few
  • Excellent companies have less structuring and less layering: excessive layering is the biggest problem of the slow-moving rigid bureaucracy. Excellent companies challenge the need of all those layers (e.g., the Catholic Church is a huge organization and only needs 5 layers — the laity, priest, bishop, cardinal, and Pope)

5. Hands-on, Value-Driven

  • Any organization, in order to survive and achieve success, must have a sound set of beliefs on which it premises all its policies and actions. The single most important factor in corporate success is faithful adherence to those beliefs. 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 the 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
  • Excellent companies are unashamed collectors and tellers of stories. Frito-Lay tells service stories. J&J tells quality stories. 3M tells innovation stories. Goes back to adherence to quality, reliability, or service
  • Most of the leaders of the excellent companies have come from operational backgrounds (design, manufacturing, sales) and are therefore comfortable with the nuts and bolts of the business
  • One individual leader at the top is not enough; the team at the top dictates all. The senior managers must set the tone in instilling critical business values, creating some homogeneity. Too much homogeneity, however, can lead to a “yes-man” syndrome. Around the critical business values, lots of yea-saying and reinforcement is essential

6. Stick to the Knitting

  • Organizations that do branch out — whether by acquisition or internal diversification — but stick very close to their knitting outperform others. The most successful are those diversified around a single skill — the coating and bonding technology at 3M, for instance

“These companies have strategies of entering only those businesses that build on, draw strength from, and enlarge some central strength or competence.” Related businesses outperform vertically integrated single businesses.

  • Most growth in the excellent companies has been internally generated and home-grown. The few acquisitions have been small businesses that could be readily assimilated without changing the character of the acquiring organization, small enough so that if there is failure, the company can divest or write it off without substantial financial damage

7. Simple Form, Lean Staff

  • A company can organize around product groupings, market segments, geographic areas where it has plants or sales offices, or basic functions of finance, sales, manufacturing, etc.
  • Excellent companies have a stable, unchanging form with crystal-clear primacy and simplicity. The most common simple form was the product division. Others, like McDonald’s, simply organize around their restaurants, stores, boutiques, or factories as the basic building block
  • J&J has 150 independent divisions, average size $30M, each called a company, each headed by a chairman. The companies are then aggregated into 8 groups of up to 20 companies each, and the companies in each group have either a geographic or a product similarity. Each consumer product division is responsible for its own marketing, distribution, and research
  • Arguments supporting the product division building block structure:
  1. Extraordinary divisional integrity. All the main functions, including product development, finance, and personnel, are in each division
  2. Constant hiving off of new divisions and rewards for doing so, like J&J
  3. A set of guidelines that describes when a new product or product line automatically becomes an independent division (e.g., $20M at 3M)
  4. Shifting people and even products or product lines among divisions on a regular basis. Constant re-revaluation of organization
  • Lean staff, especially at the corporate level. Fewer administrators (“career staffers”), more operators. Rule of 100: there is seldom need for more than 100 people in the corporate headquarters (e.g., Broadcom)
  • Having a unifying, underlying form can make better use of smaller divisions or units, temporary forms (task forces, project centers). These types of organizations can rearrange the ornaments but seldom the branches

8. Simultaneous Loose-Tight Properties

  • Soft / loose traits: clubby, campus-like environments, flexible organization structures (hiving off new divisions, temporary habit-breaking devices, regular reorganizations), volunteers, zealous champions, maximized autonomy for individuals, teams and divisions, regular and extensive experimentation, feedback emphasizing the positive, strong social networks
  • Tight — culturally driven / controlled — properties: rigidly shared values, action focus, regular communication, quick feedback and experimentation, nothing gets far out of line, concise paperwork (1-page memos), focus on realism, self-discipline, simplistic rigidity around what is vitally important. If you only have three numbers to live by, you may be sure they are all well checked out. External, maniacal focus and attention on the customer. Short-term results driven rather than 5-year long range forecasting. Great companies are highly centralized around a few crucial dimensions: central values, 1–2 top strategic priorities, a few key financial indicators
  • Revenue line comes first. Once the ball gets rolling, cost control and efficiency, over the long run, follow from the emphasis on quality, service, innovativeness, result sharing, participation, excitement, autonomy
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