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PART I
THE FOUNDATION OF EXCELLENCE
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⢠CHAPTER 1 â˘
Creating Excellence: Toward A New Age Renaissance
We must welcome the future, remembering that soon it will be the past; and we must respect the past, remembering that it was once all that was humanly possible.
âGEORGE SANTAYANA
Those things that hurt, instruct.
âBENJAMIN FRANKLIN
What Is Excellence?
A Baccarat crystal vase displaying a dozen long-stemmed American Beauty roses. New Hampshireâs technicolor hardwood forests in October. The cry of a newborn baby. Whatever your definition of excellence, you would probably agree that such experiences deserve the label. In fact, we seem to easily recognize excellence. Beethoven, Mozart, Shakespeare, Hemingway, and Leonardo da Vinci created it. Gandhi, Socrates, Franklin, Confucius, and Einstein had it. John Wooden, the legendary UCLA coach, brought it to the basketball floor, Vince Lombardi inspired it on the football field, and Jesse Owens showed it at the 1936 Summer Olympics. Everyone recognizes that an Olympic gold medal and a Nobel price reward it.
Such recognizable excellence extends to the business world. Rolls-Royce, Mercedes-Benz, and Porsche have crafted world-respected automobiles. Products such as Kleenex, Xerox machines, and Scotch tape have come to refer generically to all similar products, regardless of manufacturer. When we think of American companies that embody excellence, IBM, Hewlett-Packard, Citicorp, Delta Air Lines, McDonaldâs, General Electric, and American Express leap to mind. How did such companies create models of excellence? Did they provide outstanding products and services to their customers? Did they bestow unparalleled benefits on their employees? Did they dominate their competitors? Did their annual reports consistently display record growth and earnings? Yes, they accomplished all these goals, but they did more. They exploited ideas, inventions, and innovations; they never rested on their laurels but always sought to pioneer products and services; and they promoted and rewarded individual leaders within their ranks.
As in most fields of endeavor where you wish to gauge excellence, you can measure organizational excellence with both objective and subjective yardsticks. Neither one, however, provides a complete test. Peters and Waterman set forth six objective criteria for gauging excellence in their book In Search of Excellence: compound asset growth; compound equity growth; average ratio of market to book value; average return on total capital; average return on equity; and average return on sales. At the other end of the scale, Fortune magazine has adopted rather more subjective criteria for ranking corporations: quality of management; quality of products or services; innovation; value as a long-term investment; financial soundness; ability to attract, develop, and keep talented people; community and environmental responsibility; and use of corporate assets. Although both objective and subjective criteria help identify truly excellent organizations, they do not do justice to every type of organization at any given stage of development. For example, Peters and Waterman concluded that Dana Corp., Boeing, and Texas Instruments provide excellent models, yet in the last four years each of these companies has suffered setbacks that might, at least according to the Peters and Waterman yardstick, knock them off the list. And what about the breathtaking turnarounds of Chrysler, Baldwin-United and Firestone? Shouldnât their progress count for something?
Fortuneâs ranking of corporate reputations can also fail to capture a perfect picture. Johnson & Johnson, previously number five on the âten most admiredâ list, had a serious earnings problem in 1983. J & J 1983 versus 1982 margins (net income before extraordinary items as a percent of sales) dropped a full 23 percent in the fourth quarter. The market value of their stock plummeted 17 percent. The worst nose dive, however, was taken by Eastman Kodak, number four on Fortuneâs 1983 list, but gone completely from the 1984 list. Kodak 1983 versus 1982 profits plunged 51 percent. Are such companies no longer excellent? Or, do the measures of excellence listed above provide insufficient yardsticks? Instead of adopting a rigid set of criteria for judging excellence, we recommend that you measure your organization against your own unique standards. Your tailor-made criteria may measure customer satisfaction with your products and services, the rewards and benefits your employees receive, dominance in a defined market, progress toward growth and profit goals, or innovation. If youâre a banker, you may weigh these categories differently than a computer manufacturer would, and you might rank the categories in a different order. But you must never overlook one crucial factor: developing individual executives into leaders.
No matter what all the surveys, studies, and comparative statistics indicate, the real race for excellence is the one you run against yourself. Can you lead your organization toward your own definition of excellence?
Individual Leaders, Not Organizations, Create Excellence
Individual executives who have developed specific skills create superior organizational performance. Excellence doesnât happen miraculously but springs from pacesetting levels of personal effectiveness and efficiency. Great business, government, and nonprofit organizations owe their greatness to a few individuals who mastered leadership skills and passed those skills on to succeeding generations of executives and managers.
James C. Fargo, the third president of the American Express Company, returned from a trip overseas in 1890 fed up with the inconvenience of the âletter of creditâ system for obtaining cash in foreign countries. He immediately commissioned one of his executives, Marcellus Fleming Berry, to solve the problem. We imagine the following conversation. Fargo said, âBerry, the moment you get off the beaten track, letters of credit are of no more use than so much wet wrapping paper. If the president of American Express [then a respected shipper of goods, specializing in money and valuables] has that kind of trouble, think about the trouble the ordinary traveler has. Something must be done. Do it.â Eventually Berry developed the original âtravelerâs chequeâ to replace the inconvenient letter of credit, an innovation that made world travel much more convenient. Fargoâs insight and vision combined with Berryâs versatility and focus set the tone for future generations of American Express executives who strengthened American Expressâs status as one of the most admired diversified financial corporations in the world, with over $10 billion in revenues.
A handful of visionary pioneers created the U.S. airline industry. C. R. Smith at American, Eddie Rickenbacker at Eastern, Juan Trippe at Pan American, William Patterson at United, and C. E. Woolman at Delta each established highly profitable airlines, but only one of them successfully passed his skills on to his successors. Though each of these pioneers had mastered the skills required to build strong corporations, only Woolman assembled a management group capable of carrying on the skills that had won Delta its early success. His rival pioneers held on to their power too long, neglecting the development of those who would inherit their leadership, and set the stage for eventual reorganizations, shifts in direction, and alarming earnings fluctuations. Delta, however, sustained its excellence because Woolman slowly but surely shifted the burdens of management to a group of executives committed to his own basic tenets and philosophies. Although the transition didnât occur overnight, when Woolman died suddenly in 1966 his corporate heirs smoothly grasped their mentorâs reins. Woolmanâs management skills, characterized by his three famous tenets (treat employees like members of a family, maintain strict consistency, and thoroughly plan facilities and equipment) guided the new leaders. The financial result of Woolmanâs transfer of skills? Delta is the most profitable airline in the world. In the past ten years the companyâs cumulative net earnings have been double those of any other carrier.
Individuals, not organizations, create excellence. With their unique skills they lead others along the pathway to excellence, carefully cultivating those who will later assume the controls. To groom future leaders successfully, the mentor makes sure he passes on both his gift for strategy and his flair for building a strong corporate culture.
The Foundation of Excellence: Strategy and Culture
Before you can apply the six important leadership skills we will be discussing in much greater detail in Part II, you must understand that you cannot succeed without laying a strong foundation of strategic thinking and culture building. In Chapters 2 and 3 we will explore these two concepts thoroughly, but for now we can simply define strategy as the hard-nosed American approach to business that traditionally stresses the impact of competitive advantage on the bottom line, and culture as careful attention to organizational and people needs (an approach for which many Americans greatly admire the Japanese). To unite strategy with culture (Chapter 4) you first need to develop a vision of the firmâs future and then in order to implement strategy for making that vision a reality, you need to nurture a corporate culture that is motivated by and dedicated to the vision.
The marriage of strategic thinking and corporate culture building requires that leaders not only cultivate broad vision but master the skills to implement that vision. Such leaders see crisis as opportunity, not danger, and create a future equally responsive to the bottom line and to an organizationâs people. We all know Detroit lost its preeminence in auto making by believing that âcustomers will drive whatever we build for them,â while Japanese car manufacturers rethought the automobileâs role in a changing world and designed a car better suited to that world. Now Toyota, not GM, dominates world markets with excellence.
Transforming mediocre organizations into excellent ones, converting crisis into opportunity, and shaping vision into reality demand more than theoretical formulas or quick fixes. Although it takes a tremendous investment of time and effort, anyone can learn to do it. Unfortunately, most top executives can either think strategically or build cultures creatively but cannot do both simultaneously. The challenge is to become both visionary and realistic, sensitive and demanding, innovative and practical. The leaders who achieve this are the ones who do things first, sometimes before others even dream of them. They thrive on always being on the leading edge of new trends and ideas. They are people like Peter Schutz.
When Schutz, an American, became president of Porsche in 1980, German newspapers blared the headline âGASTARBEITER [foreign worker] IN THE PRESIDENTâS CHAIR!â An old family-run company, building one of the worldâs supreme motorcars, Porsche had languished under a previous president, not a family member, who so antagonized employees that Ferry Porsche, the founderâs son and chairman of the board, had felt it necessary to move his offices out of headquarters so as not to be associated with the management regime. Pride sank to an all-time low. In came Schutz, whose first act was to ask Herr Porsche to return to the fold. Then for ninety-five days, nothing happened. The workers, at first hostile and suspicious, turned speculative: whatâs was going on? One day the racing engineers decided to brief Schutz on their plans for Le Mans, where Porsche cars had won five times. This year, they explained, they would not race to win, because it was a marketing year for showing off the new Porsche 944. Schutz replied, âI donât care what you have to do but Porsche is going to win at Le Mans.â A scant two months before the race the team worked furiously to get cars ready for the twenty-four-hour endurance trial. Schutz, accompanying the team to the race, spent the entire time in the pits. Looking back on the experience, he said, âNever in my life have I witnessed such professionalism, team spirit, and dedication. I kept telling myself, we canât lose, we canât lose.â Not only did Porsche win the race and renewed pride, but Schutz won Porsche, establishing himself as a leader capable of strategically positioning the company and revitalizing its culture. Afterwards an engineer summed up the employeesâ respect when he said, âPeter Schutz has proved he is the right man for Porsche.â
Strategic thinking and culture building work in tandem. Actions based on strategic thinking must effectively satisfy customer needs, gain a sustainable advantage over competitors, and capitalize on company strengths. Actions aimed at corporate culture building instill a collective commitment to a common purpose, foster distinctive competence among employees to deliver superior performance, and establish a consistency that helps attract, keep, and develop leaders at all levels.
All firms follow some kind of strategy and function with some form of culture, but most do this only halfheartedly. Sometimes a company develops a strategy it canât implement. When Exxon tried to run its new office systems business like an oil company, it lost millions of dollars to more agile high-tech rivals who knew their business. When Quaker Oats moved into toys and restaurants, it almost destroyed a once invincible food marketing culture. Some senior executives attempt to correct problems in the culture with confusing and alienating policy memos and dictums. Jim Edwards reorganized Bausch & Lombâs instruments group overnight into new reporting relationships, governed by IBM-like operating policies, such as a matrix-style structure that had people reporting to more than one boss. However, the Bausch & Lomb crew didnât respond the way Edwardsâs IBM experience had taught him they should. Confusion skyrocketed, earnings crashed, and Edwards resigned. Roy Ash of AM International lost his job the same way when his seemingly brilliant strategy failed to launch the company into the high-tech future. Too much change too fast.
By sharp contrast, Hewlett-Packard has instilled a sense of shared purpose and a striving for technological innovation in its organization by encouraging rather than stifling an entrepreneurial spirit. The company has successfully kept entrepreneurs within its ranks, while many rival companies lose theirs to start-ups. The consistency of this purpose has outlasted its founders. H-Pâs strategy depends on innovation to satisfy customer needs, better products to gain advantage over competitors, and individual entrepreneurial spirit. This strategy differs dramatically from that of U-Haul, which cancelled agreements with its independent dealer network and tried to open company-owned moving centers, a thoughtless strategy that demolished U-Haulâs culture, obliterating the good dealer relationships the company had so carefully cultivated. Within a year U-Haul lost half its business to Jartran and Ryder.
Most firms are either strategy-deficient or culture-deficient. Deficiencies in either sphere usually lead to failure. Who can overcome such deficiencies? Strong leaders. Fortunately, leaders are made, not born. Any executive willing to make the commitment and investment of time and energy can learn six essential skills for constructing excellence on the foundation of strategy and culture. But before embarking on the arduous path toward excellence, the executive must develop what we call the New Age attitude.
The New Age Attitude
Just as most people recognize excellence when they encounter it, most of us accept the fact that the world has changed dramatically in the past thirty years. We might characterize the Old Age of Management as one in which opportunities seemed...
