Success in American Companies: Lessons for Canadians

MR. DERRY:

Reverend sir, distinguished guests, ladies and gentlemen: The quest for characteristics or features of business that make the difference between supreme success and that which is more modest is as long-standing as free enterprise itself. So it is not surprising that there has been great interest in and a most favourable response to the book In Search of Excellence, in which Robert Waterman and Tom Peters write about lessons from America's best-run companies.

In carrying out the study for this book, Messrs. Peters and Waterman clearly learned from their work. For not only is their book a study of and commentary on the characteristics of excellence - through its own success, it is itself an example of excellence. First published fifteen months ago, it received extremely favourable reviews and as a result of the strong interest in it, the millionth copy of the book rolled off the presses last September and it is now in its forty-third printing. This makes it the second-fastest-selling non-fiction hard-cover book in United States history, topped only by Alex Haley's Roots. In Canada, it has been on the non-fiction national best-seller list for forty-eight weeks, and over sixty thousand copies have been sold, which is easily a record for any business book in Canada. Bob Waterman is a director of McKinsey and Company, management consultants, in San Francisco and has been with that firm for some twenty years. Prior to joining McKinsey, he obtained a degree in geophysical engineering at the Colorado School of Mines and an M.B.A. at Stanford. He also obtained experience as a physicist at Marathon Oil Company, as a salesman at IBM, and as a research economist at the University of Denver Research Institute. Since joining McKinsey, Mr. Waterman has gained experience in Australia, Japan, and Switzerland, and has led McKinsey's Organization Effectiveness Practice in San Francisco. Research for In Search of Excellence began in 1978 and included a study of forty-three model American companies.

While Mr. Waterman notes that there are culturally driven differences between Canada's excellent companies and the ones studied by him and Mr. Peters, what strikes him the most is the depth and breadth of the similarities. It is with this parallel situation in mind that it is particularly interesting for us to be addressed today on the subject, "Success in American Companies: Lessons for Canadians."

I am most happy to welcome Mr. Robert Waterman.

MR. WATERMAN:

Mr. Chairman, ladies and gentlemen: The chief executive of IBM not too long ago said in a speech that the only thing we have to fear is arrogance, and I suppose with the success of In Search of Excellence I have a little bit of the same fear myself. But my family keeps me humble. Just last week I was skiing in Vail, Colorado. Following my son down the mountain, I picked up this cut on my head that perhaps you still can see. Blood was pouring down my head and I was feeling rather sorry for myself, and I thought that my son would have some sympathy - but instead, all he said was, "Getting old isn't for sissies, Dad!"

The one who really keeps me in line, though, is a guy named Bob Notes, who runs a bookstore in Burlingame, California, near where we live. He's a down-east personality from New England, sort of dour. I buy a lot of books from him and he's a "literary" sort of guy, so when Tom and I began writing the book I went down and told him. He looked at me with something that approached horror on his face and he said, "You'll probably fail, Bob - most authors do." I didn't know quite how to deal with that so I didn't say much. A couple of weeks later, I was back in his shop and it occurred to me that maybe he hadn't really understood, so I said, "You know, this book is being published by Harper and Row, and they're a super publisher," and he said, "They have their share of failures just like everybody else." So I avoided him for a long time, and after the book was published and hit fifty thousand copies in print about this time last year, I went to see him with the thought that he couldn't fail to compliment me. So I went down and he said yes, he already knew, but was I aware that "in this business, if we don't sell them, we can send them back?"

That's not the end of the saga. When it did hit the New York Times best-seller list, I rushed down with the clipping. I guess I didn't know my man because all he said to me was, "Have you read Jim Fixx's book?" I said, "You mean The Complete Book of Running, of course," and he said, "No, no - Fixx was just like you," and he thrust a book called Jackpot into my hands and said, "This is his next book and it's all about how writing a best-seller messed up his life. Read it and watch your manners."

I'd like to cover two topics with you today. We're often asked, "Which is the most important of all the attributes you talked about - what's the secret of excellence?" and "How do you move toward excellence?" Regarding the first, I'll tell you the secret in one word. And I'll share with you some thinking we've been doing recently along the lines of moving toward excellence.

The secret of excellence is fairly simple. If you look carefully, what clearly distinguishes the excellent companies from the rest is, in a way, nothing more than simple courtesy. And they demonstrate this courtesy in at least three ways.

They listen to their people; they listen to their markets. I ran across a nifty example recently. Have you heard of the Boker knife? It's a high-quality sports knife with a small share of the market. The manufacturer was almost going to drop the brand but decided to give it one last shot. The company's marketing people couldn't afford much in the way of market research or sophisticated focus groups or anything else like that, so they simply went out and talked to sportsmen - and they listened very carefully. What they discovered was that sportsmen tend to develop a sort of mystical attachment to some piece of equipment - a fly rod or a rifle or (in my own case) a reel. And they found that people like to tell grand stories about that favoured piece of equipment - in fact, they found that their potential market consisted chiefly of notorious liars. The first guy they encountered said, "This knife is so good that whenever I want to make French fries, I just put that knife open in the glove box of my pick-up together with a bunch of potatoes, and I drive across a rocky road in second gear - but for hash browns, of course, you'd use third gear." Another guy said he was whittling one day, and a horsefly landed on his knife hand, and he shooed it away and then he said he looked down and saw that critter walking away in four different directions. Still another character wrote in and said that the way he tested the hone on his Boker knife was to set it on edge, put a dollar bill on top, and watch gravity cut it in two.

Well, they ran a print advertising campaign entitled, "In every lie about the Boker knife, there's a little bit of truth." They simply printed these outrageous stories, and in about a year their market share had doubled and profitability was up about 300 per cent and it's still climbing.

The story itself may be trivial, but the important point is: They went out and listened very carefully to what their market had to say, and did something creative with that information. On a grand scale, it is precisely what Procter & Gamble did when it became the first company in the United States to put a toll-free telephone number on its packaging. They received something like two hundred and fifty thousand phone calls in the first year alone - to each of which they responded. They reported these calls in board meetings, and out of them came a lot of new product ideas. Or here's another example: I was flying back from Chicago not long ago, and the fellow sitting next to me on the plane was John Young, the chief executive of Hewlett-Packard. I asked him what he was doing in Chicago, and he said the company had been having some difficulty with its office automation product line and so he'd gone out to listen to customers to find out why.

These companies listen to their own people, too. In this year's annual report Procter & Gamble boasts of achieving $900,000,000 in cost savings. Where did that come from? From the ideas of twenty-five thousand employees. What they've done is listen very carefully to their employees. It's like Toyota getting something like eighteen suggestions per worker per year, 90 per cent of which the company acted upon. Where we could get some statistics, it appeared that similar American companies generate one suggestion per year for every three workers, only 30 per cent of which the companies typically act upon. It's rude.

Flying back to Atlanta from Denver not too long ago, I was talking with some Delta employees about how they feed ideas into the system, and one flight attendant replied, "It's fairly simple - we fill out flight reports." I said, "Everybody does that. What's different about Delta?" Another employee in the discussion, one who had worked at another airline, said, "The difference is obvious - at Delta, the supervisor always responds." She said that at her former airline there would never be any response. No one took the reports very seriously and no one bothered to put in any suggestions. The excellent companies, by contrast, pay very careful attention. And when you think about it, it's just plain courtesy.

Many of you are familiar with the Hawthorne experiments that went on a long time ago at Western Electric; they examined the impact of work conditions on productivity. When they'd turn up the lighting, productivity would go up; and when they'd turn the lighting down, productivity would go up. I believe the reason is simple - it isn't work conditions per se that matter; it's the fact that somebody is paying attention. The researchers were paying attention to the workers; of course productivity would go up.

When we were conducting our excellent-company research, we saw little signs posted everywhere at Hewlett-Packard saying "MBWA." When we asked the obvious question, we were told that the acronym stands for the company's management philosophy - "Management By Wandering Around." It's very important in the Hewlett-Packard culture to get out of the ivory tower, we soon learned - to get down to the shop floor, out into the marketplace, to talk with people and find out what they think. We thought at first that maybe this was unique among the crazies of Silicon Valley, but as time went on we found it to be common throughout most of the excellent companies. Here, it's Tom Bata, wandering around - in his case, wandering around the whole world - looki,lg for opportunities, talking directly to workers in the marketplace. It's Ray Kroc of McDonald's; it's Robert Anderson of Arco, wandering around the world looking for drilling opportunities. It is getting out to the relevant constituencies in the marketplace and onto the shop floor, finding out what's really going on. And when you think about it, it's simple courtesy.

One of our clients wasn't getting the kinds of line extension it felt it should. Research and development productivity was way down. In the first paragraph of my first report soon into the study, I made the observation that top management simply wasn't taking line extensions seriously at all. The managers balked at the charge; I told them, approximately, "Look, you tell everybody you're serious. Your strategies sound serious. You've hired us. But on the other hand, all your behaviour says you're not serious. You never go to the R and D facilities. You treat the R and D people as if they're weird because they look and they dress funny, and say funny things. You avoid them. All the signals you're sending out - which is what people really believe - say that you're not taking them seriously. You don't pay any attention to them and then you hammer them for not developing products." When you think about it, that's rude, too.

They don't serve or sell us junk. You probably all have your own favourite stories. Mine centres on a slide projector my wife Judy gave me for my birthday. (I like to take slides and bore my friends.) I pulled it out of the box and there was a big scratch on the case. I took it back to the store and said I'd like one without a scratch. The guy looked at me and said, "Well, it's not such a big scratch," and I said, "To me it is." He said, "Well, you'll probably scratch it anyway, won't you?" and I said, "Probably, but I'd like it to be my own scratch." He said, "it works, doesn't it?" and I said, "I don't even know." He said that if he took it back to the manufacturer just for being scratched, they would laugh at him, and I said that was their problem, and he said, "I can't do it," and we kept sparring. By the time my wife finally intervened and got us settled down, I'd escalated it to global terms and was talking about Japanese competition and so on. Ultimately, we did get another projector, but if it's really true that the manufacturer would have ridiculed the dealer for returning an imperfect piece of merchandise, it's another example of rude behaviour. It's a sad comment that when we get good service and quality, we're astonished.

In the excellent companies, by contrast, you find extraordinary service, extraordinary quality, or both. Take products that ought to be commodities in a purely economic sense - potato chips or toilet paper or soap or fast hamburgers, for instance - and ask why Frito-Lay and Procter & Gamble and McDonald's get much higher margins than the competition. Is it their marketing power? No. Rather, they offer unusual service, unusual quality, unusual reliability. It is as simple as that - and as complex as that. Vis-d-vis us as consumers, it's just plain courteous.

But how does a company actually move toward excellence? It's a topic we haven't researched in great depth yet, though Tom Peters and I plan to. My belief is that it takes a long time to bring about change in large organizations, or even in small ones. What I've done is look for examples of companies that hadn't been doing so well in something or other and then suddenly turned it around and began doing quite well indeed. I have in mind specific examples from industries as diverse as mining, manufacturing, and banking.

If you look at the way any of these change programs began, you find precisely what I was talking about earlier - a great deal of wandering about on the part of top and middle management. They are doing something that Hal Leavitt of Stanford calls problem-finding. He points out that experienced people, people who know a business really well, can usually sense opportunity and smell trouble if they simply get out into the field and look and observe.Tony Athos of Harvard points out the same thing. It's because of the experience base that you can do that. Inside McKinsey, I see our better problem-solvers doing it too. Basically, you're out there, wandering around in a field that you know, asking yourself the same questions: What doesn't make sense? Why?

That's where all the exciting ideas seem to come from, and that's the real value of experience in business. In Search of Excellence discussed the limitations of analysis, and I think those limitations are partly a consequence of jumping to conclusions without having formed interesting hypotheses; and the reason people don't form interesting hypotheses is that they don't go out and look. Another part of the reason is that during the past twenty years or so, our culture has been so youthoriented that we've tended to downplay the value of experience and play up what youth does so well, which is analysis. I don't think youth does this wandering around particularly well, by the way, because youth lacks the experience base.

The second critical dimension of every successful change program I've seen is analysis. If all you do is wander about, your decisions will all be made necessarily by the seat of your pants. It is equally important to do some objective testing to find out whether your hunch is really right. For example, in the case of the bank to which I alluded, wandering around told us that employees in one of its two major cities weren't nearly as concerned about the bank's declining share of the market as their counterparts were in the other major city. It took analysis to show us that the whole market share loss was in one city, and, in fact, only in certain branches in that one city. The bank was in fact gaining market share in the other city. The point is that numerical analysis is important, but it is important as the second step, not the first.

The third important ingredient in a successful change program is the ability to create a sense of urgency for change. This, I think, is the real function of leadership, and too often it is ignored. In our Canadian clientele as well as in our American, too many companies wait to change until economic crisis is just around the corner. When we look closely at our Canadian and American excellent companies, we see leaders who anticipate change in the environment and who create a sense of urgency before a crisis ever occurs. The reason this is so important is that organizations, just like people, are creatures of habit. People get comfortable; so do organizations. We're apprehensive about change. We're inclined to confront it only when we have to, when we finally perceive that the world out there is changing, and that we must, too, whether or not we like it. It's the function of leadership to create that sense of urgency in the organization, to break old habit patterns, form new ones. Otherwise, things just don't change. But why don't leaders do this more routinely? Often, life has become just too comfortable for them, too. By the time you've made it to the top, you have only a few years to go; change is a lot of trouble; it's easy to pass on most problems to your successors. I think leaders who aren't creating that sense of urgency aren't doing their job.

The fourth characteristic of a successful change program is subtle - the fact that change is probably made up of thousands of little things done differently, rather than a few major shifts. In writing the history of change, we like to tell stories about a few signal events - mine about the Boker knife, for example - because they make good stories and they're fun to write and talk about. But I believe we kid ourselves if we think a few big hits are going to make the difference. I really cottoned onto the importance of doing thousands of little things differently when I was working with a group of young engineers in a particularly innovative company. I divided them into six groups, assigning a single element of organizational effectiveness to each - "structure" to one group, "strategy" to another, "management style" and "corporate culture" to yet other groups, and so on. Their assignment was to spend forty minutes preparing an argument to prove to the rest of the group that their element of organizational effectiveness was the most important in explaining why the company was so innovative. When they came back, the expected happened, that is, they convinced one another that all the elements were important. What also happened, to my surprise, was that when these youngsters came back, they had generated fifty or sixty ideas per group, about three hundred in total, to explain why the company was so innovative. Next, they divided themselves up to examine something at which the company was not very good - and they could only come up with five or six items in all. The message was, clearly, that the reason organizations are good at some things is that they do thousands of things well, even at some fairly minute levels. And when things don't change, a big part of the reason is that management doesn't appreciate just how much it takes to do things differently.

The fifth point in moving toward excellence is the importance of involving lots and lots of people. In each of the successful change programs I've talked about - and this is, I believe, one of the reasons the Japanese are as successful as they are - people all the way up and down the line were involved. It's not just a matter of management's making a crisp decision, articulating a strategy, and firing the starting gun. It seems obvious - why shouldn't the people who are going to have to help implement a decision be involved in making it? It also seems clear, looking again at that nine hundred million dollars in cost savings at Procter & Gamble, that you get a lot of creativity out of involving people. Why isn't it done more often? Well, it's a messy process. People have the unfortunate tendency to come up with ideas of their own - the more people you get involved, the more ideas there are, and the more argument goes on. It takes a lot longer to make decisions that way. The purity of your original premise gets all messed up along the way because people mingle their own ideas in the pot with it. On the other hand, once the decisions are made, implementation happens very fast because all those people who were involved are now committed to it - the ideas are theirs, and they recognize them.

A related notion is the need to view leadership as guided autonomy rather than as control. We talked a lot in the book about autonomy and entrepreneurship. In exploring the topic of productivity through people, and the reasons some companies don't achieve it, we found productivity efforts getting started and then being squelched. What happens - and it happens a lot - is that management or top-line supervisors are really interested in power and control, and this substantially outweighs their interest in productivity. David Bradford, a researcher at Stanford who has written about this phenomenon, calls it the "heroic model of leadership." He says a lot of us have the notion that, somehow or other, if we're in charge of something, we should be able to solve problems far better than anybody else in our department. As satisfying as that model may be to those of us who carry it around, it is very frustrating for those who work for us, and it doesn't generate productivity. Bradford then articulates his model, which is very much the same as our concept of leadership as guided autonomy, rather than as control - setting up the broad boundaries for change, then letting people all the way down the line get a piece of the action in the change process.

I'll touch very briefly on the last two components of moving toward excellence, both of which should be self-evident, but which often aren't. One is the importance of follow-up. Change programs take years - and managements don't typically follow up, at least in my experience. They get bored and move on to the next priority. I received a letter from the United States Secretary of the Army not too long ago, who wrote that he had liked the book and that the Army had adopted "Excellence" as its theme for the year. (I'm worried about that!) You can't change that quickly. Where you see real change occurring, you'll also see follow-up.

The last point, almost but not quite a throwaway, is that success breeds success. If people feel like winners, they probably will win. If they feel like losers, that may be selffulfilling also. When you're changing things, you're almost inevitably entering new and often scary territory, and you're apt to come up against a lot of failures. It's important for leadership not to dwell on the failures, but to look for and applaud the successes instead. Reinforce those and a change program will work much better and much faster. I think that one important reason the excellent companies are as excellent as they are is that they have been successful and they reinforce that mentality.

And right around the corner from that is arrogance - and to get yourself calibrated again, you've got to come full circle and wander about and ask the customer how you're doing.

Thank you very much for your attention, and for the honour of inviting me to visit with The Empire Club of Canada.

The appreciation of the audience was expressed by H. Ian Macdonald, a Past President of The Empire Club of Canada.