by James C. Collins and Jerry I. Porras, Random House Business Books, 1996.
A copy of this book can be ordered online via the Ashridge e-bookshop.
This is about companies that have stood the test of time, whose core values have not changed and who have grown by 1000 steps, not by permanent revolution, but though having occasional "big, hairy, audacious goals" (BHAGS). They aim at steady self-improvement, rather than killing competitors.
(Reviewed by Edgar Wille in July 2001)
(These book reviews offer a commentary on some aspects of the contribution the authors are making to management thinking. Neither Ashridge nor the reviewers necessarily agree with the authors’ views and the authors of the books are not responsible for any errors that may have crept in.
We aim to give enough information to enable readers to decide whether a book fits their particular concerns and, if so, to buy it. There is no substitute for reading the whole book and our reviews are no replacement for this. They can give only a broad indication of the value of a book and inevitably miss much of its richness and depth of argument. Nevertheless, we aim to open a window on to some of the benefits awaiting readers of management literature.)
Like its title, this book will be around for some time, contributing to the debate on what a business really is set up to do and to be. Should businesses expect to endure, providing services and products which reflect their core competences and values, meeting customer needs and wants? Or do they exist as a means of making money for shareholders who have no intrinsic interest in them as entities, in what they do and are. Are they mere counters on the tables of the stock exchange casinos, bought and sold, merged and broken up, to make money for investors who have no loyalty to them, who do not invest in them per se, but rather in "the market"?
Collins and Porras look back over two centuries and seek to understand what has made some companies endure, compared with the continual merry go round which tends to characterise modern business, where there are daily changes in whom owns who and short termism prevails. They look back to companies which were founded on principles and purposes which permeated their whole being and were intended to last. Yes, they made good profits and intended to, but they stood for something beyond transitory shareholder value.
Obviously such a book is controversial, but at a time when much is being written about the vision and mission of companies, the empowerment of employees, shared values, dedication to quality and customer service, company culture and the role of business in society, it is stimulating to be challenged. Do we really mean all this high sounding talk? Or do we see companies as mere temporary mechanisms to inflate the money made by investors as they weave through the various companies currently seeming to offer the greatest immediate return?
Collins and Porras examine companies that have stood the test of time. Their average founding date is 1897. They compared them with other good companies that did not quite attain to the same stature and considered them from start up, through mid size to becoming large companies. A major lesson was that they were not started or developed by geniuses or charismatic leaders with rare and mysterious qualities which could not be learned by others. The lessons of these companies could be learned by the majority of managers at all levels.
The book is about what the authors call visionary companies that made an impact as ongoing institutions, which endured prosperously, whatever changes of leadership, products or markets occurred. The term "visionary" is used rather then "successful" to emphasise them as an elite breed of organisation. They are paired for the comparison with successful companies which didn't quite make that level. These were silver or bronze medallists as compared with the visionary gold medallists.
So Proctor and Gamble is compared with Colgate, Hewlett Packard with Texas Instruments, Motorola with Zenith, Walt Disney with Columbia, Johnson and Johnson with Bristol-Myers Squib, Merck with Pfizer, Boeing with McDonnell Douglas, 3M with Norton and so on. The visionary companies were selected by asking CEOs from leading corporations (eg Fortune 500 etc) to nominate five companies which they regarded as outstanding. 165 CEOs replied from a good cross section of companies. The twenty visionary companies were selected from the most frequently mentioned.
The comparison is not a highlighting of altruistic qualities. By averaging the companies out it was found that a dollar invested in 1926 in the comparison companies would have grown to $955 by 1991 (twice the return in the general market), but if invested in the visionary companies it would have grown to $6356 (fifteen times the general market).
As the authors studied the companies they did not compare "good" characteristics they might share in varying degrees, such as customer care or employee empowerment. Rather they looked at them throughout their entire histories. Instead of "how are they doing today?" they asked "how did they start?", "how did they evolve?", "how did they move into the big league?", "how did they deal with adverse external circumstances?" and "how did they adopt new technologies?" They sought to uncover the timeless principles upon which they were based.
As the authors studied the companies they made a number of interesting discoveries, which shattered generally received myths. They reached the conclusions set out below:-
They found that few of the visionary companies started with such an idea or even with initial success. They illustrate this by a parable. In what great demand someone would be who could always tell the exact time, right to the very second. But how much more valuable would be the person who could build clocks which could tell the time for ever, even after he or she was dead and gone. That is what happens in "Built to last'' companies. The greatest creation is the company itself.
Thus Bill Hewlett and Dave Packard started a company in a garage and after that decided what they would make. They were opportunistic as to product and service, but they knew what kind of company they wanted to create. Similar stories are told about Wal-mart and Marriott of the hotel chain (the latter just knew he wanted to be in business for himself). Some companies, such as Boeing, 3M and Disney, even began with failures from which they learnt. All the visionary companies saw their products as a vehicle for the company, rather then the company as a vehicle for the products.
Many were just concerned to secure the futures of their families when they started their companies. Some did have great leaders, but so did some of the comparison companies. For example who was William McKnight? Yet he guided 3M for 52 crucial years of their existence. Ibuka of Sony was thoughtful, reserved and introspective. Proctor and Gamble were stiff, prim and proper. Bill Allen of Boeing had a shy and infrequent smile. These and others did not have to provide high profile leadership to establish a great company which would last. Of course some were charismatic, but it is not the sine qua non for durability. Clock builders were required.
Often rather than great personalities, founders were operators who just wanted to make things work and go on working. Sam Watson wanted to build the finest retail organisation he could and was still at it on his death bed. He created an organisation which would evolve and change without him at the helm. Examples are given of how visionary companies encouraged dissent and debate, whereas the relevant comparison companies were given rigid prescriptions from the top.
What these leaders of visionary companies were doing was to develop a perspective that would endure, embedding a dynamic process in the enterprise, rather than offering an all knowing, godlike brilliance. (This is different from many courses and books on leadership. The Ashridge leadership programme, however, emphasises the down to earth principles which can be learned.)
Of course they intended make money, but this was only part of a cluster of objectives; they had a core ideology and yet made more profit than many companies who think only in terms of profit. In 1935 George Merck declared that the company consisted of "workers in industry who are genuinely inspired by the ideals of the advancement of science and of service to humanity". They gave away Mectizan, a drug to cure river blindness, to a million or more third world inhabitants. They did this irrespective of direct business benefit, yet of course it did also pay off in terms of reputation. "Medicine is for patients, the profits follow." In contrast Pfizer place greater emphasis in their company thinking: "so far as humanly possible we aim to get profit out of everything we do". Nothing wrong per se, but the emphasis was different from Merck. A Pfizer president said "I would sooner make 5% profit on $1bn in sales than 10% on $300m [in ethical drugs]". To this end he made acquisitions and diversified into anything that would make money.
Examples are given of other companies who expressed high ideals which became part of their permanent atmosphere. In its origin Sony stressed usefulness to society, rather than mere growth. Even Henry Ford was attacked in the Wall Street Journal for his na?ve wish for human improvement by "injecting spiritual principles into a field where they do not belong". He doubled worker wages and halved car prices, because he wanted to transform ordinary people's opportunities in life, and of course he made a profit. Whatever spotty record Ford might have, soul was present. Ford was influenced by the writings of the idealistic philosopher Ralph Waldo Emerson.
In their research, Collins and Porras claim to have established that they "did not find 'maximizing shareholder wealth' or 'profit maximization' as the dominant driving force or primary objective through the history of most of the visionary companies". They say that "profit is like oxygen, food, water and blood for the body; they are not the point of life, but without them there is no life".
Dave Packard, in establishing the HP way, told the members of the company that while making money was an important result of a company's existence, the real reasons were deeper. He went on to speak of accomplishing together something they could not do separately to "make a contribution to society - a phrase which sounds trite but is fundamental". He said "profit is not the proper end and aim of management - it is what makes all of the proper ends and aims possible". This view was still maintained by Packard's successors.
Right from the start Johnson and Johnson made it clear that they kept going, not for the purpose of "paying dividends or solely for the benefit of Johnson and Johnson, but with a view to aiding the progress of the art of healing." This agreed with the original aim of Robert Johnson in 1886 "to alleviate pain and disease". Their credo is justly famous for its establishing priorities in this order: product qualities for the users, good working conditions for employees, managers of understanding, good citizenship, and "when these things have been done, the stockholders should receive a fair return".
The visionary companies had a set of core values which were part of their very soul. They did not have to be highly idealistic but they provided the basis of consistency in the company, its very breath. They planted a fixed stake in the ground: "this is who we are; this is what we stand for; this is what we're all about". Many of these core values are illustrated in the previous section of this summary. They are always simple and straightforward, clear and powerful. They are few in number.
There is no one right core ideology. Some of the companies concentrated on customers; others on employees, products, risk taking or innovation or combinations of these. Their core values were not necessarily at the top of some moral scale. They were consistent directions of activity, which might be down to earth ways of doing business, with cynicism banished and a steady pursuit of aims ingrained in the whole company. These values were the guiding tenets of behaviour, the common cause that all could share, whatever specific changes might occur as part of development or through external circumstances.
The authors also make the point that core values are situational to the companies concerned. They cannot be taken off the shelf and applied in every company, though there some frequently repeated concerns with customers and employees, with honesty and "do to others what you would wish them to do to you". They outlive the management fads of the day. They are not to be confused with unique selling propositions. They need to be authentic, not just different.
They are values which do not change though the physical outworking may do. "Built to Last" is so written that it stimulates the memory to add examples. I thought of Baldwin's, the great steam locomotive makers of the nineteenth century. They went out of existence, because they thought that the making of the best steam engines in the world was their core value. The comfortable reduction of distance for the public might have been a clearer value - even expressed as "bringing friends and families together." This would have left the way open for diversifying of product and activity, while still staying true to values.
The previous paragraph is an illustration of the next principle that our authors emphasise. The core values never change but everything else can and often did; adaptation without compromise of core ideals was the key.
Motorola's chief executives have stressed the need for "continual renewal", while "cherishing the proven basics". IBM's Thomas J Watson Jr expressed this: "if an organisation is to meet the challenges of a changing world, it must be prepared to change everything about itself except [its basic] beliefs as it moves through its corporate life. The only sacred cow in an organisation should be its basic philosophy of doing business". The essence of the visionary company is said to be to "preserve the core and stimulate progress".
Most of the companies in the visionary category do have a relentless drive for "change and forward movement in everything that is not part of the core ideology". The authors illustrate this with 3M with their Scotch tape and Post-its, Motorola and its move on from its battery eliminators of the 1920's, as they would obviously become obsolete, and HP's recognition that they can never say that they have arrived. Core ideology and the drive for progress are both woven into the fabric of highly visionary companies. This is the essence of the "clock building" approach referred to above. The values and the activities are in alignment.
These companies might appear conservative, but from time to time they took enormous risks which got the adrenaline flowing and made leaps of progress at crucial moments. The authors call them "Big Hairy Audacious Goals" (BHAGs). They followed the challenge of Theodore Roosevelt: "Far better to dare mighty things, to win glorious triumphs, even though checkered by failure, than to rank with those poor spirits who neither enjoy much nor suffer much, because they live in the gray twilight that knows not victory nor defeat".
Examples given include Boeing's audacity to build a large jet aircraft for the commercial market, such as the 707 and 727. Douglas Aircraft held back and fell behind in the jet market. Boeing went on to the 747, a decision which nearly killed the company, yet it grabbed the whole company in its very heart and got commitment that a mere mission statement could never achieve. But the risks were high and they could have gone under but for the sense, permeating the whole company, that they were climbing a technological Everest. The goal was clear and compelling. It got "people's juices flowing".
Henry Ford's decision to "democratize the automobile', building a car for the great multitude, enabling them to enjoy the great open spaces, transformed the position of Ford among the many motor car manufacturers around in the early 1900's . Later on when they didn't replace their goal with another BHAG they just became, for a long while, another large auto company.
Sony were stimulated by the BHAG that saw transistor radios as possible for a mass market, though they were at first derided. Sam Walton's similarly outrageous targets, set in the 70's, for his retail outlets were seen as impossible, but by 1991 his company was the biggest retailer in the world.
The way in which IBM bet everything on the 360 series in the 1960s was described by FORTUNE as "the riskiest business judgment of recent times". A level of "unreasonable confidence" was required in all these cases. These BHAG's were not modest, humble cautious or prudent. There may be a time for these qualities, but starting a Disneyland, or P & G's change to direct selling to retailers, or the other cases mentioned, required a mood which was prepared to try "the impractical and the impossible and prove it to be both practical and possible". "It simply never occurred to [the insiders in BHAG situations] that they couldn't do what they set out to do".
The periodic chasing of BHAG's becomes a way of life which carries on after a charismatic leader is no longer there. They are not only set at the top of the company but at all levels, where they challenge all the staff. They defy the odds, but do much to "make people feel that they belong to something special, elite, different, better".
People who do will fit and flourish and find happiness in their work. Others will probably go elsewhere. They are not places merely following a humanistic gospel. Sometimes they develop the kind of esprit de corps associated with cults. This may be accompanied by a lot of razmataz or may feel stifling to some personalities who have not been grabbed by the big idea. The constant din of the exhortation and slogans in some such companies, with special marking out of successful people, may not be for everyone.
Nordstrom, a great department store chain, has a powerful attraction to those who love to be what they call "Nordies". But others might resent the feeling of being taken over, body and soul. "If you don't like to work in a gung-ho atmosphere where people are always revved up, then this is not the place for you." So wrote in "The best 100 companies to work for in America. Not everyone is ready to give as much of their personal identity as some of these visionary companies expect. They might feel they were being brainwashed. On the other hand there is considerable autonomy to make decisions at quite a junior level in most of these companies, especially when face to face with customers.
Other companies are used as examples of what some might regard as a downside. Employees in Disneyland are trained to see their every action as devoted to making people happy. Their job descriptions are phrased in terms of dramas. A work shift is a performance, employees are cast members, a uniform is a costume, a job is a part. For many this generates a sense of excitement and gives them a special identity. And with all the strength of the culture, mythology, language, celebrations and constant output of what might be called propaganda, most of these companies give a lot of scope for adaptation and innovation, experimentation and freedom. Because of the tight culture the employees can in fact be trusted with a large degree of freedom. There is confidence that they will not transgress the values.
They are not noted for brilliant strategic planning. They tend to grow by experimentation and opportunism, very much like Mintzberg's "emergent strategy". It's not that they never did any planning, but they "try a lot of stuff and keeps what works". Whereas BHAG's worked by large jumps, the experimental approach worked as evolutionary progress.
Johnson and Johnson got into the baby powder or talc business quite by accident; at one stage it became responsible for 44% of their revenues. In 1920 an employee developed a ready to use bandage for his wife who kept cutting herself on kitchen knives. The company took it up and Band Aid was born.
Hoteliers Marriott strayed into the business of providing airlines with food and drink and were soon operating at over 100 airports. American Express did not sit down and reach a strategic decision to develop travellers' cheques. It all happened because their president had trouble getting credit when off the beaten track. They accidentally created a new international currency. 3M and Post its is a well known example of stumbling onto something that worked.
The experiments that succeeded seemed to follow the Darwinian model of random variations and the best survive and develop. For every success there would be a number of unsung failures, though even these often led to innovation in a different area.
R. W. Johnson said: "Failure is our most important product".
Wall-mart's store greeters sprang out of an attempt to restrain shoplifting. Jack Welch at General Electric went in for what was called "planful opportunism". Bill Hewlett commented that 3M were his role model: "You never know what they're going to come up with next. The beauty of it is that they probably don't know what they're going to come up with next, either". 3M even developed out of a failed mine producing a lot of unusable grit. So they used it to make sandpaper and grinding wheels!
In this kind of opportunistic atmosphere visionary companies allow their employees space to innovate and for continuous improvement. McKnight of 3M considered that "if you put fences around people, you get sheep. Give people the room they need". Even Scotch tape wasn't planned, but arose fortuitously because an employee visiting a customer plant overheard people uttering expletives because they couldn't get the right kind of masking tape. So he went away and invented it and then the company went on to develop Scotch tape. By 1990 3M had over 60,000 products and over 40 product divisions. In a way its many innovations were part of a strategic concept - providing an environment which allowed them to happen.
The Peters/Waterman slogan "Stick to your knitting" doesn't offer a recipe for evolutionary progress, unless the knitting is described as its core ideology. Equally, although mistakes will be regarded as learning opportunities, innovations have to work in the end or they will sink without trace, but not in a way that destroys the spirit of adventure and challenge.
They are not constantly bringing in CEO's from outside. They tend to grow their own managers and confute the view that new ideas can't come from insiders. Jack Welch was a home grown chief executive, following a century of home grown CEO's. They prepared for the succession many years before the time came and looked always inside to appoint people soaked in the company values.
Collins and Porras looked at the 1700 years of combined history of their visionary companies and found only four individual cases of an outsider coming directly into the role of chief executive. This was not true of the comparison companies, good though they were in their own way, It is the continuity of leadership rather than the absolute quality that distinguishes the visionary companies from the comparison companies - continuity that preserves the core values. The lurches in top succession in Colgate is contrasted with the continuity of insider succession in Proctor and Gamble; the crisis transitions in Zenith with the steady transitions in Motorola.
Many more comparisons are offered and it is made clear that "a company absolutely does not need to hire top management from the outside in order to get change and fresh ideas". And advice is given to potential top managers that if they find a company that they fit really well with, it might be worth their while to develop their skills within that company rather than job hop.
These companies do not concentrate on beating the competition, but rather on continuous improvement within, never being satisfied with current performance. Winning is then a by product, often achieved, rather than an end goal. Their perspective is not "how can we meet or beat the competition?" but "how can we do better tomorrow than we did today?". This question becomes ingrained as a habit of mind and action at every level of the company. "There is no finish line in a visionary company."
For all their flexibility and freedom such companies are well disciplined and very demanding of themselves. They are not looking over their shoulders all the time at their competitors. Their competitive advantage comes from their own excellence, fed by decades of continuous improvement which is self generated. They are discontented with the status quo. They don't only improve processes, but they invest in employees and in the long term improvement of the company. They do everything today to make the company stronger tomorrow than it is today.
Proctor and Gamble's chief executive in the 1930's became worried that the company was showing signs of complacency. He therefore encouraged different brands in the company to compete with each other. None could therefore rest on their laurels. Three decades later most American consumer product companies copied this approach. Examples are given of other techniques for keeping the ongoing improvement going on.
Companies like Motorola and Merck recognised that their current technological offerings were going to become obsolete and they did something about it while there was yet time. Boeing got managers to work as "the eye of the enemy" and to develop plans which, if for real, would overwhelm Boeing. What weaknesses would they exploit? What markets could they easily invade? Then, given these perceptions, what should Boeing do?
Wal-Mart introduced "beat yesterday ledgers"; HP made the irrational decision to pay their way without taking out long term debt and they learnt the art of self funding. They also decided when, after the war, their defence contracts were disastrously declining, to recruit as many as possible of the scientists and technologists from other companies who were in the same situation. It was a gamble, but it was crucial to subsequent success. They built for the long term, even in a time of downturn.
While today mattered very much to all the companies, visionary companies invested in the future to a far greater degree than the comparison companies, often paying less in cash dividends to shareholders in order to plough back a greater percentage of each year's earnings into the company. Education and training always had a high priority in these companies.
They work on the basis of A and B, not A or B. They are not subject to the tyranny of the OR. For example they believe you can have stability AND progress, close team working AND individual autonomy, low cost AND high quality, do well in the short term AND invest for the long term, make progress by planning AND engage in opportunistic groping.
Nearly all the approaches we have outlined from Collins and Porras have some element of this "both/and" approach. You can be both visionary and concerned with nuts and bolts. You can have BHAG's as well as nurturing evolutionary progress. You can have ideological control and operational autonomy.
And it's not a matter of balance between the two ends of a continuum. It is a matter of fulfilling both parts of a paradox with equal enthusiasm. It's ying and yang at the same time.
Their primacy is not to be attributed to mission and vision statements and similar pronouncements. They do make pronouncements, such as the Johnson and Johnson CREDO, and the HP Way, but the growth is from within by a multitude of individual and collective steps, which reflect their values.
The authors declare: "the essence of a visionary company comes in the translation of its core ideology and its own unique drive for progress into the very fabric of the organisation - into goals, strategies, tactics, policies, processes, cultural practices, management behaviours, building layouts, pay systems, accounting systems, job design - into everything that the company does". "All the elements of the company work together in concert within the context of the company's core ideology and the type of progress it aims to achieve." All these elements are aligned.
Not all the ideologies were of an idealistic type, but all gave a permeating purpose to all that was done. George Merck in 1933 was one who did lead his company idealistically. "We pledge our every aid that this enterprise shall merit the faith we have in it. Let your light so shine that those who seek the Truth, that those who toil that this world may be a better place to live in, that those who hold aloft the torch of Science and Knowledge through these social and economic dark ages, shall take new courage and feel their hands supported." Their dedication to the benefit of society enabled them to focus on their research, until ultimately they not only helped the lives of millions, but achieved benefits in the market place. There was no difference between their rhetoric and reality.
Hewlett Packard is full of employees who use phrases like "that's not who we are"; "that doesn't fit with our way of doing things" when faced with a dilemma.
Visionary companies don't rely on any one facet of their corporate life to define themselves. It is the whole climate - the whole atmosphere they breathe and all the things they do. A cynical mood which pervades in press and politics may deride this as hypocritical, but Collins and Porras make a well documented case for the existence of such companies, some on the high and idealistic ground, but all their examples, whatever their imperfections, are rooted in a clear purpose with clear values. They follow a big picture, but also they are concerned with the little things which make a big difference.
All their activities to achieve their goals reinforce each other. They are concerned not so much with being good, as being appropriate to their ambitions and their ideology. They are stable, yet always moving forward. They don't put profit first, yet they make plenty of it. They don't give priority in their thinking and action to shareholder value, but their shareholders are generally happy with the return they get on their investments. They build up loyalty in all their stakeholders - customers, employees, suppliers, shareholders and so on.
The authors close with the encouraging thought that no matter who you are, all managers and entrepreneurs in companies large or small, can be major contributors to building a visionary company. It is not "something mysterious that only other people do". The epilogue takes this perspective and answers a number of questions which are frequently raised when the "Built to Last" perspective is propounded.
I believe that the study of this book is a salutary experience in a period when short term gain, and excessive attention to the market value of shares, instead of to the potential of companies over the long term, occupy much managerial time. Instead, the old virtues of investing in a company because you believed in its values, and had a sense of loyalty to stand by it as it developed, are encouraged by this book. Perhaps we shall have to come back to the idea that shareholders actually invest in real companies and feel a sense of ownership and even pride in them. Some time we shall have to consider whether the instability caused by an endless round of takeovers and mergers is good for the health of society, whether greed has to give way to values. Those are some of the questions that this book poses in the mind of the reader.