BE 2.0

Bill put it in terms of upside and downside. Suppose you trust someone, and he or she merits that trust. That’s a huge upside. Trustworthy people feel validated and motivated by being trusted. What’s the downside if you’re wrong? As long as you don’t expose yourself to unacceptable loss, you’ll feel pain and disappointment. Consider the other side: What’s the upside to mistrust? You minimize pain and disappointment. What’s the downside to mistrust? This, Bill counseled, is the clincher: if you assume people are not trustworthy, you will demotivate and drive away the very best people. This was Bill’s “Trust Wager”—a hardheaded belief that there is more upside and less downside to an opening bid of trust than an opening bid of mistrust.

Sure,” Bill said. “There are two types of lost trust. The first is losing confidence in someone’s abilities because you discover the person is a wellintentioned incompetent. The second is losing faith in someone’s character. You might be able to help someone who is incompetent to become competent, but if you discover someone deliberately and repeatedly took advantage of your trust, you never fully trust them again.

In Bill’s view, entrepreneurial success shouldn’t be primarily about what you do but about who you are. Just as a great painting or piece of music reflects the inner values of the artist, so, too, a great company reflects the core values of its entrepreneurial leaders.

I gleaned from Bill the idea that a company should start not so much with a business plan, but almost with a Declaration of Independence that begins with a statement of values: We hold these truths to be self-evident. Values come first, and all else follows —in business, in career, in life.

Bill imbued me with the idea that living to core values is often inconvenient, sometimes costly, and always demanding. It is indeed the hard stuff. I remain imperfect in living to all of my core values all the time. But I behave much more consistently with my values because of Bill’s teaching and example. He taught me that you must continually self-correct, like a ship at sea being guided by a constellation of stars—sometimes you get a bit off, but you resight on your values and tack back on course. And you do this forever, across the entirety of any life well lived.

But instead, I got a lecture on fun. “Well, Jim, if you don’t love doing it, you won’t stay with it long enough to ever really get good at it.” Then he added, “Life is just too short not to enjoy what you’re doing. If we can’t make this fun, we should stop doing it!

So, the director and his team reworked the story, over and over, iteration after iteration, until they found just the right formula. Catmull built Pixar on the idea that the first question is not “What are the great stories to bet on?” The first question should be “Who are the great people to bet on?” Catmull understood that a visionary idea with the wrong people makes a bad film, but great people with the wrong story will change the story to make an excellent film. Despite the fact that nearly every Pixar movie endured episodes of crisis, Catmull’s “first who” strategy led to fourteen number one movies in a row.

And what’s that metric? The percentage of key seats on the bus filled with the right people for those seats. Stop and think: What percentage of your key seats do you have filled with the right people? If your answer is less than 90 percent, you’ve just identified your number one priority. To build a truly great company, you’ll need to strive for having 90 percent of your key seats filled with the right people.

What makes for a key seat? Any seat meeting any one of the following three conditions qualifies as key:

1. The person in that seat has the power to make significant people decisions.

1. Failure in the seat could expose the entire enterprise to significant risk or potential catastrophe.

1. Success in the seat would have a significantly outsized impact on the company’s success.

Know When to Shift from “Develop” to “Replace”:

… Looking across the best leaders we’ve studied, we see about a 50/50 split between those who tilted toward develop and those who tilted toward replace. For example, here are ten of the best corporate leaders in history, five of whom tilted toward developing people and five of whom tilted toward replacing people when they were struggling to deliver superior performance in key seats:

Tilted toward Develop:

Anne Mulcahy, Xerox

Bill Hewlett, HP

Herb Kelleher, Southwest Airlines

J. W. Marriott, Marriott

William McKnight, 3M

Tilted toward Replace:

Katharine Graham, The Washington Post

Andy Grove, Intel

Ken Iverson, Nucor

Peter Lewis, Progressive Insurance

George Rathmann, Amgen.

There’s no algorithm to apply, no flow chart to follow, no equation to run to get a perfect hit rate on the decision to develop or replace. The best executives care deeply about their people, and that’s why they often wait too long. But they also improve their judgment over time.

Which brings us to a crucial question: How do you know when you’ve crossed the demarcation line, when it’s time to make the shift from “develop” to “replace” for a key seat? I’ve come to believe the best approach is to ask considered questions and let those questions guide you to an answer. I’ve distilled years of reflection down to seven questions that I offer here to stimulate your thinking when you face the “develop or replace” conundrum. To be clear, these aren’t a prescription; you might come up with only one concern and decide to replace, or you might come up with six concerns and decide to develop.

• Are you beginning to lose other people by keeping this person in the seat?

The best people want to work with the best people, and if they sense chronic tolerance for mediocre performance in key seats, they might begin to vote with their feet. Worse, if you tolerate high-performing people who behave contrary to your stated core values, the true believers will begin to lose heart and become cynical, and some will leave. There’s no better way to destroy a great culture than to retain people in key seats who fail to perform or run roughshod over the company’s core values. roughshod over the company’s core values.

• Do you have a values problem, a will problem, or a skills problem?

If someone in a key seat behaves consistently or flagrantly contrary to the core values of the enterprise, the best leaders replace them. If someone passionately embraces the core values of the enterprise and also has the indomitable will to do whatever it takes to master his or her seat, you can be more patient before reaching a decision to replace them in that seat. The hardest call comes with the question of will. Does the person lack (or has the person lost) the will to develop to meet the demands of the seat? If not, can you ignite their will?...

• What’s the person’s relationship to the window and the mirror?

The right people in key seats display window-and-mirror maturity. When things go well, the right people point out the window, giving credit to factors other than themselves; they shine a light on other people who contributed to the success and take little credit themselves. And when things go awry, they don’t blame circumstances or other people for setbacks and failures; they point in the mirror and say, “I am responsible.” People who look in the mirror—who always ask, “What could I have done better? What did I miss?”—will grow. People who always point out the window to explain away problems or affix blame elsewhere will be stunted in their growth.

• Does the person see work as a job or a responsibility?

The right people in key seats understand that they don’t have “jobs”; they have responsibilities. They grasp the difference between their task list and their true responsibilities. A great doctor doesn’t merely have the “job” of performing procedures but embraces responsibility for the health of the patient… Every person in a key seat has a broader responsibility than a task list, and the right people never hide behind “I got the tasks done” as an excuse for failing to deliver on the broader responsibility.

• Has your confidence in the person gone up or down in the past year?

Just as a company’s stock price rises or falls as investors gain or lose confidence in the company’s growth and performance, confidence in a person also rises or falls based on his or her growth and performance. The critical variable is the trajectory of that confidence over time. When someone says, “Got it!” do you increasingly set your worries aside or do you increasingly feel the need to follow up?”

• Do you have a bus problem or a seat problem?

Sometimes you might have a right person on the bus but in the wrong seat. You might have put the person in a seat misaligned with his or her capabilities or temperament. Or perhaps—and this happens frequently in high-growth companies—the demands of a seat might have grown to outstrip the capabilities of the person in that seat.

• How would you feel if the person quit?

If secretly relieved, then you might have already concluded that he or she is a wrong person on the bus. If genuinely distraught, then you might well believe that he or she is still a right person on the bus.

If you want the people with whom you work to improve their performance, first improve your own. If you want others to expand their capabilities, first expand your own.

I would be risking the whole company on this decision,” Graham wrote in her memoir, Personal History. Yet to opt for assured survival at the cost of the company’s soul, she concluded, would be worse than not surviving. The Post published.

In his memoir, L.L.Bean: The Making of an American Icon, Gorman tells of how, before he became president, he carried a little black notebook with him at all times in which he jotted down notes for how to improve the operation, eventually compiling more than four hundred specific ideas. Upon becoming president, he began to implement the list. Under Gorman, L.L.Bean increased revenues by more than forty times in inflation-adjusted dollars. If that’s shirtsleeves to shirtsleeves in three generations, then they must be very nice shirtsleeves indeed.

The cellular structure of any truly great organization is the well-led unit, for this is where great things get done. Great leadership at the top doesn’t amount to very much without exceptional leadership at the unit level. If you want to build a truly great company or social-sector enterprise, you need to cultivate legions of unit leaders who, in turn, create unit cohesion in pursuit of audacious objectives. If you want to scale your culture, if you want to make the journey from great company to enduring great company, you must invest in building a pipeline of the right unit leaders.

Anne Mulcahy and General Austin exemplify a lesson to learn as early as possible: Take care of your people, not your career. Every responsibility you get, every minibus you drive, every unit you lead—no matter how small—make it a pocket of greatness. If you do that, you’re more likely to die of indigestion from having too much opportunity for responsibility than starvation from too little.

I’ve had the joy and privilege to observe closely the trajectory of one of the most inspired entrepreneurs and company builders in the world, Brazilian Jorge Paulo Lemann. Lemann and his two partners, Marcel Herrmann Telles and Carlos Alberto Sicupira, started with a tiny brokerage firm and from there built one of the most successful investment banks in Latin America. And while the partners were smart and accomplished at managing money, they discovered they had a peculiar genius for building a culture filled with hungry, fanatic people who thrived on meritocracy. They became so good at building culture that they eventually began to consider buying entire companies outright and then running them based on their cultural operating system with the goal to build and grow them forever. “If we believe in our culture,” they said to themselves, “why not bet big on it?

Do you have Jorge Paulo’s dilemma? Do you have too many great young and talented leaders, too many ambitious and capable and driven people? If you create this “problem” for your company, you’ll be forced to go for the next big dream; otherwise, the best ones will go find something else to do.

When you read Lone Survivor by Navy SEAL Marcus Luttrell, you don’t see anything in there like, “Well, if you go do these hard and risky missions, there’s a big year-end bonus for you.” It’s not that SEAL culture lacks incentives, but those incentives are largely non-financial.

To be clear, I’m not saying financial incentives lack impact. Indeed, the evidence from economics makes clear: People do respond to incentives (even if they are not the primary source of motivation for the best people). To ignore the influence of incentives is to ignore human nature. And that leads me to a key point: The wrong incentives are not merely benign; they can be outright dangerous. If you’re trying to build a great company guided by a deeply held set of values, you simply cannot afford to have incentives that reinforce behavior incompatible with your core values, or worse, that reinforce the behavior of the wrong people and drive away the right people. Indeed, the wrong incentive system can encourage people to do the wrong things and perhaps even throw a company into crisis.

The doom loop begins when you get some of the wrong people on the bus who behave contrary to your company’s core values and degrade the culture. Some of these people then become powerful enough to install incentives that are misaligned with the core values. This reinforces the behavior of the wrong people and drives away the right people. The culture becomes increasingly dominated by the wrong people and increasingly inhospitable to the right people. More of the right people get off the bus, and the proportion of wrong people increases to a critical mass. And then one day, you wake up to the horrifying realization that the culture you’ve carefully cultivated has been destroyed.

In Goodbye, Darkness, Manchester turns his craft on himself to unravel a vexing mystery in his life. He’d been a Marine in the Pacific in the Second World War. On June 2, 1945, while engaged with his unit, Manchester incurred a “million-dollar wound”—bad enough to end his combat deployment with a Purple Heart but minor enough that he’d recover and lead a normal life. Lying in recovery before being shipped home, he decided to defy orders, go AWOL from the field hospital, and return to his unit as it was being deployed behind enemy lines on Okinawa. Just days later, his unit took a direct mortar hit, with Manchester wounded so badly that he’d been thought dead until a medic noticed he was still breathing. This time, he was sent home for good.

Like Manchester, he realized that people will do unreasonable things to come through—not for grand ideas or incentives or bosses or hierarchies or even recognition, but for each other. Smith came away from his Vietnam experience with an increased faith that if you start with basic respect for people, and you show trust by putting them in situations where they have to come through because others depend on them, they’ll summon whatever it takes to achieve the mission.

This story is exceptionally well told in the book Breakthroughs! by P. Ranganath Nayak and John M. Ketteringham (one of the best casebooks written on innovators who defied the odds), which describes Smith’s culture of mutual commitment as the true breakthrough.

Simply put, it’s impossible to build a great company if you have a destructive leadership style.

An effective style grows from within you. It should be entirely yours. No one except you should have a style exactly like yours.

The function of leadership—the number-one responsibility of a leader—is to catalyze a clear and shared vision for the company and to secure commitment to and vigorous pursuit of that vision. This is a universal requirement of leadership, and no matter what your style, you must perform this function.

As James MacGregor Burns taught in his classic text, Leadership, we should never confuse brute power with leadership.

That definition is simply this: Leadership is the art of getting people to want to do what must be done.

Notice three things about this definition. First, as a leader, it’s your responsibility to figure out what must be done. You might do this by your own insight and instinct or, more likely, via dialogue and debate with the right people; but however you do it, you need to get clear. Second, it’s not about getting people to do what must be done but about getting them to want to do it. Third, it’s not a science; it’s an art.

The key is to figure out your leadership gifts, and then—as Wendy Kopp continues to do—refine them the way a great painter or composer or actor or architect gets better across decades of obsessive attention to his or her craft.

Far better to be an uncharismatic leader who gets the right people to confront the brutal facts than to be a magnetic force of personality who leads compliant followers to disaster. If you have charisma, you can still build an enduring great company. But never forget: If your company cannot be great without your personal charisma to inspire, then it is not yet a great company.

In this chapter, we’ve identified the elements of style that are common among effective leaders. They are:

1. Authenticity

1. Decisiveness

1. Focus

1. Personal Touch

1. Hard/Soft People Skills

1. Communication

1. Ever Forward

Like Walton, your stated corporate philosophy must ultimately be a genuine reflection of the values and beliefs you hold in your own gut. The values must be so much a part of you—of your own core spirit—that you instinctively respond to situations in a way consistent with your stated philosophy. You shouldn’t have to think about it. Likewise, when actions are taken by others that go against those values, it should eat at you on a gut level.

There is no such thing as an unintuitive person; everyone has intuition. The difficulty comes in recognizing and using it. What does it take to effectively use your intuition? Here are a few suggestions.

• Go right to the heart of any problem or decision. Don’t let a myriad of data, analysis, options, and probabilities overwhelm you and push you into catatonic indecision.

• Clear away the clutter—the long lists of pros and cons—and zero in on the central question. When confronted with a problem, say to yourself, “What’s the essence of this? Never mind the details, what’s the important thing?” Don’t dwell incessantly on all the attributes and complexities of a problem. Pare the situation down to its essential elements.

• A useful technique is to distill a decision down to its core and ask a simple question: Does your gut say “Yes” or “No”?

You must learn to live with the fact that you will make mistakes—lots of mistakes—and that you will learn from them. Mistakes are in fact a great source of strength; making mistakes is analogous to building muscle in athletic training. Think about it for a minute: how does an athlete get stronger? By pushing to the point of failure. You do, say, three pull-ups and fail on the fourth. The body point of failure. You do, say, three pull-ups and fail on the fourth. The body adapts and gets stronger and the next time you can do four pull-ups, and fail on the fifth. The next time out you can do five pull-ups, and fail on the sixth, and so on.

As Paul Garvin, founder and architect of Motorola, said, “Do not fear mistakes. Wisdom is often born of such mistakes.

In general, the most effective leaders tend to make extensive use of participative decision making. The best decisions are made with some degree of participation—no one is brilliant or experienced enough to have all the answers. No one.

Keep in mind that no single style will work in all situations, and that it is helpful to be skilled across a range of methods. We offer the following rough guidelines for group decision making:

1. Whenever appropriate, delegate decisions downwards; give people a chance to build their decision-making “muscle.” Be crystal clear about what decisions you have delegated, and hold people accountable for those decisions.

1. On important decisions that require widespread commitment for successful implementation, make the decision as a group, either participative or consensus. Enter the process with your own points of view, but be open to having your ideas influenced by others. Be clear whether the final decision is to be made by consensus or by you.

1. Encourage disagreement during the process.

1. Reserve autocratic decisions for situations where there’s no time to invite participation (e.g., when the ship is crashing on the rocks), for trivial decision, for decisions where you want to send a symbolic message to reinforce your values, and for the small set of decisions that you believe should always be made entirely by yourself.

1. Whatever style you use, be up front about it. Pretending to be participative or consensus-oriented in an effort to get “buy-in” to a decision that you’ve already made is terribly destructive. If you practice this type of deception, people will see it, be unimpressed, and feel manipulated. Such deception creates cynicism and lack of genuine commitment. If you’re going to be autocratic, then just be honest about it.

Intel’s culture of constructive confrontation (sometimes referred to as “disagree and commit”) exemplifies a pattern of decision making cultivated by Level 5 leaders in our research. They stimulated dialogue, debate, and disagreement as an indispensable ingredient in making supremely good decisions. They also created a climate where evidence, logic, and facts would trump personality, power, and politics. As a member of a Level 5 team, you have not only the opportunity to engage in the dialogue, you have the responsibility to do so. If you fail to advance your argument, if you fail to disagree with the most powerful person in the room, if you fail to bring solid logic and evidence to the debate, if you attack a person rather than the problem, then you’re failing in that responsibility.

The goal must be to make a good decision and to execute that decision brilliantly.

Washington cultivated a culture of open dialogue, practicing his famous self-discipline of silence, encouraging arguments to compete, listening and probing, until he made up his mind to act.

In Great by Choice, Morten Hansen and I conducted a systematic analysis of the pace of executive decision making, with emphasis on entrepreneurial leaders building great companies in highly turbulent environments. We found that some of the best decisions happened fast and some of the best decisions happened more slowly. We learned that the critical question to ask in any given situation is, “How much time do we have before our risks change?” In some situations, you’ll incur no significant increased risk (of either catastrophe or of missing a huge opportunity) by taking more time to decide. In other situations, however, you’ll dramatically increase your risks by waiting too long. The key is to know which situation you are in, not to have a bias for “always fast” or “always slow.” You need to be good at both. The right decision made in the wrong time frame is a bad decision.

Without disagreement, you might not fully understand the problem. Without unified commitment, you’ll almost certainly fail to execute. True greatness requires a series of good decisions, supremely well executed, that accumulate one upon another over a long period of time.

It sounds topsy-turvy, but it makes perfect sense if you think about it. The amount of work you have to do, especially if you are the leader of an organization, can expand indefinitely—it’s simply not possible to do it all. Atchity hit the point perfectly in his book A Writer’s Time:

If your work is successful, it generates more work; as a result, the concept of “finishing your work” is a contradiction in terms so blatant and so dangerous that it can lead to nervous breakdowns—because it puts the pressure on the wrong places in your mind and habits.

Great companies have great relationships: relationships with customers, with suppliers, with investors, with employees, and with the general community. The emphasis in all dealings is on developing and nurturing long-term, constructive relationships.

There is a paradox evident in those who build the great companies. On one hand, they concentrate on high-level vision and strategy while, on the other hand, they involve themselves with seemingly trivial details. The acceptance of the paradox lies in understanding that details are not trivial. Details matter. The most effective leaders are obsessed with both vision and details. They are fanatical about getting the details right.

How you deal with certain details is actually a very high level statement—a statement about the core values of the company. Involving yourself with certain details can send a very powerful symbolic message.

Yes, you should be fanatical about getting the details right. Yes, you should shape the group’s values with symbolic acts on certain specific details, but not on every detail. The symbolic acts are meant to lead the way—to guide, to show, to set an example. They are meant to leave a lasting impression so that you don’t need to tightly control people—so that people will behave of their own accord consistent with the core philosophy.

You can be hands-on without stifling people; you can have your fingers on the pulse of the organization, yet not suffocate folks. Indeed, a non-controlling personal touch has just the opposite effect of micro-management. Instead of demoralizing people, it elevates and inspires them to perhaps do more than they would otherwise think possible, which leads us right into our next leadership style element.

If something is truly a strategic imperative, you need to give it your direct personal attention. Anything not worth your hands-on involvement is, by definition, not a strategic imperative.

The choice is not between hands-on or hands-off. In our research, the entrepreneurs who led their companies from start-ups into some of the greatest corporations in history generally had both a hands-on style and an empowering style. No matter how big their companies became, they remained closely connected to their people, hyper-aware of facts on the ground, and directly engaged in strategic imperatives. If you lose your voracious curiosity about tactical details, if you lose passionate interest in people and how they are feeling, if you insulate yourself in the protective cocoon of executive comforts, you may well wake up one day to discover your company has already entered a doom loop of decline and self-destruction.

The goal is to become a shaper of culture and builder of people so that the company can be great for decades beyond your own life span. When you’ve found people who are as fanatic about getting the essential details right as you are, when you’ve taught them how to build and lead a system that delivers consistent tactical excellence, when they strive to far surpass what you yourself achieve during your own tenure, then you’ve truly set the foundation for an enduring great company.

It’s a fact of human nature that people perform better when they have a positive self-image. Psychologists in a variety of experiments have found that people’s performance—objectively measured—improves or declines depending on the type of feedback they get. Positive feedback tends to improve performance, whereas negative feedback tends to decrease performance.

Get out of the literal. Draw pictures. Tell stories. Use inexact analogies. Be vivid. Don’t worry about whether the analogy is logically correct—the point is to communicate effectively, not be logically correct.

There are two basic ways to achieving this effect.

• First, reveal yourself. Don’t be afraid to share stories from your own experience and observations. Telling something about yourself, your own experience, or your unique view of the world creates intimacy, even though there may not be personal contact between you and the writer or speaker.

• Second, use a direct, personal, and unpretentious style. Use words like we, you, and I rather than depersonalized words like one. Use warm words like friends and comrades. Speak or write directly to the listener as if he’s sitting right in front of you. Shorten your sentences. Be vigorous. Use clear language. Use crisp words.

A caveat: we don’t mean to imply that vision is necessary only if you want to become big. We understand that you might want to remain a small company. If that’s what you want, then you still need a vision. Why? Because if you’re good, there will be opportunities to grow. The only way to remain small (if that’s what you want) is to have a clear vision about what you want the company to be in the first place.

The Benefits of Vision:

Let’s now turn our attention to the four primary benefits of corporate vision:

1. Vision forms the basis of extraordinary human effort.

1. Vision provides a context for strategic and tactical decisions.

1. Shared vision creates cohesion, teamwork, and community.

1. Vision lays the groundwork for the company to evolve past dependence on a few key individuals.

Most people want to do more than bring home a paycheck. They want work they can believe in and that has meaning. This may not be true of all people, but it’s certainly true of the people most likely to be solid contributors to a great company. Tap into the basic human desire for meaningful work and the traditional management problem of “how to motivate employees” largely evaporates. People will be self-motivated when doing work they believe in.

It took the leadership of a new CEO, Bob Miller, to save the company. Commenting on how he successfully pulled the company out of its malaise to a prominent position in the RISC Technology industry, Miller malaise to a prominent position in the RISC Technology industry, Miller commented:

The most important question is: what do you want to be five to ten years from now? The company had never asked or clearly answered that question. That may seem simplistic, but posing that question was the basic solution. Only then could we make good strategic decisions.

But think for a minute about the word strategy. What does it really mean? Strategy is how one intends to go about attaining a desired end. It is the means to an end. Thus, it is wholly impossible to have an effective strategy unless you are clear—absolutely crystal clear—about what the end point is. Strategy is a path to attaining your vision. Knowing how to get “there” is impossible if you can’t articulate what “there” is.

A wide range of authors on the subject all came to a startlingly simple conclusion: the United States didn’t know precisely what it was trying to achieve, and it was therefore impossible to have an effective strategy. A 1974 survey of Army generals who had commanded in Vietnam found that almost 70% of them were uncertain of United States objectives.

Don’t get us wrong. We don’t mean to imply that tactical excellence (as the United States had in Vietnam) is unimportant. It’s essential, but it should be within the context of a clear overall vision. Vision, then strategy, then tactics.

Companies are usually founded with a clear, vibrant sense of purpose. Yet, as companies mature, they often disintegrate into squabbling factions. Institutional self-enhancement and turf wars smother the spark and spirit of the early sense of purpose.

In the early phases of an organization, a company’s vision comes directly from its early leaders; it is very much their personal vision. To become great, however, a company must progress past excessive dependence on one or a few key individuals. The vision must become shared as a community, and become identified primarily with the organization, rather than with certain individuals running the organization. The vision must actually transcend the founders.

In contrast, there is the example of Duncan Syme and Vermont Castings. Syme had a vision: to make the best wood stoves in the world. He believed in this so much that he would personally stand on the production line to ensure that each stove met his exacting standards. During the 1970s, Vermont Castings became the fastest growing company in the wood stove industry, reaching sales of $29 million and margins as high as 60%.

Then, in the early 1980s, Syme stepped away from daily operations and turned the company over to professional managers (day-to-day management, Syme admitted, was not his strength).

But there was a critical problem: Syme’s vision went into retirement with Syme. In his absence, the company lowered quality standards, diluted its traditional focus on wood stoves, reduced customer service, and pulled the company away from its original vision. Sales and profit growth flattened, the company lost its ability to bring out innovative products, and many felt the company had lost its greatness.

Syme returned to Vermont Castings in 1986 and got it back on track, reinstalling his vision and regaining the company’s position as the premier woodstove maker.

This time, however, he took an entirely different approach, as he explained in Inc. magazine. Instead of relying solely on himself to be the guardian of the “Vermont Castings Way,” he began a process of institutionalizing his vision. He wrote a “Statement of Vermont Castings Vision and Creed” and began the long process of ensuring that it was expressed in all operational decisions.

Much of the material in this chapter is based on extensive research at Stanford and the article “Organizational Vision and Visionary Organizations” (California Management Review, Fall 1991). We need not go into all of the theoretical underpinnings and background research of the framework here. The essence of it is that a good vision consists of:

1. CORE VALUES AND BELIEFS

1. PURPOSE

1. MISSION

To quickly grasp the difference between purpose and mission, think of pursuing a guiding star across a mountain range. Your purpose is the guiding star, always out there on the horizon, never attainable, but always pulling you forward. Your mission, on the other hand, is the specific mountain you are climbing at any moment. While assaulting that mountain, all your focus and energy goes into that specific ascent. But once you reach the top, you sight again on the guiding star (your purpose) and pick yet another mountain to climb (another mission). And, of course, throughout the entire adventure, you remain true to your core values and beliefs.

Vision Component 1: Core Values and Beliefs

Core values and beliefs are where vision begins. Core values and beliefs are like an ether that permeates an organization—its decisions, its policies, its actions— throughout all phases of its evolution. Some companies refer to this as their “guiding philosophy.”

Core values and beliefs form a system of fundamental motivating principles and tenets—precepts about what is important in both business and life, how business should be conducted, its view of humanity, its role in society, the way the world works, what is to be held inviolate, and so on. You can think of it as analogous to the “philosophy of life” that an individual might have. Core values and beliefs are analogous to a biological organism’s “genetic code”—they are in the background, but always present as a shaping force.

The core values and beliefs come from inside you. You, as a leader of the company, imprint your personal values and beliefs about life and business through your daily actions.

And therein lies the crucial aspect of core values and beliefs: they must be an absolutely authentic extension of the values and beliefs you hold in your own gut. You don’t “set” values. The proper question isn’t, “What values and beliefs should we have?” but rather “What values and beliefs do we actually hold in our gut?”

Ultimately, core values and beliefs get instilled by what you do, by specific, concrete actions, not by what you say.

In the words of Bill Hewlett: “Fundamentally, the HP Way is respect for the individual. If you give him a chance, the individual will do a lot more than you think he can. So you give him the freedom. Respect for the individual—not just employees, but customers and the works.

Most great companies are formed to meet the goals and express the values of their founders, which is not always the same as maximizing shareholder wealth. For them, profit is simply a strategic necessity rather than the supreme end point.

This may be a jolting concept, we realize. But we’re certainly not the only management writers who have come to the same conclusion. Peter F. Drucker, in his classic text, Management: Task, Responsibilities, Practices, reached the same conclusion years ago:

Business cannot be defined or explained in terms of profit... The concept of profit maximization is, in fact, meaningless... The first test of any business is not the maximization of profit, but the achievement of sufficient profit to cover the risks of economic activity.

But profitability and cash flow are not what work is ultimately all about. Profit maximization doesn’t provide the type of inspirational aim that people throughout the company are willing to put their full energies towards, to commit a part of their spirit to. We are not saying that profit is bad. Yes, absolutely profit is needed, but profit in and of itself does not provide meaning.

Tom Chappell, founder of Tom’s of Maine, a highly profitable company, explained in Inc. magazine how the pursuit of numbers alone is an endless treadmill:

Quantitative goals can’t invest purpose in a process that has none. The quest simply for more of anything is inherently unsatisfying. If there is no point or joy in what you are doing, or if you lose sight of the point, then just measuring your progress can’t make it worthwhile or fun. If I can organize people around a purpose, that is the most powerful form of leadership.

A crucial aspect of purpose is that it’s always worked towards, but never fully achieved, like chasing the earth’s horizon or pursuing a guiding star. The enduring aspect of purpose is well illustrated by Steve Jobs, co-founder of Apple and founder of NeXT:

I don’t feel that I’ll ever be done. There are lots of hurdles out there, and there’s always a hurdle that I’ll never reach in my lifetime. The point is to keep working toward it.

You should be able to articulate your company’s purpose succinctly, in one or two sentences. This is called a “Statement of Purpose.” A statement of purpose should quickly and clearly convey why your company exists, how it fills basic human needs and impacts the world.

A good purpose statement is broad, fundamental, inspirational, and enduring. It should serve to guide your organization for at least 100 years. It should serve to guide your organization for at least 100 years.

To be a company that gives unlimited opportunity to women.

…

To enhance and disseminate knowledge that improves human kind.

Another powerful approach is to start with the statement, “We make X products” and then ask “why” five times. We call this the “five whys” approach. After five whys, you’ll find that you’re getting down to the fundamental purpose of the business. Here’s an example of how the five whys lead from products to Patagonia’s purpose.

“We make outdoor clothing.”

“Why?”

“Because it’s what we know best and what we like to do.”

“Why is that important?”

“Because it’s the best way to make innovative, high quality products that people will pay well for.”

“Why is that important?”

“Because that is how we can continue to be financially successful.”

“Why is that important?”

“Because we need the credibility of being a successful business, and the resources to do business in the way we think it ought to be done.”

“Why is that important?”

“Because we ultimately exist to be a role model and tool for social change, and the only way we can do that is to be financially viable and successful enough to have the rest of the business community looking to us as a role model.

Unlike purpose, which is never achieved, a mission should be achievable. It translates values and purpose into an energizing, highly focused goal—like the moon mission. It is crisp, clear, bold, exhilarating. It reaches out and grabs people in the gut. It requires little or no explanation; people “get it” right away. Once a mission is fulfilled, you return to purpose to set a new mission.

Procter & Gamble, known as one of the most conservative of all companies, has a history of committing to risky goals. For example, in the early 1900s, P&G established an internal mission: to reach a point where it could provide steady employment for its workers, rather than the hire and fire swings forced by seasonal demands.

To achieve the mission, P&G took the audacious step of setting up a sales force to sell directly to retailers—a move that at the time was thought by industry observers to be insane. But CEO Richard Deupree had a simple philosophy about bold, audacious moves:

We like to try the impractical and impossible and prove it to be both practical and possible. You do something you think is right. If it clicks, you give it a ride. If you hit, mortgage the farm and go for broke.

Common to each of these companies was 1) a belief that they could fulfill the mission, and 2) a willingness to go for it. This willingness to put it on the line is part of the vision-setting process. Your task is to pick a mission that falls in a zone of discomfort—where it’s not a sure bet, yet you believe deep down the company can do it.

You set a mission not by pure analysis, but by analysis plus intuition. You’ll never be able to prove ahead of time that an audacious mission is going to be 100% achievable. You have to know in your gut that it can be done, recognizing this simple truth: once committed to a bold challenge, the probabilities of success change.

Think of it this way. If someone puts you on a difficult mountain climb and leaves you an easy avenue of retreat, the probabilities of success would be at a certain level, say, for the sake of argument, 50%. Now suppose you are on the same mountain and the avenue of escape is removed; if you don’t succeed, you die. The probabilities of success change to closer to 100%. Why? Because you are committed. You’ll fight, scratch, invent, or somehow figure out a way to the top because you have no other choice.

Four Types of Mission

There are four basic types of mission to choose from:

1. Targeting

1. Common Enemy

1. Role Model

1. Internal Transformation.

Targeting is just as the name implies: setting a clear, well-defined target and aiming for it. The NASA moon project is a target mission. Ford’s aim “To democratize the automobile” and MIPS’s aim to make its architecture “pervasive worldwide by the mid-1990s” are also target missions…

Remember, the aim here is not just to create a precise target, but to create one that will galvanize people.

Setting out to defeat a common enemy is a particularly powerful, albeit uncreative, form of mission. It appeals to people’s competitive instincts. Picking a common enemy to seek out and destroy—especially if you are the underdog— can create extraordinary unity of purpose. Britain’s mission in 1940 (to beat the life and soul out of Hitler) is an excellent historical example. The same type of mission can be set in business…

An extremely powerful effect of common enemy missions is that they can convert an organization whose back is against the wall—that is concerned about its very survival—to a “we shall prevail” mode. People don’t like to “just survive,” they like to win. And a common enemy mission taps into this basic human motivation.

Another useful type of mission is corporate role models. Use organizations that you admire as images of what you want your company to become. Role-model missions are excellent for small to mid-sized companies with bright prospects.

BHAGs [Big Hairy Audacious Goal] have animated great leaders throughout history, who have used them to stimulate progress and galvanize people. It doesn’t really matter whether you call it “mission” or “BHAG” or anything else that works for you. What matters is that you commit to something that meets the tests of a BHAG. Ask yourself the following questions about any BHAG:

• Do you and your people find the BHAG exciting?

• Is the BHAG clear, compelling, and easy to grasp?

• Does the BHAG connect to the purpose of the enterprise?

• Is the BHAG undeniably a goal, not a verbose, hard-to-understand, convoluted, impossible-to-remember mission or vision “statement”?

• Do you have substantially less than a 100 percent chance of achieving the BHAG yet at the same time believe your company can achieve the BHAG if fully committed?

• Would you be able to clearly tell if you’ve achieved the BHAG?

The best BHAGs make you think big. They force you to engage in both long-term building and short-term intensity. The only way to achieve a BHAG is with a relentless sense of urgency, day after day, week after week, month after month, for years. What do you need to do today, with monomaniacal focus, and tomorrow and the next day and the day after that to defy the probabilities and ultimately achieve your BHAG? If you’re going to put a powerful computer in every pocket, or eradicate malaria, or give every kid a solid K–12 education, or cut crime rates by 80 percent, or render impotent the dark forces of terrorism, or build the most admired company in your industry, or accomplish whatever the goal might be, you cannot possibly achieve the BHAG in mere days or weeks or months. The best corporate BHAGs require 10 to 25 years of relentless intensity to achieve.

It’s good practice to codify your vision on paper. Writing it down forces you to think rigorously about what exactly you are trying to do. Even more important, it’s a critical step in making it the organization’s vision, rather than the vision of a single leader.

That’s it! We exist not just to build, but to build great things—great buildings, a great culture, great client relationships, a great collaborative team, and it all adds up to building a great company.” And so, they discovered their purpose: We exist to build great things.

The DPR founding team came away from its “Constitutional Convention” with a clearly crafted vision based directly upon the framework in the vision chapter from Beyond Entrepreneurship. In addition to the purpose, they articulated four enduring core values (see the following page) and set an audacious goal—to become a truly great construction company by the year 2000—brought to life with a vivid description composed of a dozen tangible images. These were: We will have consistently achieved the lowest possible safety modifier for a general contractor of our size. We have built a major project that has been recognized in an industry magazine. Following a pilot plant project, we are invited back to build a major manufacturing facility without competition. Our friends back East will mention that they have heard about DPR’s greatness. Our families will say we work for a great company. We are short-listed on every project in which we express an interest. For five consecutive years, we never missed an opportunity to be asked back by one of our past clients. We are used by a reputable authority on business as an example of a great company. We receive letters from customers and subcontractors praising DPR and their efforts. We will have minorities and women in senior-level estimator and project manager positions. A national magazine will have written a positive article about DPR and our success. We will routinely receive unsolicited referrals for major projects.

Core Values

Integrity. We conduct all business with the highest standards of honesty and fairness; we can be trusted.

Enjoyment. We believe work should be fun and intrinsically satisfying; if we are not enjoying ourselves, we are doing something wrong.

Uniqueness. We must be different from and more progressive than all other construction companies; we stand for something.

Ever forward. We believe in continual self-initiated change, improvement, learning, and the advancement of standards for their own sake.

Purpose

We exist to build great things.

First Mission (Big Hairy Audacious Goal)

To become a truly great construction company by the year 2000.

Next Mission (Big Hairy Audacious Goal)

DPR achieved its first audacious mission and established a new mission: to become one of the most admired companies—of any type, across all industries—by 2030.

To be effective, a vision must fulfill two key criteria: it must be clear (well understood) and shared by all the key people in the organization.

As Ted Turner said:

People don’t call themselves visionaries. People get called visionary. All I am is Ted Turner.

The task before you is not to be a single charismatic individual with vision. The task is to build an organization with vision. Individuals die; great companies can live for centuries.

... I couldn’t resist asking, “Tommy, why do you keep throwing yourself at this climb? You’ve experienced so much success as a climber, but all this climb seems to do is give you failure upon failure. Why would you go back?”

“I go back because the climb is making me better, it’s making me stronger,” he replied. “I’m not failing, I’m growing.” We got into a long conversation about how to think about failure, arriving at the idea that the opposite side of the coin of success isn’t failure but growth.

“What I find with a lot of people,” he continued, “is that they’re so focused on success that they don’t put themselves in situations where they’re likely to grow through the process of failure. But to truly find your ultimate limit, you have to go on a journey of cumulative failure and hopefully come out the other end someday. Even if I never succeed in free climbing the Dawn Wall, it will make me so much stronger, and so much better, that most other climbs will seem easy by comparison.

But equally true, had Caldwell not stayed in the game, had he given up, he wouldn’t have been in a position to receive all this good luck.

We defined a “luck event” as one that meets three tests: First, you didn’t cause it; second, it has a significant potential consequence, good or bad; and third, it has an element of surprise, some aspect of the event is unpredictable before it happens. Using this definition, the evidence showed a lot of luck in the history of these companies. But— and this is the crucial point—we also found comparable amounts of luck in the control set of comparison cases we studied! The big winners did not generally get more good luck, less bad luck, bigger spikes of luck, or better-timed luck than their comparisons. What the best achieved, instead, was a higher return on luck. Hansen and I learned that the question is not whether you’ll get luck along the way—you certainly will get luck, both good luck and bad. The critical question is what you do with the luck that you get. I’ve come to believe that about 50 percent of great leadership is what you do with the unexpected.

You can look at life as a search for that one big winning hand, or you can look at life as a series of hands well played. If you believe life comes down to a single hand, of course, you can easily lose. But if you see life as a series of hands, and if you play each hand the best you can, there’s a huge compounding effect. Bad luck can kill you, but good luck cannot make you great. As long as you don’t get a catastrophic stroke of bad luck that flat-out ends the game, what really matters is how well you play each hand over the long haul.

He penned his six-volume memoir, The Second World War (the best five thousand pages on the art of leadership I’ve ever read), which won him the Nobel Prize in Literature. He once again became prime minister. Like Steve Jobs, he ceased the relentless drive to be useful only when his body gave out.

Life is way too long to give up early and way too short to be derailed from what we’re passionate about and made to do.

Those who see life, business, and the pursuit of accomplishment as about finding that one big hit—the one big lucky break—fail to grasp how true greatness happens. No great company, no great career, no great body of work comes about by a single event, a single flip of the coin, a single hand played. Of course, persistence doesn’t guarantee success; and the best leaders understand that they may need to change strategies, plans, and methods on the long path to building a great company. But they also understand and live out this simple truth: Luck favors the persistent.

I’d like to close this chapter with an essential caveat about persistence from Built to Last. Of all the paragraphs I’ve authored or co-authored in thirty years, this is one of the most essential for entrepreneurs and leaders of early-stage ventures, reproduced here as a reminder to keep firmly in mind as you build your company:

The builders of visionary companies were highly persistent, living to the motto: Never, never, never give up. But what to persist with? The company. Be prepared to kill, revise, or evolve an idea . . . but never give up on the company. If you equate the success of your company with the success of a specific idea—as many businesspeople do—then you’re more likely to give up on the company if that idea fails; and if that idea happens to succeed, you’re more likely to have an emotional love affair with that idea and stick with it too long, when the company should be moving vigorously on to other things. But if you see the ultimate creation as the company, not the execution of a specific idea . . . then you can persist beyond any specific idea—good or bad— and move toward becoming an enduring great institution.

We did not merely study success; we studied the contrast between success and failure, ascent and decline, endurance and collapse, greatness and mediocrity.

The critical question is, “What did the great companies share in common that distinguished them from their direct comparisons?” Comparisons are companies that were in the same industry with the same or very similar opportunities and circumstances during the exact same era, but that did not perform as well.

Let’s turn first to the inputs, beginning with the role of discipline. An overarching theme across our research findings is the role of discipline in separating the great from the mediocre. True discipline requires the independence of mind to reject pressures to conform in ways incompatible with values, performance standards, and long-term aspirations. The only legitimate form of discipline is self-discipline, having the inner will to do whatever it takes to create a great outcome, no matter how difficult. When you have disciplined people, you don’t need hierarchy. When you have disciplined thought, you don’t need bureaucracy. When you have disciplined action, you don’t need excessive controls. When you combine a culture of discipline with an ethic of entrepreneurship, you create a powerful mixture that drives great performance.

To build an enduring great organization—whether in business or the social sectors—you need disciplined people who engage in disciplined thought and take disciplined action. Then you need the discipline to sustain momentum over a long period of time. This forms the backbone of the framework, laid out in four basic stages:

Stage 1: Disciplined People

Stage 2: Disciplined Thought

Stage 3: Disciplined Action

Stage 4: Building to Last

The essence of Level 5 leadership is a paradoxical combination of personal humility and indomitable will. The humility expressed at Level 5 isn’t a false humbleness; it’s a subjugation of personal ego in service to a cause beyond oneself. This humility is combined with the fierce resolve to do whatever it takes (no matter how difficult) to best serve that cause. Level 5 leaders are incredibly ambitious, but they channel their ambition into building a great team or organization and accomplishing a shared mission that’s ultimately not about them.

Every good-to-great transition in our research began with a Level 5 leader who motivated people more with inspired standards than inspiring personality. Every 10x entrepreneurial success in our research had founders and leaders who, while sometimes colorful characters, never confused leadership with personality; they were utterly obsessed with making the company truly great and ensuring it endured beyond themselves.

Level 5 leaders who build the greatest and most durable companies think first about “who” and then about “what.” They first get the right people on the bus (and the wrong people off the bus) and then figure out where to drive the bus.

When you’re facing chaos, turbulence, disruption, and uncertainty, and you cannot possibly predict what’s coming around the corner, your best “strategy” is to have a busload of disciplined people who can adapt and perform brilliantly no matter what comes next. Our research supported what we came to call “Packard’s Law” (named in admiration after HP’s co-founder): No company can consistently grow faster than its ability to get enough of the right people and still become a great company. If a company consistently grows faster than its ability to get enough of the right people, it will not simply stagnate, it will fall. The number one metric to track isn’t revenue or profit or return on capital or cash flow; the number one metric is the percentage of key seats on the bus that are filled with right people for those seats. Everything depends on having the right people. (Directed reading: Good to Great, Chapter 3; BE 2.0, Chapter 2.)

With the right people in place, you turn to Stage 2, disciplined thought. There are three key principles in Stage 2:

• Embrace the Genius of the AND.

• Confront the brutal facts (live the Stockdale Paradox).

• Clarify a Hedgehog Concept.

False dichotomies are undisciplined thought. In the words of F. Scott Fitzgerald, “The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” Builders of greatness are comfortable with paradox. They don’t oppress themselves with what we call the “Tyranny of the OR,” which pushes people to believe that things must be either A OR B, but not both. Instead, they liberate themselves with the “Genius of the AND.” Undisciplined thinkers force debates into stark “Tyranny of the OR” choices; disciplined thinkers expand the conversation to create Genius of the AND solutions.

Stockdale embraced a Genius of the AND in his leadership: You must retain unwavering faith that you can and will prevail in the end, regardless of the difficulties, and at the same time you must confront the most brutal facts of your current reality, whatever they might be. You must believe you can survive the camp and will live to see your loved ones again, and at the same time you must stoically accept that you will not be out by this Christmas or the next Christmas or even the next Christmas after that. Never fall into the leadership trap of creating false hopes soon to be destroyed by events. Yet equally, never capitulate to despair and lose faith that you will prevail in the end. You need the Stockdale Paradox to go from start-up to great company. You need the Stockdale Paradox to lead a company from good to great. You need the Stockdale Paradox to navigate turbulence and disruption. You need the Stockdale Paradox to reverse decline and engineer a return to success. You need the Stockdale Paradox to continually renew a successful company so that it might endure. Level 5 leaders confront the brutal facts before they set vision and strategy, and they create a climate where the truth is heard. Failure to confront the brutal facts is a precursor to catastrophic decline, always. (Directed reading: Good to Great, Chapter 4.)

A Hedgehog Concept is a simple, crystalline concept that flows from deeply understanding the intersection of the following three circles: (1) what you’re deeply passionate about, (2) what you can be the best in the world at, and (3) what best drives your economic engine. The Hedgehog Concept also reflects the discipline to confront the brutal facts about what you are not passionate about, what you cannot be the best at, and what does not make economic sense.

In Stage 3, you translate disciplined thought into disciplined action, building momentum to achieve a breakthrough and extend performance. There are three key principles in Stage 3:

• Build momentum by turning the Flywheel.

• Achieve breakthrough with 20 Mile March discipline.

• Renew and extend via fire bullets, then cannonballs.

It is about consecutive consistency—meaning, you almost never fail to hit the march. Some companies in our research hit their 20 Mile March for more than forty consecutive years without a miss. Committing to march with consecutive consistency achieves a beautiful Genius of the AND: it stimulates the discipline of short-term performance and long-term building. You have to hit the march this cycle and every subsequent cycle for years to decades. (Directed reading: Great by Choice, Chapter 3.)

The ability to scale innovation—to turn small, proven ideas (bullets) into huge successes (cannonballs)—can provide big bursts of flywheel momentum. Firing bullets then cannonballs is a primary mechanism for expanding the scope of an organization’s Hedgehog Concept and extending its flywheel into entirely new arenas. (Directed reading: Great by Choice, Chapter 4; Turning the Flywheel: A Monograph to Accompany Good to Great.)

If you brilliantly move through all the key principles in Stages 1 through 3, you will likely create a very successful company. In Stage 4, you make your company built to last. There are three key principles in Stage 4:

• Practice productive paranoia (avoid the 5 Stages of Decline).

• Do more clock building, less time telling.

• Preserve the core/stimulate progress (achieve the next BHAG).

Practice Productive Paranoia (Avoid the 5 Stages of Decline)

The first step in being built to last is don’t die. The only mistakes you can learn from are the ones you survive. Every company is vulnerable to decline. There’s no law of nature that the most successful companies will inevitably remain at the top. Any can fall and most eventually do. Entrepreneurs who build great companies differ from less successful comparisons in how they maintain hypervigilance in good times and bad. Leaders who navigate turbulence and stave off decline assume that conditions can unexpectedly change, violently and fast. They obsessively ask, “What if? What if? What if?” By preparing ahead of time, building reserves, preserving a margin of safety, bounding risk, and honing their discipline in good times and bad, they handle disruptions from a position of strength and flexibility. Productive paranoia helps inoculate organizations from falling into the 5 Stages of Decline that can stop the flywheel and destroy an organization. Those stages are (1) Hubris Born of Success, (2) Undisciplined Pursuit of More, (3) Denial of Risk and Peril, (4) Grasping for Salvation, and (5) Capitulation to Irrelevance or Death.

Do More Clock Building, Less Time Telling

Leading as a charismatic visionary—a “genius with a thousand helpers” upon whom everything depends—is time telling. Shaping a culture that can thrive far beyond any single leader is clock building. Searching for a single great idea upon which to build success is time telling. Building an organization that can generate many great ideas is clock building. Our research showed that leaders who build enduring great companies make the shift from time telling to clock building. Clock builders create highly replicable recipes, extensive training programs, leadership-development pipelines, and tangible mechanisms to reinforce core values. They get the right people on the bus and then manage the system, not the people. For true clock builders, success comes when the organization proves its greatness not just during one leader’s tenure but also when the next generation of leadership further increases flywheel momentum. To use an analogy, think of writing the U.S. Constitution as a consummate act of clock building, so that the start-up nation might endure beyond the courage and genius of those who won the War of Independence. Similarly, launching a start-up is like winning the War of Independence, but building a company that can last is like writing the Constitution. (Directed reading: Built to Last, Chapter 2; Great by Choice, Chapter 6.)

These companies demonstrate a particularly powerful Genius of the AND: preserve the core AND stimulate progress. Think of a yin-yang symbol used in Taoist philosophy. On one side, you have “preserve the core.” On the other side, you have “stimulate progress.

10X MULTIPLIER—RETURN ON LUCK

Finally, there’s an input that amplifies all the other principles in the framework: the principle of return on luck. Throughout all our research, a question gnawed at me: What’s the role of luck? Our research showed that the great companies were not generally luckier than the comparisons—they didn’t get more good luck, less bad luck, bigger spikes of luck, or better timing of luck. Instead, they got a higher return on luck, making more of their luck than others. The critical question is not, “Will you get luck?” but “What will you do with the luck that you get?” If you get a high return on a good-luck event, it can add a big boost of momentum to the flywheel. But if you’re ill-prepared to absorb a bad-luck event and fail to get a high return on your bad luck, it can stall or imperil the flywheel. About 50 percent of great leadership is what you do with the unexpected.

(Again, to review from the previous chapter, a “luck event” meets three tests: First, you didn’t cause it; second, it has a significant potential consequence, good or bad; and third, it has an element of surprise, some aspect of the event is unpredictable before it happens.) Any framework that didn’t account for unpredictable and unforeseen events would be incomplete, and I couldn’t be intellectually satisfied until we wrestled with the question of luck. The concept of return on luck accounts for the undeniable fact that luck happens (a lot) yet captures the essential truth that luck itself cannot cause greatness. Catastrophic bad luck can kill a potentially great company, but good luck cannot make a company great. Luck doesn’t build great companies that last; people do.

The previously described principles are the inputs to building a great organization. But what are the outputs that define a great organization? What are the criteria of greatness? There are three tests: (1) superior results, (2) distinctive impact, (3) lasting endurance.

Superior Results

In business, performance is defined by financial results—return on invested capital—and achievement of corporate purpose. In the social sectors, performance is defined by results and efficiency in delivering on the social mission. But whether you’re operating in business or the social sectors, you must achieve top-flight results. To use an analogy, if you’re a sports team, you must win championships; if you don’t find a way to win at your chosen game, you cannot be considered truly great.

Distinctive Impact

A truly great enterprise makes such a unique contribution to the communities it touches and does its work with such unadulterated excellence that, if it were to disappear, it would leave a gaping hole that couldn’t be easily filled by any other institution on the planet. If your company went away, who would miss it and why? This does not require being big; think of a small but fabulous local restaurant that would be terribly missed if it disappeared. Big does not equal great, and great does not equal big.

Lasting Endurance

A truly great organization prospers over a long period of time, beyond any great idea, market opportunity, technology cycle, or well-funded program. When clobbered by setbacks, it finds a way to bounce back stronger than before. A great enterprise transcends dependence on any single extraordinary leader; if your organization cannot be great without you, then it is not yet truly great.

But there’s also a hopeful story to tell. Companies can sustain greatness for decades, even if only a few do so. What this means is that you never get to the “end” of The Map. You’re never done with the journey. You’re never done with the need for disciplined people who engage in disciplined thought and take disciplined action. You’re never done renewing the company so that it might be built to last. You’re never done preparing for bad luck and capitalizing on good luck, getting a higher return on luck than others. Greatness is an inherently dynamic process, not an end point.

The Map doesn’t guarantee a great outcome. But those who adhere to its principles—and who do so with joyful intensity—have much better odds of building a great company that can endure than those who don’t. Along the way, perhaps as more of a by-product than a goal, they just might find the daily happiness that comes from doing meaningful work with people they truly like and deeply respect. And it’s hard to have a better life than that.

Strategy is simply the basic methodology you intend to apply to attain your company’s current mission. “This is how we will achieve our mission.” That, in a nutshell, is strategy. There’s no mystery to it. It’s not a difficult concept.

There are four key principles to keep in mind when setting company strategy.

1. The strategy must descend directly from your vision. Remember, it’s impossible to set strategy unless you have a crystal clear idea of what you’re trying to do in the first place. Vision first, then strategy!

1. The strategy must leverage off the strengths and unique capabilities of your company. Do what you’re good at.

1. The strategy must be realistic. It must therefore take into account internal constraints and external factors. Confront reality, even if reality is unpleasant.

1. Strategy should be set with the participation of those who are going to be on the line to make it happen.

The Process

Setting strategy involves the following basic steps:

First, review the vision of the company. If you haven’t clarified your vision, do so. In particular, ensure that the current mission is clear. As you recall from Chapter 4, your mission (which is the third component of vision, after core values and beliefs and purpose) is analogous to the specific mountain you are going to climb.

Next, do an internal assessment of the company’s capabilities. This is analogous to examining capabilities and resources of the expedition team.

Third, do an external assessment of the environment, markets, competitors, and trends. This is analogous to studying pictures of the mountain, examining weather reports, assessing new trends in technology that might help you in your ascent, and paying attention to competitors who seek to reach the summit ahead of you.

Finally, taking the internal and external assessments into account, make key decisions about how you intend to go about achieving your current mission. This is analogous to mapping out the route you are going to take up the side of the mountain.

Internal Assessment

There are three components of a good internal assessment:

• Strengths and weaknesses

• Resources

• Innovations and new ideas

The first thing you need is a clear assessment of what your company is really good at and its blind spots. Remember, strategy should leverage off your strengths.

To get an objective reading on your strengths and weaknesses, we suggest asking a selection of employees and managers to list the top three strengths and the top three weaknesses of the company. To ensure candor, it’s sometimes useful to have these submitted anonymously…

A particularly useful question is, “What are we better at than anyone else, and what are our unique capabilities that give us a competitive advantage?” The literature of strategic management ascribes a ponderous term to this notion (“Distinctive Competence”), but the idea is really pretty simple. It’s also important. Simply put, smart firms stick to doing things they can do better than other firms….

This doesn’t mean that you shouldn’t try to eradicate crippling weaknesses. Any great company is continually working on its weaknesses, always seeking improvement, and your basic strategy should play to your strengths. Do what you’re good at…

INNOVATIONS AND NEW IDEAS…

Make sure that your company is responsive to its own internal creative output. Examine what new innovations and new ideas are bubbling up in product development, research, design, and marketing. List all possible innovations that might come to fruition. Obtain estimates on how quickly the innovation could be made marketable, the level of resources required to complete its development, and the level of marketing required.

The last thing you want to do is kill new ideas and innovations just because they’re not planned. In fact, most great ideas are not planned, and if you introduce only products that are planned five years in advance, it’s unlikely that you’ll produce any breakthrough products.

Innovation should be able to influence strategy as much as your strategy should stimulate innovation. Innovation and strategy in a great company are inextricably linked.

External Assessment

There are seven components of a good external assessment:

• Industry/market trends

• Technology trends

• Competitor assessment

• Social and regulatory environment

• Macroeconomy and demographics

• International threats and opportunities

• Overall threats and opportunities

INDUSTRY/MARKET TRENDS

Take a quick snapshot of your industry…

• Most importantly, what are your customers telling you about their evolving needs? What are they telling you about how well your company is meeting their needs? How are customer demands changing? Direct input from your customers is an essential part of setting strategy. Get input directly from your customers regularly. They can tell you what’s going on in your market because they are the market. They can also tell you about your competitors. It’s wise to survey your customers at least once per year as an integral part of setting strategy.

• At what stage of evolution is your industry? What does this imply in terms of how the industry might change in the next five years? See nearby diagram, “Stages of Industry Evolution,” as a backdrop to this analysis. (Various versions of this chart are common in strategic management and marketing literature. A more detailed version can be found in Competitive Strategy by Michael Porter.)

All industries, even “low tech” industries, have a technology component to their evolution, either in products or in process. Every industry is somehow affected by changes in technology. For example, the banking industry, which has not historically been known as “high tech,” was nonetheless dramatically changed by computer technology. In back-room processing, effective use of computers became a key strategic advantage for those who mastered their use quickly. In services to customers, adoption of ATMs became an essential part of banking services.

Examine the technology trends in your own industry and ask how you can best use them to your advantage. The question is not whether technology trends will affect your industry, but how.

Never underestimate your competition. One of the biggest mistakes in mapping out a strategy is doing so in ignorance of the competition or, worse, with disdain for the competition.

• Who are your current competitors?

• Who are potential competitors?

• What are their strengths and weaknesses?

• What do you anticipate as being their future moves in the market? What are their visions and strategies?

• How do your strengths, weaknesses, and product line stack up against the competition? Where are they vulnerable? Where are you vulnerable?

• Do you have a clear, differentiated position with respect to your competitors? What is it?”

Examine the general macroeconomic climate and assess what impact the overall economy might have on your company.

Pay particular attention to demographic trends. Entire industries can be dramatically affected by demographic changes. For example, the United States’s “baby boom” (a gigantic bulge in the birth rate from 1945 to 1960) will continue to have a profound impact on a wide range of industries until at least the year 2020. This is only one of many demographic forces…

In preparing for a strategy session, ask a selected group of employees, managers, and objective outsiders to list the top three external opportunities and top three external threats facing the company. This is a quick and efficient way to tap the insights of a range of people as input to your external assessment.

Throughout the internal and external assessment process, it’s absolutely paramount that you do everything possible to see reality—to see things as they really are and not the way you wish they were.

Ignoring facts, explaining away problems, and refusing to see the world as it really is doesn’t change reality. It only invites catastrophe.

Whether leading a nation or managing a company, the lesson is the same: ignore reality and it will come back and smack you in the face. It’s very important to prevent this from happening in your company.

There are a number of things you can do to ensure that you are not protected from reality.

First, surround yourself with people who tell it like it is. Strange as it seems, this is not an easy task. For one thing, most people know that telling the truth can be politically dangerous and many, like the manager mentioned earlier, are terrified of political fallout.

You need at least a few people around you who aren’t afraid of you and who aren’t concerned with politics. This is where detached and objective outsiders (consultants and directors) are invaluable. You also need honest people inside— people who are so honest and direct they are almost uncomfortable to have around. You don’t have to like them. You just need to listen to them.

Churchill, for example, felt so strongly about this that he created a separate department whose sole responsibility was to root out and present the naked truth about pressing issues. Leaders of great companies never hesitate to reward what Thomas J. Watson, Jr. called “those sharp, scratchy, harsh, almost unpleasant individuals who see and tell you about things as they really are.”

Second, personally stay in touch with what’s happening. Don’t rely solely on status reports or quarterly reviews, and other formal reporting methods for information. Use your company’s products. Listen directly to employees at all levels. Talk to customers. Read consumer reports about your products. Personally answer customer complaints. In short, do whatever you can to keep in touch with reality.

Third, never punish people for telling the truth. We all know the story of how Peter the Great responded to the messenger who brought him news of defeat: he executed him.

I’ve come to see that sound strategic thinking (once you have clarity of vision) boils down to having insightful, empirically validated answers to three essential questions:

1. Where to place our big bets?

1. How to protect our flanks?

1. How to extend our victories?

There is no higher and simpler law of strategy than that of keeping one’s forces concentrated,” wrote Clausewitz. (Side note: If you’re interested in a smart overview of the history of military strategy, including Clausewitz’s work, I recommend U.S. Naval War College Professor Andrew R. Wilson’s Teaching Company course Masters of War: History’s Greatest Strategic Thinkers. I also recommend the essays of retired West Point professor Dr. Michael Hennelly, who has done extensive thinking on the translation of strategic principles into the business world.)

As Leslie Berlin details in her well-researched book The Man Behind the Microchip, they didn’t know which path would merit the big bet, so they had to explore all three. The team led by Andy Grove and Les Vadasz pursued memory chips built with a MOS (metal-oxide-silicon) technique. Their second chip based on this technology, the 1103, gave Intel a breakthrough: the first semiconductor memory that could compete on price with traditional core memories. Following this, the then tiny company decided to bet big, firing a cannonball on the 1103 and subsequent line of memory chips. The 1103 became the best-selling memory chip in the world, and the subsequent family of chips provided a foundation for Intel’s breakout from struggling start-up into successful company. Had Intel not fired multiple bullets to discover which path would work, it might have placed a bad big bet. Fortunately, Intel’s founders had the discipline to test and evaluate before placing the big bet.

The dominant pattern of history isn’t stability, but instability; the dominant pattern of business isn’t perpetuation of the incumbents, but triumph of the insurgents; the dominant pattern of capitalism isn’t equilibrium, but what Joseph Schumpeter famously described as the “perennial gale of creative destruction.” In a dangerous, turbulent world full of threats and disruptions, you need to “protect your flanks”—identify and protect against vulnerabilities that, if exposed or exploited, could kill or cripple you.

But what would have happened without the twenty-five squadrons?

You’ve got to keep your cause alive long enough for events to play out. If your company gets killed or knocked out of the game, it doesn’t matter if luck might later turn your way. This means knowing and having your buffers and reserves—your twenty-five squadrons—in place to absorb setbacks, attacks, bad luck, and even your own blunders so that you have the option to persist. What are your twenty-five squadrons?

One of our key findings is that the winners exercise prodigious amounts of productive paranoia. Our research showed that they carried a much higher cash-to-assets ratio than less successful companies as a disciplined habit from early in their development. (Think of a conservative balance sheet as one element of the twenty-five squadrons.) They worried obsessively about unexpected events that could destroy them, and they built buffers so they could survive external shocks. They also shunned uncalibrated risks that could leave them exposed to calamity.

When executive teams visit my management lab in Boulder, I often ask them the following three questions:

1. What significant changes in your world (both inside your company and in the external environment) are you highly confident will have happened by fifteen years from now?

1. Which of those changes pose a significant or existential threat to your company?

1. What do you need to begin doing now—with urgency—to march ahead of those changes?

Morten Hansen and I learned an essential lesson from our research: It’s what you do before the storm comes that most determines how well you do when the storm comes. Those who fully embrace productive paranoia don’t wait until they’re caught high on a mountain in a raging storm to secure extra oxygen canisters. Far better to be a paranoid neurotic freak, preparing and marching ahead of potential disruptive shocks that may never come than to get crushed by disruptive shocks because you failed to exercise productive paranoia all the way along, in good times and bad.

Clausewitz insisted on aggressively following up after concentrating force at the decisive point. Any strategy that doesn’t account for how to exploit victory is incomplete, inadequate. “What remains true under all imaginable conditions,” he wrote, “is that no victory will be effective without pursuit; and no matter how brief the exploitation of victory, it must always go further than an immediate follow-up.

Conversely, we’ve found that one of the most costly strategic blunders is failing to make the most of victories, failing to fully realize the flywheel effect.

The Three Legs of Setting Strategy:

VISION:

Core Values and Beliefs

Purpose

Mission

INTERNAL ASSESSMENT:

Strengths & Weaknesses

Resources

Innovations & New Ideas

EXTERNAL ASSESSMENT:

Industry / Market / Current Trends

Technology Trends

Competitors

Social & Regulatory

Macroeconomy & Demographic Trends

International

Prior to the meeting, each participant should be asked to prepare by answering a few questions. These questions should be circulated to the participants at least a week prior to the meeting. The content of the questions will vary from year to year, and from company to company, but should be related to the internal and external assessment.

To stimulate people to come to the meeting well prepared, we suggest asking each person to prepare a ten- to twenty-minute presentation on a specific topic. Few things capture people’s attention better than knowing that they need to make a public presentation. Certain individuals might take on specific preparation tasks, such as industry/market trends, technology trends, new innovations, and competitor analysis.

We suggest using the following rough agenda:

• Review vision (core values and beliefs, purpose, and mission).

• Ensure that the vision is agreed upon and crystal clear.

• As a group, do an internal assessment.

• As a group, do an external assessment.

• As a group, decide upon/revise the basic strategy for reaching the current mission.

• As a group, decide on the top five strategic priorities for the coming year.

The following four key strategic issues commonly faced by small to mid-sized companies:

• How fast to grow

• Focus versus diversification

• Whether to go public

• Whether to lead a market or follow

Are there downsides to growth? Yes.

For one thing, rapid growth can create a perilous cash flow situation. A common pattern is that a company shells out cash to purchase materials and labor in anticipation of rapid sales increases. It then turns those materials into products and sales but, as you know, cash doesn’t come in until months after the initial purchases. If the company doesn’t hit its forecasts, cash is tied up in inventory. Cash is like blood or oxygen; without it, you die. And growth eats cash. This is why roughly half of all bankruptcies occur after a year of record sales.

So where does all this leave us on the question of growth? Our main message is that growth rate should be part of your strategy formulation process, and that the pros and cons of various growth rates be thoughtfully considered. In general, the healthiest companies do grow, but at rates that allow them to put in place the pieces of greatness along the way. The question should not be, “How can we grow the fastest?” No, the question should be, “What growth rate is most consistent with our vision?

Focus versus Diversification

One of the most effective strategies for a small to mid-sized company is to focus on one particular market or product line and, within that area of focus, be significantly better than the competition. A focused strategy ensures that your limited resources are concentrated to create the maximum advantage. This not only applies to financial resources, but also applies to a resource that is far more valuable: management time and energy.

There may be a conflict of corporate purpose. Public shareholders view their stock holdings primarily as a financial investment. As long as the stock does well, they don’t really care what the company is doing. Thus, if your purpose is not strictly to maximize shareholder wealth, you may be at odds with your shareholders. Public shareholders don’t generally buy into a vision; they buy into the prospect of a capital gain.

Related to the IPO decision is the strategic decision of outside investors. Certain types of investors, such as most venture capitalists, think primarily in terms of their “cash out” value. If you decide to seek venture capital—or capital from other investors whose primary motivation is to cash out within a few years —be aware that you are simultaneously making the strategic decision to go public or sell out.

In most venture-backed companies, going public (or becoming acquired) is assumed, and it’s just a matter of when. Thus, if going public, for the reasons outlined above, does not fit with your vision for the company, then you probably should not seek venture capital or other “cash out” oriented investments.

We’ve identified six basic elements of what it takes to be an innovative company:

1. Receptivity to ideas from everywhere

1. “Being” the customer

1. Experimentation and mistakes

1. People being creative

1. Autonomy and decentralization

1. Rewards

This returns us again to the central point of this section; the primary challenge you face is not in increasing creativity per se, but in making your company receptive to the vast amounts of creativity that already exist. The point is not to build a company that depends on you for its innovation, but to continually work towards an organization that is as receptive to new ideas as if those ideas had come from you.

According to Nayak and Ketteringham, the original motivation came from the curiosity or problem-solving drive of a single inventor:

Certainly, the search for a market often followed quickly on the heels of the problem solver’s drive. In some cases, it was a parallel phenomenon. But we found no instance of the market demanding a breakthrough before the inventor had found it lurking in the depths of his semi-consciousness.

But the first step is to recognize that you need both idea-push and market-pull in your company. The classic business school market-pull dogma shouldn’t be mindlessly worshipped. Yet, at the same time, there certainly is a place for market input, as ignoring customer input can lead to missed opportunities or disaster. Think of original breakthroughs as coming primarily (although not exclusively) from idea-push, and subsequent incremental innovations coming from customer input. The total amount of innovation is higher by using both approaches, rather than relying exclusively on one.

Reject the extremists. Reject those who say, “Always go ask the market what it wants first.” Remember, just because customers haven’t been asking for the innovation doesn’t necessarily mean that they won’t be thrilled when it’s offered to them. Also reject extremists at the other end of the spectrum who say, “We’re so good we never need to pay attention to the market; we always know what’s best.” Be receptive to ideas from everywhere, no matter what their origin.

There is an additional answer to the paradox: what appears to be purely idea-push is often just the opposite. Even though the inventor hasn’t done a general market analysis, he is often as close to the customer as he can get: he is the customer!

One of the best ways to make and keep your company innovative is to have people invent solutions to their own problems or needs. In other words, be your own customer and satisfy yourself. If that is not possible—if you are in a business where you cannot be your own customer—then figure out a way to experience the world as a customer experiences it.

In 1920, the Band-Aid was invented by Earle Dickson, an employee of the fledgling Johnson & Johnson company, whose wife was constantly cutting herself in the kitchen. The accidents occurred frequently enough that he finally decided to make a ready-to-use bandage that she could apply to herself. Laying out a long strip of surgical tape, he placed small pieces of gauze on it at intervals, and to keep the adhesive from sticking, he covered it with a piece of cotton crinoline. Dickinson mentioned his invention to colleagues at work, and thus sparked one of the most successful commercial products in history.

Here are some specific things you might do to stimulate people in your company to be the customer and to replicate the woodwork factor:

• Hire customers. NIKE, for instance, has lots of athletes as employees. We visited NIKE during a product development session, and found Marketing Manager Tom Hartge—an avid runner—working with the design team to create shoes that he used on his own runs. NIKE hires elite athletes as product testing consultants who are expected to test the new products under the most severe circumstances and report back with ideas and problems.

• Allow employees to take time to field test products or services. At L.L.Bean, for example, any Bean executive can get an extra week’s vacation to do product testing, even if that means a fly-fishing trip in Alaska, going to Ontario for the opening of the duck and goose season, or checking out enormous Danner Yukon cold-weather hunting boots in British Columbia.

One approach is to solve the specific problem or fill the specific need of an individual customer—not an individual customer group, but a single, solitary individual customer. The idea here is the same as above: if you invent a solution to the problem of a single customer, chances are there are other potential customers hidden in the woodwork that would also be interested in the innovation.

Ballard Medical Products, with sales of about $10 million in 1987, set a strategy to develop and dominate niches that big companies neglected, and to do so by prolific new-product innovation.

The first premise at Ballard, as described in an Inc. magazine article, is that customers themselves are an integral part of the product innovation process. The second premise is that salespeople—people actually out dealing directly with customers—are also part of the process. Salespeople are expected to go on-site and interact directly with the customer as he goes about his activities. A salesman for Ballard described:

You can’t just ask the director of respiratory therapy or the head nurse if there are problems. You’ve got to walk through yourself . . . and ask the nurses whether they’ve got problems.

The third premise at Ballard is that R&D must respond to product ideas from salespeople. In one instance, the vice president of sales proposed his own product idea, helped design it, and worked with R&D to get it out the door. The entire product innovation cycle—from concept to delivery— was only a few months.

Indeed, many innovations have as their root source some form of just doing it —giving something a try, experimenting, just to see if it will work. Returning to the example of the 3M Post-it Notes, Spencer Silver described the original genesis of the adhesive:

The key to the Post-it adhesive was doing the experiment. If I had sat down and thought about it, I wouldn’t have done the experiment. If I had really seriously cracked the books and gone through the literature, I would have stopped. The literature was full of examples that said you can’t do this.

People like myself get excited about looking for new properties in materials. I find that very satisfying, to perturb the structure slightly and just see what happens. I have a hard time talking people into doing that. It’s been my experience that people are reluctant to just try, to experiment —just to see what will happen.

Should you be tolerant of all mistakes? Are all mistakes good?

A good mistake comes from an honest effort to try something combined with a diligent attempt to execute it well. A bad mistake is one where an idea fails primarily because of sloppy, inattentive, or indifferent effort. Saying “mistakes are valuable” should not be interpreted as, “we don’t have to try to do our best.” It’s one thing to put the wrong product on the market, it’s another to do a sloppy job of putting the product on the market.

The worst mistakes, however, are those that are repeated over and over again. It is the lesson learned from a mistake that makes it valuable, not the mistake itself.

To remain innovative, you’ve got to have people at all levels doing lots of experimenting, tinkering, and doing—creating the popcorn effect. How do you do this? How can you create the environment where this happens? There are three basic answers, which we shall now discuss in detail:

• Employ creative people

• Get out of their way

• Reward them for being innovative

Provide educational materials on the creative process. When people are hired, give them a book on personal creativity. Purchase and circulate reading materials on creativity; you might even consider selecting one book per year that the company buys for each person and gives as a gift. Some readings on the creative process that we recommend are:

• Creativity in Business by Michael Ray and Rochelle Myers

• Conceptual Blockbusting by James Adams

• The Art of the Problem by Russell Ackoff

• Lateral Thinking by Edward deBono

• A Whack on the Side of the Head by Richard Van Oech

Hire and Nurture Unusual People

Seek people who have done creative things. Look for people who have done different and interesting activities—people who have started little businesses while in college, people who have had a diverse set of experiences, people who have shown initiative throughout their life, people who don’t exactly fit in any pre-defined mold.

Yet, to have an innovative company, it’s also wise to have tolerance for a few unruly crazies. As Max De Pree of Herman Miller puts it, “If you want the best things to happen in corporate life, you have to find ways to be hospitable to the unusual person.

Daniel Boorstin in his landmark work, The Discoverers (a detailed history of human discovery and invention), observed that many significant contributions came about because people were naive. In describing Ben Franklin’s electricity discoveries, for example, Boorstin explained:

In fact his (Franklin’s) achievement illustrated the triumph of naivete over learning. . . . His amateur and non-academic frame of mind was his greatest advantage; like many another discovering American, he saw more because he knew much less about what he was supposed to see.

Hire Designers

Design talent is one of the most underutilized creative resources in industry. By design talent we mean those who are trained and talented in the craft of design. There are two basic categories of design relevant to most businesses: graphic design and product design. Designers are trained to be highly creative and, most important, to apply that creativity to practical problems.

Whichever path you take, we urge you to “think design” in every aspect of your business, from product development to marketing. Good design should permeate your company— buildings, processes, structures, products, the whole works.

Freedom, inefficiency, and prosperity are not infrequently found together. - Samuel Eliot Morison.

The basic message is to hire good people, create the environment for them to work, and get out of their way.

Yet the tendency of human organization is to move in the opposite direction —to seek control and order, to minimize unexpected surprises. To remain innovative, this tendency must be resisted, and resisted with crushing vigilance.

The oppressive desire to exchange life and soul for sterility and order is like a persistent vine, constantly creeping up the sides of an organization and wrapping itself around its limbs until it can no longer move swiftly and nimbly. Eventually, if left unchecked, the vine will wrap itself around the organization’s throat, tighten its vice-grip, and strangle away the company’s life spirit.

When to Decentralize

When should a company decentralize? You should always be heading in that direction—giving people autonomy and room to initiate and act. A good rule of thumb is that when you reach somewhere between 100 and 200 people it’s time to think seriously about slicing up the diamond.

Making Decentralization Work

We don’t have the space here to cover in immense detail all the specifics of a decentralized structure. Nonetheless, there are some general principles about making a decentralized structure work:

• Link to vision. If your vision (values, purpose, and mission) is clear, people or groups operating autonomously can self-regulate themselves relative to the shared overall vision. They can all sight on the same guiding star, yet be in separate vehicles heading toward that star. Shared vision is the crucial link in making decentralization work.

• Overcome lack of centralized control with increased communication and informal coordination. People need to know what other decentralized subunits are doing so that they can act in concert with them. At Patagonia, for example, product line directors meet at least once per month to coordinate. Another way to gain increased communication and coordination without the burden of increased bureaucracy is to use electronic communications— electronic mail, voice mail, computer networks, tele-conferencing, etc.

• Facilitate the transferring of valuable knowledge between sub-units. Hold internal seminars where members from different sub-units share ideas, present papers, and learn from each other’s experiences. Grant prestigious awards to those who contribute a significant idea, invention, or other valuable assistance to another sub-unit.

• Have an open system. People operating autonomously can make good decisions only if they have good information. One of the best ways to achieve this is to make lots of information available to people—even traditionally sensitive information. At NeXT, for example, any employee can get access to any piece of information—even people’s salary levels and internal financial information. Although you may not feel comfortable going to this extreme, we urge you to head in this direction. Again, compare centralized, secretive societies like the Soviet Union (and how terribly inefficient they are) with open systems like the United States. The same principle applies to companies.

• Avoid matrix structures. In an attempt to have the best of both worlds, some companies make the mistake of creating matrix organizations. Don’t do this. Matrix structures remove the fire of personal ownership, not to mention accountability.

This brings us to a central truth about organizations: they are inherently messy. There are no panaceas, no structures that solve all problems. Any attempts to completely eliminate the mess are doomed to failure. Yes, there are costly inefficiencies in decentralization, but the fire of personal ownership—of being our own little business—elevates human motivation and stimulates innovation in powerful, albeit somewhat chaotic, ways.

If you want the lightning bolt of innovation to strike again and again, you have to live with the inefficiencies. You’ve got to make a basic philosophical choice that the inefficiencies and disorder are worth the benefits.

It’s impossible to have an organization with all the fire and zeal of decentralization and the complete efficiency of centralized control. Pick decentralization, fully implement it, and live with its difficulties as best you can. If you try to go halfway, it’ll be like having a country shift from driving on the right side of the road to driving on the left side of the road, but only implementing it part way.

These two examples illustrate a simple point: Your reward structure should explicitly recognize the importance of creative contribution.

We don’t mean to suggest that people being creative are motivated solely by money, or power, or prestige. In fact, they’re often motivated by the desire for interesting work, the challenge of a tough problem, the joy of contribution, or the satisfaction of finding something new. Nonetheless, innovation should be explicitly rewarded. All people, no matter how pure their motivations, are influenced by the reward systems of their organizations. Rewards matter. And if you want to remain innovative, you’ve got to reward innovation.

Eight Management Techniques for Stimulating Creativity

We’ve spent most of this chapter describing the traits of companies that remain innovative. We’d now like to discuss things individual managers can do to stimulate creativity.

1. Encourage; Don’t Nitpick. Keep in mind that there’s no shortage of good, workable ideas, but that there’s a tremendous shortage of receptivity to ideas. Don’t be like one of those “wet blankets” that shot down the radio, the telephone, Federal Express, the personal computer, and NIKE shoes as “dumb ideas.”...

1. Be Not Judgmental. Harshly critical people destroy creativity and initiative. The fear of being criticized or being made to look and feel stupid is the biggest impediment to people experimenting, initiating, trying new things. The problem is not that people are inherently uncreative, it’s that people are afraid to be creative—afraid of being laughed at, ridiculed, personally attacked, or otherwise psychologically abused. It’s the deep-rooted fear we all carry around of the seventh-grade math teacher making an example of us in front of our peers. …

1. Help Shy People. Some good ideas never go anywhere because the people who have them are too shy to speak up. In fact, some of the best ideas come from quiet people. Quiet people tend to be excellent observers and thinkers; like cats, they’re watchful and attentive, and often intensely curious. Yet they’re also often fearful of voicing their ideas….

4. Stimulate Curiosity. Relentless curiosity, the pure desire to know things, to test them, to see if something will work, fosters creativity. The most creative people ask many questions; it’s as if they never outgrew that naive childlike desire to ask why. Create an environment where it’s ok to ask questions. Ask questions yourself—not critical questions (again, don’t be a wet blanket), but open ended questions in the spirit of inquiry. A favorite question of ours is, “What did you learn from that experience?”...

1. Create Necessity. Human beings have an amazing ability to innovate their way out of seemingly impossible situations. “Necessity,” as the cliché goes, “is the mother of invention.” But cliché or not, it’s true. In fact, many great ideas have emerged precisely because a company lacked the resources to do what it ideally would have liked…

6. Allow Time Away from the Fray. Certain highly creative individuals need solitary time to do their best thinking, time away, time to think in silence. Phil Knight, founder of NIKE, believes that people get their best ideas away from the office, at the beach, or running, which is one reason why NIKE has a wide ranging campus with running trails, tennis courts, basketball courts, weight rooms, and aerobics studios. Herman Miller lets its designers choose their venue for creativity—and some choose to do much of their work at home or somewhere else off-site. .. At Patagonia, the pattern-making group (part of the design department) has a little sign posted near its area: PLEASE OBSERVE QUIET TIME. Closed from 8:00 to 12:00.

1. Catalyze Group Problem Solving. “Quiet time” is not the whole story at Patagonia. In addition to letting people have quiet, solitary incubation and thinking time, it’s essential to capture the creativity of multiple minds thrashing about together. Brainstorming and other group activities produce extraordinary ideas.

Desks at Patagonia are jumbled together in large, open bullpen-style pits (called “Bangladesk”). People are expected to work closely with others—both spontaneously and scheduled—in coming up with new ideas and solutions to problems….

8. Require Fun. “As far as I’m concerned, the most important thing is having fun,” explains Ted Nierenberg, founder of Dansk International Designs. “If you’re not having fun in what you do, lock it up and try something else.”

We’re serious about fun. Fun leads to creativity. Ask people, “Are you having fun?” Ask yourself. Set enjoyment as an absolute requirement of work; if there’s no joy, there will be little creativity. Have you ever noticed that some of the most creative people are a lot like little kids? They like to play, and, to them, work is play.

This doesn’t preclude hard work. Creativity is hard work, but it should also be fun.

Creativity is natural, abundant, ordained, infinitely renewable, encoded, but discipline isn’t. The real challenge isn’t how to be creative but how to become self-disciplined while keeping vibrant the full force of your natural creativity.

Think about another analogy. Building a great company is similar to writing a great novel—you need an overall conception (vision), a plot (strategy), and creative ideas to move the plot along. You also must sweat over each sentence, executing the book word-by-word, line-by-line, page-by-page. Hemingway was once asked why he’d rewritten the last page of A Farewell to Arms 39 times. He responded simply, “Getting the words right.

In fact, many outstanding businesses have been successful primarily because of outstanding execution. An Inc. magazine survey of its Inc. 500 (fastest growing private companies) showed that 88% of CEOs attributed their company’s success primarily to extraordinary execution of an idea versus only 12% who attributed success primarily to the idea itself.

Deadlines stimulate progress. But only if they are commitments. To hit a deadline means achieving the objective with absolutely A-level work, absolutely complete, absolutely on time, absolutely without complaint, absolutely. If you establish deadlines that everyone knows will slip, then you have no deadlines.

In a culture of discipline, there are only two acceptable ways to miss a deadline. First, the person to whom you have committed initiates a change in the deadline, without your having to ask (explicit, unsolicited absolution). Or second, you’re truly incapacitated by something that has happened to you or your loved ones (disease, accident, tragedy), and it would be inhumane to hold you to the deadline.

But however you do it, the key is to ensure that people have no ambiguity about their deadlines, that they are committed to meeting them, and that you have a culture where missing deadlines is simply not an option. And that, in turn, means you need people who have the discipline to refuse to commit to deadlines that they cannot hit. If deadline slippage becomes routine, then deadlines do more harm than good.

The first step is to make sure that all key people have a copy of the vision, strategy, and the current year’s strategic priorities in front of them at all times. They should be brought to every staff meeting. They should be referred to constantly.

Bill Hannemann of Giro keeps a copy of the strategic priorities with him at all times. Not a staff meeting goes by without his referring to it. “I always try to make sure that our priorities are always being worked on in some specific way,” he says.

SMaC” is the essence of consistent tactical excellence. SMaC (pronounced “smack,” with a very hard “k” sound at the end . . . SmmaacK!) stands for “Specific, Methodical, and Consistent.

To be truly SMaC involves four basic elements:

1. Specific, replicable processes and mechanisms that create tremendous consistency

1. Checking and cross-checking systems to prevent catastrophic mistakes

1. Rigorous thinking to consider a wide range of contingencies and backups

1. Continuous evolution of SMaC based on understanding the why behind SMaC processes

This last element—understanding the why so that you can update and change the what—is the crucial element that distinguishes an advanced SMaC mindset from mere procedures and bureaucratic policies. If people in your enterprise begin to say to new members, “That’s just the way we do things” instead of saying, “This is why we do things this way,” your enterprise is degenerating from a culture of discipline into a bureaucracy. If mindless adherence to procedure erodes a true SMaC mindset, your enterprise will fail just as surely as if it had no SMaC in the first place.

Over time, I’ve simplified our AAR process down to three key questions:

AAR Question 1: What replicable new learning did we gain from what went well?

AAR Question 2: What replicable new learning did we gain from what did not go well?

AAR Question 3: Drawing upon questions 1 and 2, what changes can we make to our SMaC recipe to systematically improve our consistent tactical excellence?

There are five basic conditions under which people tend to execute well:

1. People execute well if they’re clear on what they need to do. How can people possibly do well if they don’t have a clear idea of what “doing well” means—if they don’t have clear goals, benchmarks, and expectations?

2. People execute well if they have the right skills for the job. The right skills come from talents, temperament, and proper training.

3. People execute well if they’re given freedom and support. No one does a good job with people looking over his shoulder; when people are treated like children, they’ll lower themselves to those expectations. Also, people need the tools and support to do their job well. To use an extreme illustration, imagine how difficult it would be for Federal Express employees to make on-time delivery without reliable trucks.

1. People execute well if they’re appreciated for their efforts. All people want their efforts to be appreciated. We’ve consciously chosen the term appreciated rather than rewarded because it more accurately captures that excellent performers value respect and appreciation as much as, and often even more than, money.

1. People execute well if they see the importance of their work.

And therein lies the essence of tactical excellence: people caring about their work because they see its importance.

John Gardner, former secretary of health, education, and welfare and founder of Common Cause, told us a fascinating study on heroism he was involved with. The study asked the question: what motivates people to heroic behavior? The overwhelming answer was not glory, or country, or patriotism, or anything like that. It was primarily a person’s belief that comrades were depending on him, and he couldn’t let them down.

If you can create an atmosphere where people are dependent on each other— where people think, “I can’t let these people down”—you’ll get extraordinary performance.

As described earlier, one of the primary functions of corporate vision is to add meaning, to be a source of motivation for extraordinary human effort. A clear and compelling vision is essential to people seeing the importance of their work. If you haven’t yet read Chapter 4 on vision, read it. If you haven’t set a vision, do so.

Also, remember that one of the components of a good vision is a set of core values and beliefs, a set of guiding principles and precepts. This underlying set of core values plays an essential role in guiding people’s daily behavior and standards. In fact, there is a direct link between values and tactical execution. For example, if one of your core values is “treat customers like human beings” and if it is well inculcated through your organization (as it is at L.L.Bean), people are going to treat customers like human beings.

The central tenet of Deming’s work, put forth in his book Out of the Crisis, is constant improvement.

We were looking for a way to stimulate progress in the execution of event commitments at The Good to Great Project. We’d learned over the years that we should have all event logistics largely in place three weeks prior to events. So, we came up with the “T minus 3” mechanism, a full briefing and launch review that would take place no later than three weeks before the event date. This would force us to get ahead in preparing and leave time to make adjustments before the event. We noticed that sometimes we’d fall a bit short of “T minus 3”—hitting the briefing at twenty or sixteen or even fourteen days out. There would always be mitigating factors, such as travel schedules or challenges with getting information from people outside our system. Still, our best tactical results came when we adhered to the “T minus 3” discipline.

Finally, avoid hiring outside people for senior positions; hire from within whenever possible. There are two reasons. First, hiring outsiders can devastate morale: “Why should I work hard when they’ll just bring in someone above me? I’ll never really have a shot at getting promoted.” Second, people need to be inculturated into the company, and this is easier if people come in at lower levels and work their way up.

Don’t wait too long. If yours is a young company, you may be wondering if such a history makes sense. We agree that it’s awkward to write a history of something that’s only a year old. However, by the time the company is five years old, you should be drafting a short corporate history. It needn’t be hardbound; it could be reproduced at the copy center. You can then easily update and revise it as the company grows.

Stop. Think for a minute. Does every employee in your company have specific goals? Did he take the primary role in creating them? Does he believe they’re achievable? Does he want to achieve them? Has he translated these goals into quarterly goals, weekly tasks, and daily activities? Do the goals dovetail with the company’s vision and strategy? Do the goals fit with his personal ambitions in life?

In a classic study on motivation, Professor Frederick Herzberg found that the number one factor contributing to extreme job satisfaction was personal achievement (number two was recognition). People want to achieve. They want to set goals and reach them. Tap into this natural wellspring of motivation.

L.L.Bean measures the percentage of flawless shipments (99.89% in 1987). All packers (not just managers) receive daily updates on percentage of correct orders. Bean has a battery of measurements carefully tracked, ranging from customer wait times to number of defects.

The reason for Bean’s extraordinary record is not that it has a standard, or that it has quotas. Rather, the key lies in the fact that Bean tracks its performance, identifies barriers to perfect performance, and continually seeks to improve.

The Miller Business Systems, Bob Evans, and Deluxe examples are described in the book The Service Edge by Ron Zemke and Dick Schaaf, which presents 101 case studies of companies that attain tactical excellence in services.

The Shewhart Cycle for Continual Improvement

STEP 1: What could be the most important accomplishments of this group? What changes might be desirable? What data are available? What measurements are needed? Plan a change or test.

STEP 2: Carry out the change or test, preferably on a small scale.

STEP 3: Measure and observe the effects of the change or test.

STEP 4: Study the results. What did we learn? What, if anything, should be implemented system-wide?

After placing our order and having a friendly chat with Terri about the coming of spring (it was early March), we asked, “What makes you folks at Bean take such care with a customer? Why do you, Terri, put so much of yourself into your work?”

At first the question struck her as odd; we might as well have asked her, “Why do you breathe?” But she responded with characteristic cheer:

It starts with our president. From him on down, I just know that I’m appreciated. They don’t take me for granted. It’s the little things—the juice and cookies during the Christmas rush, the pat on the back, the thank-yous, the visits from the president. I got this job out of the want ads, just like any other job. But it’s not just any other job. They actually care about how I feel. I know I’m important.

If you want mediocrity, take people for granted, show no appreciation, and treat them like peons.

Appreciation should come in all three basic forms: informal, awards and recognition, and financial.

• Informal appreciation. Leaders throughout your company should practice the personal touch and hard/soft people skills described in the leadership style chapter. Remember, you set the example; they’ll be influenced by your style.

Informal appreciation should be continuous and timely. People should be shown that they’re appreciated throughout the year, not just at review time or at the annual awards ceremony...

• Awards and Recognition. Never underestimate the power of non-financial awards and recognition. Keep in mind that the Herzberg study showed recognition as the second most important factor leading to extreme job satisfaction (behind achievement). Furthermore, what better way to highlight the importance of someone’s work than to recognize it publicly, or to give an award?

Establish awards for customer service heroism, product quality, sales success, or other categories you deem important to being a great company…

• Financial. Use financial rewards as a way to further reinforce your appreciation for someone’s efforts.

Make it possible for managers at all levels to grant small bonuses or other financial awards throughout the year. “Throughout the year” is a crucial part of this. People generally expect to receive a raise or bonus on an annual basis. Thus, the traditional annual “compensation increase” does very little, if anything, to express appreciation. In fact, it can often send just the opposite message if people receive less than they expect.

The five most critical types of information to track are:

• Cash flow, both current and projected. Cash is like fuel to an airplane; you want to anticipate a fuel shortage long before the panel display flashes: “WARNING! You’re almost out of fuel.” Related to cash flow is accounts payable and receivable information, with the age of those accounts. Many companies run into serious cash problems because they mismanage their payables and receivables during a period of rapid growth.

• Financial accounting information (balance sheet and income statement) and financial ratios. It’s particularly useful to have comparative statements (this period compared with last period, compared with last year). A list of useful ratios is given on page 296.

• Cost information. Many companies make the mistake of continuing unprofitable product lines because they have no idea they’re losing money on those lines. Put in place systems for determining costs and profitability by product line (or service line). Know your costs.

• Sales information. Track sales trends in each product or service category, which can be sorted or analyzed along dimensions relevant to your company (geography, price points, by distribution channels, etc.).

• Customer information. Customers are one of your best sources of information; they’ll tell you what’s good and bad about your products, how you stack up against the competition, why they buy your products, what suggestions they have for improvements and new products, what they use your products for, and just about anything else you ask. They’ll even tell you who they are, what they do, how much they make, and where they live. Most important, they’ll tell you when you’re missing major trends or market needs.

People need freedom to act. Motivated, trained, and well-inculturated people don’t need to be “controlled.” Adults don’t need to be treated like children. People tend not to do their best work with someone looking over their shoulders.

Do people in your company—all people—have the authority (i.e., without approval from anyone) to make decisions that cost money? They ought to. Whoa! We bet that got your attention. Are we serious?

Yes. We’re very serious. Of course, we don’t mean that all people should have the authority to commit the company to million-dollar contracts, or that front-line clerks should be able to authorize the purchase of a new building. But people should have wide discretionary power to take responsibility to make sure something gets done fast, and done right.

There are some people who will take personal advantage of every situation. There are some people in whom the dark side wins. Your company should rigorously weed these people out. You can do it with compassion (remember, it was your mistake to hire them in the first place); but it should be done.

Fortunately, these people are rare. And we don’t base this claim solely on a personal faith in human nature.

Therein lies the secret, if there is one. Great companies are built on a foundation of respect. They respect their customers, they respect themselves, they respect their relationships. Most important, they respect their people— people at all levels, and from all backgrounds.

We are intellectually indebted to the work of P. Ranganath Nayak and John M. Ketteringham and their book Breakthroughs! as a rich source of background material on the development of the 3M Post-it Notes, the microwave oven, Tagamet, Federal Express, and the CT Scanner, which we use as examples in our chapter on innovation.

We are also indebted to Michael Ray and Rochelle Myers, first for being such outstanding teachers, and second, for allowing us to quote extensively from their book Creativity in Business and from transcripts of class visitors.

My agent, Peter Ginsberg, who has worked with me for nearly thirty years, brought his imaginative and open-minded approach to creating publishing partnerships that best serve the cause of the work. Kimberly Meilun at Penguin Random House artfully guided me through the process from final manuscript to finished book.

Writing is not typing; writing is thinking. When my writing lacks clarity, it is most often because my thinking lacks clarity. Easy reading makes for hard writing.